by Piyaporn Hawiset
31 March 2003
The Philippines' President Gloria Macapagal Arroyo on March 12, 2003 ordered the cancellation of the $175 million Grains Sector Development Project (GSDP) loan from the ADB, saying that the government could no longer afford to pay the commitment fee for a program that was not being properly implemented and that the government now found it advantageous to defer implementation of policy reforms in the rice sector that are tied up to the ADB loan. Except for the Irrigation Rehabilitation Component of the project, being carried out by PCI Asia together with Klohn Crippen Consultants and Multi-Sector Development Corporation, the policy reform component has not prgressed at all. Finance officials said the government's repeated failure to privatize the National Food Authority (NFA) and to deregulate the rice industry which would force the government to cancel the loan which has two components that were supposed to have been completed in 2002 and in 2004, respectively. During the last week of March, the Arroyo administration cancelled the loan, after failing to reach an executiove decision on the pre-condition regrading the NFA, and after the Department of Finance considered the government could no longer afford the loan. However, as a last-ditch attempt to save the irrigation component of the program, the consultant was asked by the Department of Agriculture to prepare a position paper defending the need to continue with the irrigation component and indicate the losses of benefits to some 30,000 farm families that would result from the cancellation of the loan and project.
The Department of Finance said that the Department of Agriculture was directed to re-evaluate the viability of the program that had originally been proposed in 1996 and approved in 2000. The grains sector loan was intended for balance of payments support and carried several critical policy conditions that the government had repeatedly failed to meet.
In the highlights of the presidential instruction during Arroyo's meeting with the National Economic and Development Authority (NEDA) Board Executive Council, Arroyo gave instructions on the loan's cancellation.
"The president reiterated her instructions to cancel GSDP with the ADB," the report said.
The first tranche of the loan was released in 2000. Another $30 million had been scheduled to be released in 2001 but the government failed to meet the conditions attached to the loan. The third tranche amounting to $40 million was also delayed because the government did not expect to meet the conditions attached to that tranche either. This resulted in a delay of the implementation of the irrigation sector component, which only got under way in mid-September 2002.
The Department of Finance formally informed Agriculture Secretary Luis P. Lorenzo, Jr, who would have to decide if he could guarantee the completion of the preconditions to release of the loan proceeds.
"If the Department of Agriculture cannot do it then we don't see any reason for this loan to continue. It's a matter of prioritizing the limited resources that we have left," said another finance official. "We certainly cannot afford to pay commitment fees when that money clearly shoudl be spent on something we can actually accomplish." He also said that the cancellation of the loan might indeed be beneficial to the rice sector. The ADB's demands were perceived to involve drastic liberalization moves in the country's grains sector.
The loan, which has a $100 million program (policy reform) component and a $75 million irrigation component being carried out by PCI Asia and Klohn Crippen, contained certain conditions for its release such as the privatization of the national Food Authority (NFA) and the adjustment in the government's support price for paddy and release price for rice.
The $100 million program component should have been completed in 2001, while the irrigation component was scheduled to be completed in 2004. However, except for the relatively successful irrigation component in which the consultants are proactively working to bring forward, the project has been at a standstill since it was approved in 2000.
However, because the laon was still active, the source said that the government had been paying commitment fees.
"We can no longer afford to continue doing this," the source said.
The crucial pre-condition required that the NFA spin off and privatize its marketing operations, which is primarily responsible for buying and selling rice in order to influence domestic farm and retail prices. It allows rice farmers a modicum of price guarantees that makes rice cultivation affordable and produces a comparatively better return than under unrestrained market condtions. It also stabilizes prices for the Philippines' impoverished people, which make up well over half the population in which most people earn less than one dollar per day. With the privatization of this function it is expected that private traders would offer much less to buy rice from farmers and gouge people by imposing higher prices for milled rice for food, which because the Philippines is a net importer of rice, could easily be accomplished. Hence, this is why the government had been dragging on meeting this precondition. But then again, the ADB is in the business of selling loans and making money from them for the first world governments, which are the Bank's shareholders, and for improving net returns for big business in first world countries.
This also means the NFA would be reduced to the role of a regulator while its grains operations would be performed by so-called accredited rivate grains traders, who would be members of the oligarchic families that in effect own the Philippines. Like everything else they do in the country, it would serve to further impoverish the general population while increasing the level of wealth accruing to these families.
The source said that the problem arose when the government changed its mind about restructuring the NFA, especially when it realised the consequences for the country's poor. Even as of the end of March the government had been unable to make up its mind about what to do with the agency.
"It's not just the issue of the NFA's role but the whole issue of tariffication, which would damage the people's economic prospects," the source said, "We are the only country in the entire World Trade Organization that still has quantitative restrictions on grains importation. This is to protect our poor."
The source said that even Japan and South Korea, both extremely protective of their rice farmers, had announced plans to phase out quantitative restrictions on rice importa, but in both countries rice farmers were quite wealthy.
Government tries to save irrigation component
However, the government worked on a last-ditch effort to save part of the loan project by submitting within the month a set of alternative compliances to the original conditions set by the ADB. Arsenio M. Balisacan, DA undersecretary for policy and planning, said that the government was in the final stages on deciding whether to cancel the loan or not. It would depend largely on the ADB's response to the suggested compliance to the conditions.
The DA was bent on saving the investment loan portion of the GSDP, being carried out by the Japanese and Canadian engineering consulting firms. But it needed to ask the ADB to de-link the investment loan aimed at rehabilitation of irrigation systems and training of irrigators as well as National Irrigation Administration engineers through institutional strengthening, from the policy loan. However, with the government's non-compliance with the policy loan's conditions, the release of the irrigation component of the loan had likewise nearly stopped.
The investment loan portion involves pivotal developmental program for rice and maize such as the rehabilitation of irrigation systems and the establishment of the Philippine Corn Research Institute. PCI Asia and Klohn Crippen have been carrying out this component successfully with strong, measureable progress.
Set to cancel loan
The Arroyo administration put the wheels in motion to cancel the loan, after failing to reach the required executive decision on the pre-condition that required the privatization of the grains trading operation of the NFA.
Visibly exhausted by the ongoing debate over the restructuring of the NFA, Agriculture Secretary Lorenzo said the DA would wait one more week, that is, to the end of March for the official decision to come down from Malacanang before resuming talks with the ADB on the cancellation of the loan. Over the March 22-23 weekend, the DA had officially informed the ADB that it would not privatize that component of the NFA.
"We have talked with the ADB and they naturally do not want to cancel the loan," Lorenzo said, speaking during that weekend. According to Lorenzo, the DA needed a commitment from the executive department that it would push for the privatization of the NFA, but this commitment was not handed down. Two propose dmeasures on grains fariff reforms and the privatization of the NFA were at that time still pending in both houses of Congress, but there had been no palace push to have the bills classed as "urgent" so that the ADB could agree to release the secoind tranche of the loan. This was classic President Arroyo, completely unable to make a definitive decision on anything.
"Frankly, if I do not get this commitment this week, I think we will have to cancel," said Lorenzo. "I am tired of it."
Felix Jose S. Montes, DA project development chief, said in a separate interview that DA and the Department of Finance were not able to meet on the government's proposal with the ADB to submit an alternative compliance of the conditions oof the release of the loan, together with a de-linking of the irrigation component, which he said was progressing well and producing positive results. Instead of meeting to submit the alternative compliance, he said the DA and the DoF met on the termination process of the loan, including recission of the DA's contracts with PCI Asia and Klohn Crippen, and other consultants.
"It may no longer be the steering committee (members) that will meet. It may be the sub-steering committee. [The subject may be] on the details of the cancellation ... of our contractual obligations [to] consultants," Montes said.
Last-ditch efforts
As a last ditch effort to save the irrigation component of the GSDP the Agriculture Secretary instructed the NIA to have the PCI Asia-Klohn Crippen consulting consortium prepare a position paper defending the need to continue with the irrigation component, indicating the losses of benefits to some 30,000 farm families throughout the country that would come about with the project's cancellation, and to propose measures on how to best continue with the this component.
Philippines to face food shortage if civil war continues
Meanwhile, Agriculture Sectretary Lorenzo, Jr warned of food security problems in the country if the fighting in the country continued to disrupt agriculture and fish production activities. in amemorandum to presdient Arroyo, Lorenzo said direct damage and losses to agriculture as a result of the conflict had so far reached Ps 46.18 million (US$1 = 54.5 pesos). The worry was who would harvest rice and corn in the war-ravaged areas of the Philippines and who would plant new crops, particularly as 150,000 people had already been displaced between the beginning of February and the middle of March because of the fighting. Furthermore, the conflcit had disrupted food distribution channels. The fighting would also further delay the scheduled completion in 2003 of the Ps 2.5 billion Maltitubog-Maridgao irrigation project in Pikit envisione dto irrigate some 10,840 hectares in the area. About half of the Grains Sector Development Project irrigation component irrigation projects are located in the war-torn areas, making it difficult to complete their designs and subsequent implementation as the consultants have difficulties putting their people on the ground safely.
Furthermore a total 3,644 ha of rice and corn areas tilled by 13,157 farmers in the GSDP-IC project areas had been directly affected by the bombing, fires, and firefights fought in the fields that should be put to cultivation, as well as other forms of violence as a result of the armed conflict.
Four of the provinces under the GSDP-IC project are major producers of yellow corn, a central component in the manufacturing of animal feeds that support the country's Ps 111 billion livestock and Ps 88 billion poultry industries. the four account for 22 percent of the total Philippine corn output. This means that poultry and livestock production has been reduced by 20 percent because of the disruptions, which has resulted in a lack of food for the animals.This has resulted in a noticeable decrease in the availability of meat except in Metro Manila and its suburbs where the high supply of money means other areas go short in order to feed the capital's populace.