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Report No. 4910

PROJECT PERFORMANCE AUDIT REPORT

PHILIPPINES FIRST SHIPPING PROJECT(LOAN 1048-PH)

January 31, 1984

Operations Evaluation Department

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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FOR OFFICIAL USE ONLY


PHILIPPINES FIRST SHIPPING PROJECT

(LOAN 1048-PH)

TABLE OF CONTENTSPage No.

Preface ............... ******.**............Basic Data Sheet ................................................... iiHighlights ..................................... iii

PROJECT PERFORMANCE AUDIT MEMORANDUM

I. INTRODUCTION ...................... .. ........ 1

II. PROJECT IMPLEMENTATION AND RESULTS ....... ............. 2

III. POINTS OF PARTICULAR INTEREST ..................... 8

IV. CONCLUSIONS .............................................. 10

Attachment - Borrower Comments....................... 13

PROJECT COMPLETION REPORT

I. Introduction *............................. 37II. Project Preparation and Appraisal ............. 37

III. Project Cost and Implementation ***.............. 39IV. Financial Evaluation ........................... 48V. Economic Evaluation ........... ................ 50

VI. Institutional Development ........................... 52VII. The Role of the Bank ..................................... 54

VIII. Conclusions ............................................ 55

Annexes

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.



(LOAN 1048-PH)

PREFACE

This report presents a performance audit of the First Shipping Pro-ject in the Philippines for which Loan 1048-PH for US$20.0 million equivalentwas made in October 1974. Final disbursements were made in October 1981.The report consists of a Project Performance Audit Memorandum prepared by the

Operations Evaluation Department (OED) and a Project Completion Report (PCR)

prepared by the East Asia and Pacific Regional Office.

The memorandum is based on the PCR, a completion report prepared bythe executing agency, discussions by OED staff during an audit mission inJanuary 1983, with government officials and representatives of shipping com-panies in the Philippines, and interviews with Bank staff. The transcript ofthe Executive Directors' meeting of October 15, 1974, which considered theproject, has been read and project files and documents have been reviewed.

The audit memorandum generally agrees with the PCR, but raises afew aspects which were not dealt with by the PCR. These include the sugges-tion that a different approach to the financing of ships could have made theproject as appraised more attractive to shipowners; the desirability toundertake a thorough review before the objectives of a project areeffectively changed; and the need to achieve continuity in technicalassistance efforts.

The report has been sent to the different agencies in thePhilippines which were involved in the project. Comments were received fromthe Minister of Transport and Communication, MARINA, the National EconomicDevelopment Authority and the Development Bank of the Philippines. Mostcomments supported the conclusion of the audit memorandum.

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PROJECT PERFORMANCE AUDIT BASIC DATA SHEET


(LOAN 1048-PH)

KEY PROJECT DATA

Appraisal Actual orItem Estimate Reestimated

Total Project Costs (US$ million) 34.1 24.8Underrun (%) - 27

Loan Amount (US$ million) 20.0 20.0Disbursed 20.0 19.4Cancelled - 0.6Repaid as of 10/31/83 5.3Borrower's Obligation) - 12.3 /a

Date Physical Components Completed 06/30/79 07/31/81Proportion Completed by Original

Completion Date (%) 100 90Proportion of Time Overrun (%)- 45

Economic Rate of Return 20-30 n.a /b

No disbursement estimates were made at the time of appraisal

OTHER PROJECT DATA

OriginalItem Plan Actual

First Mention in Files - 02/16/72Negotiations - 06/74Board Approval Date - 10/15/74Loan Agreement Date - 10/29/74Effectiveness Date - 01/15/75Closing Date 06/30/79 06/30/81/cBorrower Republic of the PhilippinesExecuting Agency Development Bank of the Philippines and

Maritime Industry AutnorityFiscal Year of Borrower July 1 - June 30Follow on Project None

/a Includes exchange adjustment./b The PCR has reestimated the rate of return for individual Ships to range

between 8-46%, but the audit questions the methodology used (para. 18)./c Date of final disbursement October 14, 1981.

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MISSION DATA

Month/ No. of No. of Staff/ Date ofItem Year Weeks Persons Weeks /a Report

Preappraisal 12/04-20/72 2.0 3 6.0 01/18/73Preappraisal -- 0.4 1 0.4 Not available

Preappraisal 04/05-18/73 1.8 1 1.8 05/18/73Identification 07/16-27/73 1.7 1 1.7 09/17/73Appraisal 01/21-02/06/74 2.4 3 7.2 09/26/74Supervision 06/01-06/75 0.7 1 0.7 06/20/75Supervision 04/26-05/05/76 1.4 3 4.2 05/24/76Supervision 04/24-05/03/76 1.4 3 4.2 06/03/76Supervision 01/08-19/77 1.6 1 1.6 UndatedSupervision 02/12-03/03/77 2.7 1 2.7 03/10/77Supervision 03/31-04/02/77 0.4 1 0.4 04/14/77Supervision 07/03-06/78 0.6 3 1.8 07/12/78Supervision 09/23-10/06/78 1.7 1 1.7 10/20/78Supervision 01/15-18/79)Supervision 01/25-26/79)Supervision)

Supervision) 07/14-27/79 0.4 3 1.2 09/12/79Supervision)Project Completion Report 12/02/82

COUNTRY EXCHANGE RATES

Name of Currency (Abbreviation) Peso (P)Appraisal Year Average (1974) US$1 = P 7.3Intervening Years' Average (1975-1981) US$1 = P 7.4Completion Year Average (1982) US$1 = P 7.9

/a The mission may have been for the particular project alone or for otherpurposes as well. Time estimates do not attempt allocating betweenvarious tasks nor do they include estimates of travel time or of timespent on supervision in non-mission status.

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(LOAN 1048-PH)

HIGHLIGHTS

The purpose of the Shipping Project was to improve safety standards

and increase efficiency of the interisland shipping fleet. The project wasalso to assist in strengthening institutions which deal with the shippingsector. The major part of the loan was intended to be onlent to shipowners

for procurement of used ships abroad, while the project also coveredacquisition of some new ships abroad as well as in the Philippines. About10% of the project aimed at conversion and major repairs of interislandships.

The objectives of the project were only partially achieved. Very

little of the financing was used for importing ships to upgrade the fleet ofexisting shipping companies in the interisland liner service as wasoriginally intended. Instead, ships were built locally for newly establishedcompanies which operate unscheduled services (paras. 11-12). The change wascaused by a lack of interest by the intended beneficiaries (establishedshipping companies) for funds from the Bank loan. Progress was made in

strengthening the planning and coordination of the sector but efforts tosystematically improve safety largely failed (paras. 19-23). The projecttook 45% longer to implement. Insufficient information is available toreestimate the economic return (paras. 16-18).

Points of Particular Interest

- Contrary to the loan agreement the Development Bank of thePhilippines (DBP) decided to pass the currency of disbursement riskon to its borrowers which made subloans unacceptable to most of theintended clients (para. 8).

- DBP's administrative rules as well as reluctance on the part ofsome borrowers to disclose information to a Government institution

also reduced interest in the project (para. 9).

- Changing the target group of borrowers from established shippingcompanies to new entrants in the interisland shipping fieldsubstantially increased the financial risks to DBP (paras. 11,15).

- A more thorough review, at the time of appraisal, of thealternative financial intermediaries and of different methods offinancing could have kept project implementation closer to theoriginal targets (paras. 24-26, 33).

v

Lessons to be Learned

- When it becomes clear that a project is diverging substantiallyfrom the original plans, a review should be carried out todetermine the justification of the changes and the effect oneconomic justification and financial risks (para. 27-29, 34).

- When a follow-on project is not financed because further investmentis considered unjustified, ways should be found to still financetechnical assistance when there is a clear need (paras. 30-31, 35).

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PROJECT PERFORMANCE AUDIT MEMORANDUM


(LOAN 1048-PH)

I. INTRODUCTION

1. The Philippines consists of some 7,000 islands; maritime transport

is, therefore, a vital means of internal communication. Modernization of the

roads system is decreasing the importance of coastal shipping between ports

on the same island and is leading to concentration of cargo on a smallernumber of ports. However, the extent to which road transport can be a sub-

stitute for maritime transport is limited and maritime transport will con-tinue to be essential.

2. Interisland shipping services are provided by private companies.At the time of project appraisal it was estimated that some two thirds of the

fleet was more than 20 years old with the larger operators having the newerships and the small owner operators generally the oldest ones. Many of the

ships were cargo cum passenger vessels. A large part of the interislandfleet was imported secondhand from Japan. At the time of project appraisal

there was relatively little official planning or regulation of interislandshipping. However, regulation that did exist was fragmented between numerous

Government bodies. Freight rates were set by the government and thePhilippine Coast Guard (PCG) was charged with safety inspection. In order to

provide more consistent control over shipping and to achieve adequateplanning for the subsector, the Maritime Industrial Authority (MARINA) wascreated in 1974. It was given jurisdiction over the development of shipping,shipbuilding and repair, stevedoring and freight forwarding, and coordination

of marine training. The Board of MARINA was to provide policy guidance forthe maritime industry.

3. Realizing the importance of interisland shipping, the Government ofthe Philippines and the Bank decided that modernization and increased effi-ciency for both the ports and the fleet as well as strengthening of planningand organization for the maritime sector were essential. As a result theSecond Ports and the First Shipping Projects were financed in 1973 and 1974,respectively (the first ports project was financed in 1961). This reportcovers the performance under the shipping project, while the audit report onthe Second Ports Project is under preparation.

4. The purpose of the Shipping Project was to improve safety standardsand increase efficiency of the interisland shipping fleet; it was also tohelp the Government improve coordination and supervision of the shippingsubsector. These aims were to be achieved by providing financing for theacquisition, conversion and major repair of vessels of the interisland fleetwith emphasis on replacement of ships over 20 years of age and the majorrepair of ships up to 16 years of age. The project was also to assist instrengthening institutions serving the shipping subsector. The projectcovered the following items:

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Project Cost Bank Loan-------US$ million-------

Acquisition of new and used interisland ships 30.0 17.3

(of which for ships built in the Philippines) (n.a.) ( 1.8)

Conversion and major repairs of interisland ships 3.0 1.8

Technical Assistance not otherwise financed from other

sources outside the Philippines 0.8 0.7

Training 0.3 0.2

Total 34.1 20.0

5. The loan was made to the Government of the Philippines and funds

for acquisition and conversion of ships were to be onlent to the Development

Bank of the Philippines (DBP) which was to administer the subloans to ship-

ping companies. The loan included normal conditions for Bank loans; it also

stipulated how DBP was to handle procurement. The loan agreement further

stated that services of experts were to be engaged to assist DBP and MARINA

and required the latter organization to prepare a 10 year program for

development of the maritime industry in the Philippines. The loan agreement

did not stipulate what type of ships should be bought nor did it state a max-

imum age for used ships.

II. PROJECT IMPLEMENTATION AND RESULTS

Investment in ships

6. From the appraisal report and other documents it is evident that

the project funds were intended for assistance to existing shipping companies

to purchase newer, more efficient ships from abroad, which were to be used in

the interisland liner service. The prospective borrowers were already well

established in the shipping field, operating small to medium size fleets,

some being the mainstay of the interisland shipping service. In the event,

however, virtually none of the loan funds were borrowed by these companies

and most funds were used to construct new ships in the Philippines for newly

established shipping companies.

7. Before the project was financed Bank missions held discussions with

the major shipowners and DBP, which was already involved in lending for

ships. Apparently, however, this led to an overoptimistic assessment of the

demand for financing. After reviewing the project with Philippine

authorities and a number of shipowners the audit concluded that, at least

seen in retrospect, advantages for the subloans for the established shipping

companies were often only marginal, while disadvantages as seen by the

shipping companies were numerous.

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8. The loan agreement between the Bank and the Government of thePhilippines stipulated that subloans by DBP to shipowners were to be made inthe currency of procurement. DBP was to absorb any difference between thecurrency of procurement and the currency in which the Bank disbursed and hadto be repaid. However, DBP decided to pass the currency of disbursement riskon to the shipowners. As an example of what transpired, one shipping companywhich had bought a Japanese ship found itself with a debt in Swiss francs atthe then prevailing DBP interest rate of 14%. The shipping company con-sidered the interest rate too high and the risk of the Swiss franc appreciat-ing unacceptable. It, therefore, obtained other financing and prepaid theDBP loan. The currency problem has apparently played an important role inreducing the interest of shipping companies in utilizing the funds under theBank loan. DBP in their comments explain why the currency risk was passed onand express disagreement with the suggestion that this played an importantrole in reducing the interest in the loan (Attachment Part D).

9. Other factors, however, have also played a role and may have beenequally important. MARINA and NEDA in their comments concur with this view,while NEDA adds that a review of DBP's loan conditions should be done (seeAttachment Parts B and C). Representatives from the shipping industryexpressed unhappiness about several of DBP's loan conditions and had reserva-tions over the use of DBP as the intermediary institution. Shipownersobjected to such conditions as assigning 67% of the companies' voting rightsto DBP, and having representatives of DBP on their Board. They also foundthe very high collateral requirement of DBP unacceptable and suggested thatit exceeded the equity required by commercial banks. 1 / Furthermore, sub-stantial reluctance to use the loan funds was induced by the fact that DBP isa Government agency, and shipowners did not like to provide details on theircompanies to a Government body. The funds which were earmarked for conver-sion and major repairs of interisland ships remained virtually unused, mostlybecause the repayment period of 5 years was considered unacceptably short andalso due to the fact that rehabilitation had to be done to internationalclassification standards which shipowers considered too costly for olderships.

10. The PCR suggests that loan applications were delayed by the Govern-ment's discussions with Norway (which are detailed in DBP's comments, Attach-ment Part D) and the Federal Republic of Germany on possible loans forships. This financing was expected to be on more generous terms than theBank loan. However, the possibility of these loans came up only well afterthe start of the Bank project and could not have affected the project duringthe first 1 - 2 years. In the end the bilateral financing did not becomeavailable.

11. When it became evident that the established shipping companies wereshowing little interest in the Bank loan, the emphasis of the projectchanged. With the Bank's agreement DBP switched to financing ships for small

1/ DBP amplifies on the various modifications made in these requirementsduring the project (Attachment Part D).

and very often newly established shipping companies. 2 / But even with thischange, interest by reasonably qualified borrowers continued to be weak andpart of the loan funds remained unused, while subloan approvals were spreadover a period of almost five years as against about two years anticipated atappraisal. In the end, US$2.9 million was used for port studies and otherstudies in the transport sector (PCR, Annex 3.2) and US$0.6 million wascancelled.

12. The new shipping companies were interested in borrowing from DBPbecause most of the constraints discussed earlier (paras. 8-9) did not applyto them. They needed loans for smaller vessels which could be built in thePhilippines. The loans, therefore, were in pesos and the shipowner did nothave to accept any currency risks. Other conditions imposed by DBP such asvoting rights to be assigned and high collateral were more acceptable in thecase of a company owning one or two vessels. Most importantly, however,these small companies normally had no access to loans from commercial banksand if they did it was at a very high cost.

13. The change in borrowers described in the previous paragraph hasresulted in a significant change in the objectives of the project. Ratherthan aiming at modernization of the liner fleet through the purchase ofserviceable secondhand vessels, new ships were now being added to theinterisland tramping fleet, which were generally used for transport of cargoin the more remote parts of the country. The impact of the project on themaritime sector was also markedly different. Instead of contributing to theconsolidation and strengthening of existing companies it led to theproliferation of small companies, making it more difficult to promoteefficiency and safety in the sector. Officials in MARINA are ratherdissatisfied with this development but apparently were not in a position toinfluence it. MARINA notes that the Bank opted for realignment of theobjectives of the loan to suit the pattern of loan availments rather than amore thorough review of the mechanics of loan implementation and maintenanceof the original loan objectives (Attachment Part B). DPB, on the other hand,suggests that the subloans made were in line with the country'smaritime policies. DPB believes that fleet replacement and modernizationwere accomplished through the introduction of containerization (a propositionwith which the audit does not agree) and that the use of the loan for smallercompanies helped to develop secondary and tertiary routes and the growth ofthe local shipbuilding industry (Attachment Part D).

14. The project had envisaged only a minor role for the local ship-building and repair industry (about 20% of project funds). Local shipbuild-ing, however, became a main element but, as the PCR points out, this was notwithout problems. Delays in completing ships have been considerable becauseof the limited experience and often weak organization of the local shipyards

2/ NEDA comments that since the loan had to be disbursed DBP had to changethe emphasis of the project. It also suggests that the experiencepoints at the need for adequate project preparation (Attachment Part C).

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(PCR, para. 3.15). Little information is available to the audit on thequality of the ships built in local yards. A very positive aspect has beenthe fact that ships were to be built in accordance with internationalclassification standards. Undoubtedly in the process the local shipyardshave acquired useful experience, but this experience would have been morevaluable if adequate technical assistance had been available. The audit isof the view that even for the amount of work to be done by local shipyardsunder the project as originally envisaged, some technical assistance for theindustry would have been useful. Furthermore, it is not clear why suchassistance was not added during project implementation when it became evidentthat many ships were to be built locally and ample loan funds were availablefor such assistance. In their comments NEDA expresses disappoinement thatthe project did not provide technical assistance for the local shipbuildingindustry (see comments in Attachment Part C).

15. The change in emphasis under the project also had, as might beexpected, an impact on the financial risk taken by DBP. Loans to the largershipping companies would have involved a very limited risk and lendi to themedium and smaller companies would not have involved unusual risks. / Mostof those companies have adequate resources to carry extra debt withoutdefaulting on payments, even during the current recession. By contrast, thesmall companies which have now been financed have neither the assurance ofregular cargo which the liner services have, albeit somewhat reduced atpresent, nor the financial reserves to cope with the current recession. Thishas contributed to the fact that virtually all subloans under the project arenow in arrears. Information provided to the audit mission indicates thattotal arrears by subborrowers under the loan equal some 30% of the originalprincipal of all subloans. At the time of the visit by the audit missiononly a few cases had been identified by DBP as being on the verge of foreclo-sure, but at least two loans have already been restructured because of thecompanies' financial problems. The above arrears, combined with serious pro-blems with loans to other sectors of the economy, have caused DBP substantiallosses since 1980. A major reorganization of DBP is now under considera-tion. The forthcoming PCR on two Industrial Development Loans (Loans 998 and1190-PH) will deal with DBP's financial problems and their causes in greaterdetail.

Economic Evaluation

16. Estimates of the economic justification for investments in shipssuch as those financed under the project are subject to greater uncertaintythan for other investments. The regular liner flow of interisland cargo andpassenger traffic in the Philippines is subject to some economic fluctuationsand is at present rather depressed. However, the charter market in which theships concerned are operating is more volatile, with the result that during a

3/ OPS considers that the riskiness of the loans does not depend on thesize of the firms and that there is no clear evidence to conclude thatthe original target group would have fared better than loan recipients.

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recession tramp ships are often idle. The occurrence of this phenomenon hascontributed to the international practice of often using somewhat older shipsin this end of the freight service. However, the project financed new shipsto operate in the tramper market. Furthermore, these ships were owned by newcompanies which would generally be expected to be less efficient than anexperienced company and would often lack the established business contracts.

17. For the country as a whole the economic benefits of investments inships consist of the extra freight which can be carried by the new vesselsor, if older vessels were scrapped, the cost difference between providingservices with old versus new vessels plus benefits from the added reliabilityof the new vessels. This type of calculation is difficult to make becausedata available for interisland traffic in the Philippines are limited. ThePCR, therefore, looked at the individual ships and the economic justificationwas calculated as a variant of the financial results.

18. The audit questions whether recalculating the economic return forthe project would be meaningful. 4/ DBP, at the request of the Bank, hasprepared calculations for eleven vessels financed under the project and foundeconomic returns ranging from 8 - 46% (PCR, Annex 5, Table 9). Thecalculations include shadow prices for a number of cost items. The audit isof the view that because of the nature of the project the data in the PCR arenot representative of the economic return on the project. Other than someuncertainties regarding the calculations themselves, the main reasons for thereservations are that the results represent only eleven ships out of the 37self-propelled ships and 25 barges financed and that the freight market hasdeteriorated resulting in sharply reduced benefits for at least a number ofthe vessels. Even though complete information for 1982 was not yet availableat the time of the audit mission, the fact that virtually all borrowers werein arrears on their payments to DBP is indicative of a drop in revenues. Thefinal justification of the project will depend much on how soon demand forshipping services will strengthen and whether the improvement will besustained.

Institutional Development

19. The impact of the project on strengthening institutions which dealwith the maritime sector has been mixed. MARINA has become a valuable focalpoint for the development of the sector. It has completed and subsequentlyupdated a 10 year Merchant Marine Development Plan. It also organized thetraining of ship surveyors. Furthermore, MARINA had studies done onoperating costs of ships; the financial ability of the shipping industry toabsorb further investments; tariff and freight revenues; and maritimetraining needs.

4/ NEDA suggests that recalculation of the economic return, if feasible,would be useful (Attachment Part C). DBP comments on agreements reachedwith the Bank's Operational Staff on the methodology to be followed(Attachment Part D).

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20. Part of MARINA's task is to evaluate and approve vessels which willbe procured or constructed. In this manner it exerts control over quality,age, size, etc. MARINA's policy is to refuse permission for procurement ofships which are older than 12 years and it is intended to reduce thisto a maximum age of 10 years by 1985. Exceptions are made for high techno-logy vessels (e.g., LPG carriers). In MARINA's judgement there is at presentan overcapacity for interisland shipping and it insists that when a shipowner

wants to replace an old ship, the latter is to be scrapped or soldabroad. 5/ MARINA is also working on the introduction of a new tariffstructure which, when introduced, is expected to improve the financial

viability of interisland shipping services. The Minister of Transport(Attachment Part A) suggests that availability of ship financing should beimportant for the realization of MARINA's major development programs.

21. MARINA received technical assistance under the project butofficials were rather critical about the quality of the experts. They alsofelt that the Bank had not provided an adequate list from which the expertswere to be selected. MARINA staff considered that the training component hadbeen successful.

22. The task of actual ship inspection and enforcement of safetyregulations did not transfer to MARINA as was originally planned, butremained under the Philippine Coast Guard (PCG) in spite of the Bank'sefforts. Commitments made by the Government in this respect have been rathermisleading (PCR, para. 3.17). The PCG is operated by the Philippine navywhich did not want to relinquish this task. Under these circumstancestraining programs are handicapped because the navy staff are assigned foronly a few years to duty with the PCG while it is generally difficult to usefunds from development assistance programs to train military personnel. As aresult, the project has not made any impact on maritime safety standards andaccidents continued to be rather frequent. The age of the ships can play arole in these accidents but factors such as standards of maintenance,defective safety equipment, improper loading, and errors made by inadequatelytrained crew play an important role.

23. The project relied heavily on DBP which was to appraise the sub-projects. To strengthen DBP's capability in this field, two advisors,financed from bilateral sources, assisted DBP's shipping section. Further-more, some staff of the organization received several months training abroadin technical matters and ship financing procedures. Apparently DBP's compe-tence in those two fields improved considerably, but the audit mission foundthat DBP had insufficient skilled staff available to assess the freightmarket conditions and general business aspects as they related to the ship-ping companies which were to be financed. DBP in their comments amplifies onthis aspect (Attachment Part D).

5/ Indonesian companies apparently bought several of the old ships.

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III. POINTS OF PARTICULAR INTEREST

A more thorough review of possible financial intermediaries and methods offinancing would have benefitted the project b/

24. The audit does not have statistics available which provide a com-parison between the ages of vessels in the regular liner fleet at the time ofappraisal and at present. However, even though virtually no financing wasused from international organizations or bilateral aid loans, the establishedshipping companies have acquired secondhand vessels as additions or replace-ments to their fleets. The larger companies suggested that they had littleor no difficulty in obtaining loans from commercial banks which were some-times slightly more expensive than the DBP loans but provided a higher per-centage financing and avoided onerous conditions imposed by DBP. For smallercompanies, even though they may have been in business for some time, commer-cial financing was often more difficult to obtain and could be costly. Moredetailed enquiries than could be made within the scope of this audit would beneeded to determine the role which could be played by international lendingto the established shipping companies in order to achieve a more modern andefficient fleet.

25. Assuming that there was a need for such financing when the loan,which is the subject of this report, was made in 1974, the question arises asto which alternative forms were available to pass the funds on to theshipping companies. Unfortunately this is an aspect which apparently did notreceive much attention during appraisal. Bank staff seemed to consider DBP,which is Government owned, the most obvious intermediary. However, thearrangement with DBP did not appeal to the shipping companies (paras. 8-9).Several shipowners suggested to the audit mission that they would havepreferred to deal with the Private Development Corporation of the Philippines(PDCP) which was created with World Bank support in 1962. The reasons behindthis preference were that this private institution is considered to use amore business like approach 7 / than DBP and there was less risk that con-fidential information would fall into the wrong hands. Because severalcompanies already had experience in dealing with PDCP it appears that such anapproach could have been more suitable. The Government could still haveassumed the currency of disbursement risk as was intended under the project.

6/ NEDA comments that experience under the project shows the need toreassess the financing schemes (Attachment Part C).

7/ DBP expands on this characterization to suggest that PDCP as a privateinstitution had the flexibility to tailor its terms to the specificsituation of the borrower, an approach which DBP as a government-ownedbank and conducting its operations according to uniform procedures couldnot adopt (Attachment Part D).

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26. A further alternative for financing could have been to use the loan

funds for rediscounting shipping loans made by commercial banks. Under this

system shipping companies would have borrowed from their own banks and partof these loans would have been rediscounted by the institution designed asthe executing agency for the Bank loan. The latter could have been PDCP, DBPor another organization in the Philippines which operates in this field. Therediscounting system would have eliminated many obstacles which the ship-owners have now objected to. DBP has rediscounted loans in other sectors andthe system is being used successfully in various countries. This method offinancing would have been of particular importance in assisting smallerestablished companies whose access to commercial loans was only marginal,while in the process it could have served the desired sectoral aims.

Project objectives should be clearly identified and reviewed when

circumstances change

27. The project objectives were identified only in a broader sense; thetarget group to be financed in the shipping sector was agreed on but not spe-cifically mentioned in the official documents (para 6). The appraisal reportincludes a two year investment program of the major interisland shippingcompanies, covering 41 used and 4 new ships at a total estimated cost ofUS$46.8 million. It was the apparent intention to finance a substantialnumber of these ships under the project. In the event, the establishedshipping companies which were to be the beneficiaries of the loan were notinterested and loan funds were mostly used to finance ships for new companieswhich had little or no shipping experience. As a result the project changedsubstantially from the one presented to the Board. The descriptions in theloan agreement were sufficiently general that the change could be accom-modated without separate Board approval, but there was a major reallocationof funds between loan categories (PCR, para. 3.04).

28. These changes have led to some less desirable developments. Rather

than achieving a consolidation of companies operating in interisland shippingit has encouraged the creation of new companies. The additional capacity fortransporting goods to and from the outer islands will ultimately result insome benefits, but available information is not clear about the needs andachievements in this part of the subsector. Most importantly, however, thechanges in the project have greatly increased the financial risks of DBP.

29. The audit believes that the appraisal and loan documents shouldhave been more precise about the target group in the shipping subsector atwhich the loan was directed. Furthermore, when it became clear that thetarget group which had been agreed on, even without stipulating this in thedocuments, was not interested in borrowing, a critical review of the projectand the effect of the changes should have been done, looking specifically atsuch matters as whether the purpose of the project would still be served, thefinancial risks would still be acceptable and there would be a need for moreor a different kind of technical assistance.

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Technical assistance efforts should have continued even without furtherlending for shipping

30. The project under review aimed at making the shipping subsectormore efficient through the financing of investment as well as strengtheningvarious institutions. These efforts were to be continued under a follow-onproject. However, the lack of demand for subloans led the Bank to concludethat there was no need for further financing for ships. Unfortunately, thisalso ended the plans for continued and expanded technical assistance to thesector.

31. The original plans included assistance for ship design services;rehabilitation of the training school for deck and engine room officers;shipyard training; shipping management courses; and legal advice on maritimematters. In 1976, this program was estimated to cost about US$4.5 million.Officials in MARINA were of the view that much of the technical assistance isstill required. They were particularly worried that trained staff were leav-ing MARINA for jobs with local shipyards. Even though their skills are thusstill benefitting the country, it means that inadequately trained replace-ment staff in MARINA will be regulating the activities of more skilled staffin the private sector. In September 1979, a Bank supervision mission recom-mended that a next shipping project be postponed indefinitely, mostly becauseof weak demand for investment funds under the first project. However, thisdid not detract from the needs for technical assistance. The audit,therefore, is of the view that much of the proposed technical assistanceshould have been considered for inclusion under the Philippines Third PortsProject (Loan 1855-PH) which was approved by the Board on May 27, 1980.8/The need for continuation of technical assistance is confirmed by theMinister of Transport's comments and by the comments of MARINA (AttachmentParts A and B).

IV. CONCLUSIONS

32. The original objectives of the project were achieved only part-ially.9 / The project changed from financing mostly secondhand ships forestablished companies to construction of new ships for recently created com-panies. This was counter to MARINA's intentions to encourage companies

8/ OPS considers that since the Philippines authorities did not requesttechnical assistance at the relevant time it would not be reasonable toexpect the Bank to have financed further technical assistance in otherprojects.

9/ The Minister of Transport in his comments agrees that project objectiveswere achieved only partially; however, he believes that further shippingloans are necessary to support the development of the maritime industry(Attachment Part A).

-11 -

already operating in maritime shipping and thus upgrade service, efficiencyand safety. The change also exposed DBP to much greater risks because thenew shipping companies generally had little or no experience in shipping andwere operating in tramping which is the part of the market most seriouslyexposed to economic fluctuations. In view of the above changes it is diffi-cult to judge to what extent the project's investments have contributed togreater efficiency and improved safety of interisland shipping. On theinstitutional side, the project did contribute to the strengthening of plan-ning and coordination of the sector through MARINA. However, the veryimportant element of introducing increased safety failed through a lack ofinterest on the side of the Coast Guard.

33. The project experience suggests that the original assessment by theBank and the Borrower of the demand for ship financing was incomplete. Theaudit found that a more thorough review, at the time of appraisal, of thealternative financial intermediaries (such as DBP versus PDCP) and of themethods of financing would have been desirable. The latter should haveincluded the possibility of having a financial intermediary such as DBP orPDCP rediscount loans made by commercial banks instead of the direct financ-ing by DBP.

34. Experience under the project indicates that when there is evidencethat a project cannot be implemented as originally defined, a thorough reviewshould be carried out before modifications are introduced. Such a reviewwould have pointed at the increased risks to DBP as a result of the changesin the project and could also have indicated the immediate needs for techni-cal assistance to the shipyards. In the event, too much emphasis was placedon speeding up loan commitments.

35. The audit also concludes that continuity of the institutionstrengthening efforts for the maritime sector would have been desirable. TheBank's practice to discontinue technical assistance efforts when the invest-ment element of a follow-on project is not to be financed, seems open toquestion. Often continued technical assistance is essential to protectdevelopment which took place under a first project, as was the case in thePhilippines. In this case, the technical assistance funds could have beenpart of a ports project.

- 13 -

ATTACHMENT

Republic of the Philippines Part A

MINISTRY OF TRANSPORTATION AND COMMUNICATIONSPHILCOMCEN Building, Ortigas Ave.,Pasig, Metro ManilaOFFICE of the MINISTER

83L-MIN-1275

03 October 1983

Mr. Shiv S. KapurDirectorOperations Evaluation DepartmentThe World Bank1818 H Street, N.W.Washington, D.C. 20483U.S.A.

Subject: FIRST SHIPPING LOAN PROJECT (LOAN WO. 1084-PH)

Dear Mr. Kapur,

This is with reference to the draft performance audit report onthe above subject project, as prepared by your department. Inconnection therewith, please be advised that this Ministry findsthe draft report satisfactory and concurs, in general, with thefindings and conclusions of the report.

In particular, the project objectives have not been fullyrealized, considering that the financing (or relending) termsand conditions of the Development Bank of the Philippines (DBP)have been found disadvantageous by the potential shippingcompanies who hoped to avail of the shipping loan-at that time.Hence, the project did not contribute, by and large, to thefleet inprovement and modernization, as originally envisioned.

This notwithstanding, it is believed that further shipping loansare necessary to support the development of the Philippine OED Comment:maritime transportation industry. More recently, the Chamber of Footnote addedMaritime Industries of the Philippines (CMtP), in a dialogue to para. 32 ofwith the Maritime Industry Authority (*NRINA) has expressed PPAM to noteconcern over the availability of financing sources, for ship this point.improvement and modernization.

The Chamber has requested for a study that will determine the OE Comment:sources, as well as the most advantageous arrangement, method The need forand terms of financing. Availability of ship financing may improved shipcontribute largely to the realization of the MRINA major financing hasdevelopment programs; namely: the rationalization of the finn ininterisland shipping routes, the rationalization of the maritime been noted intranspo ation institutional linkages and economic regulations para. 20 of

PPAM.

- 14 -

under the maritime codification project, the ship standarddesign project, the shipbreaking industry, the grant ofadditional incentives for overseas shipping, the graduallyincreasing domestic and foreign sea-borne cargo, among others.

Within this context, continuity of World Bank technical OED Comment:assistance in the Philippine shipping transportation sector can This has beennot be overemphasized. Prospective sources may be the proposed added toFifth Highway Loan Project or the future Fourth Ports Project. para. 31 of

the PPAM.It is hoped that the foregoing matter receives your preferentialattention.

Very truly yours,

V . 04N JRMinister

cc: Mr. Kevin C. RodleyChief, Transportation DivisionProjects DepartmentEast Asia & Pacific RegionWorld Bank

Mr. Antonio M. LocsinNEDA Deputy Director-General

Capt. Victorino A. BascoMRINA Administrator

:1dg

83L-MIN-1275

- 15 -

ATTACHMENTPart B

16 September 1983

MEHORANDUM

FOR s Minister Juoe P. Dana, Jr.

SUBJECT: Comments on the tiorld Bank PerformACe Audit ReortFe th PhiliPPiM First 9hLRR1ina Loan Project

This has reference to the Project Performance Audit Report on thePhilippines First Shippin Loan Project (Loan 1048-Mi) prepared bythe Operations Evaluatien Department of the World Bank, the ttratdraft of which was referred to the Hinistry for comment and a copy

of which was furnished this Authority likewise for comtan.

It is informed that this Athority, after a thorough review of thesaid report and a recap of its experiences with the project, findsthe present draft satisfactory particularly with respect to thefollowing potas

1. Factors influencing te Lackloss of interest in loan availments

a) The DBP relandin rate was quite close to the preV4atingcomarcial rutes and its decision to pass on the cuftencY

OED Comment: disbursement risk, contrary to the loan agreement, made LheThis point has loan unattractive to borroers.been noted in afootnote to b) Certain loan couditiors imposed by the DBP, which were notpara. 9 of the required by oLar financial institutions, were consideredPPAM. Ly borrowers as unacceptable, viz:

i) assigneut of 671 of voting ri6hts;

ii) representatioi Gf Tm- uu th- Lorrower's Board; and

iiiilaib collatWrArequiraw".t

c) The borrovrs wero reluctaut to provide details on theircomany with !UE, it bein a -overnment a6ency.

2. World Bank Activities

a) The appraisals uadertaken by the Bank during the project's

- 16 -

implementation revealed already a substantial divergenesOED Comment: from the original objectives of the project. The Bank,This point has however, opted for a reali,nient of objectives to suit thebeen added to pattern of loan availments, which ultimately led to fleetpara. 13 of PPAM. expansion rather than fleet improvement/modernization. It

is believed that a more thorough review of the mechanicsof implementation in terms of the financial inttrmadiaryand methods of financing would have benefited the project.

b) The Bank, in its decision to suspend further shipping loansas a result of the experiences in the first shipping loan,

OED Comment: -inadvertently discontinued further technical assistance inThis point has terms of strenthening of institution in the sector. It isbeen added to believed that this should have been continued if the Bankpara. 31 of PPAM. intends to sustain its development efforts in the sector.

This could have been included in other maritime-related Bankleans, like for instance, in the port projects.

c) The Bank's efforts to transfer ship inspection and enforce-ment of safety regulations from the PCG to MARIN& were notsuccessful. it is the opinion that Government failed torecognize the importance and urgency of this plan in theliaht of institutional and manpower constraints at the PCGand the conditions of the operating fleet.

Inspite of the apparent failure of the project to attain itsobjectives, this Authority is of the opinion that furthersipping loans are necessary to support its development plans forthe maritime industry. In the recently concluded HARINA*CHIPDialogue on the Maritime Industry Development Program, theindustry was particularly concerned with financing in terms of,sources and the methods and terms of financing. It was agreed atthat meeting that a joint government-private sector study on thesuject shall beudertaken. The results of this study can formthe basis for the negotiation with financing sources like theWorld Bank for the granting of shipping loans to the industry.On the interim, it is suggested that government pursue its requestfor theincluaton of technical assistance by the Bank to the sectorin its other maritime-related project loans.

For consideration,

VICTORINO A. BAhCOAdministrator

17 -ATTACHMENT

REPUBLIC OF THE PHILIPPINES Part C

NATIONAL ECONOMIC AND DEVELOPMENT AUTHORITYNEDA sa Pasig, Amber Avenue

Pasig, Metro Manila

Cable Address: NEDAPHILP.O. Box 419, GreenhillsTels. 673-50-31 to 50

2 November 1983

Mr. Shiv S. KapurDirector, Operations Evaluation DepartmentInternational Bank for Reconstruction

and Development1818 H Street, N.W.Washington, D.C. 20433U. S. A.

Dear Mr. Kapur:

Re: PROJECT PERFORMANCE AUDIT REPORT ON THEPHILIPPINE FIRST SHIPPING PROJECT(LOAN NO. 1048-PH)

We thank you for sending us a copy of the draft ProjectPerformance Audit Report on the aforementioned project for our reviewand comment. We have reviewed the document and noted with greatinterest the report's substantial findings with which we concur ingeneral. We only have a few comments on the report with reference tothe following paragraphs.

On DBP's Loan Conditions (Para. 9)

We concur with the report's finding that one of the reasons

OED Comment: for low availment of project funds was DBP's conditions for the loan

This point has which eventually resulted in the change of project beneficiaries.

been noted at Considering DBP's terms, i.e., assignment of 67% of voting rights to

the head of DBP and DBP representation in the Board, other (private) sources seemed

para. 24 of preferable to the intended clientele. In this light, a review of DBP's

the PPAM. loan conditions should be done to assess their practicability as wellas their acceptability to prospective borrowers and also their com-parability with loan conditions of other financial institutions.

On the Alternative Methods of Financing (Paras. 24-26)

Relatedly, the experience under the project shows the need toreassess the financing scheme adopted in the project for the shippingsector and to determine the suitable and most advantageous arrangementunder the circumstances.

- 18 -

On the Change in Project Scope (Paras. 11-13; 27-29)

The change in project scope and objectives might have been deemedOED Comment: necessary at that time because of the low demand from the targeted.This point borrowers who objected to DBP's loan conditions. Since the loan had tois noted be disbursed, DBP had to change the emphasis of the project from largein the foot- to small and newly-established shipping companies, and from importationnote to of second-hand vessels to acquisition of locally-constructed ships and

para. 11 of barges. The new and small companies were willing to accept DBP's loan

'the PPAM. conditions as they normally had no access to high-interest loans fromcommercial banks.

This experience in the project's implementation also points to theneed for proper project preparation, specially in the projection/estimationof demand for project funds.

On the Development of the Local Shipbuilding Industry (Paras. 14; 30-31)

Despite the deviation from appraisal scope and objectives, the projectcould have indirectly contributed to the development of the local ship-building industry. The construction in the Philippines of 57 of the 60vessels financed under the project in accordance with international class-ification standards became an unintended benefit.

While there were delays in the completion of the locally constructedvessels, they could be,attributed mainly to changes in vessel design andlate delivery of spare parts from abroad, reasons which were beyond thecontrol of the local shipbuilders.

We note with disappointment, however, that even when it becameOED Comment: apparent that majority of the vessels that were to be financed under theThis point project were to be built in the Philippines, no technical assistance washas been provided the local shipbuilding industry. It would appear from this projectnoted in experience that necessary technical assistance be provided the local ship-para. 13 of building industry considering the greater role it is undertaking with respectthe PPAM. to the shipping industry.

On the Recalculation of Economic Returns (Para. 18)

OED Comment: The report questions whether recalculation of the economic return for

This point the project would be meaningful (para. 18),. On the contrary, recalculation

has been of the economic return for the project, if possible, would serve to determine

noted in a whether and to what extent the investment yielded favorable returns, not-

footnote to withstanding deviation from objectives.

para. 18 ofthe PPAM.

19 -

We appreciate the opportunity to comment on the PPAR and we hope

that our comments will be helpful in its finalization. We would also

welcome opportunities for us to assist you in your post-evaluation acti-

vities in the Philippines as part of our continuing liaison with youroffice.

Best regards.

Very truly yours,

---- ANTONIO M. LOCSINDeputy Director-General

- 20 -

ATTACHMENTPart D

BANOKO SA PAOPAPAUNLAD NO PILIPINAS

Novenber 2, 1983

Mr. Shiv S. KapurDirectorOWaticns Evaluatin DepartmentThe World Bank1818 H. Street, N.W. Washington D.C.20433 U.S.A.

Dear Mr. Repur:

Re: Project Performance Audit Repaort onPhilippines First Project

(loan 1048 -PH

I am pleased to enclose our caments on the first draft of theProject Performance Audit Report on Philippines First ShippingProject (Loan 1048-PH), as requested in vc" letter of Auut 12.1983. It is hoped that the caments v1d be taken into osidera-tion in fornulating your final conclusions.

mearmbile, we look forward to receiving the final copy of thereport as soon as it is available.

With kid regsrds.

Very truly yours,

RIANDO M. ZOSA- Governrr

Attachent

DEVELOPMENT BANK OF THE PHILIPPINES TELEX: RCA 22197 DBP PHHEAD OFFICE: MAKATI, METRO MANILA, PHILIPPINES GLOBE-MACKAY 45128 DBPHIL PMP. 0. BOX 800, MAKATI COMMERCIAL CENTER 3117 EASTERN 63771 DSP PN

CABLE: PHILDEBANK MANILATELEPHONE: 818-:st: TO 9520

818 8611 TO 9820

- 21 -

OUR COMMENTS ON CERTAIN ASPECTSOF THE WORLD BANK AUDIT REPORT

a. Per IBRD Report (par. 8)

The loan agreement between the Bank and the Government

OED Comment: of the Philippines stipulated that sub-loans by DBP toThis point shipowners were to be made in the currency of procure-has been ment. DBP was to absorb any difference between theadded to currency of procurement and the currency in which thepara. 8 of Bank disbursed and had to be repaid. However, DBPthe PPAM. decided to pass the currency of disbursement risk on to

the shipowners which made sub-loans unacceptable tomost of the intended clients.

Our Comments

Schedule 5 item 1(a) of the Loan Agreement states thefollowing:

"1. Subsidiary Loan

(a) Exchange risk. The proceeds of the Loanallocated to finance Parts A, B and D of theProject shall be on-lent by the borrower toDBP in the currency or currencies in whichwithdrawals from the Loan Account shall bemade in accordance with Section 4.01 of theGeneral Conditions; i.e., the respectivecurrencies in which the expenditures to befinanced out of the proceeds of the Loanhave been paid or are payable. DBP shallrepay the principal so on-lent to it in thesame currency or currencies in which suchwithdrawals were made, and the amountrepayable in each currency shall be theamount withdrawn in that currency."

- 22 -

As interpreted, the above condition impliesthat the currencies of withdrawals or thecurrencies of obligation are to match thecurrencies of procurement.

However, since IBRD's disbursements on theloans were not nrede in the currencies inwhich the obligations financed had been paidor are payable and since the Philippine Govern-ment has also declined to shoulder the foreignexchange risk in the currency of obligation,DBP had no choice but to pass on the burdento the sub-borrowers in turn.

We do not also agree to the statement in theOED Comment: audit report that this practice by DBP hasThis point has apparently played an important role in reducingbeen added to the interest of shipping companies in utilizingpara. 8 of the the loan since foreign exchange risk on loans

PM was also being passed on to borrowers byother institutions lending to the shipping sector,according to a DBP study in 1977. These arethe PDCP, State Investment House, NationalInvestment and Development Corporation andcommercial banks such as First National CityBank, Far East Bank & Trust Co., Solid Bank,Rizal Commercial Banking Corporation, ManilaBanking Corporation, Philippine Veterans Bankand Commercial Bank & Trust Co.

b. Per IBRD Report (par. 9)

Representatives from the shipping industry expressedunhappiness cibout several of DBP's loan conditionsand had reservations over the use of DBP as theintermediary institution. Shipowners objected to suchconditions as assigning of 67% of the companies'voting rights to DBP, and having representatives ofDBP on their Board. They also found the very highcollateral requirement of DBP unacceptable andsuggested that it exceeded the equity required by

- 23 -

commercial banks. Furthermore, substantialreluctance to use the loan funds was induced bythe fact that DBP is a Government agency andshipowners did not like to provide details ontheir companies to a. Government body.

Our Comments

It is true that some borrowers expressed unhappinessover some of DBP's loan conditions like the assign-

OED Comment: ment of 67% voting shares and high collateral require-This point ment. These were however later liberalized by DBPhas been through a waiver of the assignment of voting sharesnoted in a in the case of certain large, established companiesfootnote to and the increase in loan values assigned to vesselspara. 9 of the to be mortgaged to DBP. Real estate collateralPPAM.

requirement was also waived.

As originally adopted in 1974, the following loanvalues were given for vessels offered as collaterals:

Age of Vessel Loan Value

Brand-new and up to 2 years old 80% of appraised valueUsed not more than 12 years old 60% of appraised valueUsed not more than 16 years old 40% of appraised value

As revised, the above was amended in 1977 as follows:

Age of Vessel Loan Value

Brand-new and up to 4 years old 80% of appraised valueOver 4 years old up to 10 years old 70% of appraised valueOver 10 years old up to 16 years old 60% of appraised value

It is our opinion, however, that theavailability ofalternative sources of financing at somewhat similarrates or even better terms with shorter processingtimes, was a key factor in the slow utilization ofthe line and the non-availment thereof by the bigger

- 24 -

more established firms. The more aggressive approachemployed by PDCP as discussed in letter (f) andthe private sector, also contributed to the slowutilization of the Line.

A comparative survey on existing interisland shipfinancing facilities conducted by IPD III staff in1977 showed the following results:

CommercialDBP NDC FNCB PDCP NIDC Banks

Interest Rates

Secured byreal estate 12% 8% 11-3/4% 12% 12% 12%

Secured byship/chattel 14% 8% 11-3/4% 12% 14% 14%

Service Charge 2% None None 2% 1.5% 2%

Maturity 5-16 15-20 5-7 8-15 3-10 1 yearyears years years years years

Extent ofFinancing 80% 80% 80% 100% 100% 100%

NDC grants purely peso loans hence no foreign exchangerisk is borne by the borrowers. The rest of aboveinstitutions offer both peso and foreign currency loans.For the latter type of loans, foreign exchange risk ispassed on to the borrowers.

Another study conducted in 1978 shoWed that DBP'sfinancial charges were more or less aligned with thoseof the private sector except that our penalty rate of36% compounded monthly was by far the highestcompared to the prevailing rate of 2% to 15% p.a. then.It may be recalled that this stiff penalty rate was imposedupon the recommendation of IBRD in 1976 when effectivemoney market earning rates went as high as 27% p.a.

- 25 -

It was only in 1979 when the DBP considered reducingthe penalty rate to 8% and 16% depending on loanamount.

In the study of 1977, with the exception of NDC whichwas lending at much lower interest rates, DBP had thelongest processing time of about 8 1/2 to 10 1/2months mainly due to the requirement that subloansbe sent to Washington D.C. for approval; and toconduct international competitive bidding for theprocurement of new ships. PDCP which also usesIBRD funds, was not required to follow the time-consuming international competitive bidding (ICB)procedure for ship procurement.

The ICB procedure was later eliminated and processingtime was trimmed down by IPD III to seventy-five(75) calendar days.

c. Per IBRD Report (par. 10)

The PCR suggests that loan applications were delayedby the Government's discussions with Norway and theFederal Republic of Germany for possible loans forships. This financing was expected to be on moregenerous terms than the Bank loan. However, thepossibility of these loans came up only well afterthe start of the Bank project and could not have affectedthe project during the first 1-2 years.

Our Comments

The Norwegian loan referred to was a credit agreementnegotiated with Norway by Philippine National Lines ofwhich about $28 Million was allocated for interislandshipping. The Norwegian loan was to have been payableover 15 years with 3 years grace period at 6% interestper annum. The IBRD loan carried an interest rate of 8%to be repayable in 16 years with 4 years grace period.

- 26 -

NDC had also negotiated for a foreign credit of $80Million from Kloeckner INA of West Germany maturingin eight (8) years without grace period and bearing aneffective interest rate of 9.5% p.a. which NDCoriginally proposed to relend at 8% p.a. payable over15-20 years. However, this relending proposal wasquestioned by the National Economic DevelopmentAuthority (NEDA) which charged that this could bringabout huge losses to the government.

The first two years of the project, between November1974 (signing of the sub-loan agreement) and November1976, were IPD III's initial experience in this type oflending and preparations for the actual take-off of theproject were made during this period. Two (2)consultants from Britain, Mr. John Craig, a financialadviser, and Mr. Keith Stevenson, a naval architect/technical adviser, were sent to assist DBP in theinitial stages of the project.

Prequalification of local and foreign shipbuilders weremade at this time, legal documents and shipbuildingcontracts were prepared and referred to IBRD and othercertain small details had to be ironed out. Althoughthe first sub-loan was approved in May 1975, it wasonly in August 1976 when the first loan release wasmade. The negotiations for the Norwegian and Kloecknerloans came at the time when DBP had yet to streamlineits processing time and lending operations. Prospectiveclients had therefore felt it worth while to await theanticipated credit with definitely better terms than DBP's.The Norwegian loan was never finalized while the Kloecknerdeal was finally dropped in 1979.

d. Per IBRD Report (par. 11, 13)

When it became evident that the established shippingcompanies were showing little interest in the Bankloan, the emphasis of the project changed. With theBank's agreement, DBP switched to financing shipsfor small and very often newly established shippingcompanies . . .

- 27 -

The change in borrowers has resulted in a significantchange in the objectives of the project. Rather thanaiming at modernization of the liner fleet through thepurchase of serviceable secondhand vessels, newships were now being added to the interisland fleet

Instead of contributing to the consolidation andstrengthening of existing companies, it led to theproliferation of small companies, making it moredifficult to promote efficiency and safety in thesector.

Our Comments

The Credit program was developed on the basis ofOED Comment: IBRD's findings that 65% of the Philippine interisland

this page and fleet were 20 or more years old, poorly maintained,

following ones built to obsolete standards and ill-suited to modernhave been cargo handling methods aside from the poor recordadded to of safety. The Government, through the Maritimepara. 13 of Industry Authority, was to cause replacement of thesethe PPAM. old and obsolete vessels.

As envisioned, the funds were to be used to buy avessel after scrapping another vessel. This was nothowever followed at the time of implementation.MARINA's program instead consisted of fleet replacement,fleet expansion and the rationalization of interislandshipping such as the regulation of routes and schedulesto balance the allocations of shipping services throughoutthe country and the restructuring of the rates to ensurethe responsiveness of the rate structure to changes intrade.

Fleet replacement and modernization were accomplishedthrough the introduction of containerization which isconsidered the most modern cargo handling systemintroduced in the country's domestic trade.

- 28 -

It was started in 1976 by Aboitiz Shipping Corporationwith the operation of M/V P. Aboitiz along the Manila-Cebu link with a capacity of 120 TEU. The succeedingyears witnessed the significant increase of containeroperation in the country as more shipping companiesjoined the containerization business. At present, thecountry's domestic container fleet consists of 47 vesselswith a total capacity of 4,183 TEU owned by nine (9)shipping companies, as follows:

Name of No.of CapacityShipping Companies Vessels (TEU)

Aboitiz Shipping 6 825William Lines 13 739Sulpicio Lines 6 590Sea Transport 1 146Lorenzo Shipping 8 637Solid Shipping 3 405Negros Navigation 2 280Compania Maritime 2 226Sweet Lines 6 265

47 4_.8_3

Twenty-seven (27) ports are already being serviced bycontainer vessels on liner service. The six (6) leadingmajor link interchanges are:

1. Manila - Cebu - Manila2. Manila - Davao - Manila3. Manila - Dadiangas - Manila4. Manila - Cagayan - Manila5. Manila - Iligan - Manila6. Manila - Iloilo - Manila

Existing container vessels were funded mostly by PDCP.Some were acquired through lease/purchase arrangements,again, from the private sector.

- 29 -

Fleet expansion or addition was made in the country'ssecondary and tertiary routes through a redeploymentof the vessels of the large shipping firms replaced bythe new ones and by the entrance of new shippingventures which were, to a large extent, financed byDBP.

Most of the funds -wr6relent to new small shippingcompanies which at the time DBP found deserving ofsuch loans. As stated in the IBRD report, the IBRDagreed to the switch in target and not one of the loansapproved by DBP was denied financing by IBRD.

As mentioned earlier, the larger shipping companieswhich had a monopoly over the primary routes preferredto borrow from private sources and were reluctant toply the developmental routes where demand is notcompletely established.

In keeping with DBP's developmental role, DBP hadsupported MARINA's thrust to develop the country'ssecondary and tertiary routes.

We therefore find the statement in the IBRD report, i.e.,officials in MARINA were rather dissatisfied with theproliferation of small shipping companies but were notin a position to influence it, disconcerting.

As stated in paragraph 20 of the IBRD audit memorandum,part of MARINA's task is to evaluate and approve vesselswhich will be procured or constructed.

This is the very reason why it has been DBP's policythat no loan application for ship acquisition is acceptedwithout a clearance from MARINA.

In addition, we wish to emphasize that MARINA inseparate guidelines, under its memorandum CircularNos. 10 and 16, had stressed priority to be givento vessels to be used to ply a developmental route.In fact, among the incentives cited by MARINA for

- 30 -

vessel acquisition in a developmental route is"preferential treatment in government ship financingprogram through granting of priority in allocation ofloan funds, premium rates for government lending andguarantee operations."

DBP-financed vessels play a vital role in the improve-ment of shipping services along the secondary andtertiary routes. Some even pioneered in developmentalroutes which the MARINA advocated.

Moreover, they have significant impact on the develop-ment of the country's shipbuilding industry as most ofthese vessels were locally built.

e. Per IBRD Report (par. 23)

The project relied heavily on DBP which was to appraisethe sub-projects . To. strengthen DBP' s capability inthis field, two advisers, financed from bilateralsources, assisted DBP's shipping sector. Furthermore,some staff of the organization received several monthstraining abroad in technical matters and ship financingprocedures . Apparently, DBP's competence in thesetwo fields improved considerably,. but the audit missionfound that DBP had insufficient skilled staff availableto assess the freight market conditions and generalbusiness aspects as they related to the shippingcompanies which were to be financed.

Our Comments

In the process of loan evaluation, an important aspectof consideration. is the market study for the projectwhich include an assessment of freight market conditionsand general business aspects for each project underconsideration. The market becomes the basis of tech-nical assumptions prepared to support financial projectionsto find the viability of a particular project. The marketreports were originally being prepared by our Business

- 31 -

Research Department. However, to minimizeprocessing time and centralize control in theIndustrial Projects Department III (IPD III), theIPD III created its own Research Group headedby a technical man who underwent 3 monthstraining abroad in ship financing techniques.

DEP has competent staff to handle the appraisalof a project except that in the assessment of freightmarket conditions and general business aspects,DBP relied to a great extent on MARINA's statisticsand data.

f. Per IBRD Report (par. 25)

Several shipowners suggested to the audit missionthat they would have preferred to deal with PDCP.The reasons behind this preference were that thisprivate institution is considered to use a morebusinesslike approach than DBP and there was lessrisk that confidential information would fall into thewrong hands.

Our Comments

The report should define what it means by "moreOED Comment: businesslike" as this tend to be damaging to DBP'sDBP's amplifi- image. What could probably be accepted as PDCP'scation has been advantage is its flexibility in tailoring its termsnoted in aftnote to a to the specific situation of the borrower. DBP,para. 25 of being a government-owned bank has had morethe PPAM. difficulties in adopting this approach as it would

be subject to criticism. DBP has tended to applyits conditions with few exceptions.

- 32 -

Below is a listing of some conditions/requirements ofDBP normally objected to by shipping loan applicantsas compared to PDCP's requirements:

Condition/Requirement DBP PDCP

1. Assignment of This may be waived This may also be67% voting provided that the waived depending onshares following circumstan- whether or not an

ces are present: applicant is considereda prime borrower.

a. The account is consis-tent and up-to-date;

b. The firm is a going-concern and operationalresults are satisfactory.

c. The loan is fully secured.

2. Assignment of This is a must for all Imposed depending onfuture earnings accounts. who the borrower is.

3. Designation of This is a standard This may be waived.directors in the condition.firm

4. Joint and several This is a standard This may be waived.signature of prin- condition.cipal stockholdersand officers forthe loan

5. Payment of This is a requirement No filing fee is charged.filing fees to loan acceptance. Amount

is staggered. For loans ofPlM - P5 M, fee is P5,000.For loan above P5M, fee isP1,000 for every millionapplied for.

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6. Submission of This is a require- This may beindividual income ment for credit waived.tax returns for the checking.past 3 years ofprincipal officersand stockholders

7. Vessel construc- The contract award is The borrower istion in a DBP made after a canvass allowed to chooseprequalified by DBP of the offers his own shipyard.shipyard for made by local pre-local vessels qualified shipyards.

8. Designation of This is a standard This is nota controller in DBP condition. imposed.the firm if andwhen. necessary.

9. Equity DBP requires a PDCP may grantrequirement minimum equity up to 100%

participation of financing.equivalent to atleast 25%-30% oftotal project costor 20% of vesselacquisition cost,whichever ishigher.

Considering the above, we believe that most borrowers,expecially the prime ones, have found DBP requirementsand conditions more onerous.

g. On IBRD's Economic Evaluation (par. 16-18)

We agree to the audit's view that the charter/transportmarket in which the vessels financed under the shippingproject are operating, is more volatile than the regular

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liner traffic. Liner services, however, along themajor/primary routes or even secondary routes arecontrolled by big and established shipping companieswhich displayed little or no interest at all in gettinga loan from the Bank. Furthermore, the MaritimeIndustry Authority which approves the acquisition ofsecondhand vessel/s and/or construction of newvessel/s of shipping operators have declared thesemajor/primary routes as closed or saturated whichmeans that no other shipping company or vessel willbe authorized to ply these routes. Only developmentalor tertiary routes remained open to new entrants in theshipping industry. These new entrants, instead ofconcentrating in these developmental routes on a regularliner basis, preferred to have their vessels on a non-scheduled tramping basis for more flexibility.

On the audit's view that the calculated economic returnof eleven (11) vessels out of the thirty-seven (37)self-propelled ships and twenty-five (25) barges isnot representative of the economic return on theinterisland shipping project, we have the followingcomments:

In the discussion of the staffthe World Bank regarding

the preparation of the Project CompletionReport, it was mentioned that difficultiesin getting data for the ERR calculationsexisted. Some companies have not yetestablished voyage accounting foreach of their vessels, others have justbarely started commercial operations dueto delays in construction. It was there-fore agreed then that ERR calculationscould be made on a sample of each typeof vessel financed under the project whichwas done in the Project Completion Report.

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As it is intended, the performance audit report is inessence self-critical in that it points out areas andcircumstances where the IBRD could have done better.Certain aspects, however, dealt with in the precedingparagraphs should be clarified to erase any misrepre-sentation on DBP's roles and actions.

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PHILIPPINES: SHIPPING PROJECT (LOAN 1048-PH)


I. INTRODUCTION

1.01 The Philippines is an island nation with a total land area of300,000 sq km (about the size of Italy) scattered among some 7,000 islands.While much economic activity is concentrated in Manila, the main entrepotfor trade, a substantial and growing economic area is located in the centralislands of Negros and Cebu, as well as in the far south and west ofMindanao. Shipping is therefore of great importance in distributingimports, collecting exports, and facilitating internal trade and themovement of passengers.

1.02 In early 1972 the Bank was asked to help finance the replacementand repair of vessels in the inter-island fleet as part of the Government'splan for the integrated development of the maritime industry and for theeconomical and efficient movement of passengers and goods. It was proposedthat funds for improvement be channelled through the state-owned DevelopmentBank of the Philippines (DBP). In order to focus attention on the marinetransportation sector and its problems it was decided to provide a separatesupervision system and to organize a Maritime Unit within DBP.

1.03 At the time of the appraisal, in September 1974, the Bank Grouphad made 26 loans and three credits to the Philippines totalling US$572.0 mil-lion, net of cancellations. About half of this amount was for agriculturaland industrial projects and the balance for infrastructure projects,including US$90.6 million for roads and ports.

1.04 This report is based on discussions with the Philippine staffinvolved, on Bank staff supervision reports and on material prepared by DBPand MARINA.

II. PROJECT PREPARATION AND APPRAISAL

2.01 In early 1974 the Government set up MARINA as a semi-autonomousbody to coordinate the maritime sector and prepare and periodically revise adevelopment program for shipping, shipbuilding and repair, stevedoring,freight forwarding and marine training. MARINA is also responsible for theeffective supervision and the regulation of management and ownership ofmarine enterprises, control over the import of vessels and their registry,

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issuing registration certificates for Philippine vessels; and assistance tothe Coast Guard (a branch of the Navy) in the classification and inspectionof vessels.

2.02 The project consisted of:

(a) the acquisition, conversion and repair of vessels of the inter-island fleet, with emphasis on replacement of ships of over 20years of age and the major repair of ships of up to 16 years ofage;

(b) the provision of technical assistance to DBP and MARINA: and

(c) the formulation of a maritime industry development plan.

The project was appraised in January 1974 and a loan of US$20.0 million wasapproved by the Board of Executive Directors on October 15, 1974. The loanbecame effective on January 15, 1975, and the closing date was originallyset at June 30, 1979 and subsequently extended to July 31, 1981. An amountof US$644,798.65 was ultimately cancelled /l with a final disbursement beingmade on November 12, 1981.

2.03 Four main issues were identified during project preparation andaddressed during appraisal. They were:

(a) the manner in which the foreign exchange risk would be passed onfrom the Government to the shipowners;

(b) the interaction of ship imports, the customs tariff on the importof shipbuilding materials, and the local shipyards;

(c) the way ship safety inspection would be carried out; and

(d) the manner and speed of introducing a new cost-based ratestructure so as to enable the shipping industry to finance itsrequired improvements.

2.04 Foreign Exchange Risk. DBP had experienced heavy financial losseson its earlier shipping loans as a result of exchange rate changes andinsisted that it would not bear any part of such risks in shipping loans inthe future. Consequently, in the case of ships procured overseas, it wasagreed that the exchange risk on the currency of procurement would be passedon to the domestic shipowner. The exchange risk on the currency of obliga-tion to the World Bank would be borne by the Government. For domestic ship

/1 As of July 3, 1981 DBP loan commitments under the program wereUS$20,178,557 but disbursements were only US$15,896,251 so that DBP wasrequired to finance US$4,282,306 from its own regular funds.

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procurement the loan would be made in pesos. These understandings wereembodied in the loan documents (Schedule 5 para. 1A and 2D and para. 4.01of the General Conditions).

2.05 Ship imports, customs tariffs, etc. The basic strategy adopted bythe Government was to discourage imports of ships by maintaining a customsduty on them and to exempt from customs duties all parts and equipmentneeded to build ships. The duty on imported ships was, however, maintainedat only 10% and this was not high enough to substantially discourageimports. The Bank's industrial loans and other foreign loans supplied DBPwith the resources from which to extend shipyard improvement credit to shipbuilders who had orders. The placing of orders which would result from theproject was expected to induce improvements in the shipyards financedthrough DBP (see para. 3.16).

2.06 Ship Safety Inspection was identified in a UNDP-financed study asbeing poorly carried out by the Philippine Coast Guard. The study alsoproposed revised Merchant Marine Rules and Regulations. Appraisal missionfindings confirmed the poor quality of enforcement of safety regulations.Arrangements were made for training of ship safety inspectors so that astart would be made on the professionalization of safety inspectors underthe general supervision of MARINA (paras. 3.17-3.19).

2.07 Tariffs, Rates and Shipping Improvements. Until recently thePhilippine shipping industry operated under an outmoded tariff and rateschedule first developed in pre-World War II years and subsequently adjustedby across-the-board percentage increases. New types of goods were forcedinto old classifications and distortion of costs, resulting from inflationand rapid fuel price increases, made it difficult for most companies togenerate the cash flow needed for proper operations. Maintenance andrepairs were delayed, cash was short for replacement, and an arbitrary anduncertain system of tariff adjustments prevented proper planning in the faceof rising costs. After interviews with 15 of the 18 members of theConference of Interisland Shipowners and Operators, the appraisal missionfound that the industry supported the idea of vesting rate making powers inMARINA. A 10-Year Shipping Development Plan was to be prepared by MARINAand a special tariff study undertaken (para. 6.04) with technical assistanceunder the project.

III. PROJECT COST AND IMPLEMENTATION

(A) General

3.01 The basic objective of the project was the replacement and repairof vessels in the interisland fleet, in accordance with the PhilippineGoverment's plan for the integrated development of the maritime industry, to

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to provide for the economical and efficient transport of goods andpassengers. Financing was to be provided by DBP for interisland shipacquisition and repairs, and technical assistance by the Maritime IndustryAuthority in the development of shipbuilding plans and programs, therebycreating an improved environment for shipping. It was expected that thelarge inter-island shipping companies would be the first to improve theirfleets and scrap old, uneconomic ships.

3.02 A specific goal was the upgrading of the expertise of local ship-yards through the requirement that any new vessels constructed in thePhilippines with project finance be classed in accordance with standards ofinternationally accredited classification societies and by requiring ship-owners to go through proper bidding procedures in order to secure financingunder the program.

3.03 In implementing the goals, the stiff financial terms of DBP, par-ticularly those related to foreign exchange risks, and the availability ofcredit on less onerous terms from other sources (e.g., commercial banks) ledto the project focussing on newer, smaller shipping companies whose projectproposals responded to the need to develop and service secondary and ter-tiary routes which the traditional operators were reluctant to service; andwhose small ships could be built in the Philippines and financed throughpeso loans. The outcome was that the project assisted new, small shippingcompanies with no possible source of financial assistance except a govern-ment development bank like DBP, while commercial banks were better able torespond to the needs of larger companies.

3.04 Problems arose on how foreign exchange risks would be assumed byvarious Government organizations and on the roles of MARINA and the CoastGuard in vessel safety inspection. The first problem caused delays anddistortion of loan operations and disbursements. While the second remainsunresolved. Other delays in disbursement were also caused by (i) the fuelprice increases in 1979 which, in the face of delays in tariff increases,discouraged applicants, (ii) slow construction and late delivery of ships,and (iii) a proliferation of low cost financing offers from other officialfinancing institutions, often without final approval of the Government. Thelong delays in construction (see Annex 3.1) and the distortion of theappraisal expectations for the project illustrated in the table below, was,however, not entirely deleterious to the project. While fewer second handships than had been expected at appraisal were imported with loan funds, amuch larger number of small ships were.financed with loan funds and built inthe Philippines than had been considered possible at appraisal. The numberof ships and tonnage financed was larger than had been anticipated and manysmall shipping companies participated in the loan rather than a few largeones.

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Appraisal Actualestimate results

Disbursement by category ---- (US$ million) -----

New and used ship acquisition from abroad 15.5 1.4New ship acquisition in Philippines 1.8 14.5Major repair and conversion 1.8 -Technical assistance 0.9 3.5Cancelled - 0.6

Loan amount 20.0/a 20.0

Closing date 6/79 7/81

Tonnage (excludes tugboats) 35,500 46,675

/a Of this amount US$19.1 million was relent to DBP under a SubsidiaryLoan Agreement dated November 13, 1975, with the balance allocated toMARINA.

3.05 The increased financing of locally built ships helped the localshipbuilding industry, and shipbuilders were encouraged to improve theirfacilities, employ more workers, and gain experience in shipbuilding andcontracting. During appraisal only one or two domestic shipyards wereexpected to bid for ship construction and none of these had built ships inthe recent past. At the closing of the loan, 15 local shipyards had beenprequalified by DBP and ships were constructed under the project in 12 ofthem. In addition numerous other shipyards, including one financed by IFC,had been expanded or constructed and were in operation.

(B) Project Cost

3.06 The appraisal estimated that total project cost, including ship-owners' equity would amount to US$34.1 million of which US$31.9 million wouldbe foreign currency. The Bank loan was expected to provide US$20.0 million(62.7% of foreign exchange and 58.7% of project cost) whereas the final costof ships delivered under the project amounted to only US$24.8 million, ofwhich the Bank provided US$15.9 million or 64.1% and DBP and the shipownersthe balance. Loans were made to 24 enterprises and involved 37 selfpropelledvessels and 25 barges including 2 chemical products barges, altogethertotalling 46,675 deadweight tons. Only 3 second-hand vessels were importedat a total cost of about US$2.2 million of which the Bank loan accounted forUS$1.4 million or 64%. Details of the subloans made are included inAnnex 3.1.

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3.07 The net result of these operations, shown in the table below, wasthat financing of ships in the project decreased by 27% compared toappraisal estimates (from US$34.1 million to US$24.8 million) while theBank's disbursement on vessels declined by about 17% (from US$19.1 millionto US$15.9 million). Substantial changes also took place in the technicalassistance component, which increased from an appraisal estimate ofUS$1.1 million to actual disbursements of US$3.5 million, much of theincrease (US$1.9 million) being due to the inclusion of detailed engineeringfor a port project. Loan disbursement on the entire project, as shown inthe following table, represented about 70.6% of the foreign exchange cost ofthe completed project rather than the 62.7% anticipated at appraisal.Because of the shift to locally built ships, loan disbursement on shipsrepresented 64.6% of the cost rather than the average 60% anticipated atappraisal.

Appraisal estimate Completion resultForeign Foreignexchange Local Total exchange Local Total

-------------------- (US$ million)-------------------

Imported ShipsNew 6.0 - 6.0 - - -

Used 21.4 - 21.4 2.2 - 2.2

Domestic ShipsNew 1.8 0.8 2.6 19.2 3.4 22.6/aRepairs 1.8 1.2 3.0

Technical Assistance 0.7 0.1 0.8 }} 3.5 3.5/b

Training 0.2 0.1 0.3 }

Total Project 31.9 2.2 34.1 21.4 6.9 28.3

Loan finance 20.0 - - 20.0 - 20.0

% Loan finance oftotal 62.7 - 58.6 93.0/c - 70.6

/a Taken at 85% foreign exchange, 15% shipyard value added.7b See Annex 3.2 for detail.7- Total of shipping projects is US$24.8 million of which the loan

accounted for US$15.9 million or 64.1%.

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(C) Implementation-Shipping Subloans

(i) Foreign Exchange Risks and Other Financial Aspects

3.08 Of the problems which affected the project, the most serious wasdisagreement among Philippine Government institutions (the Central Bank andthe Ministry of Finance and DBP) on how to pass on the foreign exchange riskto shipping companies.

3.09 It had been agreed during negotiations that the Government wouldbear the foreign exchange risk on the currencies of obligation while therisk on the currency of procurement would be passed on to the shippingcompanies. This undertaking was embodied in the Loan Agreement, Schedule 5,items 1(a) and 2(d), amplified by Section 4.05 of the General Conditions.However, the agreement was not acted upon by the monetary authorities.Other Bank loans were also involved in this matter. Both of the Bank'sindustrial loans (Loans 998-PH - First Industrial Investment Credit, US$50million, and Loan 1190-PH - Second Industrial Investment Credit, US$75million) were affected; these loans were also channelled through DBP.

3.10 The Government did not abide by the undertakings in the LoanAgreement. This was not known to the Bank/1 or the shipping industry forsome time and DBP, assuming that the matter would be resolved, proceeded toaccept applications and undertake appraisals for shipping subloans and sentthem to the Bank for approval. The first subloan was approved by DBP on May7, 1975. By August 31, 1975, some 10 months after the Bank's loan had beenapproved, DBP reported that it had a pipeline of 138 applications for shiploans, and had received applications involving 10,375 GRT representing pro-jects having a value of US$12.0 million. But by December 1975 onlyUS$7.4 million of shipping projects had been approved by DBP. This level ofDBP subloan approval did not change over the next five months. As a resultof difficulties related both to DBP requirements concerning security forsubloans (e.g., assignment of 67% of voting shares to DBP) and to theuncertainty of foreign exchange obligations, a number of applications accep-ted by DBP and some loans approved by DBP but not finally agreed to byshipping companies, were cancelled. As a result, by September 1976, almosta year and a half after the first subloan had been approved by DBP, the Bankhad received subloan appraisal reports involving only US$3.5 million of loanfunds. It was clear that DBP would not be able to commit the loan by thedate set in the Loan Agreement for such action (September 30, 1976).Successive extensions of the commitment date were granted and the loanclosing date was extended, ultimately by a total of two years.

/1 This major problem was not identified until a March 1977 supervisionmission which reported in April 1977.

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3.11 Behind all this were a number of problems. After DBP had receivedBank approval for withdrawal on account of a subloan application, negotia-tions were opened with the shipping company on the terms of the DBP sub-loan/i and on the ship building or ship procurement contract. DBP wasunsuccessful in obtaining application of the foreign exchange risk provi-sions as specified in the Loan Agreement to shipping companies seeking toimport ships as the Government declined to bear the foreign exchange risk onthe currencies of obligation. Two loans which were made for import ofsecond-hand ships were accepted by the borrower in the expectation that theforeign exchange risk would apply only on the currency of procurement. Whenone shipping company discovered that the risk would be on the currencies ofobligation, it repaid the loan immediately rather than accept the risk.Several loan applications were withdrawn for this reason.

3.12 In June 1977 the Bank wrote a formal letter to the Minister ofFinance and the Governor of the Central Bank requesting compliance with theterms of the loan agreement. The Bank followed up its concern over thequestion of foreign exchange risk but without response except that in June1978 DBP wrote to the Bank to ask its assistance in getting the Central Bankto assume the foreign exchange risks as set out in the Loan Agreement. Thismatter of which organization should bear the foreign exchange risk was neverformally resolved, but the Bank offered to amend the Loan Agreement to allowDBP to pass on the foreign exchange risk in the currency of obligationinstead of in the currency of procurement to shipping companies importingships, but no action on this offer was taken.

3.13 Other complications arose to delay the project. Early in 1977.the Government had initialled a memorandum of understandine with theGovernment of Norway for low-cost bilateral assistance of US$150 million forshipping and shipyards, including USS30 million for inter-island shipping.Later in the same year. the Government. through the National DevelopmentCorporation (NDC). had conditionally accented an offer by the FederalRenublic of Germany of bilateral assistance of US$80 million equivalent toassist shipping. NDC had, it-was reported. subsequently issued letters ofintent to lend funds for the ourchase of shins at interpnt rAts AR low AR8% (far below the then enrrent DBP rate of about 15%) and the shippingcompanies believed that low-cost Norwegian funds would become available.News of this effectively dried-up loan application to DBP and delayed actionby shipping companies on contracts for ships to be financed by loans alreadyapproved by DBP. Although the German loan proposal was finally withdrawn in

/1 Initially these included the standard DBP rule that a new borrower hadto assign 67% of the company's voting shares to DBP. After discussionswith DBP this rule was revised so that shipping companies had easieraccess to credit and DBP began to receive an assignment of freightrevenues.

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October 1978 and the Norwegian proposal was never finalized, the uncertaintycreated substantially delayed the Bank project. A Presidential Letter ofInstruction in September 1978 nominating yet another agency, the PhilippineNational Line (PNL), as the implementing agency for ship finance with DBPacting as credit evaluator caused further delays. However, this Instructiondid not become effective. In the face of this unsettled situation, the Bankabandoned plans for a Second Shipping Project.

3.14 Finally, traditional shipping operators preferred to borrow fromprivate commercial banks where their long-established relationshipspermitted them to obtain dollar-linked peso-denominated loans to procuresecond-hand ships from abroad, with the loan amount adjusted yearly. Thiswas not considered to be risky by the shipping companies.

(ii) Effect on Shipbuilding and on Small Shipping Companies

3.15 In contrast to the difficulties surrounding loans for ship impor-tation, DBP found little difficulty in making loans for ships to be builtlocally. Although some initial delay in operations was experienced becauseof the requirement that all new ships had to be subjected to internationalcompetitive bidding /1 (it had not been expected that local ship buildingcould develop rapidly for the sizes of ships anticipated to be required) theentire shipping lending of DBP became focussed on locally built ships. Asexperience showed that foreign shipyards did not bid on small shipsconstruction, the Bank agreed that local competitive bidding could be used.As the sizes of ships required by the major shipping companies (from about1,000 to 3,000 tons capacity) could not then be built locally and becausethe larger shipping companies could obtain loans denominated in pesos fromcommercial banks for imported ships the only source of subloans was found byDBP to be for loans to small and, in many cases, new shipping companies forsmall ships which could be locally built. Construction times were initiallysubstantial as shipyards had to learn their craft. Improvement was seenwith time but delays in delivery (see Annex 3.1) continued because ofchanges in plans, delay in import of materials and equipment, and difficul-ties in shipyards securing working capital funds. DBP reacted by tighteningits bidding procedures, including added penalties for late delivery, andincreasing the frequency of its supervision.

3.16 There is no doubt that this change in emphasis created opportu-nities for many shipping entrepreneurs. Those with sound contractualrelationships with freight suppliers did well, but some, more dependent onthe general growth of trade, were affected adversely. Such companies, the

/1 The initial six-month period for processing of subloan applications byDBP (including ICB) was eventually reduced to 75 days and is currently55 days within DBP's regular ship lending program.

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Bank warned DBP on the occasion of the fuel price increase, were likely tohave severe problems of repayment. DBP and the Bank eventually approvedUS$14.5 million of subloans, mainly to small shipping companies, by theextended closing date in mid-1981.

(iii) Safety in Shipping

3.17 An issue which caused concern and somewhat altered the impact ofthe project was the inability of the Government to cause the PhilippinesCoast Guard to utilize the project to improve safety at sea. As notedearlier, the appraisal had counted on MARINA trained ship safety surveyorsgradually to assist in the duties of safety inspection then undertaken bythe Coast Guard. A satisfactory decree was agreed prior to negotiations.By the time of its promulgation directly prior to negotiations, the text hadbeen altered. This led to the Bank to state at negotiations that, until therespective roles of MARINA and the Coast Guard were arranged so that theproject could be used gradually to increase the professionalism of the shipsurvey operation, the loan proposal would not be presented to the Board ofExecutive Directors. This led to issuance of a Presidential Letter ofInstruction (No. 208) calling for MARINA to augment the cost of Coast Guardcivilian employee salaries, training, and other relevant expenditure notadequately provided for by the Coast Guard. The Coast Guard and MARINA wereinstructed to coordinate their activities in ship registration and inmaritime training. The revised Merchant Marine Regulations, the Letter ofInstruction stated, were to become effective January 15, 1975 but they werenot promulgated until 1981. These steps were also embodied in an agreementbetween MARINA and the Coast Guard.

3.18 This agreement did not work because of resistance by the Navy.While the Coast Guard was a part of the Navy, it was also an assignment ofabout two years for career officers who did not have a career interest inship safety and who were not ready to surrender the power given to them bythe laws requiring ship surveys for seaworthiness and safety surveys forships leaving ports. MARINA, however, embarked upon a training programwhich envisaged up to 20 trainees eventually to be used for ship safety andconstruction surveys. This training program was reduced when the difficultyof implementing the agreement with the Coast Guard became apparent. The netresult was that only five surveyors were trained by consultants (UK) inJapan in a 19-week course, starting in August 1975 and three were trained byconsultants (US) at a 15-week course on surveying and diesel engineoperations.

3.19 The practical result of the inability of the Bank to persuade theGovernment to settle the jurisdictional question of ship safety inspectionis seen in the fact that few ships in the Philippines today are properlysurveyed for safety, few are scrapped because of safety requirements, andthere are many marine casualties leading to heavy loss of life. After theBank had decided that further pressure on the question of improving safety

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at sea would not yield results, a Bank-financed consultant prepared a reporton maritime safety in the Philippines. A copy of this was given to theCoast Guard and another was sent to the National Economic and DevelopmentAuthority. This report's conclusion was, inter alia: "Serious effortsshould be made to make the Philippine Coast Guard a separate entity from theNavy." The tragedy in the bureaucratic impasse described above is that, in1975 and 1976 alone, 23 and 59 ships in respectively were lost due tocapsizing, fire, and other causes of sinking and 9 and 20 ships respectivelyran aground and required substantial repair. No record of the loss of lifein such accidents is available, nor is a record of the cost of repair.

(D) Implementation - Technical Assistance

(i) Original Technical Assistance Plan

3.20 As noted earlier, MARINA moved quickly to organize training ofship safety surveyors. At MARINA's request, the Bank financed consultantassistance in preparing and carrying out a maritime development plan. Thisplan, completed in April 1977, is being revised by MARINA on an annualbasis.

3.21 When the original two-year contracts for advisers to DBP (atechnical and a financial adviser), which had been financed under theColombo Plan, expired, they were not renewed and DBP itself carried on thetechnical and financial appraisal work satisfactorily.

(ii) Amended Technical Assistance Program

3.22 When it became apparent that disbursements on shipping projectswould lag behind the levels forecast at appraisal, MARINA and the Bankagreed to an expanded program of technical assistance and training. Studieswere undertaken of the costs of operation of various ships, the financialability of the shipping industry to absorb a further program of investment,of the tariff and freight revenues required to support such investment, andof maritime training needs. These studies were carried out by fourPhilippine consulting firms. In addition, various individuals receivedshort training courses in a variety of fields (53 man-months). Finally,agreement was reached between the Government and the Bank that projectpreparation activities, including detailed engineering for the Third PortProject would be financed from the loan proceeds. A list of technicalassistance funded under the loan is given in Annex 3.2.

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IV. FINANCIAL EVALUATION

4.01 As stated earlier the scope of the project shifted duringimplementation, so that:

(i) most of the proceeds of the loan were used to finance thebuildine of new and relatively small ships in Philippineshipyards; and

(ii) shipping companies participating in the loan were mostlysmall and new and mainly with no other possible source offinancing than the DBP.

Because the participating shipping companies and the shipbuilders weresmall and sometimes new and the economic climate worsened during the projectperiod, both the shipping companies and the DBP experienced finncialproblems outlined in the next few paragraphs.

(A) Shipping Companies

4.02 New entrants in the shipping business usually encounter difficul-ties in their initial years of operations. These were, however, exacerbatedthrough delays in the construction of vessels (about 2/3 of the newly builtships were delayed at least half a year, some much longer)./1 Circumstancesthat had appeared favorable at the time of the subloan appraisal had fre-quently changed by the time the vessels were ready for operation. Companiesthat did not have long term contracts with shippers, but which relied moreon the general growth of trade, found themselves with excess capacity andlow load factors. These operating problems were compounded further throughthe steep rise in fuel costs during 1979 and 1980 and the fact that shippingtariffs were not raised quickly to compensate for increased costs.

4.03 These factors contributed to operating performances that weregenerally worse than originally projected at time of appraisal. However,most of the earlier projects, for which ships had been delivered before

/1 Principal reasons for the delays were:

(a) Modification of original plans;(b) Delays in importation of engines and other materials:(c) Delays in approval of vessel classification;(d) Others such as failures of borrowers to make equity payments on

time and shutdowns of shipyards.

The DBP has taken steps to lessen these delays, but improvement hasbeen slow. .

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1980, now show at least a positive Net Operating Income (Gross Profitfrom Operations less Administrative Expenses) with a generally improvingtrend. Several of them even show outstanding performance exceeding theinitial expectations. Although no data are available at present, it can beanticipated that the more recent sub-projects will follow the same pattern,i.e. gradual improvement after the start-up problems have been overcome.

4.04 The subloans carried interest rates from 12-14% for the earlyloans to 21% for the most recent ones, plus a service charge of 2%, and agrace period of two years./1 Because of the high interest charges even mostof the earlier project companies that had shown a positive Net OperatingIncome for several years showed a positive Net Income (after interest) onlyin recent years while some still show losses, albeit of decreasing magni-tude. As a result of these accumulated losses, two companies already shownegative equity (paid-in-capital and retained earnings), while a few moreare very close to it./2 Furthermore, the short grace period of two years,coupled with the delay in commencement of operations, posed a heavy strainon the cash flow of the companies, especially the new ones. As a conse-quence, all but two had arrears of varying magnitude, ranging in a few casesup to 100% of principal. Loans to two of them were restructured.

4.05 Annex 4.1 gives a brief summary of the performance of the shippingcompanies participating in the -project.

(B) The Development Bank of the Philippines

4.06 As will be explained later in detail (6.01 to 6.02), the manage-ment of the loan by the DBP did contribute to the strengthening of itsoperations in the transportation lending field. However, from a purelyfinancial point of view, the result was less than satisfactory: For thefirst few years interest collected on the subloans was sufficient to coverDBP's interest payments on the loan and processing costs. This was to beexpected, considering that the Bank's funds had an interest rate of 8%,while the subloans were made at 12 or more percent. However by 1980 inter-est collections on the subloans had deteriorated substantially, so that

/1 These interest rates were the ones currently in use for domestic loans.As the exchange risk factor (paras. 3.08-3.14) caused applications forforeign ship procurement to dry-up, domestic procurement could beundertaken only as domestic interest rates.

/2 In one case the situation appears beyond repair, as even operatinglosses are increasing from year to year, in the other cases operatinglosses appear to have bottomed out, or the company may already show anoperating profit. Although all need recapitalization, only one had aninfusion of equity capital recently.

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interest payable on the loan far exceeded DBP's collections on the subloans,leading to heavy losses attributable to the project in 1980 and 1981. Annex4.2 shows the situation in detail.

4.07 DBP shows only two sub-borrowers having no arrears in their pay-ments to DBP. On the other hand, despite the difficult starting periods,most of the sub-borrrowers have positive operating income and some havebecome profitable. DBP should therefore be able to improve collectionperformance. This, together with closer supervision of sub-loans, shouldenable DBP to reduce accumulated arrears so as to contain or reduce theirfinancial losses attributable to the project.

V. ECONOMIC EVALUATION

A. Introduction

5.01 The appraisal pointed out several specific features of the projectwhich have implications for the economic evaluation and which make aninterisland shipping project different from most public transport projects.Such a project:

(i) does not represent a single, lumpy investment in creation orimprovement of a single facility, but is composed of a number ofsubprojects which have similar general characteristics, althoughdifferent in special features;

(ii) does not represent assets which, once created, are fixed in placelike infrastructure investments; ships can be sold on the marketand can be put into alternative use;

(iii) is not tied to specific infrastructure facilities except atterminal points; so there is complete freedom of route selection;and

(iv) does not have alternative modes to fulfill interisland transportdemand except for some high unit and time-value transport whereair transport facilities would be preferred.

At the macro-economic level, the appraisal concluded that interislandshipping is essential to the continued overall economic development of thePhilippines. Not improving the interisland shipping would result not onlyin lost value added from inability to transport considerable volumes ofdomestic production but also in stagnation of the national economy.

5.02 In the assessment of the internal economics of interisland

shipping, the appraisal presented only indicative estimates based on ship

- 51 -

acquisition programs submitted by shipowners and their actual cost andoperational data. Two typical cases were evaluated. One is the introduc-tion of a 5,000 GRT, modern, secondhand roll on/roll off (ro-ro) type ofvessel involving an initial investment of P 30 million (US$4.5 million) onthe main interisland shipping route, Manila-Cebu, replacing a number ofconventional passenger/cargo vessels which, in turn, will replace, throughscrapping, a number of 30-year-old "FS-type" vessels on some of the second-ary (feeder) routes. The economic rate of return was about 30% over anassumed project life of 25 years based on double the port times of Europeanoperations. The computed rate of return was sensitive to the estimated port

times of the ro-ro vessel which require fast turnaround times. With afurther doubling of the port times, the economic rate of return dropped toabout 20%.

5.03 The other case was the scrapping and replacement of a number ofFS-type vessels with newer conventional type pasenger/cargo vessels involv-ing an initial investment of P 20 million (US$3 million) on secondaryroutes only, while the operations on the main route, Manila-Cebu, remainessentially unchanged. The economic rate of return was estimated at about27%. A reduction in the operating efficiency of 20% (about a 35-40%increase in port times of the passenger/cargo vessels replacing the FS-typevessels) resulted in an economic rate of return of about 21%.

B. Economic Re-evaluation

5.04 The project was not carried out as visualized at appraisal. Theemphasis was placed on the fleet buildup program rather than on replacement.Most of the recipients of the project sub-loans were new entrants to theshipping industry. In the appraisal, most of the vessel acquisitions wereassumed to be secondhand which resulted in high economic returns. Second-hand acquisitions had been considered economically and technically soundbecause of the high cost of new ships and the availability on the market ofa substantial number of secondhand ships less than 12 years old which arereliable in operation but no longer financially viable in their present areaof operation because of technical obsolescence. If new ships were used, theappraisal felt that there would not be any further substantial additionalimprovement in operational efficiency over the use of second-hand shipsunder Philipine conditions. However, actual vessel acquisitions financedunder project sub-loans were mostly brand new except for one cargo vesseland two tankers.

5.05 In the economic re-evaluation, the economic return was calculatedfor two different types of general cargo vessels and certain specializedvessels, e.g. log carrier and oil tanker. Revenues generated in 1981 weretreated as the benefits and the capital and operating costs, excluding taxes,

- 52 -

fees, interest and depreciation, with adjustment for wages /1 to reflect theeconomic costs of labor, were treated as the economic costs. The results ofthese calculations are summarized below:

(i) New 1,000 DWT cargo vessel procuredfor an established company (Annex 5, Table 1) 20%

(ii) New 1,000 DWT cargo vessel procuredfor a new entrant (Annex 5, Table 2) 10%

(iii) Log carrier (Annex 5, Table 3) 14%(iv) Cargo vessel (Annex 5, Table 4) 15%(v) LCT (Annex 5, Table 5) 29%

(vi) Oil tanker (Annex 5, Table 6) 46%(vii) Specialized tanker (Annex 5, Table 7) 24%

(viii) Tugboat and barges (Annex 5, Table 8) 23%

5.06 The project financed vessel of an established shipping companyyielded a lower economic rate of return than its 5-year-old vessel. Thismay be attributed to the low investment cost of the latter vesel. Insituations (i) and (ii), vessels operated by an established shipping company(whether old or brand new) yielded higher economic rates of return over avessel operated by a new entrant in the shipping industry. The former'soperating efficiency may be considered the critical factor in the bigdifference in the results. As to type of vessels, oil tankers yielded thehighest economic rate of return, followed by landing craft type vessels(LCTs).

5.07 The assessment of the overall economic return on the projectinvestment cannot be established yet since some of the subprojects are stillin the construction stage while some have just barely started commercialoperations. However, results of the economic benefit calculations under-taken on a representative number of subprojects financed under the projectgive indications of a satisfactory economic return on the whole interislandshipping project. The economic rates of return range from 8% to 46% asshown in Annex 5, Table 10.

VI. INSTITUTIONAL DEVELOPMENT

(A) Development Bank of the Philippines (DBP)

6.01 DBP is a major financial institution so that the loan underreview, being only a small part of its operations, is only one of many

Al 100% of actual wages for skilled labor, 75% for semi-skilled labor and50% for unskilled labor.

- 53 -

sources of finance utilized. However, in the field of shipping lending theproject did have a positive impact on DBP in its transportation lendingfield. In anticipation of the loan, DBP sent three of its staff to foreignshipbuilding companies and banks for several months to become acquaintedwith shipping loan procedures and appraisals. This training aided theformation of the Maritime Credit Unit which, assisted by two advisorsfinanced under the Columbo Plan, reviewed loan applications, preparedanalyses for DBP's Board of Directors, and administered the loan throughsupervision. At the end of the period of the advisors' contracts, DBP stafftook over the entire responsibility for the loan.

6.02 DBP and its staff amended a basic shipbuilding contract, adaptedit to Philippine conditions, and used it successfully in internationalcompetitive-bidding. The use of this contract gave DBP and the shipyardsfamiliarity with international ship classification society requirements andgenerally accepted procurement procedures, and introduced new productionconcepts to the shipbuilders which had to meet class standards. DBP alsofocussed more of its concern about security on cash flow and the value ofthe ship mortgage than in the past. The Bank offered DBP the opportunityfor its legal department to obtain Admiralty law consultants to effectchanges in the mortgage laws govering inter-island shipping but this offerwas overtaken by events when the Philippine ship mortgage law was altered tobring it into line with international practice. After this it becamefeasible for overseas financial agencies to lend for construction of shipsto be registered under the Philippine flag.

(B) The Philippine Coast Guard

6.03 The project was unable to focus the Government's attention on thepoor quality of ship safety. Efforts to assist the Coast Guard to improveits ship safety inspection capability proved fruitless.

(C) MARINA

6.04 The new organization was effective in the fields of sector econ-omic analysis. It successfully completed, and several times revised, a10-year Merchant Marine Development Plan which was adopted by the Govern-ment. The organization's activities were well received by the shippingindustry, which was assured that its views were being properly representedat the councils of Government. A start was made on developing shipping costdata and, through route analysis, proposals for a cost based tariff and ratestructure. MARINA personnel were helpful and competent in their review ofshipbuilding plans and of ship imports made through finance from commercialbanks.

6.05 However, had the difficulties in cooperation with the Coast Guardin the field of safety been overcome, MARINA could have further stimulateddomestic shipbuilding through proper enforcement of regulations. This would

- 54 -

have resulted in scrapping of more overage ships and their replacementthrough import of ships or by locally constructed new ships; in this processit would have succeeded in reducing loss of lives and property in maritimeaccidents.

6.06 Today, MARINA is an accepted and, in the fields it now operates

in, an effective organization. In great part this results from theability of the staff, their dedication to the institution, and the resultsof the training programs undertaken.

VII. THE ROLE OF THE BANK

7.01 While the Bank contributed significantly to the preparation of the

project through its contacts with private shipping companies, it lacked

decisiveness in dealing with the major issue related to the way in whichforeign exchange risks were to be passed on to shipping companies. It could

be argued that the Loan Agreement should have provided for a differentsharing of the burden of foreign exchange risks - and in that case theproject would have been a different one with a different purpose. What in

fact happened was a de facto alteration of the project through disregard of

the Loan Agreement. Had the issue of passing on the foreign exchange riskon the currencies of obligation to shipping companies procuring ships

overseas been raised during negotiations, the Bank might have anticipatedthat few foreign built ships would be procured and so could have providedfor a large technical assistance component for improvements in ship repairyards, for funds for shipyard improvement, and for smaller purchases of

second hand ships from overseas.

7.02 The Bank was unable to persuade the Government to improve the way

in which maritime safety inspection was carried out, and was unable toconvince the Government to introduce new and better safety regulationsprepared by a consultant financed under UNDP. This lack of improvement

meant that few ships were scrapped and few upgraded to meet reasonablesafety standards. As the safety improvement of the fleet of inter-island

ships was delayed, the training programs for safety inspectors was reduced

and became less relevant. The initial difficulty surrounding cooperation

between the Coast Guard and MARINA in safety matters (para. 3.17) was not

resolved during negotiations by the agreements reached between them. As the

parties to the agreement did not carry it out, the Bank hired its own

consultant to prepare a report and recommendations to the Government about

safety. This report was presented to the Government and the Coast Guard,

marking the end of its efforts to persuade the Government to improve shipsafety.

7.03 The Bank's working relationship with DBP and MARINA was positive

and suggestions by the staff working on the project enabled both DBP and

- 55 -

MARINA to make a quick start on the project. Although not recorded asformal supervision missions, many brief visits were made to DBP and MARINAby staff who were on their way to missions in other countries and/or whowere involved in other projects in the Philippines. These informal andfrequent visits served to buildup a close relationship and understanding ofproblems faced during the course of the project.

7.04 Substantial work on the preparation of a second project wasterminated when it became clear that alternative sources of finance forinter-island shipping would be available and that the important maritimesafety issue could not be resolved.

VIII. CONCLUSIONS

8.01 Because of delays in construction, some of the ships financedunder the project had not been delivered when this report was written;others had only recently started operations. Thus it is not possible togive a final opinion on the overall success of the project except to saythat, while financial and economic results are mixed, there appears to be atrend to improvement.

8.02 The project sub-loans stimulated construction of small ships inthe Philippines. This had not been expected. The sudden demand forshipbuilding of small ships in the Philippines, occasioned by the manner inwhich the Government decided to pass on the foreign exchange risk had theships been built overseas, led to long delays in construction and financialproblems for many of the shipping companies from which they are slowlyrecovering. The reluctance of the Government to permit higher freighttariffs in the face of the costs increases of fuel also caused difficulties.Finally, the project was plagued by the lack of implementation of the safetyand ship inspection provisions of the loan. Proper enforcement would haveled to scrapping and a stronger demand for ship replacement. Although theBank had achieved a good working relationship at all levels of thePhilippines Government and with DBP and MARINA, it was unable to achieveresolution of the two important questions - foreign exchange risk and shipsafety inspection. A speedier resolution of these matters should have beenachieved.

8.03 The project had., however, a beneficial impact on the institutionscreated to undertake it - the Maritime Credit Unit of DBP and MARINA. Theseorganizations are wholly capable of continuing their shipping activitieswithout further Bank support.

PHILIPPINES

FIRST SHIPPING PROJECT (LAm 1048-PH)

PROJECT CDlPLETIOI REPORT

Subloan Record

Sub- Appli- Mount approved Appraisal Expected Actual No. of days Deliveredloan cetion DBP (Pesos except cost Ship- Costruc- delivery comple- delivery costno. Borrower-fire date approval where noted) Vessel type (Pesos) builder tion date date tion date delayed (Pesos) Reiarks

I Phil. lausa 03/03/75 05/07/75 7.500,000 (1) 3150 DWT log 9,870.000 Sandoval 10/05/76 11/04/76 06/22/77 230 10,155,700 Delay in delivery mas aily due toShipping Corp. carrier Shipyard delay in shipment of veseal parts

from foreign supplier which wereshipped to another port.

3 Link Shipping 02/10/75 06/11/75 5.742,000 (3) 650 tT cargo 2,380,000 PloW 01/27/77 07/07/77 09/26/77 61 2.750,000 Delivery delay due to certain modifi-Co. , Inc. vessels 2,380.000 01/27/77 08/26/77 01/09/78 136 2,750.000 cations made during construction,

2.380,000 01/27/77 09/25/77 06/23/78 271 2,750,000 particularly increase in capacityfrom 500 to 650 Wff each, added qear-ters, hatch raising.

4 Itrthern Mian- 07/03/75 3,731,200 (2) 650 T cargo 2,120.000 PIONI 10/08/76 04/06/77 12/13/77 251 2,450,000 Increase in capacity from 550 to 610denso Trans- vessel@ DWT each at the time of constructienport Co., Inc. 2,120.000 10/08/76 04/06/77 12/13/77 251 2.450.000 caused delay in delivery.

5 Southwest 07/13/75 6,084,000 (2) 1000 T cargo 5,348,000 Progr 07/23/76 01/22/77 03/17/77 39 5,798,113 Delay ws caused by converting theCargo sad vessels vessel@ from general cargo to logShipping carriers.Co., Inc.

SA 07/26/78 06/16/78 2,700.000 5.348,000 07/23/76 03/10/77 06/08/77 75 5.798.113

7 Abottis 06/18/76 07/14/76 SUF 1,060.466.13 Secondhand 1873.93 6,228,300 Importa- 5.293.500

Shipping Corp. IMr cargo vessel tion

8 Cagayan 03/16/76 09/29/76 4.160,000 (1) 1400 MT cargo 5,611.122 Sandoval 06/17/77 10/05/77 12/19/77 45 5,200,000Shipping Corp. vessel Shipyard

9 Mayflower 01/03/76 09/29/76 4,870,600 (1) 1200 W LCT 5,534.700 RIC 07/25/77 03/05/78 09/29/79 544 6.100.000 Delay as caused by: (a) various 0Shipping Corp. changes made against original plane, 0

(b) delay in approval of plans byABS, and (c) delay to delivery of .

materials. L.0

11 tavotas Indus- 07/01/76 12/29/76 IN 1.494,549.01 Secondhand 2500 WY 9,471.840 Imports- 05/18/77 6,848,865trial Corp. SlF 94,481.43 tanker tion

Sub- Appli- Mount approved Appraisal Expected Actual No. of days Deliveredlose cation OBP (Pesos except cost Ship- Construc- delivery comple- delivery costno. Dorrover-flrm date approval where noted) Vessel type (Pesos) builder tion date date tion date delayed (Pesos) Memarks

12 Tbtal anlk 01/07/76 02/16/77 2,648,800 (1) 550 Wr No1e- 3,010.797 Cebu 10/03/77 04/31/78 05/15/78 89 3,117.603 Slight delay cause by swo modifie.Corp. hauler Shipyard tions made for alcohol handliog.

is Marcelino K. 05/27/77 10/05/77 2,582,400 (1) 450 Wr LCT 3,000,000 Ceob (Sales contract) 3.228.000Castro Shipyard

16A Pasacao Trans- 07/14/76 10/19/77 $ 293,190 Secondhand tanker 4,150,000 Imports- 4.017,346port Services, tionInc.

165 Pasacao Trans- 03/13/78 05/24/78 4,500,000 (1) Tugboat 2,900.000 BASECO 08/03/78 03/12/79 10/15/79 187 2,353.000 Delay in the delivery of the tughotport Services. 11/01/78 10/21/78 900,000 was due to delay in the delivery ofInc. (4) 750 WT barges 3.600,000 08/03/78 12/02/78 11/23/78 900.000 the engine.

01/02/79 01/80/79 900,00002/02/79 03/08/79 900,000

19 Candano Ship- 08/1/79 7,360,000 (3) 1000 WT cargo 7,820,000 Mayon 02/28/79 07/16/79 04/02/81 227 7,820.000 Delay was caused by modification Lnping Unes, vessels each Docks, 10/14/79 (change of engines) made which called '-Inc. 01/16/78 03/15/78 10,800.000 Inc. 01/12/80 for an additional loan. Two vessels

are still under construction.

20 Rico Shipping. 12/01/76 03/15/78 3,520,000 (1) Tugboat 2,185,000 BASECO 10/04/78 02/19/79 11/03/79 274 2,300.000 Delay in delivery was caused by modi-Inc. (1) 1000 WT barge 1,244,000 12/10/78 04/20/79 138 1,200.000 fications and delay in delivery et

(1) 750 Wy barge 940,000 12/02/78 12/14/78 9 900.000 the engines for the tugboat.

21 Trans-Asla 10/17/77 08/02/78 3,178,000 (1) 450 Wy LCT 3,800,000 Sandoval 12/29/78 04/26/79 03/05/80 283 4,085,845 Delay mas caused by frequent planShipping Corp. bulk carrier Shipyard brounout and delay in engine deltv-

ery.

22 Pacific Deep 05/12/77 08/30/78 1.248.390 (2) 750 W barges 793.000 RIC 05/10/79 09/07/79 06/14/80 247 825,000 Delay due to (1) delivery of wrongSea Fishing 793,000 10/07/79 07/16/80 249 825,000 class of materials and (2) brownesta.

23 Interisland 01/17/78 08/02/78 1,167,300 (1) 300 WT cargo 1.375,000 Filipino 11/23/78 03/23/79 01/07/80 260 1.500,000 Delay caused by: (1) noncompliameeFerry Service vessel Shipyard with classification, and (2) delay I

machineries.

25 Palacto Ship- 07/20/78 12/20/78 3.440,000 (1) 500 My ILCT 4,118,000 NSSC 06/08/79 12/05/79 05/12/80 127 6.108.000 Several modifications (change of 1ping, Inc. gears and winches) made caused the

delay. (An additional loan of DP 110.000 under the DBP regular lad *Ing program mas granted to fi ncepart of the increase in cost of wee- O *Sel.) MF -

26 Paul N. 12/12/77 12/20/78 2.015,986 (1) 350 WY cargo 2,481,000 MSSC 04/27/79 10/04/79 05/13/80 189 3.589.088 Some modification (change of gears)Coroaines vessel caused the delay in delivery. Am

additional loan of F 456,395 masgranted to finance the changes.

Seb- Applt- mount approved Appraisal ftpected Actual on. of days Deliveredlose cation DP (Peso except cost Ship- Cbastruc- delivery comple- delivery costno. lorromar-fir date approval dhere noted) Vessel type (Pesos) builder tion date date tion date delayed (Peace) anorkm

27 Total falk 05/08/78 12/27/78 3,215,880 (1) 550 WT alco- 3,388,000 Sandoval 06/07/79 12/04/79 02/26/81 2S4 4,575.000 The delay we des to the accidestalCorp. hauler Shipyard launching of. the vessel, extesding

the time of delivery.

28 Berda Shipping 01/26/78 01/24/79 3,637,500 (1) Catamaran-type 3,709,000 PIOWf 08/08/79 02/04/80 09/09/80 185 4,860,000 The delay as due to the design fail-Lines cargo vessel ure to attain the required buoyancy

during the first launching, so cor-rective masures have to be made.

29 luvimin Oebu 05/22/79 2,583,686 (1) Tugboat 1,939,000 Sandoval 12/18/79 03/28/80 Vessel still under construction.Mining Corp. Shipyard Delay is due to delayed order of asi

eanglss.(2) 600 DVr barges 1,006,000 POC 12/18/79 03/08/80 06/12/80 64 805,000

1.006.000 03/08/80 06/12/80 64 805,000

31 Pedrito R. 11/07/78 06/13/79 1,884,800 (1) 350 3WT cargo 2,984,000 MSSC 09/10/79 01718/80 The vessel, already long overdue forBastida vessel delivery, is still under construc-

tion. (Omflict between borrower andshipbuilder.)

32 Seaborne Cor- 12/03/79 04/02/80 19,052,200 (2) 1200 WUT barges 3,508.000 OMC 09/01/80 01/06/81 01/29/81 3,400,000 Tugboats and chemical barges underriere Corp. 01/06/81 01/29/81 construction by E81.

(2) 1200 DUT barges 3,508.000 Eppel 10/12/80 01/26/81 12/18/80 3560,00001/26/81 01/14/81

(2) 1200 WT barges 3,508,000 EZI 10/09/80 01/06/81 01/17/81 3,564.00001/06/81 02/17/81

(2) Tughboate 5.800,000 EE1 10/09/80 04/06/81 5,800,00004/06/81

(2) 750 DWT chemi- 7,980,430 HI1 10/09/80 04/06/81 7,980,430 Ocal barges 04/06/81

34 Martina Sea 11/20/79 05/14/80 4,404,000 (1) Tugboat 2,570,000 PIO1e 11/21/80 04/05/81 Delay Is due to weather disturbanceTransport. Inc. and delay in transshipment of mater-

lts.(1) 1100 OWT LCT- 2.960,000 PDC 12/08/80 03/10/81 Delay is due to modifications.type barge

35 brthern Mi- 01/09/80 08/13/80 12.305,000 (2) 1000 WT cargo 15,526,000 For implementation.danso Trans- vesselsport Co., Inc. 09/09/80 04/01/81 2,109,000

36 Waterfront 08/25/80 12/17/80 4,803,300 (1) Tugboat 2.179,000 i1 05/30/81 10/30/61 Under construction.Stevedoring & (4) 500 Wrr barges 4.280.000 REI 05/30/81 07/16/81Arrastre Ser-vices, Inc.

37 Islands Inte- 01/16/80 01/08/81 4,000,000 (2) 750 WT barges 2,840.000 tnder constructie.grated Offshore (1) Tugboat 2,842,000Services, Inc.

- 59 -

ANNEX 3.2

PHILIPPINES

SHIPPING PROJECT (LOAN 1048-PH)


Technical Assistance

US$

A. StudiesMaritime Training Institute: location, need,curriculum 162,300

Feasibility Study of Training Facilities 10,100Financial Studies of Industry 15,000Ten-Year Maritime Development Plan 30,000

B. TrainingMarine and Safety Surveyors 264,100National Computer Center 14,950Individual Training- Master Degree in Transportation (40 M/M) 34,700- Master Degree in Marine Engineering (16 M/M) 20,780- Other (maritime training, administration,

law, etc.) 20,850

C. Engineering RelatedRelated to preparation of ports loan 1,904,867Related to National Transportation 1,022,353

Sector Study

Total disbursed by Bank $3,500,000

- 60 -ANNEX 4.1

PHILIPPINES

FIRST SHIPPING PROJECr (LOAN 1048-PH)


Subloans - Sumary of Financial Data

Appli- Average T p sitiveSubloan cation Ship(s) delay O ing Ne Debt/

no. date completed (months) income income Trend equity Notes

1 03/73 06/77 7 77 79 Improv- 66/34 Operating expenses underprojecteding

3 02/75 02/78 9 - D/b <0 Extremely poor situation. Operating incomewas positive 1978-79 and has been negativeever since.

4 ??/75 12/77 8 78 79 Imprv. 72/28

5 ??/75 03/77 1 80 - Imprv. 96/04 Losses decreasing

7 06/76 Importation 77 80 Xaprv. 66/34 Only bigger shipping line participating,vessel net income positive, company netincome negative.

8 03/76 12/77 1 78 - Imprv. 99/01 Losses decreasing, net Income almost breakeven in 1981.

9 01/76 09/79 18 80 - ?/a 87/13

11 07/76 05/77 - - D/b <0 Operating income a positive in 1978,negative ever since.

12 01/76 05/78 0 79 79 Imprv. 73/27 Results better than projected.

27 05/78 02/81 8 81 81 ?/a Results better than projected.

15 05/77 ?/a -

16A 07/76 Importation - 78 79 Japrv. 53/47 Tanker much better than expected.

16B 03/78 78,79 0-7 79 80 S/b Barges break about even,but below projections.

19 08/79 04/81 7 81 - /a 77/23 One ship delivered, doing wall, two more stillunder construction.

20 12/76 04/79 0-9 - - D/b 96/04 Very high operating expenses, had equityinfusion recently.

21 10/77 03/80 9 80 - ?j 87/13

22 05/77 07/80 8 80 - S/b 81/19

23 01/78 01/80 9 80 - ?/a 76/24

25 07/76 05/80 4 80 80 Imprv. 62/38 Doing very wall.

26 12/77 05/80. 6 80 - 8Lb 70/30

28 01/78 09/80 6 - - ?/ 85/15 Poor, technical defects of vessel.

29 05/79 06/80 2 - - D/b 69/31 One tugboat still under construction.Red positive Income for half year of 1980.

31 11/78 TL - ?/& I/& ?/a ?/a Vessel was due January 1980.

32 12/79 01/81 0 7/a 7/a 1/a ?/a Six barges completed on or before time.

? meas no information.D means detriorating, 8 means Stagnant.

Note: There are a few more recent subloans, but no financial information is available at this time.

Source: DBP

- 61 -

ANNEX 4.2

PHILIPPINES

FIRST SHIPPING PROJECT (LOAN 1048-PH)


DBP - Profit/Loss Related to Loan Administration

1976 1977 1978 1979 1980 1981

Subloans:Interest collected 33 2,283 4,223 4,317 5,172 3,923Fees (application, commitment, 70 103 327 514 705 338

service)

Subtotal 103 2,386 4,550 4,831 5,877 4,261

Other Income 0 0 1,134 0 0 5

Total Income 103 2,386 5,684 4,831 5,877 4,266

Interest Paid 0 1,862 3,610 2,625 7,600 7,101Financial Charges 0 128 226 229 543 592Administrative Expenses, Misc. 13 266 351 528 557 575

Total Expenses 13 2,256 4,187 3,372 8,700 8,268

Profit/Loss Attributable to project 90 130 1,497 1 ,459 -2,823 -4,002

Source: DBP

- 62 -

ANNEX 5Table 1

PHILIPPINES



Costs and Benefits

Candano Shipping Lines, Inc., MV Romeo, 1,000 DWT, 1980(-P)

Year Total benefits Total costs Net benefits/costs

0 (7,820,000) (7,820,000)1 4,181,484 2,415,304 1,766,1802 4,181,484 2,415,304 1,766,1803 4,181,484 2,415,304 1,766,1804 4,181 484 2,415,304 1,766,1805 4,181,484 2,415,304 1,766,1806 4,181,484 2,415,304 1,766,1807 4,181,484 2,415,304 1,766,1808 4,181,484 2,415,304 1,766,1809 4,181,484 2,415,304 1,766,180

10 6,668,154 2,415,304 4,252,850

ERR = 19.73%.

- 63 -

ANNEX 5Table 2

PHILIPPINES



Costs and Benefits

Southwest Cargo & Shipping Co., Inc., General Cargo/Log Carrier,MV Athena J, 1,000 DWT, Brand New

(p)


0 - 6,754,585 (6,754,585)1 1,049,276 982,771 66,5052 1,518,309 1,336,971 181,3383 2,303,178 1,249,881 1,053,2974 2,418,337 1,249,881 1,168,4565 2,539,254 1,249,881 1,289,3736 2,666,216 1,249,881 1,416,3357 2,799,527 1,249,881 1,549,6468 2,939,504 1,249,881 1,689,6239 3,086,479 1,249,881 1,836,59810 6,299,640 1,249,881 5,049,759

ERR = 9.57%.

- 64 -

ANNEX 5Table 3

PHILIPPINES



Costs and Benefits

Philippine Lauan Shipping Corp., Log Carrier,MV Emprise I, 3,150 DWT, Brand New


0 - 9,822,743 (9,822,743)1 954,966 654,822 300,1442 3,324,661 2,055,957 1,268,7043 4,077,494 2,620,607 1,456,8874 5,043,874 3,422,870 1,621,0045 5,425,429 3,956,577 1,468,8526 5,696,700 3,956,577 1,740,1237 5,981,535 3,956,577 2,024,9588 6,280,612 3,956,577 2,324,0359 6,594,643 3,956,577 2,638,066

10 12,941,747 3,956,577 8,985,170

ERR = 13.6%.

- 65 -

ANNEX 5Table 4

PHILIPPINES



Costs and Benefits

Interisland Ferry Service, Steel Cargo Vessel (Cargoes-SilicaSand Cement) MV Marielle, 300 DWT, Brand New

(.P)


0 - 1,592,854 (1,592,854)1 617,482 510,739 106,7432 691,340 503,061 188,2793 725,907 503,061 222,8464 762,202 503,061 259,1415 800,312 503,061 297,2516 840,328 503,061 337,2677 882,344 503,061 379,2838 926,462 503,061 423,4019 972,785 503,061 469,724

10 1,773,424 503,061 1,270,363

ERR = 14.525%.

- 66 -

ANNEX 5Table 5

PHILIPPINES



Costs and Benefits

Palacio Shipping, Inc., LCT, LCT J-J, 500 DWT - Brand New


0 - 6,108,000 (6,108,000)1 1,421,596 539,784 881,8122 2,790,937 757,077 2,033,8603 2,790,937 757,077 2,033,8604 2,790,937 757,077 2,033,8605 2,790,937 757,077 2,033,8606 2,790,937 757,077 2,033,8607 2,790,937 757,077 2,033,860.8 2,790,937 757,077 2,033,8609 2,790,937 757,077 2,033,86010 6,471,160 757,077 5,714,083

ERR = 29.20%.

- 67 -

ANNEX 5Table 6

PHILIPPINES



Costs and Benefits

Pasacao Transport Services, Inc., Oil Tanker, MT Caranan,1,650 DWT, Secondhand

Year. Total benefits Total costs Net benefits/costs

0 - (4,184,718) (4,184,718)1 2,711,836 1,292,040 1,419,7972 4,939,991 3,423,213 1,516,7783 5,663,866 3,124,297 2,539,5704 5,663,866 3,124,297 2,539,5705 5,663,866 3,124,297 2,539,5706 5,663,866 3,124,297 2,539,5707 5,663,866 3,124,297 2,539,5708 5,663,866 3,124,297 2,539,5709 5,663,866 3,124,297 2,539,57010 7,672,539 3,124,297 4,548,242

ERR = 46.15%.

- 68 -

ANNEX 5Table 7

PHILIPPINES



Costs and Benefits

Total Bulk Corp., Specialized Tanker, MT Molahauler, 550 DWT, Brand New(.F)


0 - (5,340,938) (5,340,938)1 2,791,573 1,710,392 1,081,1812 3,690,614 2,581,735 1,108,8793 3,636,476 1,986,795 1,649,6814 3,636,476 1,986,795 1,649,6815 3,636,476 1,986,795 1,649,6816 3,636,476 1,986,795 1,649,6817 3,636,476 1,986,795 1,649,6818 3,636,476 1,986,795 1,649,6819 3,636,476 1,986,795 1,649,68110 4,324,506 1,986,795 2,337,711

ERR - 24.3%.

- 69 -

ANNEX 5Table 8

PHILIPPINES



Costs and Benefits

Pasacao Transport Services, Inc.; Vessels - MT Daroanak, 730 HP;Barges - Balogo I, 750 DWT, Balogo II, 750 DWT, Balogo III, 750 DWT,

Balogo IV, 750 DWT; 1978


0 - (5,953,000) (5,953,000)1 1,366,872 586,482 780,3902 2,443,685 1,096,346 1,347,3393 2,980,553 1,304,620 1,675,9334 2,980,553 1,304,620 1,675,9335 2,980,553 1,304,620 1,675,9336 2,980,553 1,304,620 1,675,9337 2,980,553 1,304,620 1,675,9338 2,980,553 1,304,620 1,675,9339. 2,980,553 1,304,620 1,675,93310 5,944,545 1,304,620 4,639,925

ERR 22.51%.

- 70 -

ANNEX 5Table-9

PHILIPPINES



Economic Rates of Return for Ships Financed under the Project

Averageload Avg.

factor no. ofCost of per trips

Name of company/ Type of Capacity vessel trip made ERRsubloan no. Name of vessel vessel (DWT) (0) (M) p.a. (Z)

Northern Mindanao MV Alexandra Cargo 650 2,710,268 - - 13.47Transport Co., Inc. vessel(Subloan No. 4, MV Leticia Cargo 660 2,710,268 - - 7.71Subloan No. 35) vessel

Philippine Lauan MV Bnprise I Log carrier 3,150 9,766,694 65.0 26 13.60Shipping Corp.(Subloan No. 1)

Total Bulk Corp. MT Molahauler Specialized 550 4,466,500 98.3 74 24.30(Subloan No. 12) tanker

Palacio Shipping, LCT-JJ LCT 500 6,108,000 Time char- 42 29.20Inc. tered by(Subloan No. 25) SMC

Paul M. Corominas MV Alfonso Cargo 350 3,630,088 - - 21.89(Subloan No. 26) vessel

Pasacao Transport MT Caranan Oil tanker 1,650 4,017,346 99.8 42 46.15Services, Inc. MT Daroanak, Tugboat, (730 HP 5,953,000 - 22.51(Subloan No. 16A, Balogo I-IV Barges 750 @)Subloan No. 16B)

Candano Shipping MV Romeo Cargo 1,000 7,820,000 - - 19.73Lines, Inc. vessel(Subloan No. 19)

Interisland Ferry MV Marielle Cargo 300 1,500,000 50.0 50 14.53Service Corp. vessel

Southwest Cargo & MV Athena Cargo 1,000 5,798,113 64.2 60 9.57Shipping Co., Inc. vessel(Subloan No. 5,Subloan No. 5A)

world bank document...created in 1974. it was given jurisdiction over the development of shipping,...

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