Documentof The World Bank ReportNo.: 48761 PROJECT PERFORMANCE ASSESSMENT REPORT PHILIPPINES THIRD RURAL FINANCE PROJECT (LN4413-PH) June 26,2009 Sector Evaluation Division Independent Evaluation Group Currency Equivalents(February2009) Currency Unit = Peso (PhP) Exchange Rate US$1.OO = PhPS1.92 (weighted average project period) Abbreviationsand Acronyms BSP Bangko SentralngPilipinas (The CentralBank ofthe Philippines) CAR Capital Adequacy Ratio CAS Country Assistance Strategy CLF CountrysideLoan Fund DBP DevelopmentBank ofthe Philippines DFID Department for International Development(UK) DOF Department of Finance ERR Economic Rate of Return FRR Financial Rate of Return GTZ GermanTechnical Assistance Agency ICR Implementation Completion Report IDP Institutional DevelopmentPlan IDA International DevelopmentAssociation IEG IndependentEvaluation Group (earlier OED) IEGWB IndependentEvaluation Group (World Bank) JBIC Japan Bank for International Cooperation(now amalgamated with JICA) KPI Key PerformanceIndicator LBP Land Bank ofthe Philippines LGU Local GovernmentUnit (include District and other government departments) M&E Monitoring andEvaluation MFI Micro-Finance Institution MLF Micro-Finance Loan Fund MTR MidtermReview NGO Non-governmentalOrganization NPA Nonperforming Asset NPL Nonperforming Loan PAD Project Appraisal Document PAR Portfolio at Risk PCFC PeoplesCredit andFinanceCorporation PFI Participating Financial Institution PPAR Project PerformanceAssessment Report QAG Quality Assurance Group (of the World Bank) RCF Retail CountrysideFund SAR Staff Appraisal Report SDI Subsidy Dependency Index SME Small and MediumEnterprise FiscalYear Government of: July 1to June 30 Director-General, Evaluation : Mr.Vinod Thomas Director, Independent Evaluation Group (World Bank) : Ms.Cheryl Gray Manager, IEGSG : Ms.MonikaHuppi Task Manager : Mr.JohnR.Heath i IEGWB Mission: Enhancing development effectiveness through excellence and independence in evaluation. About this Report The Independent Evaluation Group assesses the programs and activities of the World Bank for two purposes: first, to ensure the integrity of the Bank's self-evaluation process and to verify that the Bank'swork is producing the expected results, and second, to help develop improved directions, policies, and procedures through the dissemination of lessons drawn from experience. As part of this work, IEGWB annually assesses about 25 percent of the Bank's lending operations through field work. In selecting operations for assessment, preference is given to those that are innovative, large, or complex; those that are relevant to upcoming studies or country evaluations; those for which Executive Directors or Bank management have requested assessments; and those that are likely to generate important lessons. To prepare a Project Performance Assessment Report (PPAR), IEGWB staff examine project files and other documents, interview operational staff, visit the borrowing country to discuss the operation with the government, and other in-country stakeholders, and interview Bank staff and other donor agency staff both at headquarters and in local offices as appropriate. Each PPAR is subject to internal IEGWB peer review, Panel review, and management approval. Once cleared internally, the PPAR is commented on by the responsible Bank department. IEGWB incorporates the comments as relevant. The completed PPAR is then sent to the borrower for review; the borrowers' comments are attached to the document that is sent to the Bank's Board of Executive Directors. After an assessment report hasbeen sent to the Board, it is disclosed to the public. About the IEGWB Rating System IEGWB's use of multiple evaluation methods offers both rigor and a necessary level of flexibility to adapt to lending instrument, project design, or sectoral approach. IEGWB evaluators all apply the same basic method to arrive at their project ratings. Following is the definition and rating scale used for each evaluation criterion (additional information is available on the IEGWB website: http://worldbank.org/ieg). Outcome: The extent to which the operation's major relevant objectives were achieved, or are expected to be achieved, efficiently. The rating has three dimensions: relevance, efficacy, and efficiency. Relevance includes relevance of objectives and relevance of design. Relevance of objectives is the extent to which the project's objectives are consistent with the country's current development priorities and with current Bank country and sectoral assistance strategies and corporate goals (expressed in Poverty Reduction Strategy Papers, Country Assistance Strategies, Sector Strategy Papers, Operational Policies). Relevance of design is the extent to which the project's design is consistent with the stated objectives. Efficacy is the extent to which the project's objectives were achieved, or are expected to be achieved, taking into account their relative importance. Efficiency is the extent to which the project achieved, or is expected to achieve, a return higher than the opportunity cost of capital and benefits at least cost compared to alternatives. The efficiency dimension generally is not applied to adjustment operations. Possible ratings for Outcome: Highly Satisfactory, Satisfactory, Moderately Satisfactory, Moderately Unsatisfactory, Unsatisfactory, Highly Unsatisfactory. Riskto Development Outcome: The risk, at the time of evaluation, that development outcomes (or expected outcomes) will not be maintained (or realized). Possible ratings for Risk to Development Outcome: High Significant, Moderate, Negligible to Low, Not Evaluable. Bank Performance: The extent to which services provided by the Bank ensured quality at entry of the operation and supported effective implementation through appropriate supervision (including ensuring adequate transition arrangements for regular operation of supported activities after loankredit closing, toward the achievement of development outcomes. The rating has two dimensions: quality at entry and quality of supervision. Possible ratings for Bank Performance: Highly Satisfactory, Satisfactory, Moderately Satisfactory, Moderately Unsatisfactory, Unsatisfactory, Highly Unsatisfactory. Borrower Performance: The extent to which the borrower (including the government and implementing agency or agencies) ensured quality of preparation and implementation, and complied with covenants and agreements, toward the achievement of development outcomes. The rating has two dimensions: government performance and implementing agency(ies) performance. Possible ratings for Borrower Performance: Highly Satisfactory, Satisfactory, Moderately Satisfactory, Moderately Unsatisfactory, Unsatisfactory, Highly Unsatisfactory. iii Contents PRINCIPALRATINGS ................................................................................................................................. V KEY STAFF RESPONSIBLE ....................................................................................................................... V PREFACE .................................................................................................................................................. vi1 SUMMARY .................................................................................................................................................. IX 1. INTRODUCTION .............................................................................................................................. 1 2. THE PROJECT ................................................................................................................................ 3 Objectives ....................................................................................................................................... 3 Project Design ................................................................................................................................ 4 Appraisal and Quality at Entry ...................................................................................................... 5 3. PERFORMANCERATINGS ............................................................................................................ 5 ........................... ....................... 5 ........................................ .............................. Efficacy.................................................... 5 .......................................... ....................... 9 Efficiency ....................................................... ........................................ ..................... 12 Risk To Development Outcome.............................................................................................................. 14 Bank Performance.................................................................................................................................. 15 Borrower Performance ........................................................................................................................... 17 Monitoring and Evaluation...................................................................................................................... 17 4. FINDINGSAND LESSONS ........................................................................................................... 18 REFERENCES ............................................................................................................................................ 21 ANNEX A .BASIC DATA SHEET ............................................................................................................... 23 ANNEX B BACKGROUND.ENABLING ENVIRONMENTAND INSTITUTIONS . ................................... 25 ANNEX C PEOPLE MET . .......................................................................................................................... 33 ANNEX D BORROWER COMMENTS . ..................................................................................................... 35 This report was preparedby RidleyNelson(Consultant).with guidance fromJohn R HeathandNalini Kumar(Task Team Leaders) RidleyNelsonassessedthe project inFebruaryandMarch2009 Marie Charlesprovided . . . administrative sumort. V PrincipalRatings PHILIPPINES THIRD RURAL FINANCE PROJECT(TRFP) ICR * ICR Review* PPAR Outcome Satisfactory Satisfactory Satisfactory Institutional Development Impact ** Riskto Development Outcome Negligible Moderate Moderate Sustainability *** Bank Performance Satisfactory Satisfactory Satisfactory Borrower Performance Moderately Moderately Moderately Satisfactory Satisfactory Satisfactory *The Implementation CompletionReport(ICR) is a self-evaluation by the responsibleoperationaldivision of the Bank. The EvaluationSummary (ES) is an intermediateIEGWB product that seeks to independentlyverify the findings of the ICR. ** As of *** July 1, 2006, InstitutionalDevelopmentimpact is assessedas part of the Outcomerating. As of July 1, 2006, Sustainability has beenreplacedby Risk to DevelopmentOutcome.As the scales are different, the ratings are not directly comparable. Key StaffResponsible PHILIPPINES THIRD RURAL FINANCE PROJECT(TRFP) Project Task ManagedLeader Division Chief/ Country Director Sector Director Appraisal Arie Chupak Geoffrey Fox Vinay Bhargava Completion Iain Shuker Rahul Raturi BertHofman vii Preface This report is the Project Performance Assessment Reports (PPAR) for the Philippines ThirdRural Finance Project (TRFP), which was supported by an IBRDloan ofUS$150 million to the LandBank o f the Philippines, guaranteed by government. The loan was approvedon 3 December, 1998 and closed on 30 September, 2007. There was an extension o f 27 months with a US$2.5 million cancellation. The PPAR was prepared by the Independent Evaluation Group (IEG). It was based on the project completion and appraisal reports, the Development Credit Agreements, a reviewo f Bank files, and discussions with beneficiaries, Bank staff, government officials, non-governmental organizations, institutions, banks, donors, and private sector managers. The cooperation and assistance o f all stakeholders, particularly the Land Bank o f the Philippines and government officials, is gratefully acknowledged as i s the support o f the World Bank Country Office inthe Philippines. Following standard IEGprocedure, copies o f the draft PPAR were sent to the government for their review and comments. Comments are located at Annex D. ix Summary This report assesses the performance o fthe Philippines ThirdRural Finance Project (TRFP). The project became effective at the height o fthe Asian financial crisis, a difficult time for the Philippines financial sector. The Bangko Sentral ngPilipinas (BSP), the Central Bank ofthe Philippines, manages the bankregulatory environment. Over recent years national accounting standards havebeen raised. However, at a lower level, the regulation o f cooperatives and microfinance intermediaries i s still evolving and regulatory capacity i s weaker. Outside the bankingsector, but significantly impacting on it, the State-Owned Enterprises continue to face major profitability problems and many still have opaque accounting practices. The two key institutions inthe project were the LandBanko fthe Philippines (LBP), which served as the borrower and wholesale lender; and the People's Credit and Finance Corporation (PCFC), a non-bank, wholesale corporation for the microfinance component. The objectives o fthe project were: (i) provide financial support to the rural to economy to overcome the difficulties created by the regional financial crisis; (ii) assist the to government inits efforts to alleviate rural poverty through the provision o f financial and institutional support to the country's micro-finance system; (iii) strengthenLBP, the main to financial institution serving the rural areas and PCFC as the country's main conduit for micro-finance; and (iv) to helpto enforce financial discipline on participating financial institutions (PFIs). Project components were: (i) a line o f credit to provide short, medium, and long-term credit channeled through LBP and, for the microfinance component, passed on to PCFC (plannedcost, US$213.8 million; actual cost, US$232.3 million); and (ii) institutional strengthening for LBP and PCFC (planned cost, US$2.3 million; actual cost, US$2.7 million). Project outcome i s rated satisfactory. The objectives to provide financial support and to strengthenLBP and PCFC were fully achieved. These two are given the highestweighting, given the financial crisis at the time. No impact assessmentwas carried out to directly measure the project's poverty reduction effects, butthere are intermediate indicators which point to a positive impact on low income groups, such as the creation o f about 47,000 jobs in sub-sectors typically employing the poor and micro-financing reaching about 110,000 small households, far exceeding appraisal targets. The objective o f enforcing financial discipline on PFIs was modestly achieved by the project; it was probablyunrealistic to expect otherwise, giventhat the project funded a very small part of the PFIportfolio. The accredited PFIs exhibited wide variation inquality of reporting, but generally performed adequately with respect to profitability, solvency, and liquidity ratios. Although it is impossible to assess the project's impact on agricultural growth, IEG found field evidence that loans for input manufacture and processing had created significant rural employment for both women and men. X Bank performance i s rated satisfactory. The weaknesses inquality at entry were more than offset by strong supervision. Despite the project's poverty alleviation objective, there was no attempt to rigorously evaluate the project's impact on poverty reduction. Also, relative to the scale o f the project, there was insufficient support to enhance PFI capacity. Borrower performance i s rated moderately satisfactory. LBP performance was more than satisfactory but the government (throughthe Department o f Finance) failed to adequately control subsidized wholesale lendingthrough DBP,contradicting GOP Executive Order 138. This immediately undercut the lendingrates defined inthe Bank's loan agreement that had required funds to be on-lent at a weighted average interest rate o f 91 day treasury bills. This was a line-of-credit project channeledthrough a government owned wholesale bank; not the type o f finance project generally designed today. Inthe absence o fthe Asian financial crisis, it would have been difficult to justify the line o f credit focus. However, injecting medium and longer-term capital into the rural sector, even on a relatively modest scale, was clearly very important at the time, not simply for the provision of longer-term resources, but for overall confidence. LBP was a proven intermediary, well placedto respond to the challenges. Over the longer term, capacity building o f intermediary and microfinance institutions will be a biggerpriority. This assessmentidentifies four major lessons: A government-owned bank within a generally sound enabling environment can reach out effectively and efficiently to rural areas throughwholesale operations when other private players are still reluctant to take such risks ina challenging sector, and particularly at a challenging economic time. Notwithstanding government ownership, they can be independent enough to counterbalance political pressure to introduce unsustainable credit policies. 0 Itis important inarural finance project involving a government owned bank,to analyze explicit and implicit subsidiesfor both the institution inquestion and the sector as a whole to ascertain the levelness o fthe playing field for non-government entrants. Inthis case, it is still not clear what advantages (or perhaps even net handicaps) LBP holds, and what this might mean for the optimal evolution o f a competitive sector over the coming decade. Whenpoverty alleviation is stated as a micro-finance objective, it is difficult to assess achievement without some form of beneficiary impact assessment even though, with rural finance, demonstrating causation from such assessmentsi s difficult. Such assessments can also contribute evidence for the design of subsequent phases. x i There i s a need for better coordination betweenthe Bank and IFC, and resolution o f disputedareas o fturfbefore preparation work on a potentialproject. The guidelines may need tightening, particularly with respect to mode and timing o f coordination, andrespective policy roles, andperhaps even some arbitration process. The Guidelines still seem to leave considerable discretion to staff. Vinod Thomas Director-General Evaluation 1 1. Introduction 1.1 The EnablingEnvironment.The Philippinesfinancial system is heavily dominated by banks, particularly commercial banks (Milo 2007) andthis has not changed much over recent decades (see Annex A). Banks are relatively unrestricted inthe types o f activities they may engage incompared to other Asian countries. The banking sector i s regulated by BSP, the securities market by the Securities and Exchange Commission (SEC), and the insurance sector by the Insurance Commission (IC). A Financial Sector Forumwas formed in2004 to coordinate these bodies but it i s not a formal organization. The Philippines economy i s heavily dominated by a powerful andwealthy political elite flourishing partly due to weak governance. Some observers point to this as the reason why, notwithstandinggenerally adequate policies and institutions (Rodrik 2003), the Philippines economy has performed relatively poorly. Patronage politics i s reported to be widespread. However, observers also note (de Dios and Hutchcroft 2003) that years o f deregulatipn and liberalization have given a more diversified economy and more participants inpolicy decisions and that, while powerful family conglomerates still exist, their power has beenreducedby this increasedopenness. World Bank governance indicators for 1996 to 2005 (Kaufmann 2006) surprisinglyplace Philippines and Vietnam at a similar level but with the Philippines showing a significant decline over that periodwhile Vietnam's rating was relatively flat. The priority need inPhilippines i s seenby a number o f observers as beingthe needto improve the overall performance o f government (de Dios andHutchcroft 2003) and to reduce institutional uncertainty allowing players to better anticipate the rules o fthe game (Pritchett 2003). 1.2 Within the broader constraints o fthe environment outlined briefly above, the enabling environment for rural finance i s generally adequate with no control on interest rates or imposed lendingtargets other than some requirementson banks for certainpercentages o frural lending. However, there i s more to be done inthe regulation o f microfinance although a consultant for one o f the donors found it to be, "one o f the betterpolicy environments for microfinance." 1.3 At the time o fappraisal in 1998 there were anumber of emergingeconomic problems dictating quick action. GNP growth was decelerating, inflation was above 10 percent, unemployment was over 13 percent, and the fiscal deficit was escalating. The liberalization of capital account transactions that took place in 1992 with a stable nominal exchange rate ledto an appreciation o f the peso alongside often unhedgeddollar-denominated borrowings, causing problems for borrower's following the depreciation inmid-1997. 1.4 The LandBankof the Philippines(LBP).' As indicatedinthe ICRand LBP documents, LBP has had 45 years o f experience in lending to the rural sector. It i s the fourth largest commercial bank inthe Philippines interms o f assets. It has the most extensive branch 1 Fitch Ratings find that LBP's net interestmargins are above industryaverage due to a substantial low-costdeposit base. Dueto its rural branchnetwork it has a relativelyhigh cost structure. It is burdenedwith the costs of financial intermediationfor the AgrarianReformProgram. LBP has a highNonPerformingLoansreservelevel. The bulk of its NPLs arose from the Asian financial crisis. Following the Asian crisis, LBP shiftedsomewhataway from rural lendingtowards manufacturing and property developmentbut it was from this that the majority oftheir nonperformingloans emerged. LBP therefore revertedback towards rural lending.FitchRatings ofLBP for 2009 give LBP an AA long-termnationallevelratingnotingstable core profitability and moderatecapitalization.They note that downsiderisk is mitigatedby moderate support from the Government ofthe Philippines. Althoughthey also note that while the government'spropensity to support LBP is likely to be high, its ability to do so may be limited. They anticipate some asset deterioration due to the current crisis but note satisfactory levels ofreserves. 2 network, havingbranches inall but one of the 81 provinces. LBP i s a government-ownedpolicy bank with a universalbankinglicense established in 1963 as part ofthe Agricultural Land Reform Code.2 It i s involved inboth wholesaling and retailing rural credit, a fact that presents some potential conflicts o f interest and i s o f some concern to private banks. LBP was selected as the borrower andthe wholesale lendinginstitution ofthe project. Annex ByTable 1 gives a selection o f key indicators; there are more inthe ICR. 1.5 LBP's success has been attributed (USAID 2007) to: the sound enabling environment, including a requirement for adequate capital and the mandating o f a market orientation in financial policy that reduced political pressure to subsidize lending; the ability to capitalize on its strong performance by persuading Congress to increase its financial capitalization; a huge deposit base as the only government depository bank with a large networkgiving it a virtual monopoly over the depositso f Local Government Units (LGUS);~ strong risk management (arising partly from the technical assistance from donors such as the World Bank); portfolio diversification, capacity building assistance to strengthen client businesses including marketing capacity; and good deposit mobilization (about US$3.2 billion in2005). Challenges ahead noted by USAIDinclude the tension between wholesale and retail lendingandthe risk o f "adverse selection" with loan officers giving excessive preference to a limitednumber o f regular "easy" clients. 1.6 LBP i s involved ina wide array o f services including collection and tax management services to government, commercial banking,trust banking, corporate lending, investment banking, deposit products, consumer finance, remittance services (inUSA and Italy), insurance, brokerage, leasing, real estate development, and marketing assistance. The net implicit subsidy effect, especially o fthe captive LGUdeposits, warranted better analysis at appraisal. LBP's dividendto government is imposedupon it. This has beenan area o f uncertainty because, although the law requires a payment o f 50 percent of the previous year's net income, inpractice it has been a matter for annual negotiation4 1.7 The People's CreditandFinanceCorporation(PCFC).PCFC was the project's conduit for on-lendingLBP funds to participating MFIs. It is a government owned and controlled corporation whose vision i s to be the leader inthe provision o f microfinance products and services, was selected as the microfinance wholesaler under the project. PCFC i s not a bank and cannot take deposits. It i s a finance corporation registered with the Securities and Exchange Commission. It was established in 1995, only two years before the project, to provide financial services to the poor and later was given the mandate for the delivery o f micro-finance services for the poor. PCFC's performance ratios are given inAnnex ByTable 2. 1.8 Over the periodo f the project, PCFC has been strengthened inmany respects, although there remain concerns about the longer term sustainability o f an institutionplaying this role that cannot take deposits. 2 It is important to understandthat the staff o f LBP are civil servants and subjectto the same incentivesand rules as other civil servants including the same level ofjob security, pensionrights, rights of appeal and similar pay scales. 3 These include District and Provincial government departments. 4 As part of the Borrower responseto the draft report, LBP commented: "LBP, being a government financial institution is requiredby law to declare 50 percentof its income from the previousyear as dividend to the National Government.LBP always managesto negotiate for a lower dividend rate with the Departmentof Finance. For the last five years (2004 to 2008), the cash dividend rate averaged25 percentof its net income and atotal of P 1.1 billionstock dividends have been declared". 3 1.9 Microfinance. The government initiated an improvedpolicy environment for microfinance through the National Strategy for Microfinance, the General bankingLaw o f 2000, the Agriculture andFisheries ModernizationAct (market orientation of credit), andExecutive Order 138 (phased out subsidized directed credit inthe non-agriculture sector).' However, over the period ofthe project there were, and still remain, anumber ofregulatory issueswith respect to land and microfinance (Llanto 2004 and 2007). These include: (i) prohibition against the mortgaging/selling landwithin 10 years o f its award; (ii) a 5 ha ceiling on ownership; (iii) the designation o f government as the sole buyer o f awarded lands under the land redistribution program; (iv) a prohibition against tenancy arrangements; (v) the general demise o f land markets due to agrarian reform; (vi) lack of an efficient mechanism to resolve landdisputes; (vii) lack o f informationneeded by courts to hear land cases. With respect to risk, crop insurance exists on a small scale but, as inso many other countries, has suffered from covariant risks due to lack o f diversity. 1.10 RFIIIfollowed immediately after RFII.BothRFIand RFIIhadbeenrated Satisfactory by IEGalthoughInstitutional Development was rated only Modest due mainly to LBP's inability to cut losses inthe agrarian reform loan portfolio, the ad hoc basis o f the dividendpayable to GOP, and the application o f GOP own funds to targeted lending at below market interest rates when political pressures were great enough. (These are all concerns that have remainedto a greater or lesser extent under RFIII; however, pressures for below market rates may now be reduced.) At the time of appraisal, there were two other projects relevant to the financial sector, the Banking System Reform Loan and the Private EnterpriseCredit Support Project. 1.11 There are a number o f other donors who have supported rural finance over the last 10 years including particularlyJICA (through DBP), KfW, ADB, and USAID.The majority have focused on microfinance. 1.12 Donor coordination i s considered adequate by most respondents consulted by IEG.There i s a Philippines Development Forum that includes government and meets regularly and has a numberofthematic or sectoral subcommittees. However, indiscussion, one donor staffer mentionedthat insufficient action emerged from such meetings. 2. The Project 0bjectives 2.1 The objectives o fthe project as stated inthe Project Appraisal Document (PAD) were to: 5 BSP Circulars on microfinance include: Circular 272 (2001) Guidelines on GeneralBanking Law; Secular 273 - (2001) to Allow Entry of Microfinance OrientedBanks; Circular 282 (2001) Guidelines on RediscountingFacility; - Circular 324 (2002) Expansionof RediscountingFacility; Circular 340 (2002) Regulationsfor the Establishmentof Branches; Circular 364 (2003) Reductionof Risk Weight for SMEs; Circular 365 and 369 (2003) Amendment of 340; Circular 374 (2003) Regulationsfor BarangayMicrobusinessEnterprisesAct; Circular 409 (2003) Regulations for Micro-financing Operations of Banks; Circular 501 (2005) Rules on the Writing off of Loans; Circular 547 (2006) Amendmentson GovernmentBorrowings; Circular 549 (2006) Amendment to the Manual of Regulationsfor Banks. 4 (a) provide financial support to the rural economy to overcome the difficulties created by the regional financial crisis; (b) assist the government inits efforts to alleviate ruralpoverty throughthe provision of financial and institutional support to the country's micro-finance system; (c) strengthen the Land Bank o f the Philippines (LDP) as the main financial institution serving the rural areas andthe People's Credit and Finance Corporation (PCFC) as the country's main conduit for micro-finance; and, (d) helpto enforce financial discipline on Participating FinancialInstitutions (PFIs). 2.2 These objectives were not changed over the life o fthe project. The Key Project Indicators (KPI) did not fully reflect all aspects o f the objectives. While objectives (a), (c) and (d) were largely reflectedinthe KPI, there were no indicatorsrelatedto rural povertyimpact and some lack o f indicators demonstrating institutional capacity changes o f the type that might be observed by clients or managers, for example, days for loan approval or loans handledper loan officer. Project Design 2.3 Total Project Costs were US$216 million o f which the Bank loan was US$l50 million (69%). There were two components: Line o fCredit Component (Planned Total Costs US$213.8 million; actual US$232.3 million).6This was a line ofcredit to provide short, medium, and long-term credit channeled through LBP and, for the microfinance sub-component, passedon to PCFC. The micro-finance component had a plannedproject cost o f US$6.7 million but an actual o f U S $18.0 million (increased duringimplementation). (b) Institutional StrengtheningComponent (Planned Total Costs US$2.3 million; actual US$2.7 million). This component was for strengthening both LBP and PCFC but it was fully financed by the two institutions themselves. 2.4 The project had no direct policy component. Policies were considered generally sound includingfreely negotiated lending rates. As indicated inthe ICR, there were some revisions to the balance o fthese components duringimplementationmainly due to increases in microfinance and also for the convenience o ftracking. The micro-finance element o f the Line o f Credit Component was increased by US$15 million and the LBP retail lendingfacility to its own clients, the Retail Countryside Fund(RCF 11)that did more restructuring and expansiono f existing, small-scale businesses, and had a stronger agricultural focus than the wholesale Countryside Loan FundI11(CLFIII), was greatly increased, by US$20 million. This was agreed by the Bank to adjust for the cautious lendingby PFIs to Small and MediumEnterprises. Thus, by 2006, the wholesale lendingsubcomponent was downto US$97.5 millionequivalent. 6 Dueto some interchange inthe contentbetweencomponents (but with no overall objectives shift) it has not been possibleto exactly reconcile the componentcosts as indicated inthe Staff Appraisal Report (SAR) with the cost tables inthe Implementation Completion Report. 5 2.5 Extensions.The project closed 27 months behindthe original schedule partly due to the slow startup which, inturn, was caused partly by the surprise under-cutting by the Development Bank ofthe Philippines (DBP) donor-supported project (see later discussion underBorrower Performance). 1. Implementationand Challenges.Annex Bbriefly provides additional backgroundand detail on the situation at the time and the structure o fthe financial system.The project faced difficult challenges with the Asian crisis. As noted inthe Introduction, at the time of appraisal GNP growth was decelerating, inflation and unemployment were high, andthe fiscal deficit was escalating. There hadbeenan appreciation o fthe peso alongside often unhedgeddollar- denominated borrowings, causing problems for borrower's following the depreciationinmid- 1997. Inorder to protect their balance sheets, banks were inclined to pursue a general credit squeeze rather thanpro-actively seek out good borrowers. Re-establishing confidence was an important element o f the project's and LBP's role. With strugglinginstitutions the first years o f project implementation were particularly challenging and supervision input at that time from the Bank was very important. Appraisal and Quality at Entry 2.6 The Quality Assurance Group (QAG) reviewed Quality at Entry (QAE) and rated it Satisfactory. As discussed later under Bank Performance, this i s downgraded inthis assessment to Moderately Satisfactory due to lack o f an Impact Study, need for a wider analysis o f LBP's place inthe sector, limitedsupport for training, and somewhat narrow indicators. 2.7 As required, the PAD discussed the project alternatives but essentially only one, the option to lend to several retail financial institutions rather than a single wholesale institution.It would have beenuseful for Bank management to have been offered, inaddition to this, more argument on the broader issue o f a very dominant government-owned bank, possibly at least implicitly subsidized, within an expanding population o f quite promising private banks and non- bank institutions. 2.8 While this assessment largely accepts the relevance o f the design at the time o f appraisal, there are some questions about the resilience o fthat design up to the end o f the project. This i s taken up again more fully under the heading Relevance. 3. Performance Ratings OUTCOME 3.1 As with IEG's ratings of RFIand 11, Outcome is rated, on balance, Satisfactorydue to Substantial Relevance, Efficacy and Efficiency but, as inthose cases, not without some areas o f reservation. RELEVANCE 3.2 Out o f the main three evaluationratings o f Relevance, Efficacy and Efficiency, the most questions arise over Relevance, mainly relevance o f design. However, on balance, and after consideration o f counterfactuals, Relevance i s rated Substantial. 6 3.3 Relevance of Objectives. It i s recalledthat the objectives had four parts (summarized): to provide financial support to the rural economy to overcome the regional financial crisis; to assist the government to alleviate rural poverty; to strengthen the LandBank andthe People's Credit and Finance Corporation (PCFC); and to help enforce financial discipline on PFIs. These were broadly consistent with the relevant CASs at the time. The 1996 CAS (pre-theAsian financial crisis), under the Rural Development category, proposed "improved access to credit and increase employmentamong poor upland and lowland farmers" and "improvement o f rural financial intermediation." However, the CAS mentioned inthe assistance strategy matrix the Second Rural Finance Project but not a third, suggestingthat the third was at least partly a response to the crisis that followed while also, as noted inthe ICR, continuing the institutional strengthening o f LBP against a new financial challenge. The 1999 CAS (post the crisis but only just after the approval date), set as priorities: to address the crisis, to enable expansion ofthe private sector, and, to pursue sustainable rural development. 3 -4 Relevance of Design. The relevance o fproject design i sjudged inthis section against the backgroundofthe Asian financial crisis at the time ofappraisal andthe importance ofBank presence and skills inthe sector at that time. Deducing a theory-based evaluation logic, the first objective suggeststhat the solution to the problems within the rural finance sector that arose from the financial crisis was seen as the provision o f a line of credit that would enable a recovery o f lending to the rural sector particularly through longer-term lendingand restructuring o f loans to still viable enterprises under temporary stress. The mission found evidence infield visits that the line ofcredit, particularly due to the longer terms thancompetitors andthe availability for restructured loans, enabled clients to borrow when other banks were, as one LBP client put it, "nowhere to be seen". However, at the core o f the problem lay the fact that there were firms and banks infinancial trouble partly related to un-hedged foreign currency loans andbanks with already insufficient loan loss provisioning were de-leveraging, reducingrisk, and opting for safer T bills.' The Lineo f Credit (LOC) was, at the time, a palliative but could not alone resolve the underlyingissues. However, the objectives to strengthenLBP andPCFC and to help enforce financial discipline on Participating Financial Institutions (PFIs) did start to address one modest piece o f the underlyingvulnerability o f financial institutions to future shocks. Obviously, the current global crisis represents a renewed test o f how far this overall financial reform and strengtheningwas achieved but it i s still too early to assess that although there are expectations o f bank mergers. 3.5 While the project design, with its microfinance component, was not inconsistent with the later Bank's 2003 Rural Financial Services Strategy, particularly giventhe exigencies o fthe Asian financial crisis, the support to MFIs was relatively more limitedas a proportion o f the whole than that strategy would suggest. But that strategy, a product o f the prior "Reaching the Rural Poor" Bank strategy, came five years after the project was approved. 3.6 While relevance of design was found to be generally sound, this assessmentfinds four areas o f weakness and expands on some o fthem inthe subsequentparagraphs. First, and by far the most significant, the designshouldhave includedan impact study to assess poverty impact since poverty alleviation was both an explicit objective o f one o f the components and a broader 7 There are, o f course, echoes of such strategies inU S and European bank behavior under the current global financial crisis. 7 objective o fthe CAS. Second, a wider analysis o f LBP's place inthe sector and advantages (or penalty) from its public ownershipwould have helpedto better set the lead institution insectoral context and mightpossibly have altered project design or policy focus. This i s a study still worth doing. Third, the project design gave limitedtraining support for the strengthening o f PFIs or NGOs and groups; the main focus was on LBP and PCFC, yet much o f the rural finance constraint inrural areas, both then and now, lies with institutional capacity and skills. It was too optimistic to expect that the pressures o f accreditation along with the existing training capacity o f LBP and PCFC, inany case o f uncertainadditionality since these were partly on-going programs, would address skills development sufficiently. Fourth, the indicators were somewhat narrowly focused on the two wholesale institutions. Some indicators tracking the sector as a whole and on the performance o f PFIs would have aided decision-making. While some o f this data was available from LBP accounts and MIS, placing such criteria into the KPIs would have given higher profile. Inthe light o f these weaknesses, and since this was a third project, notwithstanding many strong elements inproject design, Quality at Entry i s rated, on balance, Moderately Satisfactory. 3.7 The following paragraphslook at each sub-objective withrespect to the relevance o f designto that objective. 3.8 Onthe stated objective to provide financial support to overcome the crisis, channeling the line o f credit through a government owned wholesale lending organization was almost certainly the most effective approach for quick action. Itwas clearly important to inject funds into the rural sector quickly to stemthe impact o f the crisis. Longer-term lendingincluding some businessrestructuringwas needed. Itwas, and remainedthrough the life o fthe project, important to provide a source o f stable longer term financing to the rural sector since there was a shortage o f long term deposits. Evenwhenthe economy improved, while short term financing picked up, longer term financing was still short and instrong demand. However, as mentioned later under Borrower Performance, the objective o f longer term lendingwas initially undercut by the lower cost lendingunder a DBP loan. We do not fault design or Bank Performance for this, we have faulted GOP. Ifthis subsequent competitive project had beenknownabout at the time o f appraisal the designwould, no doubt, have been adjusted. Subsequent adjustments by the borrower and the Bank eventually mitigated this competition problem. 3.9 However, there i s another aspect o f the relevance o fthe financial support objective. The size o f loans inthis project covered a very wide range as discussed later.' While the crisis gave somejustification to support large as well as smaller firms for growth and employment reasons at a time o f contracting lending, especially for longer-term loans, this did leadto lendingto large firms that, at least later, should have had access to other sources. The Bank would normally seek to be a lender o f last resort. 3.10 The objective o f relieving povertywas arguably relevant and certainly consistent with the government's stated strategy althoughinthis case it was never assessed with an impact study. However, inthe RFIand RFIIproject IEGPPAR, IEGquestioned whether such an objective was realistic for a demand-driven credit project. This assessment finds that, while the objective itself ' was relevant, the original designfocused on poverty to a fairly modest scale. However, this was 8 There were 90 loans to the largest firm asset category that were above an asset size excluding land of about US$1.9 million. 8 partly due to the Asiancrisis and the needto get rapid resumption o f growth and employment through medium to large enterprises. Duringimplementation, as the crisis came under control and circumstances changed, funds were shiftedsignificantly towards smaller scale lending. 3.11 The designto meet the objective of strengtheningLBP and PCFC was relevant. However, the fact that these are bothgovernment owned banks calls for assessment about whether, inthis case and at this time, this strengthening exacerbated a tilt inthe playing field sufficient to constitute an unduebrake on competing private bank development and whether there was too much focus on LBP and PCFC relative to the strengthening o f PFIs. Inthis respect, we note that the vision statements of both institutions suggest an aim to dominate. For example, the LBP Vision Statement includes the language, ... Landbankshall bethe dominant financial institutionincountryside development ., While this would be an entirely appropriate vision . " " for a private bank, it presents something o f a moral hazard for a publicly owned institution unless the evidence shows that, inall respects, LBP competes on entirely eventerms. It i s probable that, over the period of the project insome areas o f its activities, LBP heldsome competitive advantages, although this has beenchanging over time and, infact, LBP also claim significant imposed obligation^.^ The Vision Statement o f PCFC i s somewhat more modest but inthe same vein, calling for PCFC to be "theviable and sustainable leader (our italics) inthe provision o f microfinance products and services ..." 3.12 More broadly, by the time the project closed, the development o f the financial sector and rural finance within it (with some credit to the project support) hadreached a depth and coverage of services that has almost certainly now reduced the social necessity o f supporting rural financial services through a publicly owned institution. The question i s increasingly now how to enable private banks and other non-bank financial institutions to gain a wider foothold. The project as designedfocused somewhat too heavily for the good o f the sector on LBP and PCFC relative to potential and actual PFIs so that, with changing circumstances and increased non government ownedbanking, the design for this particular objective was somewhat less relevant at closing than at appraisal. 3.13 With respect to the relevance of design for the fourth objective o f enforcing discipline on PFIs, this was highly relevant, particularly given the emerging financial crisis at the time. However, it carried with it the incentives problem that those PFIs that most needed financial discipline were unlikely to qualify, those who least needed it were likely to qualify, and only those that lay somewhat below the level o f the accreditation criteria were likely to be enticed to lifttheir performance inorder to do so. Projectdesign didnotoffer enoughto support skills capacity o f PFIs and MFIs.Capacity inrisk management i s particularly acknowledged as a weakness by PFIs and, to a limited extent, was supported by on-going PCFC training with own funds. Inmicrofinance, the need for skills i s identifiedas a key weakness and area o f focus o f the USAIDAccess to Banking Services Program (associated withthe Rural Bankers Association of the Philippines). This limited training fundingmay have beendue partly to the fact that this was a loan to the LBP guaranteed by government and therefore a less easy vehicle for channeling training grant funds to other banks including non-PFIs, some competing with LBP. 9 It wouldtake a substantial studyto weighthe benefits and costs of the many government imposedroles but for example, untilrecently, LBP hada captive deposit source inLocal GovernmentUnits (LGUs), and an insurance arm that hadcaptive government clientele. On the other hand, they do not, or have not inthe past, receivedsufficient payment for certain imposedservices, such as processingtax payments. 9 EFFICACY 3.14 Efficacy i s rated Substantial based on Substantial ratings on three objectives with a high weight givento the financial support objectives but a modest rating on the objective o fenforcing discipline on PFIs. With respect to the objective o fproviding financial support to the rural economy, this was clearly achieved and i s rated Substantial. The project almost fully disbursed (with a cancellationofUS$2.5 million) and the financial support was givento a level of 131 percent o f the target for the predominant CLF I11and RCF I1lendingand to 112 percent o f the target for the microfinance MLF element. Based on ICR data, about 90 percent o f the total lending amount went to mediumto large enterprises with the remainder going to small and micro enterprises. Briefly, the following were the mainportfolio characteristics (LBP Progress Report 2007) as at the project closing date o f September 30, 2007.'' 3.15 For the CLFIII component: e PFI Type: 48 percent o f accounts through Commercial Banks; 41 percent through Thrift Banks; 6 percent through non-bank financial institutions; and, 5 percent through Rural Banks. e Loan Size: by amount released: 42 percent small (below PhP 5 million, about US$96,000), 5 1percent medium(PhP5 millionto PhP5Omillion about US$97,000 to US$960,000), and 7 percent large (above PhP5Omillion (US$960,000). Interms of total amount, 65 percent went to the large asset size group. e Subloan Maturity: 15 percent short-term, 68 percent mediumterm, 17 percent long-term. e Subloan Purpose: 37 percent for fixed assets, 54 percent for working capital, 9 percent a combination. e Nature o f Project: 84 percent businessexpansionary, 9 percent start-up, 7 percent restructuring. 3.16 For the RCFII Component: l1 e 75 sub-projects were for loan restructuring, 100 for small business expansion, and 28 new start-up projects. 3.17 For the MLF channeled through 72 MFIs (actual project cost US$18 million): , e Lendingwas entirely for working capital for both farmandnon-farm purposes including both production (crop and livestock, etc.) and services (e.g. retail shops), average loan was US$296 and 92 percent was to women. 10Actualprojectcost of CLFIII andRCFIIcombinedwas US$214.3million,approximately75 percentCLFIII/25 percentRCFII. 11At appraisalthis was treatedas part o f the CLFIII componentbut later, with increasedfunding, it beganto be treatedas a separate component. 10 3.18 Underthe MLFcovering microfinance, average loan size was about US$250. Thus the majority o f lendingby amount lent (82 percent) was above the microfinance level but the largest number of loans was for microfinance. 3.19 We give substantial weight to the achievement o f this particular financial support objective becauseboth the documents and the designo fthe project as well as the facts o f the financial crisis suggest that this was a major and urgentpreoccupationat the time. 3.20 While there were no explicit indicators set for types o f capital to be provided, the project was expected to contribute more to fixed asset lending than working capital on the argument that fixed asset investment would have a greater impact on growth thansimply annual re-cycling o f working capital. Approximately 37% o f CLFIII went for fixed assets. 3.21 There i s very limitedaggregate data on the sector, butto putthe scale ofthe microfinance component insome perspective, there are approximately 4.9 million farmers inthe Philippines. It was estimated by USAID in2008 that rural banks and other microfinance institutions were reaching about a third of the households engagedinmicro-business activities. A 2002 study by USAIDfound apotential demand for microfinanceofPhP26 billionagainst a supply o fabout PhP 9 billion, suggesting that about one third o f the demandwas being met at that time. AssumingMLFlending of about PhPl.5 billionover say 6 fully effective years this would put the MLF component at about 3 percent o f lending and about 1percent o ftotal demand. 3.22 On the objective o f alleviating poverty, the evidence i s predominantlyoutput level evidence rather than outcome evidence. It should be noted (Ledgenvood, J 1999) that defensible outcome evidence on poverty i s notoriously problematic with credit programs due to the fungibility issue. Inthis case, the output evidence for poverty impact such as it i s includes the following. The amount o f microfinance lendingmore than doubled over the target and the numbero fmicrofinance loans reachedapproximately 110,000 small household level loans, far beyond the target. However, this was due partly to reflows measured cumulatively over a considerably extended project period. The scale o f the LBP retail component RCFII (aimed at smaller-scale businesses with employment impacts, a focus on agricultural production and reaching more remote areas) was more than doubled. Employment creationbased on sub- borrower loan documents reachedthe target and is reported as 16,960 jobs created under the CLFIII and RCFIII components.'2 There were no separate estimates ofjob creation from the microfinance component. However, PCFC estimates across all its lendingindicate approximately onejob created for every two clients. The mission observed employment gains o f approximately this order ofmagnitude duringfield visits with generally expandingbusinesses (as found in USAIDstudies) andcalculated costs perjob created at aroundUS$800.'3This is somewhat higher inreal terms than anestimate by ADB over tenyears ago. Basedon these estimates,jobs created under the microfinance component would probably lie between about 20,000 and 50,000. It is concluded that the total microfinance employment was o fthe order of 30,000 and employment impact o fthe project as a whole would therefore have been about 47,000. The 12 Missionassessment in the field found that the estimates ofjobs createdreflected the reality quite well although incrementality is always difficult to assess. 13 ADB's second microcredit loanhad found by 1996an average cost of about US$200perjob created. While by 2009 this would be higher due to inflation and economic growth it seems low basedon mission findings. Field visits by the mission confirmed that the estimationoftruly incrementaljob creation was not a simple task. priority sector enterprises, l4 that constituted about two thirds o f the total, are generally indicative o f relatively poor rural people. Mission field visits found microfinance borrowers to be poor and the majority ofthose incremental wage earners employedby the larger CLFIII borrowing enterprises to be poor also and inone case, a poultry enterprise, nearly all those employed were women. (The evidence on lendingto agriculture, a sector supporting many o fthe poor, is given inBox 1.) 3.23 However, there was no beneficiary assessment or impact study to assess the poverty levels o f beneficiaries. Other things being equal, the lack o f data inthis case would have allowed only a modest rating to the achievement o f this poverty objective. However, the greatly increased scale o f micro and small business lendingachieved, the very highrepayment rate, the predominant lending to women, and the employment evidence based on loan application and loan supervision evidence i sjust sufficient to support a Substantial poverty impact rating based on output evidence. Inmaking this assessmentthe difficulty o fproving causation inrural credit evenwith beneficiary surveyshas beentaken into account. 3.24 With respect to the third objective o f strengtheningthe LBP as the main financial institution servingthe rural areas and the PCFC as the country's main conduit for micro-finance, the achievement was Substantial although there are still concerns about PCFC's strengthand sustainability since, as a non-bank institution, it cannot take deposits. Inthis rating more weight i s given to the larger institution, LBP. The performance ratios of the two institutions are given in Annex A, Tables 1and 2. Bothinstitutions had Institutional Development Plans (IDPs) at the outset o fthe project. LBP has made substantial progress. Most o f the strengthening,including internal training programs, inthese two institutions was carried out with own funds. As noted underRelevance, while it was not an objective, the project shouldhave supported these two institutions to do more training for PFIs since a main constraint inthe expansion o f rural financial services is capacity at the lower levels o f the system. 3.25 With respect to the fourth objective which was to help to enforce financial discipline on Participating Financial Institutions (PFIs), the ICR found limitedimpact and this assessment concurs, rating achievement Modest. The number of PFIs, originally expected to be close to 100, was far less, at 32 but with only 20 active at project closing. This was partly a reflection o f the competition from DBP's competitive lower rate lendingdiscussed further under Borrower Performance, and partly the continuing impact of the crisis. However, this fourth objective i s somewhat discounted inthe assessment since it was plainly excessively optimistic that a project designoffering very small funding compared to PFItotal portfolios at the time could significantly influence PFImanagement and systems on any scale. Simply meetingthe accreditation criteria was probably only a significant incentive for a relatively narrow bando f PFIs who were withinreach and were complying with their action plans. Those comfortably above the criteria did not face any strong incentive to reach higher and those well below would have had little incentive to strive for something plainly out o f reach. Nevertheless, the accredited PFIs, while exhibiting wide variation inquality o f reporting, did generally perform adequately with respect to ratios such as profitability, solvency and liquidity. Only one failed to meet paymentsto LBP. Beyondthe pressuresthat came through accreditation, there was no direct 14 Farmers and fisherfolk, micro enterprises and SMEs, agribusiness, agri-infrastructure, other agri-related projects, and environment related projects, with a smaller percentage o f livelihood loans. 12 provision under the project for enhancing financial discipline. This has been mentionedas a design weakness. Inthis respect, the wider BSP pressurestowards performance due to the regulatory requirements (supported over the years by the Bank) were more significant than the project itself. UnanticipatedOutputsand Outcomes 3.26 AgriculturalProductivity.Therewas no stated objective to increase agricultural productivity, however, CASs have consistently discussed the importance of agriculture. There i s some evidence that the project contributed to agricultural growth although the relative scale o f the project was certainly insufficient to expect to pick this up innational agricultural growth statistics which have been disappointing relative to a number of other countries inthe region. It should be emphasized that, although this was labeled a rural finance project, a substantial share of lending went to sub-borrowers with no immediate connectionto agriculture, such as investmentsinhospitals, transport, hotels, printing, and medium-sizedmanufacturers, although, as required, they were located outside the metropolitanareas. Infact, mission analysis showed that inthe category o f the larger loans over US$200,000, such loans with no direct agriculture connection constituted over 50 percent by number. However, inmany rural provincesthe share o f household income i s now more than 50 percent from non-farm sources. The project was essentially targeted at non-city growth and income not necessarily agriculture although such things as fisheries, poultry, piggeries, aquaculture, grain milling, input manufacture, and agricultural produce transport benefited substantially as confirmed by mission visits. 3.27 PolicyRole. While not an explicit objective, notwithstanding its ownership by government, LBP has, over the years, been a not unimportant source o f financial sector policy pressure on government particularly inthe area o f counteracting behest lendingand interest rate policy. While Bank support seems to have provided some backing to some o f the on-going policy debate, this project was not a significant vehicle for national level financial policy dialogue. It focused more at the wholesale institution change. 3.28 Environment.While also not an explicit objective, the project made very substantial strides inthe incorporation o f environmental criteria into rural lending. This was associated with both the strengthening o f government regulations and the strengthening o f capacity within LBP. The missionwas impressedwith the extent to which the mitigation ofenvironmental impacts had been internalizedwithin the lendingprocedures, for all LBP lending not simply the project line o f credit. It i s very unlikely that this level o f environmental focus and subsequent mainstreaming would have emerged from a wholesale bank that was not government owned. Moreover, LBP's performance inthis area seems to have impacted on the way other bankshandle environmental regulations. This i s a significant unintendedimpact. EFFICIENCY 3.29 Efficiency i s rated Substantial on balance, although, as with most credit projects, evidence is limited. There are three elements to efficiency. First, what the financial and economic returns are for the sub-project loans that were analyzed. Second, what evidence i s there, either quantitative or qualitative, for those below the size individually analyzed? Third, how efficient were the participating banks? Fourth, was there additionality? 13 3.30 N o overall project ex ante or ex post economic analysis was done by the PAD or ICR. FRRswere carried out ex ante for all sub-loans over US$200,000 andERRs over US$1 million. A small sample of23 FRRsand ERRswas analyzed by LBPex post based on follow-up visits by LBP staff to b 0 r r o ~ e r s .Although a small sample, it i s not clear why this was not usedinthe l ~ ICR. The data show that FRRsfell from the ex ante to the ex post. However, they fell from very highaverage levels to still mostly highlevels butthere was a wide range.For the 13 CLFIII loans inthe sample the arithmetic average16FRR fell from 42 percent to 29 percent, but with 4 o f the 13 falling below a 10percent FRR.For the 10 RCF loans the average fell from 32 percent to 25 percent, with 4 out o f 10 falling below a 10 percent FRR. With a somewhat larger sample it could be informative to correlate FRRswith repayment performance but inthis case, with high repayment rates, it would be of little value. 3.3 1 The mission found the value o fdoing sub-project ERRsex ante was somewhat questionable from an operational efficiency perspective. LBP staff could not recall any case where an ERR on top o f an FRRhad changedthe lendingdecision. Inany case, nowadays, with fewer distortion adjustments, the FRR and ERR are often very similar. 3.32 Efficiencyof the Micro-financeComponent.With respect to the smaller and micro lendingthat was not subject to any FRRanalysis, a few qualitative points canbe made.Based on discussion with PFIs and observations from mission visits; most clients' businesses seemed to be growing, suggestingthat the loan hadtriggered small business growth. While not from the same sample (although there may be some overlap o f borrowers) USAID (USAID 2005) came to a similar conclusion intheir study oftheir 2005 Micro-enterprise (MABS)Program, that borrowers have been steadily gaining groundindiversifying their businessactivities. They have also been steadily increasing their savings. That study concludedthat, since repayments were highat 95 percent to the MFIsand savings have beenincreasing, the loanfunds hadprobably been used efficiently.17 3.33 InRFIII, the repayment rate from MFIsto PCFC was close to 100%butthis would not necessarily be indicative o f the health o f the sub loans. The repayment rate to the MFIs was reported as 95 percent" which, backed by some field verification, i s more indicative o fthe probable efficient use o f the loans. 3.34 Another measure o f efficiency would be the unit costs o f employment creation. Field visits and some data from LBP and PCFC suggest average costs perjob created betweenabout $800 and $13,000 from smaller to larger enterprises. These are approximately inline with industry experience inthe Philippines and the levels the PAD had projected. (The higher costs in 15 The mission was able to rather superficially review the methodology adoptedfor the FRRs and ERRSand found it broadly sound. 16 Note that the arithmetic average calculatedhere is not a true representationofthe average of all the net benefit. streams since it is invalidto average FRRs from different streams. The steams themselves would needto be added together and scale and phasingdifferences would have an impact. But inthe absence of the resourcesto aggregate the original streams and recalculateatrue average this is the next best option. It shouldbe interpretedwith care. 17 Inthat study, sub-borrower lending rates rangedfrom 18 percentto 48 percentwith an avgrage of 28 percent. 18 Project monitoring data shows that about half the microfinance lending was channeledthrough Rural and Thrift Banks and the rest through Cooperatives,CooperativeBanks, andNGOs. NGOs constitutedabout25% ofthe MLF lending. 14 the larger enterprises are partly due to substitution o f machinery for labor.) The Bankand borrower could have exploited more the data on costs perjob created." 3.35 Efficiencyof Institutions.With respect to the efficiency of institutions, LBP is a generally efficient institution. Its performance i s shown inthe key indicators inTable 1. These indicators have generally improvedover the period o f the project and since. Return on Equity rose from 9.3 percent in2003 to 15.2 percent by August 2008 and Nonperforming Loans (NPL) fell from 14.7 percent in 2003 to 3.6 percent by August 2008. As noted by USAID, LBP's performance i s considered to be remarkable considering that it has survived for 45 years without requiringbailouts to avoid bankruptcy as was required by two other government owned banks in the Philippineswith less demanding missions. LBP has also performedparticularly well inthe implementationo f environmental requirements2' 3.36 PCFC is a moderately efficient institutionbutthe data are not readily comparable with LBP because o f the different nature and remit o fthe institution. Ithas beenable to act as an important guiding wholesale lender over a period when wholesale funding for microfinance was far below demand and microfinance was still inits infancy. The more difficult question, addressedbelow, i s with respect to sustainability. 3.37 Additionality.The mission found no convincing evidence ineither direction onthis question. At the individual borrower level, the majority o f those spoken to appeared to have a number o f alternative lenders. This i s not surprisingsince they were all expected to be eligible borrowers who would have been eligible inthe eyes o fmost lenders. However, after the Asian financial crisis, many found the project to be the only source o f longer-term and restructuring funds andfoundthat other lenders were "nowhere to be seen", suggesting additionality. Looking at the question from a sector perspective to find an incremental spike inlending that might suggest additionality is not usefulbecausethe volume o f lendingthrough the project was too smal121to find significance. RISKTO DEVELOPMENT OUTCOME 3.38 Riskto Development Outcome has several dimensions: the riskthat the financial support to the rural sector will not be sustained; the risk that the strengtheningo f the two wholesale institutions will not be sustained; the risk that the micro-finance elements will neither be sustained nor achieve the intendedpoverty alleviation; the risk o f beneficiaries falling back into poverty ifthe benefits are not sustained; and the risk that what limitedenhancement to financial discipline that was instilled inPFIs will not be sustained. Overall, Riskto Development Outcome i s rated Moderate. 19 While one would not expect employment analysisto influence lendingdecisions, given the ready availability of employmentdata for the larger loans and the relative ease of gettingapproximations for the smaller loans, the available employmentdata with a wide rangeof costsperjob createdcouldhave beeninformativefor hturerural development interventions and at low marginalcost. 20 In2008, they receivedrecognitionfor environmental due diligencefrom the Association of Development FinancingInstitutionsinAsia andthe Pacific. 21 In2005 the Agricultural CreditPolicy Councilestimatedtotal loans grantedby bothgovernment andprivate banks for agricultureat P52.5billion(about US$10 billion) with about P190billion(aboutUS$4 billion) for agriculturalproduction.At that time about 60 percentcame from privatebanks. Thus the lendingunderthe project was less than 1percentofthe total lendinginthe sector. However, althoughthe total data by year is not available it would have been a muchhigher percentageofthe mediumto longterm lending. 15 3.39 Financial support to the rural sector continues to grow through anever widening rangeo f intermediaries. Competition inthe rural areas i s quite intense. The mission heard a number o f complaints from different players that a particular bank or NGO had"stolen a client". This assessment expresses some concerns elsewhere about the impact of the dominant position o f LBP on the growth o f private banking and nonbanking institutions but the fact remains that LBP has beena strong organizationproviding wholesale financial services. 3.40 With respect to the strengthening o f LBP and PCFC, LBP's performanceratios including returnon equity, loan loss provisioning, and expanding lendingand deposit volumes suggests only a modest risk for the future unless the current global financial turmoil not only impacts on their revenuebuttriggers areturnto greater government pressures for behest loans and subsidized rates. 3.41 As noted inthe ICR, the longer term sustainability situation for PCFC is o f greater concern. The privatizing o f PCFC mentioned inthe RFIIIPAD never eventuated although it appears to be widely acknowledged that it mustbe, and will be, done indue course. PCFC has no low-cost deposits sources and depends substantially on donors. It has been profitable with the helpof ahighshare of equity inits total resources and below marketinterest rates from donors. As indicatedby the SubsidyDependency Index it has been subsidized inmost years. It is difficult to see a sustainable future without it beingconverted into a bank or beingabsorbed into one o f the existingbanks. This scenario has already been quite widely discussed and anticipated and seems likely to be the course government would take at the appropriate time. As PCFC i s constituted now, the Riskto Development as an institution would be ratedHighbut with the expectation o f change inthe future, arguably the risk i s only Moderate, particularly giventhe relative ease with which a change instatus would be possible. Finally, the Riskto the achievement inenhancing financial discipline inPFIs i s Highbut o f low weight inthe aggregate rating since the achievement was, inany case, modest. 3.42 With respect to the risk o f beneficiaries falling back into poverty, lack o f data makes assessmentdifficult. However, the limitednumber o f small borrowers visited by the mission were mostly impressiveinboththeir ambition and achievement to date ingrowing their small businesses. 3.43 While, as noted, the proposed fourth project inthe series did not materialize, this makes little difference to the rating o f Risk to Development since LBP i s now such a strong bank. In any case, future development will needto gradually shift focus towards an increasing share o f non-government banks inthe sector and the building o f capacity at lower levels inthe system. BANKPERFORMANCE 3.44 Bank Performance i s rated Satisfactory overall with some weaknesses indesignalong with significant strengths butwith very strong supervision. Inmany respects, as inthe previous two Rural Finance Projects, Bank staff did an excellent and sustainedjob o f shepherding Philippines rural finance towards a generally stronger and more competitive institutional structure and enabling environment. There was enormous praise for the Bank Task Team Leader from the borrower side. 16 3.45 Quality at Entry.As notedearlier, the Quality Assurance Group (QAG) rating of Quality at Entry was Satisfactory. Inproject design, Bank staff made a thorough assessmento f the apex institutions, drew appropriately fromthe lessons of global andregionalexperience and the lessonsofthe previous two projects. Bank staff brought strong skills inthis area. Project objectives were, by and large, realistic with the exceptions noted. Loan conditions were appropriately designed. However, there was a lack o f a baseline survey that would have enabled assessment o f poverty impact. Environmental elements were particularly strong. 3.46 Quality of Supervision.Insupervision, Bank performancewas strong. Itcould be argued that the major impact o f this project was the technical support provided to the two wholesaling institutions as the project unfolded. Some LBP staff membersattribute their perceived relatively strong current position inloan provisioning, that is helping them to combat the impacts o fthe current global crisis, on the Bank support and advice, against some LBP doubts at the time. Over the series o fprojects, the borrower observed some differences inthe strictness with which agreed standards were applied by the Bank in supervision but no inconsistencies o f a serious nature. The Bank practiceddue diligence with the apex institutions and PFIs although monitoring ofperformance evidence from PFIs was weaker. The Bankmade a determined effort to sort out with the Department o f Finance the interest rate problem with the JBIC loan to DBP. 3.47 However, it i s questionable whether the Bank should have acceded to raisingthe sub-loan ceiling size and firm asset size to accommodate large companies who should have beenable to access other sources rather than scarce World Bank funds. This response may have beenmore related to the slow start due to the DBP competition than to the priorities o f the sector. But, on balance, supervision i s rated Satisfactory. 3.48 Beyond the period o f the RFIIIthere was a further performance issue that falls outside this ratingbutneeds to be described. Needless to say, there was unhappiness inLBP over the way the proposed RFIV follow-on project was dropped at such a late stage after the raising o f expectations and also over the.tardiness o f the formal written communication about this. This issue of coordination with IFC appears not to have beenwell handled by either Bank Group party. Muchofthe preparatory work was completedfor this proposed RFIV project, LBP was expecting it, a PHRD grant had been disbursedfor technical assistance, and appraisal was anticipated. Bank staff had discussed with IFC staffthe possibility o f IFC TA support for PFIs as part o f the project through a trust fund. IFC working level staff were interested. However, IFC unexpectedly argued from the senior management level that support such as this type o f project inthe financial sector was IFC's responsibility. There were exchanges at the senior management level of bothparties and it was finally agreed that this was IFC's "turf". The Bank guidance on which o f the two parties heldresponsibility revolves partly around the extent to which there i s a need for sector dialogue, this beingseen as lying outside IFC's remit. Inthis case, looking at the language o f the guidance, it i s not entirely clear whether the proposedproject fell within IFC's remitor not and under those circumstances the presumption should have beento stay withthe status quo set by the precedingproject particularly giventhe extent o fpreparation work already completed. But, inany case, the collective decision over this "turf battle" seems ill-advised since IFC did not, infact, proceed to occupy this particular disputedturf. At a minimum,better coordination was needed at an earlier stage. Bank staff report that there i s now better coordination with IFC including coordination on the CAS. 17 BORROWER PERFORMANCE 3.49 Borrower performance i s rated, as inthe ICR, Moderately Satisfactory overall. 3.50 Governmentperformance i s ratedUnsatisfactory due to the failure to initially prevent, or subsequentlyresolve, the subsidized wholesale lendingthroughDBP by JBIC,contradicting GOP Executive Order 138. This immediately undercut the lending rates definedinthe Bank's Loan Agreement that had requiredfunds, as per EO 138, to be on-lent at a weighted average interest rate o f 91 day Treasury Bills. Inaddition, the government did not resolve the inconsistency between the floor on the currency swap rate for the Peso derived from US dollar loans and the floor on the swap rate for the Peso derived from Yen-based loans. Thus, when interest rates dropped, Yen-derivedloans were cheaper thanUS$-derived loans. Department o f Finance (DOF) should have ensured that all wholesale lending floor prices were at the same level regardless o f currency borrowed. These two problems resultedina significant handicap in implementingthe project against the DBP competition. Hadthese two things beingknownin advance, the project would have been designedina different way. 3.5 1 Following mission discussion with DOF, it i s still not entirely clear how this situation came about. It seems possible that it was simply an inadvertent error by DOF that occurred partly as a result of the very fast (three to four week) appraisal process o f JBIC (now JICA after the amalgamation) calling for quick decisions and little time to inform other players. The Bank somehow needs to devise ways o f picking up such events earlier. 3.52 Overall, the implementing agencies 'performance was Satisfactory (defining the agencies as LBP and PCFC). Inthe case o f LBP, performance was exemplary. Other country's institutions (e.g. Vietnam) sent significant numberso f staff to LBP on training visits which were much appreciated. LBP, as the borrower, carried out its assigned task efficiently over a period o f difficult challenges and over that period still was able to gain incapacity and efficiency as shown by most ofthe performance ratios. PCFC performedadequately with the microfinance component and became stronger over the project period. However, as noted inthe ICR, their overall operating costs remain quite highfor a wholesale operation and sustainability awaits resolution. MONITORINGEVALUATION AND 3.53 Performance o f M&E i s rated Substantial. Monitoring and Evaluation within a financial sector project takes a somewhat different form to M&E o f a traditional investment project since much of the monitoring element i s related to the quality of the financial institutions' accounts that are the subject o f internal control and audit. LBP because o f its maturity has strong, long- standing, monitoring capacity. However, inboth design and implementation there were weaknesses inpoverty monitoring since there was no Impact Study although some PCFC data and some USAID evidence from similar micro-finance interventionsgive some indirect indications o fpoverty impact. 3.54 M&E Design. The Land Bank, havinghad two earlier projects, had an established M&E systemsince 1991 whenthe first Rural Finance Project was approved. However, we have noted above some lack o f breadthinthe KPIs agreed with the Bank and this seems to have partly contributed to the lack o f a beneficiary impact assessment. For both the participating wholesale 18 banks, LBP and PCFC, M&E design i s rated Substantial mainly due to very thorough data management by LBP. 3.55 M&E Implementation.M&E implementation is rated Substantial, indeedfor LBP close to High.LBP's reporting is thorough andwell presented.22The agreed quarterly andsemiannual progress reports were submittedpromptly and the quality o f the reports seen was good. However, there was some weakness inthe quality o f reporting by PFIs. Inevitably, there was quite wide variation intheir skills. 3.56 M&E Utilization. As noted by the ICR, the findings o fM&Ewere used inthe adjustments o fthe funding allocations andto make some adjustments at mid-terminthe indicators. These were usedby both the wholesale banks and, as i s evident from supervision files and reports, by World Bank missions that drew on them. Utilization i s rated Substantial. 4. Findingsand Lessons 4.1 This was a traditional line o fcredit project channeled through a government owned wholesale bank, not the type o f finance project generally designedtoday. However, it i s a case o f an efficient publicly owned banking institution satisfactorily wholesaling credit to the rural sector. Inthe absence o f the Asian financial crisis, it would have been difficult to justify the predominant line o f credit focus. One would have expected more focus on capacity building o f intermediaryandmicrofinance institutions, onbuildingabsorptive capacity and demand, and arguably more attention to further leveling o f the playing field for competitors. However, injecting moderate amounts o f medium and longer-term capital into the rural sector was clearly very important at the time and LBP was a strong, available and proven vehicle. 4.2 Itwould havehelped strategic decisions ifthe Bank hadbetter understood several issues including: the place o f LBP within the sector with respect to the levelness o f the playing field and the probable implicit net LBP subsidies and competitive advantages through their captive deposits and various other government programs; and, more broadly, the role o f other government and nongovernment bankingand microfinance institutions inchanneling different types o f fundingto the sector. 23 4.3 Itwould also have helped, particularly given the current circumstances andthe need for employment creation, to better understand data related to the efficiency o f employment generation from different types o f enterprise and the growth and equity impacts o f that employment. The apparent wide rangeso f costs perjob created and financial returns offer fertile ground for analysis. This i s particularly so inan only moderately targeted project design that seems to exhibit some ambivalence about whether to lendto the poor or the less poor, where to place the boundaries o f "non-rural", and whether to lendfor large or small enterprises. 22 Their website is indicative oftheir reporting and information sharingcapacity. 23 The Bank Regionpoints out that the SubsidyDependencyIndex for LBP was closely monitored and improved over time and now shows anegativesubsidy. This is correct. However, IEG's concernlay more inthe possible implicit advantagesthat LBP held over the project period with its captive government services. Suchadvantages do not show up inSDIs. They also argue that the combination of wholesaleandretail lending worked well to both encourage private sector bank expansionand to reachremoteareas. IEG has concerns, as do some other players and academics, about the conflict of interest inbeing awholesaler and aretailer competitor to those receiving wholesale funds, an issue referred to inthe World Bank's operationalpolicy. 19 4.4 The utilization o f LBP as the wholesale bank was sound at the time. However, as the rural financial sector has beenevolving rapidly over the period o f the project, circumstances have changed. Ifthe Bank were to support a further rural finance project, the role o f LBP inthe sector would warrant re-examination although it would remain a serious contender for support because o f its exceptional capacity and ongoing attentionto enhancing efficiency and modernization. But deeper analysis may show it to have significant net benefits24over competitors conferredby its government-owned status. This may be less healthy inthe future for growth inthe rural finance sector as a whole. On the other hand, the judgment should not be one o f principle but of the effectiveness and efficiency facts, not all o f which were sufficiently understood at appraisal. 4.5 The main lessons are the following:25 (9 A government-owned bank within a generally sound enabling environment canreach out effectively and efficiently to rural areas through wholesale operations when other private players are still reluctant to take such risks ina challenging sector and particularly at a challenging economic time. Notwithstanding government ownership, they can be independent enough to also serve as a useful counterbalance to government and political pressures towards unsustainable credit policies. (ii) Itis importantina rural finance project involving a government owned bank, to analyze explicit and implicit subsidies for both the institution inquestion andthe sector as a whole to ascertain the levelness o f the playing field for non-government entrants. Inthis case, it i s still not clear what advantages (or perhaps even net handicaps) LBP holds and what this might meanfor the optimal evolution o f a competitive sector over the coming decade. (iii)When poverty alleviation i s stated as a micro-finance objective it i s difficult to assess achievement without some form o f beneficiary impact assessment eventhough, with 24 We use the term "net benefits" advisedly since it i s clear that LBP's governmentownership status conferson it significant costs as well as significant benefits. Without substantial study is not clear how balancedor unbalanced these costs and benefitsmay be. 25 It is worth recalling the main lessons of the IEG assessment of Rural FinanceIand 11. Summarized, these were (inparenthesis comments ofthis current assessment are added): (i) focus shouldbe as narrow as possibleto Project achieve the objectivesbut broad enoughto includeelements important to long-run sustainability. The narrowing of focus that took place betweenRFI and RFII was good inthat it was more realistic about what could be accomplished.However, it was badto the extent that it avoided dealingwith policies potentially important for project success. (Still a dilemma with trade-offs, but RFIIIprobably erred somewhaton beingtoo narrow in microfinance/capacitybuilding.) (ii) Financial liberalization is more thanjust the controlling of interestrates. This refers to the lack of a level playing field with subsidizedinterest rates for certain classes of borrowersand the BSP continuedintervention inbranching decisionsby banks that satisfiedregulatory requirements.(Branching decisions now less constrainedbut this assessment still urges better analysis ofthe levelnessofthe playing field with respect to LBP role.) (iii) sustainability of credit operationsrequires ongoing access to hnding and credit projects The shouldincludeincentivesand monitor and promotethis. This refers to the needfor more attentionto rewarding depositmobilization by PFIs. (Still arguably an area for greater attentioninrural areas but electronic banking is rapidly moving inthis direction to ease deposit making.) (iv) Poverty alleviation and environmentalobjectives may exceed the reachof aproject designed to meet market based demand driven credit needs. (The evidence suggests that environmentalobjectives were quite well achievedunder RFIIIsuggestingthat such an objective did not exceed the reachofthe project. Poverty alleviation to amodest level probably also didnot exceedthe reachofthe project and probably occurred but was inadequatelymeasured.) 20 rural finance, demonstrating causation from such assessmentsi s difficult. Such assessmentscan also contribute evidence for the designo f subsequent phases. (iv)There is a need for better coordination betweenthe Bank and IFC and resolution of disputedareas ofturfbefore preparation work on a potential project. The Guidelines may need tightening particularly with respect to mode andtiming o f coordination and respective policy roles and perhaps even some arbitration process. The Guidelinesstill seem to leave considerable discretion to staff.26 26 This lessonwas inspired by an event after RFIIIclosed(see paragraph3.48 above). 21 References BDOUnibankInc. Reports on SelectedBorrowers.2009 CGAP.MicrofinanceFunder Survey.EastAsia andthe Pacific. 2008 (also a number of other CGAP website papers, blogs, andtabulations) Chua, R., ThePerformance and Sustainability of TwoPhilippineMicrofinance Institutions. Bwtp.org. 1998 D e DiosandHutchcroft(2003) Political Economy inThe PhilippineEconomy:Development, Policies and Challenges.QuezonCity Ateneo UniversityPress Favis-Villafuerte,N.MicrofinanceHandbookPhilippines.Apples of Gold(Publisher), 2007 FitchRatings.PhilippinesCreditAnalysis. Landbankofthe Philippines.January 2009 Fukui, R., andLlanto, G.Rural Finance andMicrofinance Developmentin Transition Countries in Southeast and EastAsia. PhilippineInstitutefor Development Studies. 2003 IEG, WorldBank. FinancialSector Assessment ProgramEvaluation.2006 Landbank documents (various unpublishedandwebsite reports) includingOutlines of Performance,2009 Kaufmann,D. (2006)GovernmentsMattersV. Aggregate and individualgovernance indicatorsfo 1996 to 2005, WorldBankPolicyResearchWorkingPaper No. 4012, Washington, DC Landbank.Analysis of Sub-borrowerERRBRR, 2007 Landbank. AnnualReports 2005 onwards Landbank. InstitutionalDevelopment Plan. 1998 to 2003. Landbank.KnownPortfolioQualityReport.RiskManagementDecember2008 Landbank.ThirdRuralFinanceProject ProgressReport. Wholesale LendingDepartment. Septerr 3er 2007 Ledgerwood,J., (1999) SustainableBankingwith the Poor, MicrofinanceHandbook, World Bank Llanto, G., (2003)A Microfinance Promise: ToProvide the Poor Access to Finance Services.PolicyNote 2003-06 PhilippineInstitutefor DevelopmentStudies, 2003 Llanto, G., (2007) Overcoming ObstaclestoAgricultural Microfinance. PhilippineInstitutefor DevelopmentStudies. 2007. PeoplesCreditandFinanceCorporation.AnnualReport 2007 Pritchett,L.,(2003) A Toy Collection, a Socialist Star and aDemocratic Dud? InRoderik,D. ed."In Searchof Prosperity: AnalyticalNarratives on EconomicGowth". PrincetonUniversity Taytay sa KauswaganInc.Reporton SelectedBorrowers.2009 Roderik,D., (2003)In Searchof Prosperity: AnalyticNarratives on Economic Growth.,Princeton University USAID.Assessing the Impact of Microfinance on the Clients Enterprises in the Philippines: Report on the ThirdSurvey of Borrowers. ExecutiveSummary.USAID, 2005 USAID.Micro-enterpriseAccess to BankingServicesProgram.USAID, October 2008 USAlD.TheCase of Land Bank in Philippines. Preparedby SalahGossbasedon reportby Vogel and Llanto..Micro-note32. June 2007 WorldBank.OP 8.30. OperationalManual. Policyon FinancialIntermediaryLending Note: This reference list does not includeall the WorldBank CASs, PADS,ICRs, and PPARsreferredto for the lendingprograms and agricultureprojects. 23 Annex A Annex A, Basic Data Sheet PHILIPPINES: Third RuralFinanceProject(IBRD-44130) Key ProjectData (amounts in US$million) Appraisal Actual or Actual as % of estimate current estimate appraisal estimate Loan/Credit amount 150 147.5 98 PFls/MFIs 21.4 31.7 148 SBs 42.4 53.1 125 PCFC 0.3 0.5 167 LBP 2.0 2.2 110 Total project costs 216.1 235.0 109 ProjectDates Original Actual Concept Review 04/16/1998 04/16/1998 Begin Appraisal 07/01/ I998 07/01/1998 Board approval 12/03/1998 12/03/1998 Signing 12111/1998 12/11/1998 Effectiveness 05/06/1999 05/06/1999 Restructuring _ _ Mid-term Review -- ____ Closing date 06/30/2005 09/30/2007 MissionData BankLendingandImplementationSupport/SupervisionProcesses Task TeamMembers 24 Annex A Spec. Gilbert Llanto Consultant Fin. Econ. And Micro-Fin. Spec. Yaacov Ziv Consultant Env. Spec. Supervision/ICR Arie Chupak Sr. Financial Analyst EASRE Task Team Leader LisaValenzuela Micro-Finance Spec. EASRE Task Team LeadedMicro- Finance Xiaolan Wang Operation Officer EASRE Micro Finance Guzman Garcia- Operations Officer EAPRE Advisor Rivero Steven Oliver Sr. Agric. Economist EASRE ICR Preparation Iain Shuker Agric. Economist EASE Task Team LeadedAgric. Economist Sameer Goyal Sr. Financial Sector EASPF Financial Sector Spec. Preselyn Abella Fin. Mgmt. Spec. EAPCO Fin.Management Spec. Yaacov Ziv Consultant Environmental Spec. Paul Harrison Consultant Agric. Econ. and Banking i 25 Annex B Annex B. Background, EnablingEnvironmentand Institutions 1, Agriculture. Agriculture, including Fisheries and Forestry, constitutes about 20 percent o f GDP and about 35 percent o f employment. Agricultural growth has beenrelatively modest over the last two decades averaging 1.7 percent over the period 1981to 2003 compared to a GDP growth over that period o f 2.6 percent. However, from about 1998 there was some improvement. The productivity o f labor is low partly due to highlevels o funderemployment(Mudlak, Larson, andButzer 2002). 2. The EnablingEnvironment.The Philippines financial system is heavily dominated by banks, particularly commercial banks (Milo 2007) and this has not changed much over recent decades. Banks are relatively unrestricted inthe types o f activities they may engage incompared to other Asian countries. The bankingsector i s regulatedby BSP, the securities market by the Securities and Exchange Commission (SEC), and the insurance sector by the Insurance Commission (IC). A Financial Sector Forum was formed in2004 to coordinate these bodies but it is not a formal organization. The Philippines economy is heavily dominatedby a powerful and wealthy political elite flourishing partly due to weak governance. Some observers point to this as the reasonwhy, notwithstanding generally adequatepolicies and institutions (Rodrik 2003), the Philippines economy has performedrelatively poorly, for example compared to Vietnam. Patronage politics i s reportedto be widespread. However, observers also note (de Dios and Hutchcroft 2003) that years o f deregulation and liberalization have given a more diversified economy and more participants inpolicy decisions and that, while powerful family conglomerates still exist, their power has beenreduced by this increased openness. World Bank governance indicators for 1996 to 2005 (Kaufmann 2006) surprisingly place Philippines and Vietnam at a similar level butwiththe Philippines showing a significant decline over that period while Vietnam's rating was relatively flat. The priority need inPhilippines is seenby a number o f observers as beingthe need to improve the overall performance o f government (de Dios and Hutchcroft 2003) and to reduce institutional uncertainty allowing players to better anticipate the rules o f the game (Pritchett 2003). 3. Within the broader constraints o fthe environment outlined briefly above, the enabling environment for rural finance i s generally adequate with no control on interest rates or imposed lending targets other than some requirements on banks for certainpercentages o f rural lending. However, there i s more to be done particularly inmicrofinance although a consultant for one o f the donors found itto be, "one o fthe betterpolicy environments for microfinance." 4. However, at the time o f appraisal there were a number of emerging economic problems dictating quick action. GNP growth was decelerating, inflation was above 10 percent, unemployment was over 13 percent, and the fiscal deficit was escalating. The liberalization o f capital account transactions that took place in 1992 with a stable nominal exchange rate ledto an appreciation o f the peso alongside often unhedgeddollar-denominated borrowings, causing problems for borrower's following the depreciation inmid-1997. 5. Compared to the 1980s, by the time o f appraisal, there had been nearly a tripling o f the numberofbanks operating inthe country. Following the Asiancrisis in 1997, there was an increase innonperforming loans contributing to a credit squeeze inthe rural economy. Inorder to 26 Annex B protect their balance sheets, banks were inclined to pursue a general credit squeeze rather than seek out the good firms from the bad. 6. There are three regulators inthe system. Banks are regulated by BSP, cooperatives are regulated by the Cooperative Development Authority, andNGOs are regulated by the SEC. BSP regulations are generally sound and implemented. These include regulations for the review o f portfolios and other risk assets, RiskAssets to Equity Ratio, minimumcapital requirements,the definition o f past due loan accounts, loan classifications, minimumnet equity base, and provisioning for loan losses. However, the other two regulatory institutions are still quite weak. A Credit BureadRegistry has beenapproved and is expected to be operational by next year although, for larger borrowers, there are already private credit agencies. 7. The banking systeminthe Philippines has changed substantially over the last two decades. At the start of the Rural Finance I11Project there would were 54 commercial banks operating inthe country including 14 foreign banks against only 27 commercial banksin 1980. At the start ofthe project, universal and commercial banks accounted for approximately 80 percent o fthe assets o f the banking system while thrift and rural banks accounted for the remaining20 percent. The profitability o f commercial banks hadimprovedby 1996 at approximately 18 percent on equity and 2 percent on assets but with the crisis this declined the following year to about 15 percent and 1.6 percent respectively. 8. Interest rates are largely based on prevailing market rates but there i s intermittent political pressure to reduce rates. The agrarian loans for land acquisition are handledunder a separate program and, for example, in2008, under the Rice Productivity Program, concessional interest rates were adopted for farmer's organizations (8.5 percent) and SMEs conduits (7 percent). At various times within the last 5 years there have beeninterest free or subsidized loans through the Department o f Agriculture, for example, through the Agricultural Competitiveness Enhancement Fund.Last year, interest rates to cooperatives were lowered for social policy reasons. Within LBP's portfolio there are a number o f different windows o f directed credit aimed at particular purposes, for example the lending to Local Government Units (LGUs). 9. Inmost areasthere is no landtitle andthe only options for a lender for some degree o f security are vicinity maps, locationplans, tax declarations, realty tax evidence, or affidavits o f neighbors. 10. Outside the banking sector, but significantly impacting on it, the State-Owned Enterprises still face major profitability problems and typically have opaque accounting practices. 11. The LandBankof the Philippines(LBP).27LBP is a government-owned policy bank with auniversal bankinglicense established in 1963 as part o fthe Agricultural LandReform 27 Fitch Ratings find that LBP provides financing at sub-commercialrates butthat its net interest margins are above industry average due to a substantial low-cost deposit base. Dueto its ruralbranchnetwork it has arelatively high cost`structure. It is burdenedwith the costs of financial intermediation for the CARP. LBP has ahighNon Performing Loansreservelevel. The bulk of its NPLs arose from the Asian financial crisis. Following the Asian crisis, LBP shifted somewhat away from rural lending towards manufacturing andproperty developmentbut it was from this that the majority oftheir nonperforming loans emerged. LBP therefore revertedback towards rural lending. Fitch Ratings of LBP for 2009 give LBP anAA long-term national level rating noting stable core 27 Annex B Code. It i s involved inboth wholesaling and retailingrural credit, a fact that presents some potential conflicts o f interest and i s o f some concern to private banks. LBP was selected as the borrower and the wholesale lending institution o fthe project. In 1988, the Comprehensive Agrarian Reform Law was signed and became the legal basis for the Comprehensive Agrarian Reform Program (CARP) for which LBP i s the financial intermediary. In 1995 it became an official government depository thereby giving it access to deposit funds from the government and government linkedbodies. 12. By December 1997 LBP's available resources had reached approximately US$4.0 billion. The main source o f funds was government deposits which constituted at that time 46% o ftotal resources. Private deposits amounted to 24% o ftotal resources and bills payable including loans from WB, ADB, OECF and IFAD, represented 11%. O nthe asset side, cash and investment in government securities totaled 31% o f assets and net loans amounted to 59%. There was 4% in non-government securities. LBP premises and other fixed assets represented 2% and other assets 4%. 13. As indicatedinthe ICR andLBP documents, LBP has had45 years o fexperience in lendingto the rural sector. It is the fourth largest commercial bank inthe Philippines interms o f assets. It has the most extensivebranch network, having branches inall but one o f the 81 provinces. Deposits have risen steadily to P334 billion by end of 2008 with deposits from government increasing somewhat more than deposits from private depositors. Assets reached P434 billion by the end o f 2008 and total loan portfolio about P185 billion. Returnon Equity rose from 9.3 percent in2003 to 15.6 percent by end o f 2008. Capital Adequacy Ratio (CAR) held fairly steady from 2003 to 2008 at 14-15 percent, well above the BSP's requirement o f 10 percent and the Basle 2 requiremento f 8 percent. LBP's Liquidity Ratio had been healthy even prior to the project. In 1999, it was about 58 percent. By the time o fproject closing it had reached about 79 percent. Nonperforming Loans (NPL) fell from 14.7 percent in2003 to 2.9 percent by end o f 2008 thus improving to the pre-1997 Asian crisis level after a difficult period. As of September 2007, the past due loans level stood at 1.58 percent. By 2007,72 percent of loans by amount went to the designated priority sectors, i.e. to farmers, fisherfolk, micro and SMEs, agribusiness, agri-infrastructure (to Local Government Units), agri-projects (to government owned corporations), environment-related projects, and livelihood loans. 14. LBP's success has beenattributed (USAID2007) to a number o fthings including: generally sound enabling environment including a requirementfor adequate capital and the mandating o f a market orientation infinancial policy that reduced political pressure to subsidize lending; the ability to capitalize on its strong performance by persuading Congress to increase its financial capitalization; a huge deposit base as the only government depository bank with a large network giving it a virtual monopoly o f LGU deposits; strong risk management (arising partly from the knowledge support from donors such as the World Bank); portfolio diversification, capacity buildingassistanceto strengthen clients including marketing capacity; and good deposit mobilization (about US$3.2 billion in2005). Challenges ahead notedby USAID include the profitability and moderate capitalization. They note that downside risk i s mitigatedby moderatesupport from the Governmentofthe Philippines. Although they also note that while the government'spropensity to support LBP is likely to be high, its ability to do so may be limited. They anticipatesome asset deterioration due to the current crisis but note satisfactory levels of reserves. 28 Annex B tension betweenwholesale and retail lendingand the risk o f "adverse selection" with loan officers giving excessive preference to a limitednumber o f regular "easy" clients. 15. As documented inLBP's Annual Reports, LBP is involved ina wide array of services including collection and tax management services to government, commercial banking, trust banking, corporate lending, investmentbanking, deposit products, consumer finance, remittance services (inUSA and Italy),insurance, brokerage, leasing, real estate development, and marketingassistance. The net implicit subsidy effect, especially o fthe captive LGUdeposits warranted better analysis at appraisal. 16. LBP's performance improved over the project period inmost respects. By project closing in2007, RealReturnonEquityhadreached 12percent, RealGrowth inEquity 14percent, the SubsidyDependency Indexreachednegative 12% (however the Agrarian Reform SDIwas still significantly positive at 23 percent), the proportion o f loans to priority sectors had steadily increased to 69 percent (in2000 it was 36 percent), Non-Performing Asset Provisions Coverage hadreached 74 percent, on the Countryside Loan Fundthe past-due ratio was 1.58 percent. 17. LBP's dividendto government i s imposedupon it. This has been an area o f uncertainty because, althoughthe law requires a payment o f 50 ercent o fthe previous year's net income, in practice it has beena matter for annual negotiation?' As indicated inthe PAD, at the time o f appraisal, there remained a need for civil service reform, more prompt audit submission insome projects, deepening o fthe capital market, contractual savings reform, strengthening o f banking regulations in some areas, and enhancement of the regulatory environment for private sector participation in infrastructure. With respect to risk but subsequent to project appraisal, Philippine national regulators had developed the Internal Credit Risk Rating System, a scale system. This was adopted by LBP. 18. The government created a favorable policy environment for microfinance through the National Strategy for Microfinance, the General banking Law o f 2000, the Agriculture and Fisheries Modernization Act (market orientation o f credit), and Executive Order 138 (phased out subsidized directed credit inthe non-agriculture sector).29However, over the period o fthe project there were, and still remain, a number o f regulatory issues with respect to microfinance (Llanto 2004). These include (Llanto 2007): (i) the prohibition against mortgaginghelling land within 10 years of its award; (ii)5 ha ceiling on ownership; (iii) designation of government a the 28 As part of the Borrower responseto the draft report, LBP commented: "LBP, being a government financial institution is required by law to declare50 percentof its incomefrom the previousyear as dividend to the National Government.LBP always managesto negotiate for a lower dividend rate with the Departmentof Finance. For the last five years (2004 to 2008), the cash dividend rate averaged25 percentof its net income and atotal of P 1.1 billionstock dividends have been declared". 29 BSP Circulars on microfinance include: Circular 272 (2001) (2001) to Allow Entry of Microfinance Oriented Banks; Circular 282 (2001) Guidelines on RediscountingFacility; - Guidelines - on General Banking Law; Secular 273 Circular 324 (2002) Expansionof RediscountingFacility; Circular 340 (2002) Regulations for the Establishmentof Branches; Circular 364 (2003) Reduction of Risk Weight for SMEs; Circular 365 and 369 (2003) Amendment of 340; Circular 374 (2003) Regulationsfor BarangayMicrobusinessEnterprisesAct; Circular 409 (2003) Regulations for Micro-financing Operations of Banks; Circular 501 (2005) Rules on the Writing off of Loans; Circular 547 (2006) Amendmentson GovernmentBorrowings; Circular 549 (2006) Amendment to the Manual of Regulationsfor Banks. 29 Annex B as the sole buyer o f awarded lands under the land redistributionprogram; (iv) a prohibition against tenancy arrangements; (v) the general demise o f landmarkets due to agrarian reform; (vi) lack o f an efficient mechanismto resolve landdisputes; (vii) lack o f information needed by courts to hear landcases. With respect to risk, crop insurance exists on a small scale but, as inso manyother countries, has suffered from covariant risks due to lack ofdiversity. 19. While there i s now no usurylaw, there are still intermittent political threats to subsidize credit programs and cap interest rates, particularly at election times. So far these seem to have been resisted but the threats remain. However, there are a number o f programs including the Agrarian Reformprogramo f landredistributionwith subsidized lendingand other programs through the Department o f Social Welfare, some at zero percent interest, insupport o f 47 o f the neediest provinces. There are also a number o f grant plus cost recovery social welfare programs incertainsectors that provide the equivalent ofsubsidized interest rates andthere are also a number o f subsidiesto Local Government Units (LGUs). There has been no aggregate analysis o f what the net effect of all these market distortions i s on the levelness o f the playing fiefd for the entry o f other players. 20. The People's Credit andFinanceCorporation(PCFC). PCFC, a government owned and controlled corporation whose vision i s to be the leader inthe provision o f microfinance products and services, was selected as the microfinance wholesaler under the project. PCFC i s not a bank and cannot take deposits. It i s a finance company registeredwith the Securities and Exchange Commission. It was established in 1995, only two years before the project, to provide financial services to the poor and later was given the mandate for the delivery o f micro-finance services for the poor. It was initially capitalizedby funds from the National Livelihood Support Fund. PCFC is LBP's main conduit for the delivery o fmicrofinance services andwas so under FWIII.It is expected that eventually PCFC will beprivatized and there is apparently an executive order to that effect. PCFC has the remit to provide wholesale funds to micro-finance institutions inall provinces. Ithashadfunds from anumberof sources including anADB/IFADRural Micro-enterprise Finance Project (US$33.7 million o f which US$7.4 million was for institutional capacity buildingo f micro-finance institutions). 21. PCFC's performance ratios indicated inthe PAD at the time o f appraisal showed that it had so far maintained a high-quality o f loan portfolio with a past-due ratio o f only 0.5% o f its loan portfolio. It was, at that time, allotting 2 percent to provisioning. It had highliquidity. Capital to risk asset ratio declined from 66 percent in 1997 to 46 percent in 1998 due to the increase inthe loan portfolio. Financial projections prepared for PCFC at about the time o f appraisal showed expectations o f increasing Real Profit after tax and improved Risk Asset to Equityratio. 22. Over the period of the project, PCFC has been strengthened inmany respects, although there remain concerns about the longer term sustainability o f an institutionplaying this role that cannot take deposits. It has become a stronger financial institution than it was in2002. Equity has increased somewhat, all from retained earnings. Total resources more than doubled. Lending increased threefold. Operating costs have been reduced significantly from 12% in2000 to about 3% in2006 but, as noted inthe ICR, this i s still highfor a wholesale operation. Table 2 shows a selection of the main ratios. 30 Annex B 23. BSP have, over recent years, issued a number o f Circulqs to ensure the safety and soundness of microfinance institutions but BSP recognizes that it will take systematic training to develop the capacity to adequately supervise microfinance institutions. Donors have been supporting this effort. The regulation o f credit cooperatives and credit unions has beenweak through the Cooperative Development Authority. The National Cooperative Council developed performance indicators that have now been tested and adapted. The main microfinance need now i s for MFI skills to make sound lendingjudgments while substantially expanding operations to both smaller and larger clients. 24. Targeted Lendinginthe RuralSector. While the targetingo flendingunder the project was relatively loose, simply excluding metropolitan areas, over the period o f the project there was substantial targetedlendinginthe agriculture sector under various Department o f Agriculture schemes. Targeting was by both agricultural enterprise (even separating InbredRice from HybridRice) and by region. LBP was the conduit for some o f this lendingbut private banks had a larger share. The Agri-Agra Law (PD7 17) requiredcertainmandatory percentages o f all bank's credit to go to Agrarian Reform Credit and Agricultural Credit programs. However, since 1999, alternative compliance was permittedthrough such means as investment inLBP agricultural bonds, other bonds, low-cost housing, and special-purpose treasury bonds for agriculture. 25. Bank-fundedProjects. RFIIIfollowed immediately after RFII.BothRFIand RFIIhad been rated Satisfactory by IEGalthough Institutional Development was rated only Modest due mainly to LBP's inability to cut losses inthe agrarianreform loanportfolio, the ad hoc basis o f the dividendpayable to GOP, and the application of GOP own funds to targeted lending at below market interest rates when political pressures were great enough. (These are all concerns that have remainedto a greater or lesser extent under RFIII, inparticular pressures for below market rates may now be reduced.) 26. At the time of appraisal, there were two other projects relevantto the financial sector, the Banking SystemReform Loan and the Private Enterprise Credit Support Project. Currently, there are a number o f projects with links to the rural sector either recently closed or still active. These include: the Community Based Resources Management Project, the Local Government Units Finance and Development Project, Mindanao Rural DevelopmentProject (First and Second Phase), the Diversified FarmIncome and Market Development Project, the National Program Support for Environment andNRMP, and the Second Agrarian Reform Communities Development Project. There are three projects with some funding channeled through LBP, a new project supporting investment for LGUs and the private sector for local services,30Manila Third Sewerage Project, and a National Fluorocarbon Phase out Grant. 27. DonorCoordination.Thereare a number ofother donors who have supported rural finance over the last 10 years including particularly JICA (through DBP), KfW, ADB, and USAID. The majority have focused on microfinance. USAIDhas had success with their Micro- enterprise Access to Banking Services Program (MABS).This has helpedmany rural banks to become major players inthe microfinance sector. It offers a step-by-stepapproach to 30 This projecttook the Boardslot of what would havebeen RFIV. 31 Annex B microfinance taking into account the multiplicity o f income from various sources, the ability o f farmers to make rational decisions, the borrower's character and capacity to repay. The program has also supported participating rural banks inoffering mobile phone bankingservices. 28. Donor coordination i s considered adequate by most respondents. There i s a Philippines Development Forum that includes government and meets regularly and has a number o f thematic or sectoral subcommittees. However, indiscussion, a few Bank and other donor staff appeared to suggest that not enough concrete progress on the important issues was made at such meetings. Table 1.LBP's Financial Ratios and Figures I 11999 I2000 I2005 I2006 I2007 I2008 I Loan Portfolio (Peso bill.) 106.7 108.8 121.5 120.8 134.6 184.7 Net NPA/Equity % 109.4 138.3 33.2 19.9 12.5 10.6 RealReturnon Equity YO -1 0.4 8.64 9.24 10.19 6.47 CAR Yo 10.1 10.6 14.4 13.5 14.0 14.4 SDI Yo 2.0 20.8 -47.0 -32.6 -35.9 NA Table 2. PCFC Financial Ratios and Figures I 1999 I2000 I2005 I2006 I2007 I2008 I Net'Ln.Balance (P. mill.) 1,027 2,972 3,102 2,849 3,237 Net Past Duemquity (YO) (2.5) (8.0) (10.9) (4.3) (0.6) Real Profit (%)31 (6.1) (0.3) 2.8 2.9 3.9 Portfolio at Risk (YO) 17.8 7.1 6.0 8.5 10.3 CAR(%) 91.4 42.5 41.9 44.0 34.9 SDI 72 2.83 (20.6) 2.6 NA 3 1 RealProfit = Nominal profit -((equity start o f year -net fixed assets at start o f year)*inflation rate) 33 Annex C Annex C. People Met32 World Bank Iain Shuker Arie Chupak Carolina Figueroa-Geron Mark Woodward Hoonae Kim LandBank Cecelia Borromeo, Exec. Vice President, InstitutionalBankingand Subsidiaries Sector Julio Climaco, First Vice President, Strategic Planning Group Noemi DelaPaz, Vice President, Program Lending Group Gabriel Jayme, Vice President, Wholesale LendingDepartment Antonio Hugo, Vice President, Corporate Planning and Central MIS Department Vivian-Manuel Canonero, Dept.Manager, Iloilo LendingCenter Margarita Cabrera, Head PMIS Unit,WLD Briccio Creag, Team Head, PLEMUnit, WLD ErwinAlmacen, Bank Executive Officer, Corporate Planning Blesilda Coroza, Accounts Officer, WLD Prudencio Calado, Acting Head, Environmental Program and Management Department MariaVeronica Tuala, Accounts Officer, WLD PCFC Edgar Generoso, Presidentand CEO Atty. Noel Poso, Vice PresidentAccount Management Group BangkoSentralngPilipinas(CentralBank) Mr.Botardo, MicroSMEUnit Z. Rho, MicroSMEUnit Government CharissaHipolito, Director 111, Corporate Affairs Group, Department of Finance RenaCuarez, HeadDept, Corporate Operations Other PFIs Sheryl Luy, Banco D e Oro, Manila RolandDillague, Vice President Special Lending, Banco De Oro Nanette Biason, Senior Manager, Bank of the Philippine Islands, Iloilo Adonis Liang, Manager Account Officer, Bank of the PhilippineIslands, Iloilo Ana Kwan, Senior Vice President, Credit Supervision and Services Group Head, Planters Development Bank Staff of Taytay sa Kauswagan, MFINGO 32 Ina few cases interactionwas by phone. 34 Annex C Donors TeresitaEspenilla, Project ManagementSpecialist, USAID Flerida Chan, Senior Program Officer, JICA (now amalgamatedwith JBIC) Clients William How, President, Universal Harvester Inc. Milagros Ong-How, Executive Vice President, Universal Harvester Inc. J. Bautista, Manager, Armour Milling, Batangas Davy Barlin,General Manager, A1 New Creations, Iloilo Rowena Barte-Zulueta, Executive Director, Illonggo ProducersAssociation, marketshandicrafts Manager, Retcom Aquafarm, Iloilo Andy Sibayanand Dennis, Agri Poultry Dressing Plant, Sta Barbara, Iloilo Noreimi, small business client inIloilo baranguy and chair of group Madelaine, small business, client inIloilo Others Staff of SouthEast Asia FisheriesDev. Center Gilbert Llanto, Vice Chairman CARD (NGO and commercial bank) and academic researcher 35 Annex D Annex D, Borrower Comments lune 25, 2009 ms. MONIKA HVPPI Manager %or Evaluation Divishn LndepeMent EvatuationGroup me WorldBank Dear Ms. HUM: Tiis refers to the draR Project Performme Assessment Reprrrt on the Third Rural Finance Projeil (JARn 44130j. - Generally, we find the assessment repwtacceptable,However, we are endosing our comrnenps to some observations and we have updated some data on the repxt for your consi.ieration. Thank you and be$tregards. very t d y yours, ,,&Ae&+# 'GiLDA E. PlCO Presidentand CEO 36 Annex D LBPs Comments on the draft World eank - LEG Prolei3 Performance Assessment Report 1. Pagexi -5"' paragraph, * line 4, please put"0" in micro-financesystem line 5, please correct the acronym of Land Bank of the Philippinesas LBP instead of U P . 4 line 7, to delete the word"to" betweenthe wards helpand enforce) 2. Page 2, Para. 1.6 the last M o setltences stake that: - "LBP's dividend to government is Imposed upon it. This has been an area of uncertainv because, although the law requires a payment of 50 percent of the previous year's net Income, in practice Is has been a matter for annual negotiation." We suggest the followingrevisions: "LBP, being a government financialin&?ution is requiredby law lo declare 50 percent of its fncome f i the previcrus year as divfdend to the National Government.LBPalwaysmanages to negatlatefor a lower dividendrate with the Depament of Finance. For the last five years (low to 2008), the cash dividend rate averaged 25 percent of its net income and d total of P 1.1 Bilionstock Giifeds have been dedared. 'I Thjs revisionshould also apply to para. 18 of page 28 underAnnex 9. 3. Page 2, para. 1.7, grid line corporation" instead of " , , government-owned bank". This will also correct -.Pleaserevise as "government owned and controlled controlledcorporation" insteadof "government-ownedabank, ," page 29, para. 22 which should read as 'PCFC, government-owned and 4. Page 2, footnote no, 2 and Page 27, footnote no, 26 we suggest delettonof - both footnotes vhl& state that 'Zis irnpmnr t~understand &at the staff of LBP are civilsewants and subjecl to the same incentives and rules as uther dW servants including the same level ofjob securiij!, pension rights, rightsof appeal andslmihrpay sw/es," 5. Page 6, Para. 3.6 - "While relevanceof designwas found to be generally sound and is rated Substantial, this assessment finds four areas of weakness and expands on some of #em in the subsequent paragraphs. .. IThird, the project design gave limited support for the strengtheningof PFIs or NGOs and groups; We main focus was on LBP and PCFC, yet much of the ruralfinance constraint in rural areas, both then and now, lies with instltutionalcapacity and skills. It was too optimistic to expect that the pressures of accreditation along with the exlstingtraining capacity of LBP and PCFC, in any caw of uncettain additionality since these were partly on-going programs, would address skills development sufficiently." LBP commonls on PPAR.doc Pzgm 1of 2 I June2008 \ 37 Annex D EBPs Comments on Ehe draft World Bank - IEG Project Performance Assessment Repon 6. 7. Page 11, para 3.24 -to con& "LDP" as" LBP." 8. Page i4, para. 3,35, line 7 - We suggest that "over 40 years" be repiaced with "45years". 9. Page 24, Annex A On page32, to rewse therdect -To as "Els. Lisa Valenzuela" irstead of "Cafcnruela". folowing listedon Annex C: Ms, Carolina Rguerog- Geron Ms. Vivian Manuel - Caiioaero Mr. PrudencigCalado Ma. Vera- Tuala Margarb Cabrera, Head, PMISUnit,WQ Mr. BriccioCrag, Team Head, PLEM Unit,llys,,E 10. Page 27, para. 14 -We suggest the following rwislons to update data under Annex 3: I -- 1 Deposits .. ."P 290 From To Dillion in 206% 1 "P 334 billionby endof 2008" 1 NPL) . . -11 , 3.6 Nanperformmg Loans (NPL) ratio ' * . 2.9 percentbyendof 2008 ... ...1 I 11.Page 31, Annex 6, Table 1 Revision of 2006 taan Portfolio from '120.4" to - "320.8". 12. Page 31, Tabre2 -PCFCreqiiestedthe update of finanrial ratios and figures as follows (computatlonattached): LBPcommentson PPARW PPge 2 of 2 / June2009 38 Annex D k0Pl.E'S CRCDm& FINANCE CORP~RAT~ON A Micro-Ftrmnce C o m p j 39 Annex D Las:Allow- focm.LWS (48,950,311.33) (195,711,334.931 (226,767,23331) (268,977,7M).52) (241,265.3ss.Wl 1,028,~70,W.19 2,971,M8,357.26 3.402,8(1,298.32 2,W.754,521.51 3237,527m.03 Mams inL d l p h n 3,525.8 19.36 6,035,459.36 56,474.786.09 49,066.137.45 49.W6,137.46 Less!AllcwmefwPrrrb. toss (48,%50.311.33) (195,711,334.93) (228.36?,23331) (208,977.750.62) (241.285,355 50) N dPutoue I25.500.810.46) (1OS,Jso42733) (I4t3,000830933) {M,*sic,3?82s) &683,383,17) w l t y 1.039992908.73 f,280.841,872.25 1334,273,793.83 1.2&a,OW.f.a8.f5 1,152,445,042.84 Rauo 4 5% -8.0% -10.9% -4.3% -0.6% 8.1% 4.3% 2.8% 2 9% 3 9% if7lwcm*(per U P 1 6 70000 6.WW 4.13410 1.01819 0,00673 d)CAR Capital 1,039,992,908.73 1,290,041,672.25 1,334,273,793.83 1384,063,148-15 I,152,445,042,&4 RiskAss& 1,137,@11,009.55 3,0W8,404,00S.35 3,185,406,728.18 2,917,884,95406 3,302,012,888.96 91.4% 42.596 413% 14.0% 34.MI