Document of The World Bank Report No: ICR00001182 IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-44460) ON A IN THE AMOUNT OF $100 MILLION TO THE REPUBLIC OF THE PHILIPPINES FOR A LOCAL GOVERNMENT FINANCE AND DEVELOPMENT PROJECT June 29, 2009 Philippine Sustainable Development Sustainable Development Department East Asia and Pacific Region CURRENCY EQUIVALENTS (Exchange Rate Effective December 2008) Currency Unit = Philippine Peso (PhP) PhP1 = 48.77 US$1 = 0.02 FISCAL YEAR January to December ABBREVIATIONS AND ACRONYMS BAC Bids and Awards Committee LGA Local Government Academy BLGF Bureau of Local Government LGU Local Government Unit Finance BHC Barangay Health Center LOGOFIND Local Government Finance & Development BTE Business Tax Enhancement LRC Local Revenue Code BHW Barangay Health Worker MDF Municipal Development Fund CAS Country Assistance Strategy MDFO Municipal Development Fund Office COA Commission on Audit MDP Municipal Development Project DepEd Department of Education MFC Municipal Finance Corporation DO Development Objective MOA Memorandum of Agreement DOF Department of Finance M&E Monitoring and Evaluation DOH Department of Health MOOE Maintenance and Other Operating Expenses DPWH Department of Public Works and MTR Mid-term Review Highways ERR Economic Rate of Return NGAS New Government Accounting System FGD Focus Group Discussion O&M Operation and Maintenance FIRR Financial Internal Rate of Return PAD Project Appraisal Document FM Financial Management PDO Project Development Objective GAD Gender and Development PGB Policy Governing Board GIS Geographic Information System PMO Project Management Office GFI Government Financial Institution PS Personal Services GOP Government of the Philippines RPTA Real Property Tax Administration IBRD International Bank for RPU Real Property Unit Reconstruction and Development ICR Implementation Completion and SDP Social Development Program Results Report IPs Indigenous Peoples SIE Statement of Income & Expenditure IRA Internal Revenue Allotment SPCR Subproject Completion Report KPI Key Performance Indicator TRC Technical Review Committee LFF LGU Financing Framework WBI World Bank Institute Vice President: James W. Adams Country Director: Bert Hofman Sector Manager: Mark C. Woodward Project Team Leader: Christopher T. Pablo ICR Team Leader: Christopher T. Pablo PHILIPPINES Local Government Finance and Development Project CONTENTS A. Basic Information ....................................................................................................... i B. Key Dates.................................................................................................................... i C. Ratings Summary........................................................................................................ i D. Sector and Theme Codes ........................................................................................... ii E. Bank Staff................................................................................................................... ii F. Results Framework Analysis..................................................................................... iii G. Ratings of Project Performance in ISRs .................................................................. vii H. Restructuring (if any).............................................................................................. viii I. Disbursement Profile................................................................................................. ix 1. Project Context, Development Objectives and Design .............................................1 2. Key Factors Affecting Implementation and Outcomes.............................................5 3. Assessment of Outcomes.........................................................................................12 4. Assessment of Risk to Development Outcome .......................................................17 5. Assessment of Bank and Borrower Performance....................................................18 6. Lessons Learned......................................................................................................20 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners.........22 Annex 1. Project Costs and Financing...........................................................................24 Annex 2a. Outputs by Component.................................................................................25 Annex 2b. Output by Number of LGUs Assisted..........................................................28 Annex 3. Economic Analysis ........................................................................................29 Annex 4. Bank Lending and Implementation Support/Supervision Processes .............36 Annex 5. Beneficiary Survey........................................................................................38 Annex 6. Stakeholder Workshop Report and Results ...................................................39 Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR......................48 Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders........................57 Annex 9. List of Supporting Documents.......................................................................58 MAP No. 38689 i A. Basic Information Local Government Finance & Country: Philippines Project Name: Development Project (LOGOFIND) Project ID: P048588 L/C/TF Number(s): IBRD-44460 ICR Date: 06/25/2009 ICR Type: Core ICR REPUBLIC OF THE Lending Instrument: SIL Borrower: PHILIPPINES Original Total USD 100.0M Disbursed Amount: USD 58.6M Commitment: Environmental Category: B Implementing Agencies: Department of Finance Local Government Units Cofinanciers and Other External Partners: B. Key Dates Process Date Process Original Date Revised / Actual Date(s) Concept Review: 01/16/1997 Effectiveness: 02/28/2000 06/21/2001 Appraisal: 06/30/1998 Restructuring(s): 06/08/2006 06/17/2008 Approval: 03/23/1999 Mid-term Review: Closing: 06/30/2006 12/31/2008 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Moderately Satisfactory Risk to Development Outcome: Moderate Bank Performance: Moderately Satisfactory Borrower Performance: Moderately Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Moderately Unsatisfactory Government: Moderately Satisfactory Quality of Supervision: Moderately SatisfactoryImplementing Agency/Agencies: Moderately Satisfactory i Overall Bank Overall Borrower Performance: Moderately SatisfactoryPerformance: Moderately Satisfactory C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Performance Indicators (if any) Rating Potential Problem Project Yes Quality at Entry Satisfactory at any time (Yes/No): (QEA): Problem Project at any Quality of Yes Satisfactory time (Yes/No): Supervision (QSA): DO rating before Moderately Closing/Inactive status: Satisfactory D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Agricultural marketing and trade 9 Animal production 15 General education sector 27 General transportation sector 20 Health 15 14 Housing construction 20 Sub-national government administration 30 18 Water supply 32 Theme Code (as % of total Bank financing) Municipal finance 50 77 Municipal governance and institution building 50 23 E. Bank Staff Positions At ICR At Approval Vice President: James W. Adams Jean-Michel Severino Country Director: Bert Hofman Vinay K. Bhargava Sector Manager: Mark C. Woodward Keshav Varma Project Team Leader: Christopher T. Pablo Thomas L. Zearley ICR Team Leader: Christopher T. Pablo ICR Primary Author: Lance Morrell ii F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) The main objective was to assist participating LGUs in expanding and upgrading their basic infrastructure, services and facilities and in strengthening their capacities in municipal governance, investment planning, revenue-generation, and project development and implementation. It would also enhance capabilities at the national level to provide technical support and long-term financing to local government units through the Municipal Development Fund. Revised Project Development Objectives (as approved by original approving authority) (a) PDO Indicator(s) Original Target Formally Actual Value Indicator Baseline Value Values (from Revised Achieved at approval Target Completion or documents) Values Target Years % increase in number of households (HHs) with access to various basic Indicator 1 : infrastructure & social & environmental services and facilities in all participating LGUs. Value 502,416 HHs in 72 LGUs None 30% increase; 110% increase quantitative or 653,141 HHs (1,054,142 Qualitative) households with access) Date achieved 01/01/2000 01/01/2000 03/03/2008 04/21/2009 Comments Fully achieved. 160% of the revised target is achieved. The increase in the total (incl. % number of households in all participating LGUs is substantially higher than the achievement) target of 30%. % increase in number of households with access to various basic infrastructure, Indicator 2 : social & environmental services and facilities in all participating 3rd to 6th class LGUs. Value 354,685 households with None 30% increase; 51% increase quantitative or access (532, 028 (534,685 Qualitative) households households with with access) access) Date achieved 01/01/2000 01/01/2000 03/03/2008 04/21/2009 Comments Fully achieved. 100% of the revised target is achieved. The increase in the (incl. % number of households from 3rd to 6th class LGUs is greater than the target value achievement) of 30%. Indicator 3 : % increase in revenue collection of all participating LGUs. 67% increase from Value the baseline; quantitative or PhP8.09Bn; 545 LGUs None 40% increase; revenue collection Qualitative) (own source) PhP11.32Bn of PhP13.47Bn for Q3 2008 Date achieved 01/01/2000 01/01/2000 03/03/2008 04/21/2009 iii Comments Fully achieved. 119% of the revised target is achieved. The increase in revenue (incl. % collection to PhP13.47Bn is higher than the target value. achievement) Indicator 4 : % increase in proportion of internal revenue (own source) to total revenue in all participating LGUs. Value Proportion of own source None 40% increase 27% increase in quantitative or to total revenue of 545 in share of share of own source Qualitative) participating at 24.82% own source to to total revenue (own source: PhP total revenue (own source: 8.09Bn; total: PhP13.47B; total PhP32.61Bn) PhP50.48B Date achieved 01/01/2000 01/01/2000 03/03/2008 04/21/2009 Comments Not achieved. The proportion only increased by 2% from the baseline value. The (incl. % rate of increase was affected by the substantial increase in internal revenue achievement) allotment (IRA) and weak taxing powers and tax base of 3rd-6th class LGUs. Indicator 5 : % of LGUs that attended training on local revenue code implemented the code. Value None None 40% (231 out 51% (294 out of quantitative or of 579 LGUs) 579 LGUs) Qualitative) Date achieved 01/01/2000 01/01/2000 03/03/2008 04/21/2009 Comments Fully achieved. 127% of the revised target is achieved. (incl. % achievement) Indicator 6 : % of all LGUs submitting quarterly statement of income and expenditure (SIE) reports Value 60% or 1,014 out of 1,691None 90% of all 94% (1,533 out of quantitative or LGUs submitted SIE LGUs (1,474 1,638 LGUs) Qualitative) out of 1,638 LGUs) Date achieved 01/01/2000 01/01/2000 03/03/2008 04/21/2009 Comments Fully achieved. As of loan closing, 1,533 out of 1,638 LGUs (94%) submitted (incl. % SIE reports on an annual basis. 104% of the revised target is achieved. achievement) Indicator 7 : Increase in real property tax (RPT) collection rate in all participating LGUs Value PhP0.34Bn actual RPT None 75% increase PhP0.90Bn actual quantitative or collection against in RPTA RPT collection Qualitative) PhP0.44Bn projected collection rate against PhP0.67Bn collection; 77.14% projected collection collection rate (134% collection rate, 75% increase from baseline) Date achieved 01/01/2000 01/01/2000 03/03/2008 04/21/2009 Comments Achieved. RPT collection rate in all participating LGUs increased by 75% as of (incl. % loan closing. achievement) Indicator 8 : % increase in number of LGUs accessing long-term financing through MDFO Value 185 LGUs None 150% increase 198% increase; 551 iv quantitative or or equivalent LGUs accessing Qualitative) to 485 LGUs long term financing through MDFO Date achieved 01/01/2000 01/01/2000 03/03/2008 04/21/2009 Comments Fully achieved. 114% of the revised target is achieved. The increase in the total (incl. % number of LGUs accessing financing through MDFO's various windows achievement) exceeded the target by 48%. Indicator 9 : % increase in LGUs under 3rd to 6th income class bracket accessing long term financing through MDFO Value 156 LGUs None 150% increase 160% increase; 405 quantitative or or equivalent LGUs accessing Qualitative) to 390 LGUs long term financing through MDFO Date achieved 01/01/2000 01/01/2000 03/03/2008 04/21/2009 Comments Fully achieved. 104% of the revised target is achieved. The increase in the (incl. % number of 3rd to 6th class LGUs is higher than the target by 10%. achievement) Indicator 10 : LGU Financing Framework (LFF) updated, monitored and implemented Value None None LFF updated, LFF was not quantitative or monitored and updated but has Qualitative) implemented been monitored and by December implemented. DOF 2008 formally adopted LFF and issued Guidelines in 2007 Date achieved 01/01/2000 01/01/2000 03/03/2008 04/21/2009 Comments Partially achieved. Work to update the LFF is on-going from inputs generated (incl. % from the LFF Conference in 2007 and the PDF. Government inter-agency achievement) working group established to monitor its implementation and impact on LGU borrowing patterns. (b) Intermediate Outcome Indicator(s) Original Target Formally Actual Value Indicator Baseline Value Values (from Achieved at approval Revised Completion or documents) Target Values Target Years Indicator 1 : Improved basic infrastructure, services & facilities. Value 0 200 LGU 104 LGU 133 LGU (quantitative subprojects subprojects subprojects or Qualitative) approved fully approved and fully completed completed Date achieved 01/01/2000 01/01/2000 03/03/2008 04/21/2009 Comments Achieved. The cancellation of $40M from Component 1, reduced the target to (incl. % 104 subprojects. This was not formally agreed by the Bank and the Borrower. achievement) The Project financed 133 subprojects which is 67% of the original and 128% of the revised target. Indicator 2 : Enhanced LGU management capacity v Value 0 200 LGUs trained No revision 1,033 LGUs trained (quantitative (no double count) or Qualitative) Date achieved 01/01/2000 01/01/2000 03/03/2008 04/21/2009 Comments Fully achieved. 517% of the original target is achieved. (incl. % achievement) Indicator 3 : Improved ability of BLGF to monitor fiscal performance Value No system in place LGU credit rating No revision A credit-worthiness (quantitative system established rating and tracking or Qualitative) by December 2000 system established Fiscal information in November 2007. system established DOF to design by March 2002 implementation Regular mechanism. monitoring reports Fiscal information are disseminated system established by 2002 and operational since 2005. Published disseminated and uploaded SIEs in BLGF website- 2002-2007. Date achieved 01/01/2000 01/01/2000 03/03/2008 04/21/2009 Comments Achieved. Reliable data on LGU financial standing is easily accessible and used (incl. % extensively by banks for their credit evaluation needs. A credit-worthiness rating achievement) and tracking system exists. Indicator 4 : Improved local resource mobilization Value 0 524 LGUs with No revision 66 LGUs with (quantitative manual RPTA manual RPTA or Qualitative) 200 LGUs with 5 LGUs with computerized computerized RPTA RPTA 30 LGUs with 5 LGUs with BTE BTE Date achieved 01/01/2000 01/01/2000 03/03/2008 04/21/2009 Comments Not achieved. The Project fell short of its target. However, additional 254 LGUs (incl. % have implemented manual RPTA. Also, another 46 LGUs now have achievement) computerized RPTA. These were achieved using their own funds or through other financing facilities. Indicator 5 : Enhanced institutional arrangements and capacity for MDF. Value None MDFO would No revision Operations Manual (quantitative have in-place new established and or Qualitative) policies, utilized procedures and vi operations manual by an agreed specific date Date achieved 01/01/2000 01/01/2000 03/03/2008 04/21/2009 Comments Achieved. LOGOFIND Operations Manual was utilized by the Project during (incl. % implementation and is now being used for other MDFO financing windows. achievement) Indicator 6 : Streamlined MDF procedures and approvals Value Subproject processing 20% reduction in No revision 68-84% decrease in (quantitative (submission of expression subproject subproject or Qualitative) of interest to approval) processing time processing time (3- took 19 months at project 6 months depending start up on the complexity of the subproject) Disbursement of funds to Improved LGUs took 14 days at timeliness of 64% reduction in project start-up disbursements the time required to disburse funds (now averages at 5 days) Date achieved 01/01/2000 01/01/2000 03/03/2008 04/21/2009 Comments Fully achieved. 340-420% of the original target of 20% reduction in approval (incl. % processing time was achieved and 64% reduction in the disbursement processing achievement) time was achieved. Indicator 7 : Strengthened MDFO Value None Formation of No revision MDFO was created (quantitative MDFO in DOF in November 1998 or Qualitative) through Executive Order No. 41 Spin-off/ transfer Municipal Finance of MDFO Corporation (MFC) created but not sanctioned to operate because of legal impediments Date achieved 01/01/2000 01/01/2000 03/03/2008 04/21/2009 Comments Partially achieved. MDFO took steps to create MFC through an executive branch (incl. % issuance, but the entity could not be operationalized. In lieu of MFC, DOF is achievement) currently pursuing the upgrading of the status of MDFO, from merely an office into a full bureau. G. Ratings of Project Performance in ISRs Actual No. Date ISR Archived DO IP Disbursements (USD millions) 1 04/07/1999 Satisfactory Satisfactory 0.00 vii 2 12/28/1999 Satisfactory Satisfactory 0.00 3 05/02/2000 Satisfactory Satisfactory 3.50 4 06/16/2000 Satisfactory Satisfactory 3.50 5 12/28/2000 Satisfactory Satisfactory 3.51 6 06/13/2001 Satisfactory Unsatisfactory 3.62 7 12/21/2001 Satisfactory Unsatisfactory 3.84 8 06/16/2002 Satisfactory Unsatisfactory 3.86 9 12/12/2002 Satisfactory Satisfactory 4.82 10 06/18/2003 Satisfactory Satisfactory 5.55 11 12/16/2003 Satisfactory Satisfactory 8.82 12 06/22/2004 Satisfactory Satisfactory 13.14 13 12/21/2004 Satisfactory Satisfactory 17.96 14 06/23/2005 Moderately Satisfactory Moderately Satisfactory 20.66 15 06/21/2006 Satisfactory Satisfactory 24.37 16 06/27/2007 Satisfactory Moderately Satisfactory 31.11 17 06/24/2008 Moderately Satisfactory Moderately Satisfactory 47.97 18 04/30/2009 Moderately Satisfactory Satisfactory 54.06 H. Restructuring (if any) ISR Ratings at Amount Restructuring Board Restructuring Disbursed at Reason for Restructuring & Date(s) Approved Restructuring PDO Change DO IP in USD Key Changes Made millions 06/21/2001 N S U 3.62 Funds were cancelled due to slow project implementation. Reallocation of $3 million from Categories 2 (goods) and 3 (consultant services and training) was requested to rectify the imbalance in terms 06/08/2006 N MS MS 24.37 of demand for financing- increasing demand for subproject financing and slow implementation of the LGU Capacity-building and Resource Mobilization components. Additional reallocation of loan proceeds amounting to $3.3 million from Categories 2 and 3 06/17/2008 S MS 47.38 to Category 1 was requested to respond further to the sustained demand for subproject financing and maximize utilization of loan proceeds. viii I. Disbursement Profile ix 1. Project Context, Development Objectives and Design 1.1 Context at Appraisal Urban finance and development in the Philippines were characterized by four challenges: (a) underdeveloped capital markets for LGU financing; (b) weak local capacity in delivering local services and managing infrastructure projects; (c) limited local resource mobilization; and (d) poorly organized information to monitor LGU fiscal and financial performance. The Government, with Bank assistance, prepared the LGU Financing Framework (LFF) to address these issues. The LFF was seen as a key instrument to address the financing challenges faced by LGUs. It envisioned LGU financing to be provided by the private capital market rather than by programs of National Government agencies. It also advocated for LGU financing through market segmentation, along with a policy of "graduation" - lower-income and middle income LGUs would access the Municipal Development Fund (MDF) for grants and loans and gradually shifting towards Government Financial Institutions (GFIs) as their capacity improves and then higher income LGUs would access private commercial finance. The Local Government Finance and Development (LOGOFIND) Project was designed to operationalize the LFF by reorienting and strengthening the MDF by: (i) enhancing its role in helping resource-poor LGUs establish track records of credit-worthiness and improve their capacities for planning, financial management and project management; (ii) supporting LGU subprojects with social/environmental objectives that were considered non-bankable due to their long gestation period and lack of identifiable revenue streams; (iii) strengthening MDF's technical capacity to evaluate and monitor LGU credits and grants and oversee the implementation of the LFF; and (iv) promoting direct access of LGUs to official development assistance funding by providing MDF loans at market terms with technical assistance for project preparation and capacity-building. The MDF, created under the first Bank-financed Municipal Development Project (MDP1), was implemented in 1984. MDP1 piloted the demand-driven approach to LGU financing. Subsequent MDPs continued to provide LGUs with financing for infrastructure and supported the strengthening of the administrative procedures of the MDF. LOGOFIND can be regarded as the fourth in the series of MDPs. But this time, it is guided by the LFF. The Project, thus, intended to bring together, in an integrated manner, the investment, capacity-building and policy reform components of LGU lending. The Government's decentralization thrust was supported by Bank's Country Assistance Strategy (CAS) for the Philippines, which aimed at strengthening public policies and implementation capabilities. LOGOFIND was seen as a key vehicle for sustaining the Bank's involvement in the country's decentralization program. At the same time, it was considered an instrument for introducing innovation and mainstreaming of lessons from global experience in municipal finance in the Philippines. 1.2 Original Project Development Objectives (PDOs) and Key Indicators (as approved) The main development objective of the Project was to assist participating LGUs in expanding and upgrading their basic infrastructure, services and facilities and in strengthening their capacities in municipal governance, investment planning, revenue generation, and project 1 development and implementation. The Project was to also enhance capabilities at the national level to provide technical support and long-term financing to local governments through the MDF. The PDO presented in the Project Appraisal Document (PAD) is worded differently in the Loan Agreement. The key performance indicators (KPIs) were: (i) 200 subprojects approved; (ii) 200 LGUs trained; (iii) LGU credit rating system established by December 2000, fiscal information system established by March 2002 and regular monitoring reports disseminated by 2002; (iv) 524 LGUs participating in manual Real Property Tax Administration (RPTA), 200 LGUs in computerized RPTA and 30 LGUs in Business Tax Enhancement (BTE); (v) the Municipal Development Fund Office (MDFO) would have in-place new policies, procedures and operations manual by an agreed specific date. The KPIs which should have been used to measure the achievements of the Project in terms of its development objectives were not adequately defined at appraisal. 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification The PDOs were not revised but the KPIs were revised to take into account the reduction in the loan amount of $40 million that resulted from the Project's slow implementation start-up. These KPIs were also revised to better measure the progress of the Project in achieving its PDOs given that the KPIs were not adequately designed in the PAD. While there was no formal agreement, the Task Team and MDFO agreed to adopt the modified results framework. 1.4 Main Beneficiaries The Project's target beneficiaries were LGU constituents (students, households, entrepreneurs, and communities) requiring improved environmental and social infrastructure services and facilities. The subproject financing component of the Project would target LGUs at the lowest income classes (3rd through 6th). The Government of the Philippines (GOP) preparation team estimated that about 200 LGUs would borrow for subprojects under the Project, and of this total, 180 would be from the 3rd to 6th income classes. These LGUs would also benefit from the capacity-building program of the Project. While not stated explicitly in the PAD, the Project would also benefit the National Government by supporting its decentralization agenda. Technical assistance and equipment would be provided to strengthen the capacity of the Department of Finance (DOF) through its two offices: (a) MDFO to manage the financing facility for the lower income LGUs; and (b) Bureau of Local Government Finance (BLGF) to monitor LGU fiscal and financial performance. 1.5 Original Components (as approved) The Project had four components: (a) Component 1: LGU Subprojects (Original cost $95.7M ­ IBRD $77.1M and GOP $18.6M) was to finance subprojects for the expansion, rehabilitation and improvement of basic infrastructure, social and environmental services and facilities under LGU responsibility. Financing under this component targeted LGUs in the 3rd through 6th income classes, LGUs in the 1st and 2nd income classes could also access LOGOFIND funding on a case-by-case basis for social and environmental subprojects. 2 (b) Component 2: LGU Training and Capacity Building (Original cost $8.2M ­ IBRD $4.5M and GOP $3.7M) was to support LGU training and capacity-building for: (i) subproject development and implementation; (ii) municipal planning, finance and management; (iii) improved training modules and delivery mechanisms; and (iv) piloting of new programs. (c) Component 3: LGU Resource Mobilization and Monitoring (Original cost $16.5M - IBRD $9.5M and GOP $7M) was to finance: (i) expansion of the RPTA Program to achieve nationwide coverage; (ii) development and implementation of new initiatives to help LGUs improve creditworthiness and revenue generation; and (iii) development and implementation of systems to improve monitoring of LGU fiscal performance and local financial reporting and disclosure. (d) Component 4: MDF Reorganization and Strengthening (Original cost $12.3M ­ IBRD $7.9M and GOP $4.4M) was to support the MDF reorganization and strengthening to implement, on a phased basis, new institutional structures with new/streamlined procedures and approvals, decentralized (field) operations, and contracting and training of management and staff. 1.6 Revised Components Several second and third level restructuring were undertaken that resulted in reduction in the scope of project components. Key changes were as follows: (a) Cancellation of $40 million. June 21, 2001, Government requested the cancellation of 40% of the loan proceeds due to slow start-up resulting from weak initial organizational capacity and impact of the Asian financial crisis on LGU borrowing at the start of the Project. The financial crisis at that time affected the overall government fiscal position that in turn adversely impacted on the transfers to LGUs. The ultimate effect in this context was the reluctance of LGUs to carry out investments in municipal infrastructure. The entire amount cancelled was taken out from Component 1. (b) Re-design of Component 3. During the May 2003 supervision mission, the Borrower and the Task Team agreed to re-design component 3 to align the BLGF to its new role arising out of the enactment of new laws and policies. 3 Activities Scope and Funding Original Revised Manual RPTA Funding to participating LGUs with the 50% grant, 30% loan and 20% equity following mix: maximum of 80% grant Only 3rd to 6th class LGUs are eligible and minimum of 20% equity depending on LGU income class Open to all LGUs Computerized RPTA Funding to participating LGUs with the 100% loan, later modified to 50% loan, following mix: maximum of 80% grant 25% grant and 25% equity and minimum of 20% equity Cities and first class municipalities with depending on LGU income class real property units of at least 20,000 only Open to all LGUs Business Tax No cost-sharing policy. Interpreted by 50% grant, 25% loan and 25% equity Enhancement the BLGF as full grant. Cities and first class municipalities with Open to all LGUs business tax units of at least 1,000 only Studies Documentation of local best practice in Documentation of local best practice in resource mobilization resource mobilization BLGF Re-engineering Study LGU Fiscal and Fiscal performance indicators, report Fiscal performance indicators, report Financial format and database development format and database development Performance BLGF website development Monitoring (c) Reallocation of loan proceeds. The Borrower requested reallocation of proceeds amounting to $3 million from Categories 2 (goods) and 3 (consultant services and training) to Category 1 (subproject financing) in June 2006 to rectify the imbalance in terms of demand for financing-- increasing demand for subproject financing and slow implementation of the LGU Capacity-building and LGU Resource Mobilization components. Additional reallocation of loan proceeds amounting to $3.3 million from Categories 2 and 3 to Category 1 was requested on June 17, 2008 to respond further to the sustained demand for subproject financing and maximize utilization of loan proceeds. 1.7 Other Significant Changes Other significant changes include: (a) Adoption of the Modified Results Framework. KPIs for the PDOs were introduced and intermediate outcome indicators were refined. This was informally agreed by the Task Team and the Borrower in 2006 and the Borrower formally submitted the final Results Framework to the Bank on March 3, 2008. (b) Utilization of exchange gains to fund additional subprojects. The Borrower requested to use funds generated from the appreciation of the US dollar for five additional subprojects not included in the initial list to be financed by the LOGOFIND during the loan extension period. Work was completed by loan closing. This request was approved by the Regional Vice President on December 29, 2008. (c) Loan extensions. The closing date of Project was extended from June 30, 2006 to June 30, 2008 to respond to the increased demand from LGUs for subproject financing. The second extension (June 30, 2008-December 31, 2008) was requested to complete the 23 subprojects that were on-going implementation at that time and other activities that were perceived to slip beyond the June 30, 2008 loan closing date. 4 2. Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design and Quality at Entry The QAG rated quality at entry as Satisfactory. Background analysis for project preparation is sound. The problems in LGU capacity and financing constraints to investments were properly identified and well-defined and the PAD captured the essence of a number of related assessments of the devolution program. The government was in transition, from national government-led to LGU-led service delivery policy. The LFF tried to address the debates around the residual role of the National Government in the financing and delivery of services at the local level, and the challenges of putting this into motion motivated some of LOGOFIND's objectives and strategies. The background analysis was considerably enhanced by the preceding policy work that went into the formulation of the LFF. The LFF clearly defined what it seemed to be the efficient allocation of credit resources and steered DOF interventions towards resource-poor LGUs. The LOGOFIND Project was designed to continue the approach of the completed MDPs, i.e., expand and upgrade LGU capacity for service delivery at the local level by making municipal finance readily available to interested LGUs. Project design benefited from the key lessons offered by the review carried out by the OED, and enriched by its findings that include: (a) the need for strong government commitment to the financial integrity of the intermediary's operations; (b) the viability of any lending operation depends on the credit-worthiness of the borrowers; and (c) the role of government-backed operations should be seen only as an interim solution and should facilitate more direct relationship between the LGUs and the private markets. These findings formed part of the innovation and broader reforms that the Project introduced and aimed to achieve. The Project, however, did not fully consider the organizational challenges that these proposed reforms would impose on DOF as the implementing agency that plays a role of being both the policy oversight agency and key provider of loans and grants to LGUs in the lower income classes. Stakeholder participation was emphasized at project design and implementation. Subproject identification and selection are vetted by municipal, provincial or city resolutions passed by councils where the population at large is represented. To be eligible for project funding, the activities proposed by LGUs would have to be part of local development plans that are formulated though a consultative and participatory process. Sufficient attention was also given to the fiduciary and safeguards requirements for Bank projects. LGU subprojects to be supported by LOGOFIND were designed to be guided by environmental and social assessment frameworks. Project management practices were to be aligned with financial management and disbursement procedures acceptable to the Bank. Project design is logical. The design of the Project had a logical structure of results. It was made up of coherent project components that align well with government's strategic decision (laid out in the LFF) to focus on LGUs belonging to the 3rd to 6th class categories and to support investments with social and environmental benefits. This was consistent with the intention to limit government intervention in the LGU credit market through a cost-sharing framework 5 between the National Government and LGUs that guided allocation of grants so as to complement rather than undermine market-based financing. The capacity of LGUs in the target market was typically weak in terms of managerial and financial aspects, thus the need to provide assistance for capacity-building (component 2). The Project envisaged tapping the resources of the Local Government Academy (LGA) and external service providers. However, it departed from this approach when MDFO decided to provide training through in-house consultants. The change in approach resulted in significant savings for this component and helped significantly to increase the pipeline of well-prepared subproject proposals. Component 3 responded to a felt need by the National Government and was intended to finance and implement the component to complete the coverage of all LGUs that were not reached by the predecessor projects. The benefits were substantial to LGUs but for various reasons LGUs were seen to be unable to pursue such investments without a push from the National Government. The relevance of this component to the LFF was in its impact on the creditworthiness of LGUs and the desired reduction in their dependence on National Government. This objective was, however, lost when the Policy Governing Board (PGB) decided to deal with this as a lending operation in order to forcefully implement the LFF. The shift from grant to loan caused a significant drop in demand from LGUs which should have called for a downscaling of targets. The component for MDF reorganization and strengthening (component 4) was appropriate as the implementing agency was to assume the responsibility for the whole range of activities. It focused its desired results, however, on the transformation of the MDFO into an autonomous financial intermediary for LGUs. The legal and policy hurdles of the proposal to establish the Municipal Finance Corporation (MFC) given the short timeframe were too great that Government could not complete the transformation envisaged at design. But this result (or the lack of it) was indicative of a gap in project design that could deal with high-level policy review and reform in LGU financing. It is noted for instance that one of the PDO indicators was the updating, monitoring and implementation of the LFF. Yet there was no engagement strategy or an appropriate counterpart agency responsible for this. The PGB could have stepped up to fill this role if the Project anticipated the need to transform it (from a governing board of the MDF) into a policy coordination body for LGU financing. Institutional and risk analyses were, however, inadequate when the Project was designed. Preparation analysis is weak on the institutional arrangements for program implementation. The Project adopted a structure for implementation that is based largely on earlier MDP operations that were exclusively focused on LGU subprojects. The necessary shift in focus towards sound institutional and policy arrangements for the implementation of the LFF was (and continues to be) not adequately established. This places the MDFO in a difficult position where the success of the "graduation" policy could mean the diminution of its share of the LGU credit market. In addition, design was compromised by the very little attention paid to mitigating the identified project risks. The PAD identified the following as moderate risks: (a) delays or reversal by government in implementing the LFF, (b) lack of sustained government commitment to strengthen and reorient the MDF, (c) inadequate demand from LGUs for subprojects, (d) 6 LGUs lack the capacity to prepare subprojects and benefit from the training and advice offered to them, (e) turnover of elected officials and staff, and (f) reduction of the cost effectiveness and timeliness of the MDF. While the Project correctly identified the relevant risks, the PAD did not give sufficient explanation about the nature of these risks and was unable to provide sufficient and effective mitigation strategies that could have been used to focus monitoring and supervision of implementation. Basic design requirements were also overlooked. The project results framework did not have adequate KPIs, nor was an M&E system in place. Project design is therefore unrealistic and ambitious. Expecting the MDFO to execute credit operations and capacity building of 200 LGUs through the Project at the same time requiring it to be instrumental in its own dissolution (at least from the viewpoint of shedding off its lending functions) in a short timeframe seemed unrealistic. Again, this should have warranted a closer assessment of institutional capacity of the implementing agency and another look at possible approaches to simplify the Project by breaking it up into more manageable activities lining up to meet singular rather than multiple objectives. 2.2 Implementation The QAG assessed quality of supervision as Satisfactory. Project implementation suffered from poor institutional preparation and mismatch of implementation assignment in some of the project components. Implementation of the Project was negatively affected by the inadequate preparation described in Section 2.1 and by the fact that Government sought to proceed with new procedures under the LFF which meant developing new implementation units/procedures than those envisaged by the Bank. The ICR confirms the findings of QAG assessment on the inadequate capacity of the implementing agency. The QAG review at supervision rated the project as unlikely to achieve its objectives due to inadequate capacity of the implementing agency. This issue had not come up prominently in the PAD because the Project was to continue the strategies and implementing arrangements of past MDPs. Core staff would come from the same units of the DOF, BLGF, LGA and Department of Public Works and Highways (DPWH) that successfully implemented previous MDPs and assisted in project preparation. This did not materialize, however, and the slow process of constituting the PMO affected project performance in the first three years. The preparatory work appeared to assume that the Project would be a "repeater" of the previous MDPs, but in fact the Project assumed a larger role of developing the institutional capacity of both the National Government and LGUs and their staff. One key difference from earlier MDPs was the emphasis on subproject implementation as a mechanism of learning-by-doing, particularly for lower income LGUs that had less experience in this regard. Despite this shift in emphasis, inadequate attention was given to institutional and human resource capacities which negatively affected implementation. Some of the critical tasks required to do with subproject promotion appraisal and supervision were new and unfamiliar to 7 the MDFO.1 In addition, the shift to MDFO as implementing unit of component 2 from the LGA also delayed subproject implementation-related training and the delivery of the capacity-building program envisaged for LOGOFIND. The first three components were by design intended to be provided to LGUs as internally integrated interventions. The Capacity-building component was to prepare and assist the LGUs in project development, implementation and sustainability; Subproject Lending component to provide the funding for the municipal investment; and Resource Mobilization component to enable the LGU to improve tax revenues in LGUs to pay off the investment, maintain or expand infrastructure. The implementation including institutional arrangements did not seem to have supported the intention. The expectation was for participating LGUs to have availed themselves of assistance from the three components as a package to benefit from the synergy of the outcomes. Most of the participating LGUs received either subproject financing and training, or resource mobilization and training, or training only. Again, this is for most part a result of fragmenting program implementation: component 1 was carried out by MDFO while component 3 was executed by BLGF. Component 2 was implemented both by MDFO and BLGF. Efficiency was not achieved either as both DOF units tended to independently conduct their respective marketing, appraisal and approval processes. Lack of budget in MDFO was a recurrent problem, even more pronounced at start up when the Government was in a chronic fiscal deficit situation. Having no budget for hiring the Project Management Office (PMO) staff was a problem at start-up. Without a fully operational PMO, the Project lost momentum built by the preceding MDPs, compounding the serious start up setback when 12 of the 20 LGUs with completed proposals withdrew their applications for sub-loans because of the slow process of subproject approval. Furthermore, because of substantial delays in start up and unrealistic target of 200 LGUs, the Bank and GOP saw the need to scale down the lending operation for LGU subprojects. Therefore, the Bank and GOP in 2001 agreed to cancel $40 million from component 1 only, leaving the allocations for the other three components intact. Even as component 1 was scaled down, no corresponding adjustment was made in the component targets. After reducing the loan amount for subprojects, it would appear that the other components retained rather large resources for activities in relation to the overall outcome of the Project. The Mid-term Review (MTR) could have been an opportunity to review the extent of funding required by the other three components and to adjust the project targets. Unfortunately, the MTR was not carried out because at the time that it was planned to be carried out, the Project had just started to be fully operational. After much delay, the PMO was expanded, reorganized and further strengthened to provide more efficient service to client LGUs, especially for subproject processing. This became a major factor for the turnaround of the project's performance after the project's first two years. Delays in establishing the PMO, thereby, marketing the facility led to a slow build-up of subprojects. Most subprojects were initiated four years after the MDFO became operational (around 2004) and initial disbursement therefore remained low. Change in the terms of LOGOFIND funding, tedious approval processes, and lack of LGU capacity to develop ready 1Under the MDP3, the MDFO was responsible only for subloan disbursements and collections. 8 proposals also contributed to a weak pipeline of subprojects. After a few years, the PMO sought PGB approval to facilitate the processes by standardizing and simplifying requirements and delegating approval authority to a Technical Review Committee and then later to a Management Committee2, depending on the size of the loan application. This enabled the project to move more quickly in the processing of subprojects and respond to the growing demand for subprojects from LGUs. Most participating LGUs had little or no demonstrated capacity in planning and implementing development projects financed through loans. This lack of capacity was addressed by training programs provided by the Project. The LGU capacity building component was delivered through classroom-type training coupled with high-quality supervision and advice from the PMO to help LGUs in implementing their subprojects in accordance with approved standards and guidelines. Although this approach was deemed successful, the impact would have been greater had a capability-building framework defining the content, delivery, institutional arrangements and sustainability mechanisms was put in place at the onset of project implementation. This is important since institutional development takes longer and more attention is needed to have effective follow-up activities for scalability and sustainability. The Project operated in unpredictable and changing environments. Implementation straddled two governments, supervised by DOF under six Secretaries and an equal number of Undersecretaries (who directly oversaw project implementation), three Project Managers, and five Bank Task Team Leaders. These changes affected continuity and consistency of interventions and commitments, in turn impacting on the pace of implementation. The change in government in 2001 was critical as, at the time, the new administration did not appear to place the implementation of this Project as a high priority and thus did not ensure adequate staffing capacity of the implementing agency. In addition, the Project had to contend with a "re-enacted budget"3. Adapting to such changes had forced the Task Team to focus on the day-to-day requirements of ensuring that the activities are carried out. This approach, however, led to the Team missing out on opportunities to re-think of the project as a whole, including conducting the MTR that would have provided an exercise to review the relevance of the components, the appropriateness of identified interventions and implementing agents. At the local level, project implementation was also negatively affected by elections. LGU decisions often change when new administration comes in. In some cases, the local chief executive was unwilling to provide support for the operation and maintenance (O&M) of revenue-generating subprojects which adversely affected subproject viability. In addition, some LGUs initially resisted compliance with fiduciary and safeguards policies (especially procurement and resettlement). However, the delivery of the mandatory training program, 2To "fast-track" approvals, the PGB delegated subproject approval to the MDFO-Technical Review Committee (TRC) with an approval threshold of PhP15 million. The TRC was composed of technical staff (i.e., director level) representing the various departments constituting the PGB. In 2006, PGB further delegated approval to the Management Committee and increased approval threshold to PhP25 million. The Management Committee was composed of MDFO Executive Director, BLGF Executive Director, and Project Manager of the concerned subproject. 3The level of budget of the previous year was retained, leaving no room for spending for new activities (e.g. additional subprojects for the project). 9 establishment of technical designs and standards for subprojects and close supervision of the PMO and Task Team significantly built LGU awareness of the need to comply with the policies and thus facilitated compliance. But as the project gained momentum and proved its capacity to deliver useful support to LGU development priorities, its profile improved and this resulted in better implementation performance in the last few years of project implementation. On the supply side, the subproject financing component was given particular prominence and subproject approvals, construction and completion in much faster pace than in the first half of project life. On the demand side, the successful implementation of the first batch of subprojects led other LGUs to express interest in receiving support from the Project. LOGOFIND ­ Use of Loan Funds (Actual Amount) Components Amount (in US$ million Percent to total equivalent) loan (%) 1. LGU Investments 46.0 80 Education 15.8 Health 6.6 Environment 16.9 Revenue-generating 5.2 Others (i.e., heavy equipment, consultancy, etc) 1.4 2. Building LGU Capacity 2.5 4 Training relating to LOGOFIND subproject development, implementation and sustainability; and general LGU capacity enhancement (e.g. local development planning, feasibility study preparation, etc.) 3. Improving LGU revenues 3.4 6 Completion of real property and business tax system 1.9 improvement activities in LGUs Development of business tax administration software 0.4 Documentation of best practices & LGU performance 1.1 Monitoring 4. Support to institutional reforms to improve 4.3 8 provision of LGU finance & Project Administration Front-end Fee 1.0 2 TOTAL 57.2 100 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization The Monitoring and Evaluation (M&E) Framework was not well designed at appraisal. The framework, as presented in the Program Design Summary of the PAD did not have adequate indicators to monitor and evaluate its progress in achieving the PDOs. The PAD only provided 10 for intermediate outcome indicators some of which were later revised. The details of the M&E framework including KPIs were refined and adjustments to the intermediate outcome indicators were made in the middle of project life. The PMO initiated the establishment of an M&E system using Excel-based databases to track the Project's progress in achieving the PDOs. Information was generated through the subproject monitoring and completion reports submitted by the LGUs to the PMO as well as back-to-office reports of PMO personnel during field visits. The large number of LGUs participating in the Project and inadequate system of data collection and analysis contributed to the delay in the provision of information on the KPIs. Building on the LOGOFIND experience, the MDFO is currently improving its M&E system to adapt to the requirements of its other financing facilities. 2.4 Safeguard and Fiduciary Compliance 2.4.1 Environmental Safeguards and Social Safeguards. The Project complied with the Bank's safeguards policies set forth in OP 4.01 (Environmental Assessment). Procedures and arrangements regarding safeguards were included in the updated Operations Manual. In addition, training modules specifically on environmental management planning were developed and delivered. Overall, the subprojects have not resulted in any significant adverse impact on the environment during construction and early years of operation. The Project generally contributed direct and indirect environmental benefits to the local communities and LGUs in terms of improved health and well-being, protection of lives and property, preservation of natural wealth and resource base, enhancement of economic activities, and reduced damages or rehabilitation expenditures. On the social safeguards, a Land Acquisition and Resettlement Policy Framework was developed and incorporated in the Operations Manual. In subprojects where OP 4.12 (Involuntary Resettlement) was triggered, the Project generally followed the policies and procedures required by the Operations Manual. In areas where indigenous peoples (IPs) are involved, the Project also made adjustments in subproject designs to take into account the affected IP characteristics and special needs. This was considered one of the best practices in this regard. 2.4.2 Financial Management (FM). The Project generally complied with the financial covenants stated in the loan agreement but with recurrent delays. MDFO has a functioning FM system, with adequate and skilled Finance and Administration staff handling the books of accounts and accounting records. Separate books of accounts are maintained for the Project using the New Government Accounting System (NGAS). The Project relied on NGAS' accounting and reporting systems, supplemented by additional analysis, to provide FM reports. Overall, the FM system had moderate shortcomings but these did not materially affect the system's capacity to provide timely and reliable information for the management and monitoring of the Project. The FM system was adequate to provide reasonable assurance that the Bank loan proceeds were being used for the intended purposes. 2.4.3 Procurement. The Project generally complied with the specified procurement procedures, both at the national and local levels. At the national level, there was no major procurement issues recorded. At the local level, however, the Project encountered a number of challenges: (a) LGUs are not familiar with the World Bank procurement Guidelines; (b) difficulties and delays in the preparation of the standard bidding documents due largely to LGU lack of capacity to develop 11 detailed engineering designs and the bill of quantities; (c) MDFO did not have standards for evaluating the reasonableness of bids given that there was no cost ceiling, thus, evaluation became a tedious process; (d) considerable number of failed bids (therefore requiring re-bids that magnified delays in subproject implementation); and (e) in many instances, few number of bidders participating in the procurement process even if packages were advertised nationwide. Yet, notwithstanding the desire to speed up procurement and pressure from local officials to expedite bid awards, the Project did not compromise the integrity of procurement process. The procurement training provided by the Project and close supervision of the PMO and the Task Team significantly helped resolve issues before they became serious. 2.5 Post-completion Operation/Next Phase Towards the end of the Project, GOP contemplated a second LOGOFIND to build on the positive experiences gained by the Project and to respond to increasing demand for subproject funding. However, the lack of significant progress in policy reforms, particularly the transformation of the MDFO to a corporate entity and other on-going reforms (e.g., performance based grants system for LGUs) were key considerations that led the Bank not to continue the dialogue on the proposal. Notwithstanding, Government continues to provide subproject financing to LGUs out of the MDF (estimated at $278 million) and through several financing windows established with support from other development partners. The CAS recognizes the importance of the Bank continuing to engage in the dialogue with Government regarding the development of an LGU credit system. A more comprehensive program of capacity-building and technical assistance for project formulation and implementation is needed to pursue the reforms not completed under LOGOFIND. In addition, the Bank should consider developing a follow-on operation, focusing on resource mobilization in LGUs to build on the achievements realized in the areas of real property taxes and business taxes. The sustainability of the systems financed by the Project is likely because MDFO required the LGUs to enact local ordinances regarding the O&M of the subprojects financed by the Project. MDFO also encouraged participating LGUs to forge partnerships with various private and public institutions (e.g., private sector, Department of Health, Philippine Health Insurance Corporation (PhilHealth), Local School Boards, Department of Education, parents-teachers associations, etc) for the implementation and maintenance of the subprojects. MDFO intends to use the training modules developed and used under LOGOFIND in the delivery of capacity building activities included in other lending operations. In addition, BLGF is committed to expand the LGU Resource Mobilization and Performance Monitoring program and is requesting the Bank to help in the development and implementation of an expanded program. A project concept paper has been informally shared by BLGF with the Bank. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation The Project was designed and approved in 1999. The project design and objectives remained relevant throughout implementation and continue to support government's decentralization program and the participation of low-income LGUs in the credit market. The PDO remains consistent with the 2005 CAS, a major pillar of which is to support replicable successes in 12 delivering public services and improving institutions at the local level. Further, discussions regarding the preparation of the 2010 CAS retain the focus on supporting LGUs to improve service delivery including the development of a performance and capacity building framework encompassing revenue mobilization, planning and budgeting, and local service delivery. 3.2 Achievement of Project Development Objectives Achievement of the first PDO of expanding basic infrastructure services and facilities of the participating LGUs is rated Moderately Satisfactory. The total number of households estimated to benefit from the 133 subprojects stood at 1.05 million, registering 160% increase from the revised target of 653,000. Households from 3rd to 6th class LGUs should account for half of all household beneficiaries and actual achievement is 100% of the target. Achievement of the second PDO of strengthening LGUs' capacity in municipal governance, investment planning, revenue generation and project development and implementation is rated Satisfactory. Based on KPIs, the Project achieved four out of the five established KPIs, as follows: (a) 51% of the 579 LGUs trained to develop the Local Revenue Code (LRC) actually implemented their approved LRCs, exceeding the target of 40%; (b) LGUs participating in component 3 achieved the 75% increase in RPTA collection; (c) revenue collection of all participating LGUs increased by 67% compared to the target of 40%; and (d) 94% of the total number of LGUs regularly submit SIE reports on an annual basis exceeding the target of 90%. The Project partially achieved its target of increasing the proportion of the own-source revenue to total revenue by 40%. The rate of increase could not catch up with the substantial increase in internal revenue allotment (IRA) and the weak taxing powers and tax base of low-income LGUs. The net effect of the increased local revenues to total revenues of participating LGUs only accounted for 2% increase from the baseline. Achievement of the third PDO of enhancing national capacity to provide technical support and long-term financing to LGUs through the MDF is rated Moderately Satisfactory. Based on original targets, processing time for subproject approval was substantially reduced from 19 months at the start of the Project (2000) to 3-6 months when the Project gained momentum. Similarly, fund disbursement was reduced from 14 days to five days, registering a reduction rate of 64%. On the reform side, the Project aimed at transforming the MDFO into a sustainable financial intermediary for local government finance. The reform is to be realized through a two- stage process: (i) creation and strengthening of MDFO, followed by (ii) "spinning off" of the MDFO into a financial institution. The first stage was fully completed while the second stage was carried out by the Project, i.e., a Municipal Finance Corporation (MFC) was created by a Presidential Executive Order and incorporated under the Securities and Exchange Commission, but was found to have legal infirmities and was therefore not sanctioned to operate. Based on the revised targets, LOGOFIND also showed significant achievements in the third PDO, as manifested by the following: (a) 119% of the target number of 462 LGUs accessing long-term financing through the MDFO was achieved; and (b) 104% of the 405 3rd to 6th class LGUs accessing long-term financing through the MDFO was also achieved. Work to update is on-going based on the inputs generated from the LFF Conference held in 2007 and the Philippine Development Forum Working Group on Decentralization and Local Government. Government inter-agency working group has been established to monitor its implementation and impact on 13 LGU borrowing patterns. As the LFF has been formally adopted by DOF, its implementation is being supported through the Working Group. Overall achievement of the PDO is rated Moderately Satisfactory. Eight of the 10 KPIs were fully met. The achievements of the Project per component are presented below. Component 1: LGU Subprojects (Original cost $95.7M, Actual cost $55.7M ­ IBRD $46M and GOP $9.7M). Moderately Satisfactory. The Project was a major source of LGU infrastructure financing especially for the 3rd to 6th class LGUs. The Project financed 133 LGU subprojects: 48 education subprojects ($15.8 million), 28 health subprojects ($6.6 million), 34 environmental subprojects ($16.9 million), 17 revenue generating ($5.2 million) and six other subprojects (e.g., heavy equipment, project preparation consultancy ($1.4 million)). It achieved 67% of the original target of 200 LGU subprojects and 128% of the revised target of 104. The Project also substantially exceeded its end-of-project targets in KPI 1 and KPI 2 (refer to discussion above). Actual disbursements were above the revised amount as loan proceeds were reallocated in the later stages of the Project. Component 2: LGU Training and Capacity-Building (Original cost $8.2M, Actual cost $2.7M ­ IBRD $2.5M and GOP $0.2M). Satisfactory. The Project exceeded by six-fold its end- of-project target of training 200 LGUs. It trained a combined total of 1,033 LGUs under the MDFO and BLGF "mandatory" and "demand-driven" programs. Under the MDFO administered mandatory program, the Project supported a total of 345 LGUs in improving key areas of project development and implementation including logical framework formulation, procurement, environmental management financial management, construction supervision, participatory monitoring, subproject completion report development and subproject sustainability. Another 862 LGUs also received training from BLGF on resource mobilization, fiscal and financial monitoring. In addition to the progress made in revenue generation, the ICR team assessed additional outcomes: (a) approximately 30% of the 345 LGUs that participated in the mandatory training program successfully implemented their priority infrastructure investments; and (b) LOGOFIND training also helped LGUs prepare a useful tool for monitoring fiscal and financial performance and investment planning. The high rate of compliance in the submission of Statement of Income and Expenditure (SIE) reports indicate that LGUs are on track in improving their capacity for investment planning. Component 3: LGU Resource Mobilization and Performance Monitoring (Original cost $16.5M, Actual cost $4.1M ­ IBRD $3.4M and GOP $0.7M). Moderately Unsatisfactory. The Project supported 71 programs to expand RPTA and five BTE subprojects. However, the Project did not fully utilize the component budget and was unable to reach the target of 524 RPTA subprojects set at appraisal due to policy changes governing eligibility criteria for participating LGUs and cost-sharing between National Government and LGUs, and from competition with other financing facilities. However, an additional 254 LGUs implemented RPTA using other sources of financing. 14 The Project also facilitated the establishment of the BLGF's system for monitoring fiscal performance and supported efforts by BLGF to design and issue SIE. SIE indicators were developed and reports are regularly disseminated to LGUs, national government agencies and development institutions. The SIE reports are now the main source of data on LGU financial performance for use by policy makers and researchers in monitoring trends in local public expenditures management and financing and related issues. BLGF also uses it to monitor indebtedness and ensure that LGUs stay below the 20% debt cap set in the law. In addition, LOGOFIND supported the conduct of a BLGF re-engineering study to assess the institutional and organizational requirements of this DOF bureau in relation to its mandate and evolving role in LGU financing. However, DOF decided to subsume the recommendations under the government's long-running Rationalization Program. Actual changes in functions, structures and staffing under the program have yet to be initiated. Component 4: MDF Reorganization and Strengthening (Original cost $12.3M, Actual cost $5.1M ­ IBRD $4.3M and GOP $0.8M). Moderately Satisfactory. The first phase of reorganizing and strengthening of the MDFO was fully completed. MDFO became operational. It has improved the efficiency and effectiveness of the MDF. It also continues to provide financing services to assist LGUs in the delivery of basic services and other development projects by opening new lending windows using MDF Second Generation Funds and other external sources and used the processes and techniques for credit allocation and subproject promotion developed under LOGOFIND. The second phase which required the transformation of the MDFO into the MFC, however, was not achieved because of legal impediments not foreseen at formulation of the executive branch issuance creating the MFC. In view of this development, DOF decided to pursue other means of reinforcing the institutional backbone for LGU finance provision. One such means was the DOF-Change Management Team Resolution adopted on December 2, 2008 calling for the spin-off of the MDFO from a unit under the Office of the DOF Secretary into a separate entity (a full line bureau, lined up as an organic unit in the formal structure of the DOF), with such entity envisioned to enjoy more permanency and assurances of sustained budget allocation for staff and operations. Another measure is the issuance of Executive Order No. 742 in 2008 providing the MDFO resources to carry out its operation effectively. Finally, MDFO has revised the LOGOFIND Operations Manual that it now adopted as the MDFO Operations Manual in its administration of other funding facilities managed by DOF. 3.3 Efficiency At appraisal, the Economic Rate of Return (ERR) and Net Present Value (NPV) of the entire Project were estimated at 17% and PhP802 million, respectively. The ICR estimates that the ERR of the entire Project at 35% and the NPV at PhP71.9 million. While both B/C analyses used the same methodology, some caution should be observed in the comparison of the two ERRs because of the different set of subprojects used for analysis at appraisal and at ICR. In addition, at appraisal, it was envisioned that the interventions of the Project for the LGUs would come as a package (i.e., each LGU subproject would consist of investment, training and resource mobilization). As implemented, LGUs only received either subproject financing and training, or resource mobilization and training, or training only. Therefore, it is more appropriate to compare the ERR at the subproject level where costs and benefits can be properly imputed. 15 The average ERR at ICR for specific types of subprojects are as follows: health (29%), education (51%) and environmental (44%). These values are higher than the ERR of 27%, 40% and 24% computed at subproject appraisal, respectively. For revenue-generating subprojects, the average Financial Internal Rate of Return (FIRR) at ICR was computed at 8% which is substantially lower compared to the FIRR of 18% computed at subproject appraisal and 30% at Project appraisal. The low FIRR of revenue-generating subprojects can be attributed to lower benefits than projected due to: (i) fees not being implemented as agreed, (ii) poor or lack of enforcement of municipal ordinances that created adverse impact on the viability of operations, (iii) low utilization rate or occupancy of the facilities, and (iv) change in priorities of the new local administration as a result of election. In general, the high ERR of subprojects and Project as a whole showed that the use of resources was efficient. The ERR/FIRR of subprojects remained robust when subjected to sensitivity analysis (see Annex 3). 3.4. Justification of Overall Outcome Rating - Moderately Satisfactory The overall outcome of the Project is rated Moderately Satisfactory. The development objectives of LOGOFIND remain relevant to GOP's priorities and are consistent with the Bank's current and planned CAS. The Project showed significant achievements toward its development objectives. LOGOFIND achieved the first PDO based on the revised KPIs. It facilitated access of 1.05 million households (160% of the revised target) to basic environmental and social infrastructure and services. It achieved 67% of the original target of 200 LGU subprojects and 128% of the revised target. The Project also satisfactorily achieved its second PDO as the targets were achieved for most KPIs. It also delivered satisfactorily a capacity-building program that covered 517% of the original target of 200 LGUs trained. LOGOFIND, however, only partially achieved the third PDO. MDFO was established and is fully functional but its transformation into a corporate entity was not achieved. Overall disbursement is 95% of the revised amount and 57% of the original. Finally, the Project showed that, in general, the use of resources was efficient. 3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development Poverty alleviation was considered an indirect objective of the Project. The Project was designed to target 3rd to 6th class LGUs whose incidences of poverty were higher than the national average. Poor families were thus expected to benefit through access to the infrastructure and services, mainly social and environmental, financed by the Project. The Project did not conduct a poverty analysis at appraisal or during the ICR. While the Project did not also conduct any gender analysis at appraisal, the relatively equal gender distribution among the beneficiaries resulted from gender sensitivity mechanisms put in place and applied during the subproject design, social assessment, appraisal and implementation phases. As a result the Gender and Development (GAD) assessment conducted by the Bank in 2008 considered the Project as gender-responsive. The Project was also seen as having contributed to the development of the GAD plan for the Department of Finance in 2004. The Project's requirement that LGUs' proposed investments be supported by local council resolutions also have contributed to better stakeholder awareness and participation in decision making. Obtaining the council's resolution required consultations with primary beneficiaries and affected groups. This requirement was generally adhered to by LGUs during implementation although the quality and extent of these consultations varies across LGUs. 16 (b) Institutional Strengthening Institutional strengthening occurred at the local and national levels. At the local level, the learning-by-doing approach was instrumental in strengthening the capacity of LGUs to plan, develop and implement subprojects. LGU staff were trained in project development and implementation including logical framework planning, detailed engineering and design, social and environmental safeguards, procurement and financial management, and construction supervision. Through the training conducted by the BLGF, LGU capacity to mobilize resources, prepare and monitor their own fiscal and financial performance was also strengthened. At the national level, the DOF established a new agency- the MDFO, and restructured the BLGF. The MDFO has developed the capacity to allocate credit resources to 3rd to 6th class LGUs that have substantial financing needs. Through the loans channeled through MDFO, the DOF has helped these LGUs build good credit records and develop project management skills that enable them to tap credit resources from the private and government capital markets. This is crucial to the government's devolution program because it promotes local autonomy in planning and allocating local public expenditures as envisaged by the Local Government Code. The BLGF's role in monitoring local public sector fiscal and financial performance was also enhanced by the development of a reliable and internally consistent information system for LGU receipts and expenditures. (c) Other unintended impacts There are unintended outcomes resulting from the Project, as follows: 1. Because of the demonstrated capacity of LGUs to prepare and implement projects under the LOGOFIND, they were able to mobilize additional resources from the provincial governments and congressmen. The LGUs used these additional resources either for equity on the subprojects and/or for ancillary facilities and investments. 2. In conjunction with the health projects of LOGOFIND, the subprojects provided an opportunity for participating LGUs to implement health insurance coverage for their constituents by linking up with PhilHealth. This link contributed to sustainable operations of the health facilities and to the improved health of the LGU constituents. 3. For the environmental protection, the subprojects contributed to increasing local incomes from real property and business taxes due to the stability created in previously at- risk areas, and in cases involving resettlement, these subprojects even provided better living conditions to affected communities that are relocated to resettlement areas. 4. Computerization of resource mobilization efforts was found useful for other LGU functions such as land use and physical planning. 5. LOGOFIND was instrumental in the global piloting of the Design-Build- Operate scheme which involves greater private sector participation in solid waste investments. The scheme is not being adopted by other LGUs in the Philippines and elsewhere. 3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops Please refer to Annex 6. 4. Assessment of Risk to Development Outcome The risk to maintaining the Development Objectives is rated moderate. Subprojects generally had sound technical design and were constructed with standard quality. In addition, the 17 participatory approach in selecting subprojects and the requirement for counterpart (equity) funds promoted a strong sense of ownership of the subprojects among participating LGUs. Based on the ICR findings during the site visits, various types of arrangements and partnerships were forged between LGUs, national government agencies and other stakeholder groups to operate and maintain the subprojects and were sustained even after subproject completion. LOGOFIND also ensured that LGUs were well informed of various ways of maintaining and operating subprojects by providing training on subproject sustainability. Sustainability of development outcomes, however, can be affected by: (i) changes in administration at the local level that could result in the new mayor being unwilling to provide maintenance support for subprojects or abandon the subprojects altogether; (ii) lenient enforcement of local ordinances required by the Project to protect the integrity of structures, impose market fees and charges, and enforce other plans attached to the subproject such as transport plans; (iii) the quality of institutional arrangements (and corresponding commitment) put in place during the operational phase; and (iv) low FIRR for revenue-generating subprojects. The effect of training on organizational development of the LGUs is likely to be sustainable. The training activities that were sought by LGUs ensured that they would be able to comply with Project rules, processes and reporting requirements. Based on ICR findings, most of the LGUs also apply the knowledge learned from training in the development and implementation of subprojects financed through own-source funds or through other donor support. At the national level, GOP remains committed to supporting its decentralization agenda. DOF formally adopted the LFF in 2007 and thus, it is still seen to provide the overall policy guidance for LGU development. The continued support of GOP to the LFF is evident with the continuing operation of the MDFO after loan closing. Government also issued Executive Order No. 742 in 2008 directing the MDFO-PGB to further enhance the function of the MDFO and restructure the organization for its effective operation and administration and adopt policies for the collection of fees and charges needed to defray its operation and administrative expenses. 5. Assessment of Bank and Borrower Performance 5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry - Moderately Unsatisfactory The Team attempted to incorporate the results and recommendations of previous policy studies and the lessons of previous MDPs into the project design. The design was responsive to the needs of LGUs and consistent with the GOP decentralization agenda. However, preparation and appraisal for program implementation were weak. The Bank appraisal team generally assumed that the institutional arrangements adopted by previous MDPs would continue to work well under LOGOFIND and did not fully assess the institutional impacts and requirements of the LFF. Hence, the team failed to provide sound advice on the appropriate institutional arrangements for implementing both the Project and the LFF. While the Team correctly identified the risks, measures to mitigate them were not identified. Further, the PDOs were not consistently presented in the PAD and the loan agreement, and KPIs were not developed to monitor the Project's progress in achieving its development objectives. 18 (b) Quality of Supervision - Moderately Satisfactory The QAG review of quality of supervision (2002) rated the performance as satisfactory. As noted by QAG, performance suffered from long delays in signing and effectiveness, insufficient staffing of the PMO, slow initiation of implementation, and MDFO having to act as fund channeling mechanism, for other projects. QAG also concluded that: (i) the Task Team made the right decision of focusing on the critical issue of establishing adequate implementation capacity at MDFO and enable it to launch the investment program; (ii) supervision of fiduciary and safeguards aspects was carried out satisfactorily; and (iii) supervision inputs and processes were adequate. The Task Team was proactive in addressing implementation issues and sought alternative approaches to solve them. Project supervision missions were conducted twice yearly with good communications with Government between missions. These missions were adequately staffed, with each mission, on average, comprising urban development, fiduciary, social and environmental safeguards specialists. However, the failure to carry out a MTR of the Project as planned was a missed opportunity especially considering that US$40 million of the loan was cancelled shortly after a new administration took office in 2001. While the team was successful in working with Government to develop a set of KPIs and an effective M&E system, the final Results Framework was only submitted to the Bank in 2008. Finally, the fact that the Bank had five different team leaders made developing an effective dialogue with Government and consistent implementation plans very difficult. (c) Justification of Rating for Overall Bank Performance - Moderately Satisfactory The rating for quality at entry was moderately unsatisfactory while the rating for quality of supervision was rated as moderately satisfactory. Since the overall project outcome is in the satisfactory range, the ICR Guidelines indicate that the Bank's overall performance is rated as moderately satisfactory. 5.2 Borrower Performance (a) Government Performance - Moderately Satisfactory Government strongly supported the Project during preparation and appraisal. During implementation, it sustained its efforts to improve the policy framework for LGU finance (e.g., updating of LFF) and remained committed to facilitate LGU access to financing. The complexity of project design and very high expectations for reform were not matched by the level of decision-making established for resolving reform issues. For instance, the transformation of MDFO into a separate entity (outside of DOF) had to be dealt by DOF largely and was not subject to broader consensus building mechanism. Yet, the government persistently pursued the reforms, with the leadership issuing an Executive Order to create the institution that the Project aimed for. The change in administration in 2001 did see some wavering in support for the Project and for MDFO. But after that, support to the objectives of the Project, particularly in providing funding for municipal investments, skills upgrade and in the reform in MDFO remained steadfast. In addition, while the DOF strongly supported the Project, the lack of sufficient budget significantly affected the ability of MDFO to maintain its staff and for BLGF in implementing activities to help LGUs improve their tax enhancement programs, although the budget problem was borne by the fiscal position at the time and not because of lack of commitment to the Project. 19 The legal impediments faced in operationalizing the MFC were being addressed by considering a shift in strategy, i.e., initiating the drafting of a legislation to create the LGU financial institution. (b) Implementing Agency or Agencies Performance - Moderately Satisfactory MDFO performance is rated Moderately Satisfactory. The MDFO was strongly committed to achieve the PDOs. It generally complied with the fiduciary, social and environmental safeguards specified in the Operations Manual. It initiated changes in the project operations to improve implementation efficiency such as developing minimum design standards for common infrastructure and raising the threshold for MDFO approval of subprojects. It also pursued innovative means of securing the required budgetary allocation to ensure timely release of funds for on-going LGU subprojects, despite fiscal constraints facing program implementation government-wide. Issues related to the number and qualifications of staff, however, were a recurrent theme. There were also some procedural flaws as far as certain project design requirements were concerned. These include the decision by the PGB to extend LOGOFIND resources as full loans (instead of grants) under component 3 (as agreed during appraisal). BLGF performance is rated Moderately Satisfactory. BLGF showed a commitment to achieving the PDOs during preparation and appraisal. Given the successful implementation of the RPTA programs under the previous projects, BLGF demonstrated readiness to implement the proposed program. However, the new institutional arrangements introduced by the Project weakened its accountability which resulted in an unclear assignment of tasks. While BLGF was instrumental in the development of LGU fiscal performance monitoring system and delivery of training on resource mobilization to about half of the LGUs nationwide, however, it provided less focus on the implementation of the RPTA program. LGUs. LGU performance is rated Satisfactory. The Project involved 165 LGUs (counting those that implemented infrastructure and resource mobilization subprojects only). LGU performance, in terms of quality of subprojects chosen, commitment, ability to implement and sustain the supported investments, and compliance with project requirements, including fiduciary and safeguard requirements, varies widely across LGUs. The LGUs selected much needed investment subprojects, sanctioned by their respective councils. Commitment was strong. Though many LGUs initially lacked the capacity to develop and implement these subprojects, their skills have been upgraded through the training supported by LOGOFIND, especially as the training activities are carried out in conjunction with the implementation of their subprojects (or bolstered by the learning-by-doing approach of the project). There is general compliance with project rules even if there was initial resistance (specifically regarding procurement and resettlement policies). (c) Justification of Rating for Overall Borrower Performance - Moderately Satisfactory On the basis of justification provided above, overall borrower performance is rated Moderately Satisfactory. 6. Lessons Learned The following lessons may be considered in shaping the design and implementation of future projects of similar nature in the Philippines as well as other countries in the region: 20 (a) An Adaptable Policy Loan (APL) would be a more appropriate instrument to support the reform process aimed at improving the provision of LGU finance. The reforms and institution building envisaged under LOGOFIND required time and sustained dialogue within government. GOP and the Bank would have benefited from phased program, with a series of loans funding activities but approved sequentially as progress of implementation of reforms are made. Through APL, adjustments can be made as the reforms are carried out, unlike with the regular investment lending. In the case of LOGOFIND, the attempt was to complete a rather package of reforms that proved to be unrealistic given the institutional, economic and political circumstance and the short timeframe for implementation. If it were pursued through an APL, the first phase could have addressed the institutional and capacity requirements of the MDFO as the implementing agency. The succeeding loans could have then covered the next phases of MDFO reorganization and transformation into a separate entity. In this way, the institutions and agencies that are assigned the responsibility for overseeing the reform process could also be assisted and strengthened while allowing them to implement the reform agenda and they would be more prepared to deal with more complex institutional reforms requiring actions like creation of municipal financial entities. (b) Project design and desired outcomes should be kept realistic and achievable in an environment where institutional capacity is established to be wanting, In line with the suggested progressive implementation of reforms, project design should be kept simple, preferably avoiding multiple objectives and the size of operations in the level that the agencies can manage. The Project, while featuring innovative and pioneering activities, proved to be too complex to be carried out at the time when several institutional issues were still being addressed. It is necessary to carry out a careful assessment of institutional readiness of the agencies before project implementation. Inadequate attention at preparation given to assessing DOF and LGUs capacity resulted in high opportunity costs as benefits from the loan started to accrue only after more than three years of implementation. The Bank could have made the creation and adequate staffing of a project implementing unit a condition for loan effectiveness and these could have helped ensure smooth transition from project preparation and appraisal to implementation. Municipal funds projects should also continue to support sustained LGU capacity building. But such projects should at the outset define the content, delivery mechanisms, institutional arrangements, M&E system and sustainability mechanisms of the capacity-building components. It should also promote the use of information communications technology (e.g. in distance learning programs) to scale up the capacity-building activities particularly given the large number of LGUs in the Philippines and their geographical spread. Participation of the association of LGUs (i.e. the leagues of local governments) should be encouraged in the identification and design of the training programs to ensure relevance and usefulness of delivered training activities. Developing a national strategy for LGU capacity-building will also be very helpful. Grants can also be extended to encourage LGUs to perform better or "reward" those LGUs that are already functioning well. This performance-based approach for funding provision would have to feature capacity enhancement component to allow lagging LGUs to participate in such programs. 21 (c) Funding support to LGUs should be viewed comprehensively and in overall context of broader fiscal transfer policies. Efforts to increase own source revenues by LGUs must be tied to a broader government program on local government finance. While many local officials recognize the benefits of raising taxes to improve their own-source revenue position, they are reluctant to do so because of perceived political costs associated with any additional taxes. And if the fiscal environment also allows for increased transfers from the national government (through the IRA process), any effort to encourage LGUs to increase own source revenues (such as Component 3 of LOGOFIND) can be undermined. Design of municipal finance projects should take this into account. National Government is also encouraged to calibrate policies to encourage LGUs to exhaust all possibilities for raising local revenues. (d) Municipal finance projects should encourage development and implementation of innovative projects. So far, financing has largely flowed to traditional infrastructure subprojects (such as public markets, school buildings, etc). Due to lack of technical expertise, limited financial capacity, and the risk-averse and inward-looking nature of many LGUs, traditional infrastructure dominated the LOGOFIND portfolio. Investments in inter-LGU infrastructure such as roads and bridges that enhance connectivity and production logistics for example have not been encouraged. Such investments provide the scale for efficient service provision and possibly even pooling of resources among poor LGUs and enable them to implement projects. The institutional and capacity requirements should be taken into account or be part of the innovation. Offering grants for these innovative activities can encourage LGUs to implement them. (e) LGU investment decisions are highly sensitive to the availability of "soft" loans and grants. Quality of local government services is therefore greatly determined by the architecture of financing created by projects such as LOGOFIND. The loan-grant-equity mix adopted by the project that favored low-income class LGUs and social and environmental projects saw a large proportion of project funds supporting construction of school buildings, health clinics, hospitals and flood control infrastructure. Some LGUs maximized the availability of grant funding from LOGOFIND and built a number of schools simultaneously, an investment decision that would otherwise be cautiously taken, if at all, if such funding is not made available. (School building is also a national government responsibility but the concessional funding availability encouraged many LGUs to implement massive school construction activities, leading to increased enrolment and cohort survival rates in those LGUs.) In contrast, the vacillation in extending grant funding to modernize LGU tax systems has delayed implementation of computerization of business and real property tax collection systems that would have improved the financial conditions in many interested LGUs. Project design of future municipal finance projects will benefit from analyzing the benefits and impacts of various financing schemes for LGUs, setting clear indicators for assessing outcomes from the projects that are to be supported by such financing arrangements, and the overall impact of the desired financing mechanisms in the fiscal position of National Government if these were to be carried out on scaled up basis. 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners Borrower/implementing agencies: The Borrower's/implementing agency assessment of the Project and the conclusions are generally consistent with the ICR. The Borrower notes that the LOGOFIND Project performed satisfactorily in achieving its target objectives. It contributed to addressing the challenges facing local development and finance in varying degrees. While many 22 factors adversely affected project implementation, the implementing agencies addressed these through strategies, innovations, and policies. Future LGU credit-financing projects need to learn from the diverse lessons learned in LOGOFIND implementation, build on the initial successes of the Project and work on developing capital markets accessible to LGUs in all income classes. 23 Annex 1. Project Costs and Financing A. Project Cost by Component (in US$ million equivalent) Component Appraisal Revised Actual/ Percentage of Estimate Estimate Latest Appraisal After Estimate Cancellation 1. LGU Subprojects 95.7 53.2 55.7 58 2. LGU Training and 8.3 7.3 2.7 22 Capacity Building 3. LGU Resource 16.5 12.2 4.1 30 Mobilization and Monitoring 4. MDF Reorganization and 12.2 10.2 5.1 42 Strengthening Total Project Costs 132.7 82.9 67.6 51 Front-end fee 1 1 1.0 100 Total Financing 133.7 83.9 68.6 51 Required B. Project Financing by Source of Funds (in US$ million equivalent) Appraisal Actual/Latest Source of Funds Type of Percentage of Cofinancing Estimate Estimate (US$ millions) (US$ millions) Appraisal Borrower 33.7 11.4 34 International Bank for 100 57.2 57 Reconstruction and Development C. Project Financing by Component (in US$ million equivalent) Percentage of Component Appraisal Estimate Actual/Latest Estimate Appraisal Bank GOP Total Bank GOP Total Bank GOP 1. LGU 77.1 18.6 95.7 46.0 9.7 55.7 60 52 Subprojects 2. LGU Training 4.5 3.7 8.2 2.5 0.2 2.7 56 5 and Capacity Building 3. LGU Resource 9.5 7 16.5 3.4 0.7 4.1 36 10 Mobilization & Monitoring 4. MDF Re- 7.9 4.4 12.3 4.3 0.8 5.1 54 18 organization & Strengthening Front End 1.0 1.0 1.0 1.0 100 - Total 100 33.7 133.7 57.2 11.4 68.6 57 34 24 Annex 2a. Outputs by Component Component Intermediate Output Indicators Original Revised Actual Outcome Cost Cost Indicators Quantity (US$M) Quantity (US$M) Quantity Cost (US$M)) LGU Improved basic Total number of 200 77.1 104 44.4 133 46.0 Subprojects infrastructure, subprojects completed: services and i. Education - - - - 48 15.8 facilities ii. Health - - - - 28 6.6 iii. Environment - - - - 34 16.9 iv. Revenue-generating - - - - 17 5.2 v. Others (equipment, etc.) - - - - 6 1.4 LGU Training Enhanced LGU Total number of LGUs 200 4.5 200 3.5 1,033 2.5 and Capacity management trained (no double count) Building capacity Mandatory MDFO 190 BLGF 101 Demand-driven MDFO 189 BLGF 858 LGU Resource Improved local Total number of LGUs 754 9.5 754 5.2 72* 3.4 Mobilization resource with RPTA & BTE: mobilization *Some LGUs availed themselves of both RPTA and BTE i. RPTA-A (manual) 524 524 66 ii. RPTA-B 200 200 5 iii. BTE 30 30 5 25 Annex 2a, con't Output by Component Component Intermediate Output Indicators Original Revised Actual Outcome Cost Cost Cost Indicators Quantity (US$M) Quantity (US$M) Quantity (US$M)) LGU Resource Improved ability LGU credit rating 1 system A credit-worthiness Mobilization, to monitor LGU system established by rating and tracking con't fiscal Dec 2000 system established in performance November 2007 Fiscal info system is 1 system Information system established by March established and 2002 operational since 2005 Regular monitoring Regular SIE SIE regularly reports are reporting & published and disseminated by June publication disseminated 2002 Additional output: BLGF Re- engineering study conducted 26 Annex 2a, con't Output by Component Component Intermediate Output Indicators Original Revised Actual Outcome Cost Cost Cost Indicators Quantity (US$M) Quantity (US$M) Quantity (US$M)) MDFO Enhanced MDFO would have in- 7.9 5.9 Operations Manual 4.3 Strengthening institutional place new policies, developed and used arrangements procedures and 70 staff complement and capacity for operations manual by Electronic M&E MDF an agreed specific date systems Streamlined 20% reduction in 68-84% decrease in MDF procedures subproject processing subproject processing and approvals time time (3-6 months) Improved timeliness 64% reduction in the of disbursement time required to disburse funds (now averages at five days) Strengthened Formation of MDFO MDFO was created MDFO in DOF in November 1998 thru Executive Order No. 41 and fully operational Spin-off/ Transfer of MFC created but not MDFO sanctioned to operate because of legal impediments 27 Annex 2b. Output by Number of LGUs Assisted Component No. of LGUs No. of Subprojects Remarks 1. LGU Subprojects 97 133 No double count. LGUs availing themselves of multiple subprojects are counted once. 2. LGU Training and Capacity Building 1,033 No double count. 3. LGU Resource Mobilization 72 76 No double count. LGUs availing themselves of multiple subprojects are counted once. Sub-total (1&3 only) 165 209 No double count. LGUs availing themselves of components 1 and 3 are counted once. Sub-total (1,2,3 only) 1,198 4. MDFO Strengthening a. LGUs assisted by MDFO through 165 209 LOGOFIND (1&3 only) - 1st to 2nd income class 10 - 3rd to 6th income class 155 b. LGUs assisted by other MDFO 386 financing facilities - 1st to 2nd income class 136 - 3rd to 6th income class 250 Total LGUs assisted by MDFO 551 28 Annex 3. Economic Analysis The Project Appraisal Document (PAD) did not have precise estimates of economic and financial rates of return for the Project inasmuch as investments were to be demand driven and there were no pre-identified subprojects at appraisal. However, benefits were estimated using as proxy a sample of similar type of subproject investments in previous municipal development projects; project costs include subproject investments as well as training, resource mobilization and technical assistance. The Economic Rate of Return (ERR) and Net Present Value (NPV) of the entire Project at appraisal were estimated at 17% and P804.2 million, respectively. At the subproject level, the PAD estimated the ERR of subprojects based on average rates of return. ERRs varied depending on type of subprojects, as follows: markets (30%), bus terminals (27%), slaughterhouses (35%), roads (49%), traffic management (41%), shore protection (45%) and sanitation facilities (19%). No ERR was computed for social subprojects, e.g., school buildings and health centers. Adopting the same cost and benefit methodology used at appraisal, the Implementation Completion and Results Report (ICR) estimates that the ERR and NPV of the entire Project are 35% and P71.9 million, respectively. The computed ERR is substantially higher than the 17% estimated at appraisal due to higher stream of benefits accrued from social and environmental projects, which comprise almost 80% of the total subproject cost (or approximately 60% of the total Project cost). Caution, however, should be applied in comparing the two ERRs because of the different menu of subprojects used in the two computations. In addition, at appraisal, it was envisioned that the interventions of the Project for the local government units (LGUs) would come as a package (i.e., each LGU subproject would consist of investment, training and resource mobilization). As implemented, LGUs only received either subproject financing and training, or resource mobilization and training, or training only. Therefore, it is more appropriate to compare the ERRs at the subproject level where costs and benefits can be properly imputed. Recognizing that the demand-driven approach would result in different sets and types of subprojects, the Local Government Finance & Development (LOGOFIND) Project required that each proposals for subproject financing should provide a computation of that subproject Financial Internal Rate of Return (FIRR) and/or ERR. At loan closing, the Project funded 133 subprojects under component 1: 13% of which are revenue-generating, 57% social and, 25%, environmental subprojects. For the ICR, a sample of 14 subprojects was chosen, representing all sub-sectors covered by the Project. The sample includes four school buildings, three health centers, four environmental subprojects, and three public markets. Under component 3, a sample of eight subprojects (from a total of 76 Real Property Tax Administration (RPTA) and Business Tax Enhancement (BTE) subprojects), is used as the basis for the economic analysis. The ERR (for non-revenue generating) and FIRR (for revenue generating) of the sample subprojects were re-computed using the same cost and benefit methodology, and the results are to be called the ERR and FIRR at ICR. Project costs included actual 29 investment costs, training cost, and updated operation and maintenance (O&M) costs based on the initial years of operation of the facility. Investment cost was converted to economic cost by deducting taxes and duties assumed to be 10% and applying the shadow price of foreign exchange on the foreign component of the subproject where appropriate. Majority of the subprojects in the sample involved new facilities/services where there was none previously or where service levels were very low and therefore all costs were considered incremental. In cases where there were existing services and the subproject sought to improve or upgrade these services to a higher level, only incremental costs were included. For example, in the case of a school building that replaced an old school, salaries of teachers already employed were not included, only incremental costs for O&M. The identification and estimation of benefits were based on previously prepared subproject appraisal reports approved by Municipal Development Fund Office's (MDFO's) Policy Governing Board. Data was updated as necessary. `With' and `without' project scenario analysis was then conducted. Flows were discounted at 15%, the social discount rate used by the government, to estimate the NPV and ERR. Subprojects were expected to provide benefits for at least 15 years for investments and 6 years for resource mobilization subprojects. The detailed economic analysis of the sample subprojects can be found in the full-length version of the LOGOFIND ICR Report filed in the IRIS. A. Health Subprojects LGU Base Case Scenario 1 Scenario 2 NPV ERR (%) NPV ERR (%) NPV ERR (%) Passi, Iloilo 2,116,200 18 (4,728,075) 8 5,199,997 22 Pavia, Iloilo 6,169,878 36 3,647,007 28 3,961,847 29 Tuy, Batangas 6,935,449 30 1,112,552 18 3,748,383 24 Average 5,073,842 29 10,495 18 4,303,409 25 Benefits come from reduced cases of morbidity and mortality and savings on laboratory fees. Without the project, it was assumed that patients would have paid higher laboratory fees in private health clinics. Costs included investment cost, training cost and operating costs (i.e., personnel services (PS), maintenance & other operating expenses (MOOE) and insurance costs). Adjustments in the estimation were made to take into account the updated population projection. The sample health subprojects are economically viable, with ERRs exceeding the social discount rate of 15%. For these subprojects, the returns are more sensitive to a 5% decrease in morbidity cases (Scenario 1) rather than a 20% increase in O&M costs (Scenario 2). 30 B. Education Subprojects LGU Base Case Scenario 1 Scenario 2 NPV ERR (%) NPV ERR (%) NPV ERR (%) Tuy, Batangas 31,720,900 35 22,354,605 31 26,755,004 33 Mina, Iloilo 49,262,200 34 33,771,242 30 47,623,596 34 Sto. Tomas,La Union 8,668,860 24 2,660,289 18 7,988,209 23 Taguig City, Metro Manila 566,179,638 112 377,169,783 80 403,295,395 101 Average 163,957,900 51 108,988,980 40 121,415,551 48 Two methodologies are used in estimating benefits for education subprojects: The first methodology measures the benefits in terms of potential value of earnings of students who had access to education because of the project, with assumptions on drop out rates throughout the year levels and ratio of students proceeding to college. Computation for benefits was adjusted to take into account the updated projected enrolment rates and assumes that only 60% of high school graduates would proceed to college and only 60% of the college entrants would finish college. The second methodology estimates the benefits based on savings in cost of education and transportation. Without the project, students would have gone to private and other schools imposing higher fees and would have spent more on transportation (assuming that the schools are constructed are closer to the students). Subproject costs included investment costs, training costs, and operating costs (i.e., personal services, insurance, utilities, repairs/maintenance and supplies). All ERR estimates for the sample subprojects exceed the social discount rate of 15%. The high rate of return of school buildings in Taguig City can be attributed to the high utilization rate of classrooms. The classrooms were used for 2-3 shifts of classes a day. The assumptions were then tested by: (i) a 20% decrease in projected benefits, and (ii) a 20% increase in O&M costs and 10% in PS. These subprojects remain viable given the adverse changes in the assumptions. C. Environment Subprojects LGU Base Case Scenario 1 Scenario 2 NPV ERR (%) NPV ERR (%) NPV ERR (%) Bonifacio, Misamis Occidental 49,342,526 35 33,072,847 29 8,967,070 19 New Washington, Aklan 10,702,312 28 6,258,568 23 (407,048) 14 Plaridel, Quezon 1,057,611 16 (1,558,856) 13 (5,483,555) 6 Dipolog, Zamboanga del Norte 291,132,511 98 221,159,852 79 116,200,864 50 Average 88,058,740 44 64,733,103 36 29,819,333 22 31 For environment subprojects, benefits are derived from incremental income from fish ponds and shrimp catch, incremental mangrove values, savings in property reinvestments including institutional properties such as government buildings and public roads, averted loss in taxable and saleable land due to erosion, and increased property values. Subproject costs included as-built cost, training cost, O&M. The results of the analysis show that environment subprojects are economically feasible. Each estimate was then subjected to: (i) 20% decrease in projected benefits; and (ii) 50% decrease in projected benefits. Apparently, a 50% decrease in benefits would still yield an ERR estimate higher than 15% for subprojects in Bonifacio, Misamis Occidental and Dipolog, Zamboanga del Norte. However, the outcome is different for New Washington, Aklan and Plaridel, Quezon, in which ERR estimates stood below the social discount rate and yielded negative NPV. At ICR, the computed average ERR for environment subprojects is only a percent lower than the 45% estimated at appraisal. D. Public Market Subprojects LGU ICR Base Case Scenario 1 Scenario 2 NPV FIRR (%) NPV FIRR (%) NPV FIRR (%) Pozzorubio, Pangasinan (3,733,088) 10 (9,555,166) -1 (6,511,570) 6 Taal, Batangas (1,934,289) 14 (5,876,166) 11 (12,304,927) 6 Jala-Jala, Rizal (10,427,693) 0 0 0 Average (5,365,023) 8 (7,715,666) 3 (9,408,249) 4 The FIRR was computed for revenue generating subprojects such as public markets. Revenue flows were mainly from lease fees and daily cash tickets from ambulant vendors, and were validated based on the actual revenue acquired from the initial years of operation. Costs were estimated in the form of as-built cost, training cost, and O&M costs. It was assumed that the occupancy rate would be 70-100% and incremental costs would increase from a range of 5-10% annually. Based on the sample, the FIRR estimates are below the discount rate of 15% and have negative NPV, with Jala-Jala, Rizal having a zero rate of return. The average FIRR at ICR was computed at 8% which is substantially lower compared to the FIRR of 18% computed at subproject appraisal and 30% at Project appraisal. The low FIRR of revenue- generating subprojects can be attributed to lower benefits than projected due to: (a) fees not being implemented as agreed, (b) poor or lack of enforcement of municipal ordinances that created adverse impact on the viability of operations, (c) low utilization rate or occupancy of the facilities, and (d) change in priorities of the new local administration as a result of election (as in the case of Jala-Jala, Rizal where the public transport routing was to be planned around the market and would therefore bring more customers to the new facility, but was not carried out, affecting the viability of the subproject). The result clearly demonstrates that non-compliance of required conditions has serious effect on the operations and sustainability of the facility as a whole. Also, it is important to note that the quality of preparation and analysis of subproject appraisal 32 reports is vital in the correct estimation of projected benefits. Feasibility studies should be carefully analyzed and validated especially for revenue generating subprojects. E. RPTA and BTE Subprojects LGU Base Case Scenario 1 Scenario 2 NPV FIRR (%) NPV FIRR (%) NPV FIRR (%) 1. RPTA-A (Manual) Cabangan, Zambales 2,201,888 61 1,947,748 57 1,820,677 55 San Luis, Pampanga (851,810) 0 (949,236) -2 (997,949) -3 Panaon, Misamis Occidental 357,080 26 262,008 23 214,472 22 Bacuag, Surigao del Norte 543,778 27 505,691 26 432,151 25 Average 562,734 29 441,553 26 367,338 25 2. RPTA-B (Computerized) Sta. Rosa, Laguna 901,893,189 1200 838,610,835 1191 806,969,659 1186 Iloilo City 1,047,576,845 3434 974,346,174 3424 937,730,838 3419 Average 974,735,017 2317 906,478,505 2308 872,350,248 2303 3. BTE Sta. Rosa, Laguna 1,755,784,223 6678 1,635,299,043 6668 1,575,056,454 6663 Iloilo City 1,177,085,356 7625 1,095,288,078 7615 1,054,389,440 7610 Average 1,466,434,789 7152 1,365,293,561 7142 1,314,722,947 7137 The benefits of RPTA and BTE subprojects are additional real property and business tax revenues. Costs include investment, training and O&M costs. Revenue collection were assumed to increase 20% in the second year of operation and 5% in succeeding years, and operating cost to increase 5% annually. At ICR, the computation for cost was adjusted to take into account the actual O&M costs, which is 10% of total PS & MOOE expenses in 2008. RPTA and BTE subprojects are generally highly viable, especially for those that introduced computerization. But only a few cities implemented computerized tax systems under the project because of the perceived lumpy investment requirement (and that as such, it would require a large number of real property units and business establishments to make it cost effective). The modernization of the tax systems also created additional benefits such as: (i) reduced processing time for tax filing and payment; (ii) use of Geographic Information System (GIS) for land use planning, crime mapping, flood mitigation and disaster reduction management efforts, and (iii) successful RPTA-B/BTE subprojects being showcased for replication to other LGUs to encourage them to use such 33 systems as a means of reducing red-tape and improving conduct of business with LGUs (e.g., Sta. Rosa, Laguna becoming the pilot city for anti-red tape for Philippine Business Registry because of its efficient administration of RPT and BT collection). The financial viability of these subprojects do not seem to be affected by a reduction in the assumed revenue increases (from the base case of 20% to 10% increase in RPT/BT revenues, or from even from 20% to 5% increase). In general, the high ERR/FIRR of subprojects and Project as a whole showed that the use of resources was efficient. The ERR/FIRR of subprojects under components 1 and 3 remained robust when subjected to sensitivity analysis. Moreover, these streams of benefits were validated during site visits. Further insights about the process of subproject preparation, approval, implementation and operation were generated from the site visits, interviews with LGU local chief executives and staff, review of rapid assessment of emerging benefits, and discussions with LOGOFIND staff to evaluate the sensitivity and sustainability of project benefits. At the subproject level, the selection and planning of infrastructure investments was found to be sound. The subprojects were a result of deliberation by local government officials including the local council (legislature) based on the need of the constituents and the socio-economic benefits of the investments. Where fees and charges were to be imposed, a willingness-to-pay survey was conducted during subproject preparation. In most cases, the subprojects were identified as development priorities by the participating LGUs early on even prior to them being aware of the Project. However, the lack of funds and the nature of the subprojects being largely non self-liquidating necessitated that these gaps were either left unaddressed (e.g., for health centers/services, public markets) or addressed on an intermittent, `piece meal' basis whenever limited funds were available as grants from the provincial government and congressmen (e.g., for classrooms, water supply). In the case of environmental projects (e.g., river protection, seawall), spending took the form of annual recurrent costs, with temporary structures rebuilt as soon as they were washed away by the next flooding or typhoon. The availability of financing as well as substantial grants from the Project allowed the participating LGUs to address these gaps with a long term view. In planning for the investments, the maximum size of subprojects was based on: (a) the LGU's borrowing capacity as defined by Bureau of Local Government Finance (BLGF) subject to its willingness to borrow a certain amount, (b) its capacity to provide the required counterpart funding, and (c) topped up with the grant based on the financing mix specified according to type of project. At appraisal, the need for the subproject was further reviewed and its scope determined based on an assessment of demand, including ensuring non duplication of financing (grants) from national government agency programs (e.g., Department of Education (DepEd) national school building program). In many cases, the LGUs were able to mobilize additional resources from the provincial government and/or congressmen for their equity, freeing up funds for other purposes. Thus, in general, participating LGUs (particularly the lower income class municipalities) 34 gave sufficient consideration to maximizing leverage from their limited resources for substantial grants from the Project and for mobilizing additional resources from the provincial government and congressmen to implement their subprojects. Ensuring efficiency in the use of project resources at the subproject level, particularly important given the significant grant component, was further strengthened by the subproject appraisal and implementation policies that were developed by LOGOFIND during project implementation. The appraisal required that the scope and design of the subprojects were according to standards established by relevant national government agencies (e.g., Department of Public Works and Highways (DPWH) for public markets and seawall/river protection projects, DPWH and DepEd for school buildings, Department of Health (DOH) for health centers) and compared with actual costs of completed subprojects. Subproject costs were further reduced through competitive bidding. Any enhancement in design or scope was on the account of the LGU, as well as any cost overruns resulting from reasons other than force majeure. In effect, this put a tight lid on over or unnecessary spending particularly in the use of the grants and provided a disincentive for overdesigned projects. Coordination with relevant national government agencies at subproject appraisal stage ensured institutional linkages critical to sustainability. For example, DepEd endorsement of a school building project signaled its commitment to provide for teachers and an annual O&M budget upon operation. Endorsement by DOH of a health center project provided the opportunity for the proposed facility to be designed to provide for the minimum number of services required for accreditation with DOH's Sentrong Sigla (Center for Wellness) program, benefiting from free medicines and supplies. This coordination was done through a national level Policy Governing Board established by the Project and composed of sectoral representatives. 35 Annex 4. Bank Lending and Implementation Support/Supervision Processes a. Task Team Members Names Title Unit Lending 1. Thomas L. Zearley Team Leader/Financial Specialist EASUR 2. Dana Weist Senior Economist/Lead Public Sector Specialist PRMED 3. Jose Antonio League Operations Officer/Urban Specialist EASUR 4. Patchamuthu Illangovan Senior Environmental Specialist EASEN 5. Pramod Agrawal Resettlement Specialist EASSO 6. Lanfranco Blanchett--Revelli Senior Social Sector Specialist EASSO 7. Cecilia Vales Procurement/Disbursement Specialist EAPCO 8. Rene SD Manuel Procurement Specialist EAPCO 9. Margaret Png Legal Counsel LEGES 10. Hung Kim Phung Disbursement Officer LOADM 11. James Ford Peer Reviewer 12. Tim Campbell Peer Reviewer Supervision/ICR 1. Thomas L. Zearley Team Leader (1999)/ Principal Operations Officer EASUR 2. Toru Hashimoto Team Leader (2000-02)/ Urban Dev Sector Coordinator EASUR 3. Ming Zhang Team Leader (2003-2005)/ Senior Economist EASUR 4. R. Mukami Kariuki Team Leader (2008)/ Senior Operations Officer EASUR 5. Christopher T. Pablo Team Leader (2006-2008)/ Local Program Coordinator EASUR 6. Jose Antonio League Operations Officer/ Urban Specialist EASUR 7. Jose Tiburcio Nicholas Resettlement Specialist EASSO 8. Ernesto Diaz Senior Financial Management Specialist EAPCO 9. Noel Sta. Ines Procurement Specialist EAPCO 10. Maya Gabriela Q. Villaluz Senior Environmental Specialist EASEN 11. Evangeline Kim Cuenco Senior Operations Officer, Training WBI 12. Agnes Albert-Loth Senior Financial Management Specialist EAPCO 13. Victoria Florian S. Lazaro Operations Officer/ Social Safeguard Specialist EASSO 14. Christopher Casuga Ancheta Sanitary Engineer EASUR 13. Rene SD Manuel Procurement Specialist EAPCO 15. Arvin Gupta Lead Private Sector Development Specialist EASPR 16. Patricia Clarke Annez Urban Adviser EASUR 17. Luis Claudio Tavares Lead Water and Urban Sector Specialist EASUR 18. Allan Rotman Lead Procurement Specialist 19. Randeep Sudan Lead ICT Specialist GICT 20. Narasingham Vijay Sector Manager EASUR Jaganathan 21. Joanne Nickerson Operations Analyst EASUR 22. Joseph Reyes Financial Management Specialist EAPCO 23. Mark Woodward Sustainable Development Leader EASSD 24. Angelique Plata Program Assistant EACPF 25. Gia Mendoza Program Assistant EACPF 26. Isabel Duarte A. Mutambe Program Assistant EASUR 27. Demilour Reyes Ignacio Program Assistant EACPF 28. Luisa Espanola Team Assistant EACPF Non-staff 29. Maria Rosanna M. Manuel Consultant 30. Marilyn Orehuela Tolosa Consultant 36 31. Aubrey Bualat Consultant 32. Maria Eugenia Valdes Consultant 33. Arlene Porras Consultant 34. Fred Pizzario Consultant 35. Roderick Durmiendo Consultant 36. Irene L. Villapando Consultant 37. Reynaldo E. Asturizaga Consultant 38. Gilbert C. Braganza Consultant 39. Elena Martinez Consultant (b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage of Project Cycle No. of staff weeks USD Thousands (including travel and consultant costs) Lending FY97 150.06 FY98 174.62 FY99 86.53 FY00 0.00 FY01 0.00 FY02 0.00 FY03 0.00 FY04 0.00 FY05 0.00 FY06 0.00 FY07 0.00 FY08 0.00 Total: 411.21 Supervision/ICR FY97 0.00 FY98 0.00 FY99 23.83 FY00 48 77.56 FY01 33 72.30 FY02 37 98.52 FY03 23 66.86 FY04 31 157.28 FY05 31 74.93 FY06 25 86.72 FY07 22 89.80 FY08 28 119.52 FY09 14 0.00 Total: 292 867.32 37 Annex 5. Beneficiary Survey Not applicable. 38 Annex 6. Stakeholder Workshop Report and Results An evaluation of the initial outcomes of the Local Government Finance & Development (LOGOFIND) Project at the local government unit (LGU) and community levels was conducted as part of the preparation of the Implementation Completion and Results Report (ICR). The evaluation utilized four instruments: (a) review and analysis of project implementation documents (feasibility studies, Subproject Completion Reports (SPCRs) and Subproject Appraisal Reports, Municipal Development Fund Office (MDFO)-Rapid Appraisal of Emerging Benefits Document, Statement of Income and Expenditure (SIE), training evaluation, etc.); (b) collection and analysis of financial data of participating LGUs; (c) interviews and focus group discussions with LGU officials and staff and community beneficiaries; and (d) case studies and interviews with beneficiaries in selected project sites. A total of 21 LGUs were visited from December 2008 to April 2009: 13 for subproject implementation and eight for resource mobilization. These LGUs were also recipients of the mandatory training program of the Project. Out of the 13 LGUs, eight were subjected to case analysis (studies). An additional six LGUs that only availed themselves of the Project's demand-driven training program were visited. The selection of the sample was mainly based on the type of subprojects (social, environmental and revenue-generating), type of training received, and geographical location of subprojects. Peace and order situation was also a key consideration in the selection of subprojects to be visited. A. LGU Subprojects: Case Studies Dipolog City Sea Wall and Foreshore Development Subproject Prior to the subproject, Dipolog City experienced soil erosion at a rate of about 0.2 hectares per year due to the weak capacity of the sea wall to buffer the strong waves and current of Iligan Bay. This destructive natural force affected the productive value of the foreshore areas to about less than half of the price of the land compared to those in the nearby commercial and residential areas. It was thus important to reduce the further destruction of the foreshore areas and promote sustained productive use of the valuable area. Other than environmental protection, the improvement of the sea wall and the foreshore areas clearly provided an effective recreational facility for the residents of Dipolog City. Before the subproject, residents conducted their recreation activities either in the city plaza or in nearby schools. For the past two years, the celebrations for the Araw ng Dipolog, held in June every year and attracting almost 100,000 people, have been held in the area. Also, the area has attracted small business enterprises, particularly in the old sea wall area, such as eateries, souvenir shops and small bars. The families relocated from the subproject site, whose main livelihood included fishing and fish processing, are being provided training in alternative livelihood by the Dipolog School of Fisheries and the 39 local office of Technical Education and Skills Development Authority. Many of the houses of the relocated families are made of concrete, compared to wood and galvanized steel when they were still located in the sea wall area. There is a general feeling of security among the residents since they are now located a safe distance from shore. The relocation site has also provided the opportunity of some residents to engage in productive enterprises such as bakeries, sari-sari stores, and small public transport. Construction of Riverbank/Slope Protection Subproject in San Luis, Pampanga San Luis was perennially flooded by the swelling of the Pampanga River. The most damaging effect of this calamity was felt by the three barangays of the Poblacion area which are also where the central business district, commercial strip, and educational institutions are located. The constant erosion and flooding resulted in the further destruction of valuable agricultural lands and the loss of lives and property. Furthermore, local and outside investors' confidence was also significantly affected. Before the subproject, the municipality experienced two major floods per year with an average height of five feet thus significantly disrupting business and school activities. The floods usually lasted for a week thus cutting off major business and service access. About 3,000 people would be evacuated during major flooding incidence. With an estimated annual soil erosion rate of 238 sq. meters, the municipality needed to immediately act on preserving its valuable land assets and stimulate local economic growth. The main objective of the subproject was to minimize, if not totally arrest the continuous flooding and erosion of land along the banks of the Pampanga River in order to provide economic benefits in terms of foregone property damages, appreciation of the market value of land within the area, and provide better prospects for investment and employment opportunities. The subproject greatly contributed to the security of the Poblacion and nearby barangays from the disastrous swelling of the Pampanga River. Since the completion of the subproject, no serious flooding has occurred. As a result, school activities are being conducted regularly and student attendance in the schools located in the Poblacion area has improved (San Luis Elementary School has about 1,000 students; A. Gonzales Sioco High School has about 600 students). There is a general and overall feeling of security with the improved protection of the riverbank. Social activities are now being conducted regularly. The improved protection of the riverbank has noticeably encouraged the establishment of new business ventures. For example, two gas stations and a major hardware and construction store were established along the major road leading to the central town area. It is noteworthy that local revenues have increased partly due to the improved stability of the municipality. Revenues in 2005 increased by about PhP0.8M compared to that in 2003 (local taxes, permits and licenses, business income and service income totaled about PhP3.3M in 2005 and about PhP2.5M in 2003). Design, Build and Operation of the San Fernando City Engineered Landfill Subproject 40 Of the 59 barangays of San Fernando City, about 44% or 26 barangays are urban and were serviced by an existing controlled dumpsite. The remaining 33 barangays are located in the rural and distant areas and employ backyard dumping, composting and burning as waste management methods. The daily average volume of garbage collected in San Fernando city's 26 urban barangays is about 220 cubic meters. The existing controlled disposal site covered an area of 6.4 hectares in barangay Mameltac. With the expected increase in the daily volume of garbage of San Fernando City, the existing dumpsite will not be adequate. Equally important, the Solid Waste Management Act requires that landfills be the primary method for managing waste. The construction/operation of an engineered sanitary landfill was expected to provide for the preferred, environmentally responsible, socially acceptable, cost efficient and affordable integrated solid waste management facility to serve the entire population of the city for the next 15 to 20 years. Integrated into the subproject was the formulation and implementation of a Social Development Program (SDP) to address any socially adverse impacts that may result from the subproject, particularly with regard to the families of waste-pickers working in the old dumpsite. The SDP's livelihood support activities included the organization of the waste-pickers into recognized laborers of the facility and the provision of trainings in alternative livelihood/income generating activities. Because of this effort, some waste- pickers have "graduated" to other livelihood/ employment activities such as tricycle drivers and market vendors. The subproject also contributed to the improved awareness of waste management among the residents of the City. With the landfill facility, the city government has vigorously advocated for the segregation of garbage at source or at the household level with its "Nabubulok at Di-Nabubulok Program" to encourage recycling, reuse and composting of solid waste. The effort intends to lessen the volume of garbage being dumped at the landfill and provide opportunities for alternative livelihoods such as selling the recyclables and the compost. Another impact attributed to the subproject is the emergence of small/barangay-level junk-yards that collect and process waste collected from the barangay recovery facilities. These facilities have opened up opportunities for more effective and efficient ways of collecting recyclables and other waste materials for composting thus increasing local livelihood activities Improvement and Expansion of Water Supply System in Panaon, Misamis Occidental Before the subproject, the water supply system only serviced the households of barangays Poblacion and Punta. The Level III water supply system and facility consisted of a pumping station, transmission mains, distribution pipes and service connections. The constant and sustained provision of water to the beneficiary households however was very limited. Only about 20% of the beneficiary households enjoyed provision of water. Moreover, water was only made available two hours daily. As a result, most of the 41 facilities deteriorated and households had to get their water from deepwells and communal systems. Thus, the subproject aimed to improve and provide adequate and safe water to the major barangays of the municipality namely Poblacion, Lutao, Punta, Sumasap, Villalin, Dela Paz and Map-an. The water supply system is now servicing a wider area namely the targeted seven barangays and a barangay from the adjacent municipality (Mohon, Aloran). Because of the availability and constant supply of water 24 hours a day, household beneficiaries have increased their savings since a household now only spends about PhP260/month for continuous water supply compared to about PhP400/month under the old system. It has been observed that there is now an increased awareness in the communities about water use and management. Also, it has been generally felt that overall health condition in the serviced areas has improved with reports of lower cases of gastroenteritis, diarrhea, and amoebiasis. It is clear that the beneficiary communities and households have experienced improved productivity. For example, a hatchery facility installed with the new water supply system increased its layer chickens from 1,000 heads to 4,000 heads because of the improved opportunity to clean its livestock facilities thereby minimizing disease among the livestock. Also, the municipality noted an increase in business establishments resulting from the improved access to water. There were about 24 business establishments in Poblacion in 2003. By 2008, there were 38 which included new prawn hatcheries and livestock farming. In addition, a new lodging house catering to high school students has built and restroom facilities in public schools were improved. Now, public school classrooms have individual toilets. Construction of Barangay Saoay Cluster Health Center (San Fernando, La Union) The Barangay Saoay Cluster Health Center is part of a subproject that included the establishment of Barangay Health Stations in Brgy. Apaleng and Brgy. Nagyubuyuban, Cluster Health Centers in Brgy. Poro, Brgy. Sibuan-otong, and Bgy. Pao Sur and the upgrading of the City Proper Health Office. Prior to the subproject, there were only 10 barangays with existing Barangay Health Center (BHC) structures, of which five are located in urban and 5 in rural barangays. Rural Health Midwives and Rural Sanitary Inspectors had difficulty in implementing health programs in areas without a BHC considering that 62% of the city's barangays are located in the rural areas. The city had four doctors, seven nurses, 22 midwives, eight sanitary inspectors, 366 Barangay Health Workers (BHWs), 64 Barangay Nutrition Scholars (BNSs), and 64 Barangay Service Point Officers. Their tasks included, among others, recording of the immunization service administered, assisting pregnant women for pre-natal check-up, feeding of children, and conduct of health education activities. The health infrastructure though was wanting. All the health stations/centers are already operational. The Saoay Cluster Health Center is composed of four BHWs, one BNS, and one resident nurse. Before the subproject, the health and medical needs of the residents of barangay Saoay was provided by one nurse and two BHWs in a room located in the barangay hall. This facility was open only once a 42 week and had an average visit of about six patients. With the new facility, patient visitations have increase to about 20 patients per day. The facility is open 24-hours daily, seven days a week. It is the first facility-based (lying-in) health center (established before the Department of Health (DOH) 2008 order) and is catering to almost 900 people from eight barangays (Bangkusay, Abot, Bato, Saoay, Mameltak, Didanop, East Dalanguyan, and Nantutan) whereas before only the residents of barangay Saoay were provided medical assistance. The facility is now able to provide more medical services such as pap smear tests, urinalysis, blood tests, dental examination, immunization, and the conduct of medical missions from partner institutions. As a result, there has been observed reduction in child birth mortalities (two in 2003; none in 2008), maternal mortality (five in 2005 and zero in 2008) and malnutrition (26 in 2003 to six in 2008) in the cluster area. Construction of Health Center in Tuy, Batangas The old municipal health center was located at the Poblacion and was situated beside the Municipal hall. The building was built 20 years ago and was in a dilapidated condition. It had very limited medical equipment and lacked the necessary facilities to offer basic laboratory examinations and services. Records of the municipal health center showed that a majority of the residents of Tuy suffered from respiratory diseases. Cardio vascular disease is the leading cause of mortality and acute respiratory infections is the main cause of death among infants. The subproject has improved the delivery of expanded health care services such as the introduction of new programs like urinalysis testing, complete blood count, maternal care, etc. The facility has also enabled the municipality to provide Philippine Health Insurance Corporation benefits to the community members (5,000 people from the municipality are benefiting out of total population of 45,000) thus significantly reducing medical costs at the household level. The health center has also enabled affiliations with partner institutions such as University of Sto. Tomas thus providing regular medical missions like dental and optical services. There is also improved linkage and network with major health care facilities. Overall, mortality cases have almost remained constant while morbidity cases have slightly increased in recent years. It is difficult at this point to be certain if the improved provision of health care services has positively influenced the economic productivity of the community members. Construction of Science Building in South Central Elementary School (San Fernando, La Union) Most of San Fernando City's public schools are in bad condition with some of them having been built in the 1940s. Compounding the worrisome structural condition of the public schools, most have student-classroom ratio beyond the prescribed ratio determined by the national government (Department of Education (DepEd) recommends a 35-40:1 student-classroom ratio). With an annual increase of enrollees at about 2% per year, it was expected that classroom and teaching facilities would be lacking. In South Central Elementary School, student classroom ratio was about 43:1 and had about 900 students in 2008. With the school's particular emphasis in science, having a reputation for producing 43 outstanding students in science and math, it was determined that improvements in the school's science facilities were needed. The main objectives of the subproject were to improve the learning environment of students and teachers and to enhance the skills of students and other faculty members in computer literacy and information technology. A total of 10 one-storey, three-classroom buildings were built and were located at Canaoay Elementary School, San Agustin Elementary School, Sevilla Elementary School, Mameltac Elementary School, South Central Elementary School, Lingsat Elementary School, Ilocanos Community School, Catbangen Central School, Sacyud High School, and Cadaclan Elementary School. Science laboratories were built in South Central, Lingsat, Catbangen and Ilocanos schools while the others had Home Economics rooms. All the science buildings had additional 20 computers and a printer. The subproject in South Central Elementary school eased the student classroom ratio for science. Whereas before there was only one science classroom and laboratory for all grades 1- 6 students, the subproject provided facilities for grades 1-3 students. There is no recent and accurate data indicating impact on students' performance and grade in science but it has been observed by the teachers that the new laboratory has facilitated effective teaching of science and has also improved students' interest in science. The computer rooms and computers have greatly increased students and teachers' exposure to computer use and information technology. It is unclear at this point how much impact the facilities have on student performance, especially for grade 1 to 3 students. What is evident though is that the school has been able to sustain the high performance of its students in various math and science competitions (students of the school are consistent winners in math and science contests). Construction of Taal Public Market Subproject The subproject was aimed to provide its constituents better market facilities as replacement to the old public market which was razed by fire on October 10, 2004. The subproject was expected to enhance the local economic activities and promote better trade opportunities for local producers and entrepreneurs, which will give the municipality higher revenue generation and subsequent increase in income in the coming years. With more stalls (the new market accommodates about 50 more vendors than the old market) and with improved access and sanitation, there has been an observed increase in customers and clients coming from the municipality and neighboring areas. The improved facility and increased clientele has relatively improved net income for some vendors. For eatery owners, daily net income has improved from PhP700/day to PhP1,000/day, meat vendors earn a net income from PhP250/day to PhP500/day, while barong selling used to earn about PhP800/day to about PhP1,500/day. However, due to the emergence of new market facilities in the neighboring areas (e.g., Lipa and Lemery), some establishments have not experienced significant changes in their net income. For example, net income from barong rental has remained at PhP500/day while net income from selling vegetables remained at PhP1,500/ day. 44 B. LGU Training and Capacity-building: Focus Group Discussion (FGD) Results Majority of the training participants interviewed were able to apply what they learned at work as members of the Bid and Awards committee (BAC) (on procurement training) or the technical departments (on construction supervision and punch-listing). Technical knowledge, such as the use of Geographic Information System (GIS) for tax mapping and data storage, was another key learning that participants remember and applied to their work. Participants recorded either learning new material or being able to enhance their existing knowledge of the subject matter (e.g. for detailed engineering design, and construction supervision training for engineers and financial management for accountants). In some instances, some LGUs noted significant differences between the procurement process of the World Bank and that of Republic Act 9184. In many cases, participants found the modules useful because of their application to projects and activities outside LOGOFIND (Panaon used the Logical Framework approach to identify projects to be funded by other donors) on the other hand, one LGU (Occidental Mindoro) intends to apply the lessons learned in the Environmental Management Plan and SPCR training events in the construction of another hospital. Participants appreciated the combination of lectures and practical exercises. However, better sequencing of modules would have been more effective (the Logical Framework module was delivered after project identification and development). Actual field visits or sharing of experiences also helped reinforce learning and the possibility for replication. In terms of length of courses, participants commented that they would have preferred adding an extra day rather than additional hours to complete the lessons and exercises. Follow-up activities by LOGOFIND staff during scheduled visits to the subproject sites to monitor the progress of subproject implementation were useful in reinforcing skills learned. Participants stated that LOGOFIND staffs were always available for technical assistance, especially in the preparation of reports which, in some cases, included a review of training concepts. Sustainability. Impact of training can be inferred from increases in local revenue generation and adoption of the Local Revenue Code (for BLGF courses) and/or in improvements in urban management practices, including the quality of sub-projects (MDFO). There was some evidence from the field of positive outcomes. In Panaon, tax mapping project contributed to an increase in real property units from 6,001 to 7,133 and a corresponding increase in assessed values. In Valencia, prior to tax mapping, real property units (RPUs) were only recorded at 16,000. After the tax mapping, this rose to27,000. This translates to an increase in revenue from PhP 1.2 M to PhP 3.6 M. In Sta. Rosa Laguna, FGD participants reported significant improvements in transaction time after the introduction of the new software. With the new Real Property Tax Administration (RPTA) system in place, the LGU posted a 15 percent increase in its initial revenue collection in January 2009. In business licensing alone, it has already collected some PhP 100 million in taxes. 45 Similarly, a number of LGUs have started to mainstream tools and strategies acquired from the courses in their regular duties. In San Ildefonso, the municipal accountant has employed pro-forma documents from the training events to disburse funds of the Commission on Election used during the last election. In Paluan, the municipality included an item in the LGU's annual budget for the environmental guarantee fund. In Oroquieta City, most of the tools in project implementation have been adopted by the LGU in its operations. The mayor even issued a memorandum for project monitoring patterned after World Bank standards. There was also an attempt to use pro-forma WB documents because these included steps for easy monitoring of projects. The municipality has used the Logical Framework approach in identifying projects and sourcing out funds (i.e., fishport project funded by Land Bank of the Philippines). In Sta. Catalina, as part of the LGU's effort to sustain the seawall project, an annual budget for the maintenance of the structure was included in the municipality's investment plan. The local chief executives strongly endorsed the World Bank-funded projects. LCEs agreed not only to cover transport and allowances of participants to these events, they encouraged their staff to scope out other future training events. Finally, while training needs for each LGU varied, overall participants requested additional and refresher courses on fund sourcing, computer literacy, AutoCAD (computer aided design) for engineers, livelihood generation. Key Recommendations for Future Events (i.) Select participants who are end-users of training in addition to department heads who are decision-makers. In this way, the applicability of training's tools, concepts and strategies can be ensured. (ii.) Organize training events by provinces and invite both provincial and municipal officials to the event. The training events can be a venue for them to discuss the development goals of the province vis-ā-vis the development direction of its municipalities. (iii.) Conduct the training events in proper sequence within the framework of a broader capacity building framework. (iv.) Combine lecture and exercises with fieldwork if applicable. This will break the monotony of class room type of training and can bring new insights. C. LGU Resource Mobilization Based on the sample of subprojects visited, all LGUs (except for Minalin) with RPTA subprojects showed significant increases in number of RPUs and locally-sourced revenues. No. Region LGUs No. of RPUs %age Total Local Source Collection %age Before After Increase Before After Increase 1 III Cabangan, Zambales 7,653 8,921 17% 3,819,351.40 4,734,801.41 24% 2 III San Antonio, Zambales 15,000 17,687 18% 6,332,149.04 6,421,485.00 1% 3 III Minalin, Pampanga 9,450 11,245 19% 5,174,000.00 4,381,894.00 -15% 46 4 III San Luis, Pampanga 11,770 19,058 62% 2,889,251.47 4,498,209.00 56% Panaon, Misamis 5 X Occidental 6,075 7,133 17% 567,668.93 2,119,817.00 273% Bacuag, Surigao del 6 CARAGA Norte 8,672 9,108 5% 1,079,378.39 2,145,778.00 99% 7 IV-A Sta. Rosa, Laguna 98,686 106,536 8% 351,856,000.00 765,000,000.00 117% 8 VI Iloilo City 131,011 136,067 4% 394,464,060.00 740,000,000.00 88% Total 288,317 315,755 10% 766,181,859.23 1,529,301,984.41 100% Average 36,040 39,469 95,772,732.40 191,162,748.05 However, it was not apparent how these additional revenues would influence future expenditures of the LGUs and the likelihood of improved performance in delivery of services. Most of the subprojects had been in operation for less than a year and have yet to be reported in their financial statements and figure into the next planning cycle. It can be inferred that these incremental revenues will directly increase LGU fiscal resources that it can use for investments in the expansion of services and facilities. Only two LGUs (cities) carried out the computerization sub-projects under this component, mainly because of the perceived political implications of modernizing the system as well as the increase in tax rates that such computerized programs introduce. Some LGUs chose manual systems and refused computerization and GIS even when their net borrowing capacity could accommodate additional investments. The project introduced some important changes in the administrative systems and quality of governance in participating LGUs: (i.) Increased integrity of land records and business establishments which were used to produce updated and precise maps for use not only in tax administration but also for physical planning. (ii.) LGU assessors discovering unrecorded tax units and reducing errors in computing RPT and business tax assessments. (iii.) More consistent enforcement of the tax code since the mayor and other local executives could not grant exemptions for newly "discovered" and "corrected" assessments. (iv.) Staffing plans of the office of the Municipal Treasurer and the Assessor were updated and led to request for hiring of additional staff with the right qualifications. 47 Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR The Local Government Finance and Development (LOGOFIND) Project aims to: (i) assist participating local government units (LGUs) in expanding and upgrading their basic infrastructure, services and facilities; (ii) strengthen their capacities in municipal governance, investment planning, revenue generation, and project development and implementation; and (iii) enhance the capabilities at the national level to provide technical support and long-term financing to local governments through the Municipal Development Fund (MDF). The Project is composed of four components through which the development goals and objectives will be attained: (a) LGU Subproject Financing, (b) LGU Training and Capacity Building, (c) LGU Resource Mobilization and Performance Monitoring, and (d) Municipal Development Fund Office (MDFO) Strengthening. The Loan Agreement for the LOGOFIND Project was signed between Department of Finance and the World Bank (WB) on September 8, 1999 with total project cost of US$133.7 million (US$100 million from the loan proceed (WB Loan No. 4446-PH) and US$33.7 million Government of the Philippines counterpart). The loan became effective on 28 February 2000 and with an original closing date on 30 June 2006. In August 2001, US$40 million was cancelled from the loan due to difficulties in building up the pipeline of interested and qualified LGUs, registering a net commitment of US$60 million. On August 18, 2005, the MDFO-Policy Governing Board (PGB) approved the realignment of US$3M from Component 3 to Component 1 to cover funding gap. Due to oversubscription of LGU under the subproject-financing component, the MDFO-PGB approved the second fund realignment of US$4.3Million from Components 2, 3, & 4 to Component1 to fill the budget shortfall. A. Assessment of Performance Based on Project Development Objectives (PDOs) in Relation to Key Performance Indicators (KPIs) PDO1: Expanding and upgrading basic infrastructure services and facilities of LGUs. This was primarily achieved through the various infrastructure projects implemented under Component 1. The total number of households benefiting from the Project was estimated at 1,054,142. Around half of which (534,685 households) come from 3rd-6th income class LGUs. PDO2: Strengthening LGUs' capacity in municipal governance, investment planning, revenue generation and project development and implementation. The remarkable outcome for the increase in revenue collection of the participating LGUs (PDO 2.1) is attributable to the intervention of both the Bureau of Local Government Finance (BLGF) Central and Regional Offices in terms of effective training and other technical assistance (mapping, recording, accounting). Also, with the development of the Statement of Income and Expenditures (SIE), the LGUs are better equipped with information needed to assess their fiscal performance for the previous years and are, therefore, able to plan and execute improvements. The target increase in the proportion of own source revenue of the participating LGU at the end of Project life (PDO 2.2) was not achieved. Although there were 535 LGUs who 48 were trained by BLGF, only 72 of these have implemented Real Property Tax Administration (RPTA) (66 LGUs) and Business Tax Enhancement (BTE) (6 LGUs) subprojects - the remaining LGUs were not able to update their existing sources of revenue. Moreover, most of the participating LGUs are relying from the Internal Revenue Allotment (IRA), which has substantially increased. This is very relevant because the increase for cities alone is 37.11%, a number, which almost met the target but still is not compliant notwithstanding the fact that cities have the broadest taxing powers under the Local Government Code (LGC). With the training on Resource Mobilization, the LGUs were able to maximize their sources of revenues through improved techniques and strategies imparted to them through the training. Fifty-one percent (51%) of the LGUs that participated in the LRC workshop were able to implement their revised LRCs, hence, updated their schedule of values and thus increasing their revenue collection. The percentage could have been higher if the LGUs that underwent the process of revision have implemented their updated LRCs but was constrained to do so due to economic or political reasons such as fiscal crisis within their locality or change in administration. With respect to the Training on Examination of Books of Accounts, its benefits were further enhanced by the requisite SIE submission because the LGUs are able to monitor their lapse and progress for the previous year, and are therefore better equipped to map their courses of action for the coming year. The compliance rate for SIE submission (PDO 2.4) is above satisfactory because, compared with the previous Budget Operating Statement (BOS), the SIE is much simpler to accomplish. Further, the Legal Department of the BLGF, observing due process, also imposes administrative sanctions for late or non-submission of the SIE. The 6-7% delinquency in submission may be attributed to postal delays. With regard to the real property tax (RPT) collection of the 72 LGUs who participated in the subprojects (PDO 2.5), there is an increase of 76% attributable to the discovery of new real property units, proper identification and classification of properties, elimination of erroneous data, and the organization and harmonization of data from the tax mapping and computerization respectively undertaken. PDO3: Enhancing the borrower's capacity to support and finance local government development and investment. In Year 2000, there were only 185 LGUs accessing long- term financing through MDFO. This baseline value increased to 551 LGUs by project end (Q4 2008). Thirty percent (30%) of these or 165 LGUs have accessed LOGOFIND funding through Components 1 and 3. The increase in baseline value is 40% more than the target LGUs. In Year 2000, one hundred fifty-six (156) LGUs accessing long-term MDFO financing belonged to 3rd-6th income class bracket. By project end, there were already 405 LGUs belonging to the 3rd-6th income bracket accessing long-term MDFO financing, 18% more than the target end-of-project value of 390 LGUs. Through Components 1 and 3, LOGOFIND assisted 155 LGUs belonging to this income bracket, or 62% of the actual increase in LGUs for this indicator. 49 Based on the BLGF Database on Net Borrowing Capacity Issuance from 1994-2008, of the 165 LGUs that availed of the LOGOFIND funding, 75 or 45% are first-time borrowers. Of the 75 first-time borrowers, 74 or 99% belong to the lower income class bracket (3rd-6th), only 1 or 1% belong to 1st-2nd income class. Note that this data does not cover net borrowing capacity issuances prior to 1994, thus LOGOFIND LGUs that availed of financial assistance prior to 1994 are still considered "first-time borrowers." As an offshoot of the LGU Financing Framework, the National Government-LGU Cost- sharing policy was revisited to adapt to changing situations. It incorporated lessons learned from the LOGOFIND LGU credit financing. The policy is now being adopted and followed by LGU credit financing projects since 2003. B. Assessment of Outputs Output 1: Improved basic infrastructure, services and facilities. The LOGOFIND Project assisted 102 LGUs in the implementation of 141 subprojects under Component 1. Out of these, 97 LGUs completed 133 subprojects. Component 1 fell short by 2 LGUs in reaching the revised end-of-Project target of 104 LGUs. Despite this shortfall, it did not prevent the Project from achieving its development objective of expanding and upgrading basic infrastructure, services and facilities as it was able to accommodate about 1,054,142 household beneficiaries of all project-assisted LGU subprojects, more than the number of households (532,028 households) targeted in Component 1. The LOGOFIND Component 1 financed mostly social and environmental subprojects, taking up 56% and 26%, respectively, of the total number of completed subprojects. In terms of project distribution, subproject financing under Components 1 and 3 was fully accessed by LGUs in all regions, with greatest concentration in Region 10 (Northern Mindanao Region) of 39 LGUs. Throughout the project cycle, interplay of various factors greatly influenced the overall target output. Component 1 of the Project only met its end-of-the-year targets in two years (2003 and 2004) out of the seven projected. A year's extension to the project life proved crucial in beefing up actual output, which it did in 2008. Output 2: Enhance LGU management capacity. The Project clearly exceeded its end-of- project target value for 200 LGUs trained. When MDFO and BLGF took on training implementation and delivery in April 2002, output shot up to as high as 900% (year 2005) more than the projected target. Despite the fact that several training modules were not completely rolled out (e.g., Sustainability Training modules and Subproject Completion Report modules) due to hindering factors in the project life, the component met the target number of LGUs trained. MDFO trained a total of 345 LGUs, without double count, while BLGF trained a total of 862 LGUs, also without double count. For purposes of consolidating project output, however, the LGUs trained by both MDFO and BLGF are counted only as one trained LGU output, thus coming up with a total of 1, 033 LGUs trained. The Project has trained 60% of the total LGUs (1,711) nationwide. 50 Output 3: Improved ability to monitor LGU fiscal performance. The LOGOFIND Project was able to successfully complete a fiscal information database through the development of the SIE, later improved into Statement of Revenues and Expenditures (SRE), which the LGUs are required to submit quarterly to the BLGF, which then encodes and compiles the data for publication. The SIE publication for CYs 2004-2007, however, was only carried out in 2008 due to lack of human resources. The government had a freeze hiring policy then and the positions needed to be filled up did not reach the level of consultancy, which is allowed by the Bank to be contracted out. With the completion of this fiscal information database, the LGU credit rating system is subsequently established. The system is envisioned to provide a gauge to measure the ability of an LGU-borrower to meet its debt obligations on time. A study was done and a system was developed for evaluating LGU credit risks. Moreover, a manual was also produced in order to clearly explain the methodologies in determining the creditworthiness of LGUs. This system is on its way to implementation after the formulation of a Road Map/ Action Plan detailing the procedure to operationalize to system and to address the hindrances and obstacles such as the determination of the proper agency to rate the LGUs; coordination with the MDFO, Bangko Sentral ng Pilipinas and other private agencies; information access; level of access; the general effect of the system to an LGU's capacity to borrow and the possible limit of the 20% of the annual regular income debt capacity ceiling provided under the LGC. Output 4: Improved local resource mobilization. There were no LGUs that availed of the resource mobilization financing from 2000-2006 because the financing mix of the subproject was not favourable to LGUs. When subproject financing was first marketed by the BLGF to LGUs prior to the LOGOFIND Project, the financing mix was still 60% to 80% grant, depending on the LGU income class. However, the Local Financing Framework (LFF) was adopted by the National Government in the late 1990s (and at the onset of LOGOFIND Operations) where grants for LGU subproject financing was lowered to a maximum of 50% grant only for municipalities and almost 0% grant for cities. BLGF found out that this grant did not attract LGU clients and that lower income municipalities do not have adequate financial resources to come up with the required equity. For the computerization subprojects, the implementation of the LFF meant that essentially there would be 0% grant for cities. BLGF had to lobby to the PGB to increase the grant subsidy to initially 25% and later to 50% just to attract more LGU interests in the computerization subprojects of Component 3. The priorities of LGUs are basically infrastructure projects that are far more visible and therefore more politically expedient. Coupled with the lack of a more attractive incentive such as higher grant subsidies, BLGF was hard pressed to look for client LGUs. The Project funded and completed a total of 76 subprojects in 72 LGUs; 66 subprojects for RPTA-A (manual); 5 for RPTA-B (computerization); and 5 for BTE subprojects. Output 5: Enhanced institutional arrangement and capacity for MDF. At project appraisal, it was planned that the MDF will be strengthened and reorganized in two 51 phases under the LOGOFIND Project. The 1st phase, planned for a period of three years, consists in the creation of the MDFO to be staffed with full-time professionals. The 2nd phase involves the spin-off of the MDFO into an existing or new financial institution. Only the 1st phase was achieved, albeit partially, since MDFO still has to fill up its vacant personnel positions. The 2nd phase, the creation of the Municipal Finance Corporation (MFC), was hampered by the legal impediment of transferring portion of the Second Generation Fund to the MFC. Notwithstanding the non-operation of the MFC, MDFO has continued to pursue its mandate by providing relevant financing services to assist LGUs in their delivery of basic services and other development projects through the implementation of the LOGOFIND and Community-Based Resource Management Projects. It has likewise embarked on a number of credit and financing programs such as, Program Lending, Millennium Development Goals Achievement Fund, and the Philippine Water Revolving Fund. To date the MDFO-PGB has approved and allotted P4.55Billion pesos for the implementation of the financing facilities. C. Assessment of Inputs The Key Results framework identified expenditures by component as the project input indicator. (a) Infrastructure, services and facilities subprojects. The LGU Subproject Financing (Component 1) registered 103% disbursement performance with a cumulative release of US$ 45.95 million to LGU clients. It exceeded its allocated fund of US$ 44.4 million. The budget shortfall in this component will come from the potential unutilized funds from Components 2, 3 and 4. However, regardless of this over-disbursement, the component was unable to reach its end- of-project target value of 104 LGUs. Several factors brought about this situation. For one, LGUs were allowed multiple subproject applications, either through one SPLA or subsequent loan applications. These LGUs are termed "repeater LGUs." A subsequent LGU application retained the number of LGUs, but increased the subloan and grant assistance disbursed by the project. Secondly, substantial amount of around US$1.8M (P89M) was already released to eight LGUs with partially completed subprojects. These are LGUs that still had a few remaining works, but substantially completed civil works. (b) LGU Training and Capacity Building. The LGU Training and Capacity Building component, funding training activities conducted by the LGA and MDFO, disbursed US$ 1.7 million of the allocated US$ 3.5 million. BLGF trainings were charged to the Component 3 allocation since these comprise of resource mobilization and financial reporting courses. Fifty percent (50%) of Component 2 allocation was undisbursed because some Component 2 activities planned at project inception did not push through, BLGF LGU trainings were charged to Component 3, some MDFO-conducted LGU trainings were not rolled-out as planned, and the trainings held were implemented through prudent spending. Planned activities that did not push through included the Distance Learning Program and sole sourcing for demand-driven trainings amounting to 52 approximately US$ 1 million (P48M) or 29% of the project allocation for this Component. (c) Local Resource mobilization and LGU Performance Monitoring. LGU Resource Mobilization and Performance Monitoring component, on the other hand, has the second highest disbursement rate among the four components at 81%. It disbursed US$ 4.22 million of the US$5.20 million allocated. Still it fell short of its target disbursements because it was unable to implement the required number of RPTA and BTE subprojects. (d) Streamlined MDF Procedures and Approvals and Strengthened MDF. The MDFO Strengthening Component disbursed 75% of its allocated funds at US$ 4.32 million of the allocated fund of US$ 5.90 million. Component 4 did not disburse the entire amount allocated because spinning-off into an MFC did not push through. D. Key Factors Affecting Implementation and Output The LOGOFIND Project underwent two extension periods as the implementing agency experienced challenges in project implementation. Among the issues encountered at the Project level are: (i) unfavorable lending rates, (ii) lack of a well- defined coordinating and reporting functions and accountabilities between and among implementing agencies, (iii) lack of budget cover at some periods during project implementation, (iv) incomplete computerization/automation of the project's Monitoring and Evaluation (M&E) systems, (v) election-related delays, (vi) limited manpower, (vii) LGU unfamiliarity with WB procurement guidelines resulting in delays in the procurement subproject stage, and (viii) non-inclusion of post- implementation monitoring in the M&E design. Since the Project components were independently implemented, these experienced unique factors affecting specific component implementation. For example, the implementation of the LGU infrastructure subproject component (Component 1) was affected by facilitating factors such as (a) the adoption of strategies and innovations to fast-track achievement of targets, (b) use of the Second Generation Fund as bridge financing during the period the MDFO lacked budget cover, (c) conscientious PMO assistance to LGUs, and (d) conduct of subproject progress monitoring. On the other hand, reaching Component 1 targets within the original six-year period was hindered by the following factors: (i) numerous LGU fallouts from the pipeline due to non- conformity with Project standards, bid failures, changes in LGU priority and non- compliance with Detailed Engineering Design subproject stage requirements, and (ii) extension of financial and technical assistance to LGUs availing of LOGOFIND funds for the second and third time, thereby beefing up disbursements but not physical output accomplishments. The availability of approving bodies also affected the rate of approval of subprojects that passed the development and appraisal subproject stages. Component 2 target physical output target was achieved mainly because the BLGF utilized its regional offices in the conduct of resource mobilization demand-driven trainings. However, the expenditure target was unmet because some Component 2 53 activities planned at inception did not push through, such as the Distance Learning Program and the sole source training provision, which was deemed not viable. The implementation of Component 3 was greatly affected by lack of LGU interest to apply for resource mobilization subprojects due to low grant component (25%) offered for the manual RPTA and zero grant offered for the computerized RPTA subprojects. Also, the prospective LGUs are on a "wait and see" attitude pending the actual implementation of the approved subprojects under RPTA Package A. On August 3, 2006, the MDFO-PGB approved a resolution allocating a grant component of 50% for RPTA-A and RPTA­B subprojects. Furthermore, the BLGF has intensified promotional activities in the region and key provinces. There was also delayed LGU submission and posting of SIE reports due to difficulty in preparation of the reports and the frequent turnover of local treasurers. The strengthening and reorganization of MDFO under Component 4 was originally planned to undergo two phases. The second phase was supposedly the spinning-off of the Office into an existing or new financial institution. This phase, however, was hampered by a Commission on Audit observation recommending instead, that the new financial institution be created through a legislative fiat. Nevertheless, the MDFO was able to put in place policies, procedures and drafted the MDFO Operations Manual. The MDFO-PGB, through Executive Order (EO) 742, is directed to further enhance the function of MDFO and restructure the organization for its effective operation and administration. The EO also allows the MDFO to adopt pertinent policies for the collection of fees and charges needed to defray the operation and administrative expenses of the office. E. Lessons Learned and Recommendations On the Project Design: (a) Critical assumptions and realities such as prior LGU financing mixes, institutional readiness, election-related delays, and legal impediments, not reflected in the project design occur as hindering factors in project implementation and hamper the achievement of outputs. (b) The availability of grants, provided together with credit, encouraged borrowings for specific subproject types. The number of social and environmental subprojects indicated that the provision of grant financing could direct investments in this type of subprojects and prove to be an effective means of promoting these sectors. However, given that the Project is demand-driven, it is critical to exercise careful evaluation and prudence to ensure that proposals for subprojects with large grants reflect the actual needs of LGUs rather than being influenced solely by the grant element. The LOGOFIND Project also proved that LGUs are willing to access loan financing and to cost-share for priority projects especially social and environmental subprojects provided the right matching grant is provided accordingly. (c) Financing for lower income class LGUs introduced them to alternative source of funding and provided them with options to pursue development projects and developed their familiarity with basic financing arrangements other than their 54 IRA and grants from the National Government. The voluntary repayment requirement also developed due diligence on the part of LGUs who were required to program their regular expenses and amortization thus instilling a sense of financial discipline. (d) National projects for local government units financed by Official Development Assistance, or otherwise, should adhere to the national policies particularly on the cost sharing arrangement. Provision of grant to LGUs for devolved projects with significant national interest could facilitate convergence of local and national financial resources in a particular sector. (e) Computerizing resource mobilization subprojects require larger concession rates to be attractive to lower income class LGUs. The priorities of LGUs are, basically, infrastructure projects that are more physically visible to the public and are therefore more politically expedient. (f) The need for a well-defined coordinating and reporting functions and accountabilities should be addressed prior to start-up operations, otherwise, if enhancing the institutional capacity of the implementing agencies is simultaneously focused with the delivery of targets for the Project, the start-up operations will necessarily be put on hold. (g) The Project did not have control over the emerging benefits of the subprojects because the scope of the Project was designed to end at subproject completion which does not cover operation and maintenance. These were seen in the Rapid Appraisal of Emerging Benefits survey conducted by the PMO. It is thus recommended that Project intervention in the Operations and Maintenance phase be included in the Project design to ensure sustainability of the subprojects. (h) There is still a demand for the RPTA manual type of subprojects. In fact, there are still LGUs that have not undertaken tax mapping projects. At the same time, there are growing LGUs and newly created municipalities, cities and provinces that need to conduct tax mapping activities to account for recent changes in land activities within their jurisdiction. (i) There is also a great demand for the computerization of local tax administration systems because a great number of LGUs have already implemented the tax mapping projects. (j) There is still a huge demand for LGU trainings in the area of local government finance. As such, if a resource mobilization development project is to be designed and implemented anew, LGU trainings in local government finance have to be incorporated as a subcomponent. On Project Implementation: (a) While orientation conferences and marketing activities were undertaken to develop the subproject pipeline, "word of mouth" promotion of mayors and LGU staff who have availed of LOGOFIND assistance proved to be very effective in enjoining other LGU applicants. Moreover, mayors tended to exhibit a "wait and see" attitude, hence, there was an increase in applications after the first set of subprojects were completed. 55 (b) LGUs are willing to comply with project requirements in accordance with existing national laws and standards if these are seen in the light of subproject sustainability, and beyond project requirements. The possibility of good governance is manifested in the LGUs that have committed to LOGOFIND subproject implementation. A crucial factor in facilitating the good governance aspect in LGU subproject implementation is earnest PMO support and assistance. (c) While the Project provided technical assistance through blended classroom training and onsite mentoring, there is recognition of the need to have a national framework for LGU capacity development. Such framework will rationalize the provision of technical to LGUs to facilitate harmonization, minimize duplication, effective allocation of resources, and more importantly, allow for the measurement of technical assistance outputs, outcomes and impact to better program and deliver such interventions. (d) Mandatory modules, or modules related to the processing and implementation of subprojects are more efficiently and effectively delivered by the PMO rather than by an external agency as modules may be developed to cater to the specific needs of the Project. (e) Component 3 was directly affected, both positively and negatively by the current BLGF organizational structure. BLGF relied in its regional offices for the marketing, processing and monitoring of the subprojects. The regional offices were more attuned to the needs of the LGUs because they have regular contact with the local treasury and assessment offices. (f) From the point of view of BLGF, the policy changes that were applied to the project during the middle of its implementation significantly affected the potential of the project to achieve the desired objectives. While such policy changes may be good for the over-all standing of the national government, there is a need for an assessment on the potential impacts to projects that were already in the middle or almost end of implementation. F. Conclusions Overall, the LOGOFIND Project is generally successful in achieving its target objectives. It contributed to addressing the challenges facing local development and finance in varying degrees. Although it experienced many factors adversely affecting its implementation, the implementing agencies and the PMO addressed these through strategies, innovations, and policies. Future LGU credit-financing projects need to learn from the diverse lessons learned in LOGOFIND implementation, build on the initial successes of the Project and work on developing capital markets accessible to LGUs in all income classes. 56 Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders Not applicable. 57 Annex 9. List of Supporting Documents 1. Country Assistance Strategy 1999, 2002, 2005 2. Project Appraisal Document Report No.: 18971 PH 3. Loan Agreement 4. Staff Appraisal Report for Third Municipal Development Project: Report No. 10042- PH 5. Implementation Project Completion Report for Third Municipal Development Project: Report No.: 22213-PH 6. PSR Sequence No. 1 to 6 and ISR Sequence No. 1 to 12 7. Mission Aide Memoires and Management Letters 8. Local Government Finance and Development (LOGOFIND)- DOF Project Completion Report 9. Local Government Finance and Development (LOGOFIND)- Task Team Implementation Completion and Results Report ­ Extended Version 58 59