-V 3fI4S5& PH Document of The World Bank FOR OFFICIAL USE ONLY MIICROFICHE COPY RePort No. 10042-PH Type: (SAR) Report No. 10042-PH UCHUMORA,/ X80452/ D8 021/ AS21N (G, STAFF APPRAISAL REPORT PHILIPPINES THIRD MUNICIPAL DEVELOPMENT PROJECT FEBRUARY 27, 1992 Infrastrueture Division Country Department I East Asia and Pacific Regional Office Tiis document has # restricted distribudon and may be used by redpIents only in the perfonmance of their official duties. Its contents may not otherwise be dilosed without Wodd Dank authoiztion. CURRENCY EQUIVALENTS (as of December 31, 1991) Currency Unit - Peso (P) P 1 - US$0.037 US$1.00 - P 27 WEIGHTS AND MEASURES 1 meter (m) - 3.28 feet (ft) 1 kilometer (km) - 0.62 mile (mi) 1 square meter (sq m) - 10.76 square feet (sq ft) ABBREVIATIONS AND ACROQYMS BLGF - Bureau of Local Government Finance GPO - Central Project Office DILG - Department of the Interior and Local Government DOF - Department of Finance DPWH - Department of Public Works and Highways ERR - Economic Rate of Return GAA - General Appropriations Act IDA - International Development Association LOA Local Government Academy LGU - Local Government Unit LIA - Local Loans Account MDF - Htunicipal Development Fund MDFGB - Municipal Development Fund Governing Board MDP I - First Municipal Development Project MDP II - Second Municipal Development Project MDP III - third Municipal Development Project NEDA - National and Economic Development Authority PMO - Project Management Office PSA - Program Support Account PSC - Project Steering Committee RPTA - Real Property Tax Administration SPMS - Special Project Management Service, BLGF, DOF USAID - United States Agency for International Development GOVERNMENT FISCAL YEAR January 1 to December 31 FOR OFFICIAL USR ONLY THIRD MUNIGIPAL DEVELOPMENT PROJECT Loan and Pro2lct SuMmXy Aorrower: Republic of the Philippines Bantficianr.: Local Governments Amount: US$68 million equivalent TegM£: Repayable in 20 years, including five years of grace, at the Bank's standard variable interest rate. Relendinc Terms: Maximum maturity of 15 years including three years of grace at an interest rate based on the prevailing weighted average interest rate 014 time deposits of 61-90 days plus a spread of 2%. ProJect Dascriggion: The proposed project would assist cities and municipalities in the Philippines to address existing deficiencies and improve priority infrastructure, services and facilities for their residents by strengthening the National Government's institutional framework for assisting local governments and the local governments' planning and management capabilities. The project wouid support further evolution of the system established under the Bank-assisted First and Second Municipal Development Projects to promote local government development and improve local government access to credit financing. The p,oj ect would comprise: (a) Subproj ects including construction and/or rehabilitation of basic infrastructure and facilities, procurement of equipment, and hiring of consultants; (b) a Maintenance Program to improve maintenance planning and implementation in selected local governments; (c) a Real Property Tax Admlnistration Program to improve real property tax records management and increase real property tax collection; (d) a Munigipal Trainine Program to train local officials; and (a) Technical Assistance for (i) a study of institutional options for further lending to local governments; and (ii) an environmental sanitation and solid waste study. C B&nefits: The proposed project would improve the delivery of services, infrastructure and public facilities at the local level, strengthen the management capacity of cities and municipalities, and improve the National Government's ability to assist the cities and municIpalities to respond to the needs of the increasing urban population. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. - ii - Project risks relate to the acceptability of moving toward market rates for municipal lending, as envisioned under the project, the technical and managerial limitations of the local governments, the capability of the project office to handle a larger number of cities and municipalities than in the past, and the political uncertainty surrounding the upcoming national elections. However, tho proposed on-lending rates are estimated to be affordable by the cities and financially stronger municipalities, and project procedures are being streamlined, based on experience to date, to accommodate larger numbers of local g-overnments. Esimte gst: Local Foreig Total (US$ million)- Subprojects 38.2 31.6 69.0 Maintenance 4.6 3.6 8.1 Real Property Tax Administration 7.2 4.8 12.0 Municipal Training 1.4 1.0 2.4 Technical Assistance _.72 _2.1 6.8. Base Cost 56.0 43.0 911 Price Contingencies 8.3 6.3 14.6 Total Project Cost La 6i43 49.4 113.7 inaning Plan: Local Governments L6.2 - 16.2 DPWH 12.3 12.3 Municipal Development Fund 17.2 - 17.2 IBRD 18.6 49.4 68.0 Total 64.3 49.4 113.7 Estimated Disbursements: Bank FY 1993 1994 1295 l996 1997 1998 1999 -(US$ million) - Annual 4.0 10.5 13.5 14.0 12.0 8.5 5.5 Cumulative 4.0 14.5 28.0 42.0 54.0 62.5 68.0 Economic Rat_e of Rcturn: A minimum rate of return of 15% for each subproject. IBRD No. 23396 La Includes taxes and duties estimated at US$17.4 million. cl - ili -f PHILIPPINES THIRD MUNICIAL DEVdLELOMEN PROJECT STAE APRAISAL REPORT Table of Contents Page No. LOAN AND PROJECT SUMMARY .............................i I. QECM&L CQE A. Local Government in the Philippines. 1 B. Issues in Local Government Development and Management... 2 II. S ANDEXPERIENCE FROM PREVIOUS PROJECTS A. Bank Strategy .4 B. Bank Project Experience .5 C. Lessons Learned and Implications for the Third Project . 8 III. THE MUNICIPAL DEVELOPMENT FUND AND LENDING TO LOCAL GOVERNMENTS A. Organization and Structure ...... ....................... 10 B. Subproject Selection ........ ............................ 13 C. Lending Terms and Conditions ...... ..................... 15 IV. THE PROJECT A. Project Origin and Formulation ..... ................... 16 B. Project Rationale ......... ............................ 17 C. Project Objectives ........ ............................ 17 D. Project Description ........ ........................... 17 E. Project Costs and Financing Plan ..... ................. 22 V. PROJECT ORGANIZATION. IMPLEMENTATION AND MANAGEMENT A. Project Organization and Implementing Arrangements ...... 24 B. Implementation Schedule ......... ....................... 28 C. Procurement and Disbursement ...... ..................... 28 D. Accounts and Audits ........ ........................... 31 E. Progress Reporting and Monitoring ..... ................ 32 This report is based on the findings of an appraisal mission consisting of Messrs. Yoshine Uchimuru (Senior Economist, Task Manager, AS2IN), Brian Binder (Financial Analyst, Consultant) and Allen Williams (Engineer, Consultant) which visited the Philipplnes in July 1991. The peer reviewer for the project was Mr. William Dillinger (Urban Finance Specialist, INURD). Ms. Nimfa Campos assisted in the preparation of the report. The report was cleared by Messrs. Callisto Madavo (Director, EAl) and Jeffrey Gutman (Chief, EAIIN). - iv - VI. ROJCT JjISTIFICATIO D RISKS A. Institutional Impact .................................. 32 B. Envi;onmental Impact .................................. 33 C. Poverty Impact ....................................... 33 D. Economic Analysis ..................................... 33 E. Risks ..... . 34 VII. AGREEMENTS REACHED AND RECOMMENDATION ...... .............. 35 ANEXES 1. Local Government Financial Summary 2. The Real Property Tax Administration Program 3. Municipal Training Program 4. Municipal Development Fund: Subloan Financial Flows 5. MDF Policy Governing Board Resolution No. 01-92-MDF (Policy Statement) 6. The Selection of Subprojects: the Project Cycle 7. Environmental Aspects 8. Outline Terms of Reference: (a) Institutional Study (b) Environmental Study 9. Implementation Schedule 10. Supervision Arrangements (a) Supervision Plan (b) Monitoring Indices 11. Disbursement Schedule 12. Documents in Project Files Provincial Map of the Philippines - IBRD No. 23396 THIRD MUNICIPAL DEVELOPMENT ROJEET I. SECTORAL CONTEXT A. Local Government in the Philinoines 1.01 Local government responsibilities in the Philippines are shared by 75 provinces, 60 cities and over 1,500 municipalities that include both urban and rural areas. The provinces are subdivided into municipalities over which they maintain administrative control, while the cities are administratively equal to and independent from the provinces. Both cities and municipalities are further subdivided into barangays (community organizations). 1.02 The local governments are headed by elected governors for provinces and mayors for cities and municipalities, all of whom report to elected local councils. The governors and mayors have authority to collect charges and taxes, prepare budgets, hire staff and invest in and manage local services and enterprises within limitations set by the Local Government Code and other national laws and regulations. 1.03 Within the national government, there is strong sentiment that the country's currently centralized administrative system has not been effective in improving the living conditions of the people, especially those in the regions. Being closer to the people, the provinces, cities and municipalities are considered to be in a better position to meet the priority service and investment needs of the local populations and to contribute to economic development country- wide. The Government is therefore pursuing a Decentralization Program to provide greater local autonomy and increased responsibilities to the local governments. Under the revised Local Government Code signed into law in October 1991, the provinces, cities and municipalities will take over functions currently performed and financed by national government agencies, namely: agricultural development and extension services, environmental protection, construction of school buildings, construction and maintenance of barangay roads and other local infrastructure, social services, tourism and low-income housing. 1.04 Under the Decentralization Program, national government agencies would continue to be responsible for overseeing local government activities and, through the Department of Public Works and Highways (DPWH), for executing larger infrastructure investments. The local governments would be responsible for constructing and maintaining minor roads and drains, operating public markets and slaughterhouses, and providing garbage collection and other municipal services. 1.05 Real property and business taxes are the main sources of locally raised revenues, accounting for 28% and 14% of total local government revenues, respectively, in 1990. Real property taxes are levied on the assessed value of land, buildings and equipment, with each local government setting its tax rate within ranges determined by the revised Local Government Code. Property assessments are a fixed percentage of market values and are to be revalued every three years. Business taxes are levied on gross annual receipts, with an additional fixed charge based on the type of business. Revenues from public markets, slaughterhouses and other enterprises, and various fees and charges -2 constitute the remainder of locally generated revenues. In smaller cities and municipalities, the public market is the center of commercial activity and the rental income from the market is an important source of local revenues. The combined revenues from enterprises, fees and charges accounted fcr about 22% of total local revenues in 1990, 1.06 National government grants are the single largest source of local government revenues, accounting for 37% of total local government revenues in 1990. Under the revised Local Government Code, the amount of revenue-sharing grants from the national government is expected to double. These revenue-sharing grants are allocated among the provinces, cities and municipalities based on a formula considering population, land area and equal share. As a result, local government revenues and expenditures are expected to double with decentralization. 1.07 Within the local government sector, significant differences exist between cities and municipalities and among municipalitias. The cities and the larger urbanized municipalities, especially those in and around Metro Manila, have a more developed economic base and higher average incomes, and are experiencing an increase in their populations through urbanization. On the other hand, the municipalities in the poorer regions have limited financial resources and development possibilities. B. Issues in Local Government Development and Management 1.08 The local governments' financial and managerial capabilities have not kept pace with the increase in demand for services which has accompanied the shift in population from rural to urban areas. The number of people living in urban areas in the Philippines increased from 18 million (37% of total population) in 1980 to an estimated 29 million (48% of total population) in 1990, an average growth of about 5.18 per annum. The provision of basic services and infrastructure has lagged behind this growth. Public markets, the core of commercial activities in many cities and municipalities, have become dilapidated, overcrowded and unsanitary due to a lack of proper sanitation and drainage facilities. The lack of drainage systems has resulted in flooding. Stagnant water, improper sanitation facilities and inadequate solid waste disposal now pose health hazards in high-density urban communities. The problem is made worse by the lack of regular maintenance that shortens the effective economic life of infrastructure investments and public facilities. 1.09 A lack of funds has been one major constraint. Total expenditures by the provinces, cities and municipalities in 1990 were an estimated P 14.1 billion (about US$580 million) or P 230 (US$9.55) per resident. Capital expenditures accounted for only about 6% of total expenditures. Although the local governments are responsible for providing many of the basic services and facilities that directly affect the living standards of their residents, they have played a limited and declining role in the Philippine economy. Local government revenues and expenditures declined in real terms during the 1980s, causing local governments to play a smaller role in 1990, when local government expenditures accounted for 1.2% of GDP and 6.6% of national government *3- expend2.tures, compared to the early 1980s when local expenditures accounted for 1.7% ox GDP and 14% of national government expenditures.,, 1.10 Despite the shortage of funds, many local governments do not adequately utilize their existing revenue base. Real property taxes are the primaty source of local revenues. However, local governments collect only about 60%, on average, of the real property taxes due because of poor record keeping and administration. Property transactions are not always recorded so that ownership and land use data become out of date. Notices of payments due are not sent to taxpayers. Payments of taxes are recorded manually so that it is impossible to adequately monitor the status of delinquencies. Legal sanctions are rarely enforced against delinquent taxpayers. 1.11 Similarly, although operations of public markets are an important function and a major source of revenue for most cities and municipalities, market rents are generally not revised on a regular basis, have not kept pace with inflation, and are out of line with rents for commercial properties. Many cities and municipalities do not maintain separate accounts for markets, making it difficult to determine the actual operating costs and creating an impression that the market is profitable when it is actually incurring a loss. At the same time, conditions in the markets have been allowed to deteriorate due to a lack of regular maintenance and rehabilitation, making it more difficult for the cities and municipalities to raise rents. 1.12 Local governments have not made effective use of credit financing, relying on locally raised revenues and national government grants, which limits their ability to carry out capital programs. Through borrowings, the local governments could smooth out lumpy infrastructure investments and assure that future users of the assets pay part of the costs rather than putting the whole financial burden on the current residents. While local governments have the legal authority to borrow through government banks, such as the Development Bank of the Philippines and the Land Bank of the Philippines, and issue bonds, debentures, and securities, borrowings are not a significant part of local government revenues. As of December 31, 1988, debt obligations by the local governments to government financial institutions totaled P 358 million, about US$17 million at the prevailing exchange rate. 1.13 Finally, many local governments lack both experience in carrying out major capital projects and staff with the necessary administrative, technical and managerial skills to plan and implement investment programs and provide basic services. Many of the smaller municipalities have no municipal engineer's office and do little planning given their limited financial resources. Programs or projects are added during the year through supplemental budgets as additional revenues become available. The local governments have difficulty hiring experienced, professional staff, and those staff that do work in the cities and municipalities are very often overburdened with many responsibilities. LI Local government revenues and expenditures for 1980-90 are shown in Annex 1. -4- II. BANK URBAN SRATC MD EERIENCE FROM PREVI0US ECTS A. Bank Stratevv 2.01 Under tbe Government's Decentralization Program (para. 1.03), the local governments are expected to play a greater role in addressing the infrastructure and service deficiencies that currently exist. For decentralization to succeed, the cities and municipalities would need to strengthen their management and teclnical capabilities to carry out their current responsibilities as well as the additional functions devolved from the national agencies. It is estimated that the additional resources that the local governments receive from increased revenue sharing would be offset by cutbacks in other grant programs and increased expenditure responsibilities for the devolved functions. The local governments would consequently need to increase funds available for additional expenditures through improved local resource mobilization and use of alternative sources sucl as credit.L 2.02 The Government's current emphasis on decentralization is in line with the Bank's strategy and efforts to date in the Philippines, and is very timely. The Bank has been assisting the Government to meet the challenge of urbanization and to provide infrastructure, services and facilities, with an emphasis on targeting the urban poor. The main objectives of the Bank strategy in municipal development are to: (a) strengthen municipal management through improved resource mobilization and fiscal management, investment planning, project implementation and maintenance operations; and (b) increase the level of resources available to local governments for investments by improving their access to loan financing. The Bank's approach has evolved from direct lending to individual project cities in the early 1980s to the development of an institutional framework within the National Government to assist local governments with their financing, technical assistance and traialing needs. While the larger and financially stronger local governments, sucb as the cities in Metro Manila or Cebu Province, may be in a better position to access domestic capital markets, most of the local governments in the Philippines would need to rely on national government support for the foreseeable future to obtA'n loan funds for their investments. Z2 An innovative and unique approach was taken by Cebu Province which issued P 300 million in bonds in 1991 and directly accessed the local capital market. These bonds, named the Cebu Equity Bond Unit, pay annual interest of 16% and are backed up by shares in the Cebu Property Ventures and Development Corporation, a joint venture between the Cebu Provincial Government and a private developer. The corporation was set up to develop a publicly owned, unused airstrip in a prime location in rapidly expanding Cebu City. B. Bank Project Experieneta 2.03 The Rebgonal Cities DevelRODnt Proleot (RCDP, Loan 2257-PH) was the first Bank project to on-leud funds to local governments in the Philippines. This project addressed the comprehensive investment needs of four larger regional cities: Bacolod, Cagayan De Oro, Davao and Iloilo. A loan of US$67.0 million was approved in 1983 to finance drainage, solid waste management, roads, markets, slaughterhouses and other umnicipal infrastructure to be implemented by DPWH and the four project cities, and sites and services and slum upgrading to be implemented by the National Housing AuthoritF.y. The identification of the project cities, feasibility studies, and subsequent project preparation was carried out by the National Government. The Regional Cities Development Project is scheduled to be completed by end March 1992, just over three years behind schedule, with the delay partly due to the country's financial. and political crisis of the mid- 1980s. As of December 31, 1991, 95% of the project has been completed and 77% of the reduced loan amount has been disbursed.L& 2.04 The Bank's FiTst &W ipal DeXvlopment Prolec (MDP I, Loan 2435-PH), approved by the Board in 1984, focused on developing an institutional framework at the national level to assist cities and municipalities in the preparation, implementation and financing of local investments, *nd to coordinate assist:ance to local governments. An institutional approach, rather than a city-by-city approach was considered necessary, given the large numbers of local governments and their diverse needs. 2.05 Under MDP I, project cities and municipalities were selected through a bottom-up process which emphasized self-selection: i.e., only those cities and municipalities which qua4.ified for inclusion in the project, were able to prepare Investment proposals, and agreed to take necessary fiscal, administrative and managerial improvements were provided financing t0rough the project. A Municipal Development Fund (MDF) was established within the Department. of Finance (DOF) to provide local governments with direct access tc long-term development finance. A Central Project Office (CPO) was set up under DPWH as a technical intermediary to assist local governments to identify investment priorities, evaluate project proposals for financing through the MDF, and act as a liaison with national and external funding agencies. A Project Steering Committee consisting of DPWH, DOF, the Department of Interior and Local Government (DILG), the Department of Budget and Management (DBM) and the National Economic Development Authority (NEDA) L3 The Bank's initial involvement in the urban sector in the Philippines was focused primarily on basic needs and shelter and aimed at establishing the acceptability of lower cost approaches involving slum upgrading and serviced sites with the National Housing Authority as the lead agency. Three shelter projects (loans 1272-T/1281-PH, 1647-PH and 1821-PH) have been completed and a combined Project Performance Audit Report for first two projects (Report No. 7092, 1988) has been issued. The Bank approved the iHousing Sector Loan (Loan 2974-PH) in 1988 as a follow-up to these projects. /4 US$27.56 million has been cancelled to date. -6- provided overall policy guidance and approved loans through the tDF. The system for on-lending to the local governments is discussed further in Chapter III. 2.06 The project included financing for infrastructure investments in project cities and municipalities and for national government programs to improve local government management and operations. The project was targeted at cities and municipalities outside of Metro Manila and consisted of three major components: (a) Infrastructure Investny"ts. Construction and/or rehabilitation of drainage, roads, solkt -.ste management systems, bus terminals, public markets, slaughterhouses, nd other infrastructure and facilities and the purchase of equipment. (b) A nationwide ial Eroerty TJar, Adinistration (RPTA) program through DOF. The RPTA program aimed at improving the real property tax administration. DOF provided a grant to the local governments to finance part of the cost of the additional contractual staff, equipment and supplies required to prepare tax maps, sort and update tax records and follow up with delinquent taxpayere. RPTA is discussed in more detail in Annex 2. (c) An experimental Municipal TrXaLinig Proram through DILG in, among others, project preparatf.on and management, municipal finance, and municipal enterprise management. Given the diversity of training needs at the local level and existing training organizations, the Municipal Training Program aimed at developing a capacity within the DILG to assess local government training needs and match these needs with existing training programs or institutions, both government and private, offering training in the appropriate field. DILG was intended to be a "broker" or organizer of local government training rather than a supplier of a limited number o4 in-house training courses. The Municipal TraLining Program is discussed more detail in Annex 3. A Bank loan of US$40 million was made for loans to local governments through the MDF for infrastructure investments, financing the DOF share of the RPTA program, the Mutnicipal Training Program and technical assistance. 2.07 In each city or municipality, infrastructure investments are categorized into national and local components and are packaged into subprojects. National components consist of investments to be funded and implemented by DPWH, such as trunk roads and major drainage which are the responsibility of the National Government. Local components include investments to be funded and implemented by the cities and municipalities themseilves, such as local roads and public markets, which are the responsibility of the local governments. Bank loan funds are provided to the cities and municipalities through the MDF to finance up to 90% of local component costs on the Bank's terms and conditions with a spread of between 3* and 4% to account for the foreign exchange risk which is borne by the Government. The national components are funded entirely by DPWH with national government budget funds. The subprojects are appraised by the CPO and approved by the Project Steering Committee for financing. The Bank reviews subproject appraisal reports prepared by the CPO prior to approving the use of -7- Bank loan funds. The on-lending terms and conditions are discussed in more detail in Chapter III. 2.08 After a sluggish start, implementation of MDP I picked up momentum after the local government elections in early 1988. The slow start was due to the dismissal of elected local officials and their replacement with national government appointees after the People's Revolution in February 1986, one year after project effectiveness. Project implementation was delayed as the new appointees replaced local staff and reviewed the decisions and commitments made by their predecessors. Similarly, staff changes in DILG following the change in government significantly delayed the start of the Municipal Training Program. 2.09 The local elections in 1988 stabilized the political situation in the cities and municipalities. The newly elected mayors were eager to carry out investment projects to promote development in their cities and municipalities and appeared to be willing to implement fiscal reforms if they could produce tangible improvements by 1992 when the next local elections are scheduled. As of end- 1988, only 12 cities and municipalities had MDF loans approved, MDF loan commitments totalled US$14.5 million, and US$2.5 million of the Bank loan had been disbursed. As of December 31, 1991, 42 cities and municipalities are included in the project, the US$27.9 million of the Bank loan funds allocated for onlending to local governments is fully committed, and US$16.4 million (59%) has been disbursed by the Bank for subloans. 2.10 The project has had a significant impact on the project cities and municipalities. In most cases, the project financed the single largest investments undertaken by the cities or municipalities. 2.11 As of January 31, 1992, 12 of the 38 cities and municipalities with subloan releases were in arrears on their payments of interest and principal on the MDF subloans. Initially the MDF faced administrative problems resulting in delays in sending cut notices to the cities and municipalities of their debt service requirements. As a result, the cities and municipalities needed to pass supplemental budgets to correct differences in debt service requirements before actual payments were made. The proposed restructuring of the DOF's Special Project Management Service (para. 5.07) is expected to improve administration of the MDF. The DOF has also started witholding part of the revenue sharing grant to the local government concerned to recover the outstanding arrears. 2.12 The RPTA Program as originally planned by DOF was completed by end- 1990, but the program haa been extended until end-June 1991 in many local governments to process additional properties that were identified through the tax mapping. The RPTA program covered a total of 18 cities and 54 municipalities. As a result of RPTA, the total number of real property tax units in the 72 local governments increased by 45% from 1.1 million to 1.6 million, and total assessed values increased by 58% from P 26.0 billion to P 41.2 billion. Much of this growth comes from changes from rural to urban land uses which had gone unrecorded: e.g., the transformation of an agricultural lot to a housing subdivision would increase the number of properties and increase the value of the land. -8- 2.13 The Municipal Training Program suffered delays caused by staff changes in DILG following the change in government in 1986 and the novelty of the approach, especially the use of outside trainers. The situation has improved with the establishment of the Local Government Academy (LGA) within DILG in 1988 which was given the responsibility of conducting the Municipal Training Program. As of December 31, 1991, a total of 41 training courses were conducted involving over 1,700 participants. However, several courses remain to be implemented in 1992. 2.14 MDP I was targeted at regional cities and municipalities outside Metro Manila, but the approach developed under MDP I has been expanded to Metro Manila and its fringe areas. In December 1989, the Bank approved a loan of US$40 million for the Second Municipal DeveloRment Prolect (MDP II, Loan 3146-PH) for infrastructure investments in cities and municipalities in Metro Manila and surrounding provinces, expansion of the RPTA Program, and technical assistance. A separate project office, DPWH's MMINUTE Project Management Office (PMO) for the Metro Manila Infrastructure and Engineering Program, performs the role of the CPO under MDP II. Since the two projects covor different geographical areas, there is no conflict between the PMO and the CPO. Subloans to local governments are on-lent through the MDF under identical procedures, and both the PMO and CPO report to the same Project Steering Committee. As of December 31, 1991, a total of 20 municipalities were included in the project with investments totalling P 850 million (about US$32 million). C. Lessons Learned to Date-and IMnlications for the Third Project 2.15 Experience under the Bank projects to date has shown that there is sufficient interest in a lending facility for local governments and that this provides an effective instrument for strengthening municipal management. Although MDP I got off to a slow start, by February 1990, over 100 cities and municipalities had expressed interest in borrowing through the MDF. This necessitated the preparation of the proposed Third Municipal Development Project (MDP III). 2.16 The flexible, institutional approach adopted under the MDP I and continted under MDP 1I is preferable to the project approach adopted under RCDP. The top-down planning and selection of project cities by the national government under the RCDP caused some of the cities to regard the project as an entitlement. It became difficult to implement policy changes, such as increasing market tariffs, especially when the mayors lacked political control over their local councils. On the other hand, the bottom-up, self-selection process of MDP I and II has introduced an element of competition among local governments for funds and has allowed the CPO to include in the project only those local governments which are willing and capable of making necessary policy changes and improvements. This approach would be continued and institutions at the national level strengthened under the proposed MDP III. 2.17 The Bank initially overestimated the local governments' financial and technical capacity to undertake large, comprehensive investment programs. At the time of apjrainal, both RCDP and MDP I anticipated financing multi-component, medium-term investment programs in the four regional cities under RCDP and in about 15 cities and municipalities under MDP I. However, the investment programs -9- proved to be too ambitious. Partly as a result, RCDP is three years behind schedule and the investment programs in the five project cities and municipalities originally appraised by the Bank for MDP I are yet to be fully completed. The project eities and municipalities have been unable to g:;nerate additional revenues for counterpart funiding as originally projected, especially real property taxes, or manage a large number of contracts at one time. 2.18 As a result, the Bank is moving to finance smaller subprojects in a larger number of local governments. The number of cities and municipalities under MDP I increased threefold from the 15 anticipated at appraisal to 42. The subprojects under both MDP I and II include a limited number of components. The smaller subprojects facilitate implementation and reduce the financial burden on the local governments. Those cities and municipalities that are able to complete their subprojects in a timely manner and achieve their revenue targets would then be eligible for additional financing through the MDF. The long-term investment needs of these local governments can be met through a series of subprojects, with the provision of additional funds dependent on actual performance. 2.19 While there is a willingness to borrow, local executives have taken a conservative approach to loans, requesting financing primarily for markets, where there are clear revenues to offset the debt service requirements. The local authorities are reluctant to utilize borrowings for investments which do not directly generate revenues, such as drainage and sanitation. As result, the share of public markets under MDP I is expected to double to around 40% of total subproject costs compared to the 20% estimated at project appraisal. This increase in markets need not be an undesirable outcome. The public markets are generally the center of economic activity and a very important service performed by the local government. While private supermarkets exist in the larger cities, they cater primarily to the higher-income groups. The majority of the local residents, especially the lower-income groups, shop for their daily needs in the public municipal markets, many of which are in very poor condition, are congested and unsanitary, and are in need of expansion, relocation and/or major rehabilitation. 2.20 Experience under MDP I has shown that local officials are willing to implement potentially unpopular measures, especially increasing market rents, to improve fiscal performance if they can assure improvements in facilities and services to residents. The project cities and municipalities, however, have not been successful in m.aobilizing additional local resources, especially real property taxes, as expected at appraisal of MDP I. In part, this is due to the difficulty of administering the real property tax which requires the (largely manual) processing of a large number of property records, many of which may be out of date. There is also a reluctance of local officials to increase general taxes without being able to show significant improvements in the provision of municipal services. 2.21 MDP I has also demonstrated the importance of beneficiary participation in the design of investments. The project cities and municipalities are required to pass council resolutions approving increases in market rental charges after public hearings and consultation with vendor's associations before construction on the market is started. In a few cases, the market design was modified in light of objections from the potential beneficiaries. As a result, the local 10 - governments have been able to charge rents sufficient to cover the operations, maintenance and debt service costs of the market. 1II. THE MUNICIPAL DEVELOPMENT FUND AND LENDING TO LOCAL GOVERNMENTS 3.01 The development of an institutional framework for increasing local governments' access to credit and technical assistance is considered to be a long-term process involving several phases, with the organizational structure evolving with each phase as more experience is gained in lending to cities and municipalities. The first phase of this process was carried out under MDP I which established the institutional and financial arrangements for this lending. Under the second phase, carried out under MDP II, the MDF was expanded to include local governments in Metro Manila and its surrounding provinces, giving the program nationwide coverage. While set up as a revolving fund, the MDF functioned primarily as a mechanism for disbursing funds. However, with the increased number of local governments now receiving loans from the fund and the accumulation of payments of interest and principal, the existing policies and procedures are proving inadequate to effectively manage the MDF as a fund. Consequently, the third phase of this process, to be implemented under the proposed MDP III, would consist of: (a) strengthening administrative procedures for the MDF; and (b) revising the lending terms and conditions to shift MDF lending conditions more toward the market rates prevailing in the Philippines. The overall organization and structure developed under the ongoing MDP I and II projects, with the separation of functions between the CPO and MDF, would be maintained. However, the long-term institutional arrangements for local government loan financing would be examined through an institutional study included under the technical assistance component of the proposed project (para. 4.16). The next phase of developing institutional arrangements for the fund is expected to include a reorganization and consolidation of the project offices and MDF, based on the recommendations of the study. A. Organization and Structure 3.02 As formalized under Presidential Decree 1914, dated March 29, 1984, and introduced under MDP I, the organizational structure of the Municipal Development Fund comprises the following: (a) A Project Steering Committee consisting of Undersecretaries or Assistant Secretaries of DPWH, DOF, DILG, DBM and NEDA and chaired by DPWH, which: (i) formulates policy and sets overall priorities and directions for the project; (ii) approves appraisals of subprojects; and (iii) co-ordinates the various agencies involved in program planning, financing and implementation. (b) The Ceptral Projeat Office (CPO) under DPWH which: (i) prequalifies cities and municipalities for inclusion in the program; (ii) assists cities and municipalities to develop subprojects; (iii) appraises subprojects proposed by the cities and municipalities for approval by the Project Steering Committee; (iv) monitors implementation and advises cities and municipalities during subproject implementation, including coordination with other national agencies providing support to the cities; (v) prepares X 11 - annual budgets and cash flow requirements, monitors the flow of funds, and recommends fund releases to project cities and municipalities; and (vi) evaluates the impact of programs. (c) The Municipal Develonment Fund (MDF), which is a loan account administered by DOF to: (i) release subloan funds to project cities and municipalities; and (ii) maintain subloan accounts. 3.03 This arrangement mirrored the institutional responsibilities and strengths of the various agencies during preparation and appraisal of MDP I. The MDF was established within DOF, since DOF had administrative responsibility over local government finances. However, since DOF lacked the technical expertise to assist cities a.3 municipalities in project planning or to evaluate investments submitted by the local governments while DWPH had significant experience in planning and implementing Bank-funded projects and had been active in helping to prepare MDP I, a separate CPO was set up under DPWH to handle project preparation, appraisal and supervision. The option of establishing a separate institution was considered and rejected as being premature. It was considered important to involve the national government agencies with' statutory control over local governments; thus, the option of using an existing financial institution, such as the Development Bank of the Philippines or the Land Bank of the Philippines, was not adopted. 3.04 The MDF was originally envisaged to be a revolving fund to make loans to and receive loan repayments from local governments for investment projects. To enable the fund to grow and become self-sustaining, the National Government took on the responsibility of paying the finance charges and principal on the Bank loan. Payments of interest and principal by the local governments to the MDF were to be relent to additional eligible local governments.L" 3.05 While originally conceived to be a revolving fund, the MDF functioned primarily as a disbursement mechanism for both foreign and local funds under donor-assisted projects during the 1980s. The Government was interested in monitoring the flow of donor-assisted funds to local government, and the scope of the MDF was expanded to become the channel through which all donor-sourced funding for local government related projects and programs would pass, including grant funds and national government counterpart funding. Consequently, in addition to acting as the on-lending facility for MDP I and II funds, the MDF also on-lends for the Bank's RCDP and the Metro Cebu Development Project funded by the Overseas Economic Development Fund of Japan. Grant funds from the United States Agency for International Development (USAID) under its Local Resources Mobilization Program were also channeled through the MDF. 3.06 With the growth in the number of subloans and loan fund releases, more focus now needs to be given to the revolving fund aspects of the MDF. During the 4E Presidential Decree 1914 states that: "The amortization (interest and principal) made by the local governments to the MDF shall form part of and accrue to the MDF and shall be made automatically available for relending to finance other similar projects of the local governments." - 12 - project start-up period, the DOF's Bureau of Local Government Finance concentrated on implementation of the RPTA program and the disbursement functions of the MDF. Initially, the funds available for relending were very limited, and detailed policies and procedures for utilizing payments of interest and principal were not developed. However, accumulated payments of interest and principal to the MDF have grown to around P 117 million or about US$4 million as of September 1990, and are projected to increase to about P 190 million by end-1991 and P 325 million by end-1992. The flow of funds for MDF's lending operations are presented in Annex 4. The HDF has now evolved to the point where lending policies and procedures need to be formally instituted not only to utilize the accumulated payments of interest and principal but also to effectively manage the MDF. 3.07 As the next step In developing the lending facility, a reorganization of the MDF would be undertaken under the proposed MDP III to distinguish: (a) the lending functions from the grant disbursement functions; and (b) the fund management operations from the project implementation and monitoring operations. First, there will be a realignment of the units handling foreign-assisted projects within the DOF Bureau of Local Government Finance to provide a clearer focus on on-lending operations. This is discussed in more detail in Chapter V (paras. 5.06 and 5.07). 3.08 Second, a sepaeate account, the Local Loans Account (LLA), was created within the NDF to cover all lending to local governments and distinguish MDF's lending operations from its grant disbursement functions. A Policy Statement was issued to guide the operations of the MDF/LLA.1L The HDF/LLA would continue to be operated on a fully revolving basis, retaining all its capital and all interest on its loans as established under Presidential Decree 1914 (para. 3.04). The terms and conditions of MDF/LLA lending would be set to maintain the fund's long-term viability and pursue real growth in MDF/LLA balance and loans. These terms and conditions are discussed in Section C below. The amortization payments by the local governments would be used to: (a) finance further investments in infrastructure, facilities and equipment; (b) provide counterpart financing for donor-assisted projects; (c) provide bridge financing until loan fund releases are obtained; and (d) finance supporting activities such as training. The amount of funds to be used for bridge financing and supporting activities would be limited to 0.75% of the total outstanding loan balance and a separate Program Support Account (PSA) was created to account for these activities. The NDF/LLA Policy Statement is attached as Annex 5. The establishment of the LIA and the PSA will be a condition of loan disbursement. 3.09 Third, a Municipal Development Fund Governing Board (MDFGB) was established to oversee lending operations of the MDF. The MDFGB would be chaired by the Undersecretary of DOF and would include representatives at the Undersecretary level from DBM, DILG, DPWH, and NEDA. The MDF/LLA Policy Statement would apply to all lending through the NDF, irrespective of source. The Project Steering Committees would continue to guide individual projects. In 1_ Municipal Development Fund Governing Board Resolution No. 01-92-MDF, "Providing General Policies for the Lending and Program Support Operations of the Municipal Development Fund" dated February 5, 1992. - 13 - the case of Bank-supported projects, the membership of the MDFGB would be the same as that of the Project Steering Committee, so that coordination should not be an issue. 3.10 Over the long term, the functions of the CPO and MDF and the organization of local government lending would need to be re-examined. To provide the basis for taking the next step in institutional development, a study is proposed under the technical assistance component of the proposed project (para. 4.16) to examine the role of credit in local government development and the institutional alternatives for improving local government's access to credit based on the experience to date. Possible options could be to reorganize the CPO and MDF into a separate local government lending institution, with the MDFPB functioning as a managing board, or maintain the CPO as a technical assistance agency and encourage financial institutions to provide loans to local governments. B. SubDroiect Selection 3.11 Project cities and municipalities are selected through a bottom-up process which emphasizes self-selection, i.e., only those cities and municipalities are included in the project which meet eligibility criteria, are able to prepare investment proposals, and agree to take necessary fiscal improvements. 3.12 Based on the experience to date, the system developed under MDP I would be modified under the proposed MDP III. First, the eligibility criteria for participating cities and municipalities would be tightened by setting a minimum annual revenue of P 3 million (about US$125,000); this would eliminate most of the Fifth and Sixth Class municipalities that would not have the financial capacity to borrow loan funds.LZ Second, subproject identification, screening and selection procedures would be simplified and a point scoring system introduced. It was recognized that it would be difficult to conduct a meaningful economic and financial evaluation of small projects. At the same time, there was a need to develop a simplified system to rationalize and make transparent the selection of components at the local level. 3.13 The subprojects would be prepared and evaluate4 as follows: (a) Prequalification. Cities and municipalities would express their interest in obtaining subloans to the CPO and submit their financial statements. To be eligible, the city or municipality would to have to meet the following criteria: (i) an urban population of at least 10,000 and a population growth rate of at least 2.3% per annum, the 1980-,90 national average; (ii) average annual revenue of at least P 3.0 million over the /.Z The lower class municipalities would continue to rely on national government revenue share allocations to meet their financial needs. The Bank is developing a Rural Infrastructure Development Project to address the infrastructure investment needs of the poorer areas in the Philippines. - 14 - preceding three years; (iii) for project centers seeking a second or subsequent loan, no arrears on outstanding debt obligations and satisfactory performance under previous subprojects. The CPO would determine whether the city or municipality meets the project's eligibility criteria as well as the level of lending, based on initial projections of revenues and expenditures and a minimum debt service coverage of 1.2. If found to be eligible, the CPO would notify the city or municipality (the project center) of the level of lending they could anticipate receiving from the MDF. The project center would need to confirm its commitment to the project by passing a local council resolution endorsing the project and establishing a local project office for project preparation. (b) Prefeasibility. The CPO conducts a preliminary screening of the investment proposals put forward by the project center and determines which ones should be considered for further study and preliminary engineering based on a point scoring system. Individual investments would be screened for population served, project impact, infrastructure deficiency and local support. The poverty impact would be taken into consideration for localized, community-based investments such as minor roads, minor drainage, sanitation and water supply. Those investments which pass the initial screening would then be ranked based on ease of implementation and other considerations. (c) Pregaration. Preliminary engineering and financial and economic studies are carried out on those investment selected for inclusion in the subproject. Physical surveys and preliminary engineering and design will be undertaken by city/municipality staff for local components and by DPWH staff for national components. During the design phase, several technical options would be identified and the least-cost approach selected. Environmental impact would be taken into consideration in determining the engineering design. Financial evaluation would be carried out for municipal piers, markets, slaughterhouses, bus terminals and other municipal enterprises. Full economic evaluation would be carried out for individual investments estimated to cost over P 6 million (or about US$250,000).LA Local consultants would be hired by the project center to carry out subproject preparation where necessary. (d) Appraisal and Approval. The CPO will conduct an appraisal of the project center's investment program once engineering works and investigations have been completed by the project center. For minor works below P 6 million, the proposed designs and cost estimates would be reviewed to determine whether they are technically and environmentally sound and are the least- cost option. For municipal enterprises, such as public markets, slaughterhouses, bus terminals and municipal piers, financial evaluation would be carried out to determine whether operation and maintenance costs and debt service obligations could be fully covered through fees and charges. Larger investments over P 6 million 'sould need to have an Li This cutoff level was established under MDP II and would be maintained under MDP III. - 15 - Economic Rate of Return of over 15%, the minimum return required by the Government. The overall program would be evaluated on the local government's technical capacity to implement the project and its financial capability to provide the necessary counterpart funds and service the debt obligations. A minimum debt service coverage of 1.2 would be required for the life of the subloan. The CPO's appraisal of the subproject would be approved by the Project Steering Committee. The subproject screening and evaluation process is described in more detail in Annex 6. The environmental aspects of the project and the approach used for environmental analysis are described in Annex 7. 3.14 Project cities and municipalities are generally required to undertake management improvements to qualify for subloans, e.g., they must improve collection of real property and business taxes or revise market tariff rates. Local staff would receive training through the Municipal Training Program under DILG in project planning and project development, municipal finance and revenue administration, municipal enterprise management, engineering and contract management, and infrastructure maintenance and equipment management. C. Lending Terms and Conditions 3.15 Under MDP I and II, MDF subloans finance up to 90% of the local component costs, with the project city or municipality providing the remainder (at least 10%) from their own funds. The MDF subloans were for 20 years including five years of grace at a variable interest rate. The foreign exchange risk is borne by the Government. At the start of the MDF, the interest rate was set at 14% per annum based on the Bank's interest rate (10.08% for the first semester of 1984) with a margin (about 3% to 4%) to reflect the commitment fee and foreign exchange risk./2 In 1987, the MDF interest rate was reduced to the current level of 11% per annum to reflect the drop in the Bank's lending rate. The interest rate is reviewed annually with the Bank. Repayments to the MDF are made in equal payments of interest and principal. 3.16 Under the proposed MDP III, the on-lending terms and conditions of the MDF subloans would be revised in line with the development of the MDF into a revolving fund. Under the MDF/LLA Policy Statement (para. 3.08), the MDF/LLA lending terms would be adjusted in line with the overall management objectives. The following changes would be made: (a) The repayment and grace periods would be adjusted in line with the economic life of investments, with a maximum grace period of 3 years and maturity of 15 years. v (b) The interest rate would be linked to market rates, and the gap between the MDF/LLA interest rates and the market rates would be narrowed over time. i2 The interest rate is based on the Bank lending rate. For administrative ease, the Government has rounded the MDF rate to the nearest percent. - 16 - (c) The interest rate would be set annually in January and would be fixed for that year. (d) The interest rate for a subloan would be that prevailing at the time of subloan signing and would be fixed for the duration of the subloan. (e) Interest would be calculated annually and billed and collected semesterly. The move to annual interest rates ((c) above), fixed interest rate ((d) above) and semi-annual billings ((e) above) reflects the need to provide local governments with predictability in their debt service requirements so that the necessary appropriations could be made in their annual budgets. These terms and conditions would apply to all new loans made by the MDF irrespective of their source of funds. 3.17 The weighted average interest rate on time deposits of 61-90 days with a sprea& of 2* would be taken as the reference market rate. Due to the lack of comparators for long-term municipal lending in the Philippines, the on-lending rate of all Bank loan funds to government financial institutions with fixed interest rates and maturities of over eight years was adopted as a proxy for the market rate. As of end December 1991, the 60-91 day time deposit rate was 16.3% so that the reference market rate would be 18.3%. 3.18 The move toward market interest rates reflects the long-term objective of moving local governments toward tapping private as well as government sources for borrowings. However, since most provinces, cities and municipalities lack the financial capability to sustain high levels of debt, the move toward market rates would have to be gradual. The initial MDF interest rate for 1992 would be set at 14%, the original MDF lending rate (para. 3.15). This rate was determined taking into consideration the anticipated inflation rates (to be positive in real terms) and the potential cost of funds, foreign exchange risk, and loan administration costs. The proposed rate would still be below the market reference rate of about 18%. The MDF interest rate would be increased by 1.5% each year starting in 1993 (e.g., in 1993 the rate would be set at 15.5%) until the rate is equivalent to the market reference rate. These arrangements are reflected in the MDF/L1A Policy Statement. IV. THE PROJECT A. PXroject Origin and Formulation 4.01 Demand for MDF investment funds from cities and municipalities in the Philippines is vwery strong. As of February 1990, over 100 additional cities and municipalities had expressed interest in obtaining loans above what could be accommodated under MDP I; as of June 30, 1991, this number had increased to over 300 cities and municipalities, of which about 80 have been evaluated as creditworthy for loans through the MDF. In light of this demand, the CPO initiated preparation of a possible follow-up project in early 1990. - 17 - B. Prgject Rationale 4.02 The proposed project forms an integral part of the Bank's municipal development strategy and would build on the institutional framework developed and strengthened under the first and second projects. Continued Bank involvement at this time would be important to sustain investment momentum and continue capacity building both at the national and local government levels. The project is also very timely and would assist the national government to develop and carry out its program of decentralization. C. Project Objectives 4.03 The proposed project would aim at assisting Philippine cities and municipalities to expand and upgrade their infrastructure, services and facilities by: (a) strengthening the National Government's institutional framework for assisting local governments; (b) strengthening the local governments' investment planning, financing and implementation capacity; (c) strengthening the local governments' maintenance capacity; and (d) improving local fiscal performance. The project would support further evolution of the system established under MDP I to promote local government development and improve local government access to credit financing. D. Project DescriRtion 4.04 The proposed project is a continuation and expansion of the approach developed under MDP I and MDP II and would consist of: (a) Subgrojects (about US$85.4 million) including construction and/or rehabilitation of basic infrastructure and facilities, procurement of equipment, and hiring of consultants; (b) Maintenance Program (about US$9.8 million) to improve maintenance planning and implementation in selected pilot cities and municipalities; (c) Real Property Tax Administration (about US$14.0 million) to prepare tax maps, improve real property tax records management, increase real property tax collection, and computerize the management of real property information; (d) Municigal Training Program (about US$3.1 million) to train local officials in, among others, municipal planning, fiscal management, contract management and environmental assessment; and (e) Technical hsssistance (about US$1.3 million) for (i) a study of institutional options for further lending to local governments; and (ii) an environmental sanitation and solid waste study. Suburoeigal 4.05 The investment needs of the project cities and municipalities would be packaged into subprojects for each local government. Subprojects would be divided into Local Components funded, implemented and maintained by the cities - 18 - and municipalities, and National Components funded, implemented and maintained by DPWH. The National Components can account for up to 30% of the subproject. The local governments would obtain subloans through the NDF to finance up to 90% of Local Component costs. 4.06 The subprojects are expected to include the construction, rehabilitation and/or purchase of the following: (a) National Components 1infraitXuctue: major shore protection, flood control measures, primary drainage systems, and major roads and bridges. (b) Local Components InfrastrMcture: secondary and tertiary drainage systems, sanitation facilities, sanitary landfills, municipal water systems (rehabilitation only), local roads, traffic management measures, and municipal piers/wharves; Facilities: public markets, slaughterhouses, bus terminals, motorpools, health centers and school buildings; Eaupmngnt: maintenance equipment, solid waste collection and disposal equipment, and computers; and Consul-ancy Services: consultancies for detailed engineering and construction supervision. The selection of subprojects would follow the procedures outlined in Chapter III, Section B, and in Annex 6. In cases where operation expenses are being provided by national government agencies, construction of new facilities would be undertaken only if the national agency concerned confirms that the facilities are within their overall program and operational costs would be provided, e.g., the Department of Health for health centers and the Department of Education, Culture and Sports for school buildings. Sanitary landfills would be included in subprojects after completion of the environmental study proposed under the project's technical assistance component (para. 4.16). The composition of each subproject would differ among project cities and municipalities. Based on experiencePgained from the first project (para. 2.17), a significant part of the demand for financing is expected to be for public markets. 4.07 Details of each subproject, on-lending terms and conditions and implementation arrangements would be included in two separate on-lending agreements between the National Government and the local government: (a) a Subproject Agreement between DPWH and the local government; and (b) a Subloan Agreement between DOF and the local government. Special conditions for fund releases to the cities and municipalities under the project would include, among other things, passing of a local council resolution approving tariff increases that would be necessary to assure the financial viability of a market, if one is included in the subproject. - 19 * 4.08 Local governments would be included In the project and become eligible for Bank loan financing subject to Bank review and approval of: (a) the CPO's appraisal of the investment program; and (b) the Subproject and Subloan Agreements. These arrangements were confirmed with the Government during negotiations. MLantenance Progr 4.09 Lack of adequate infrastructure maintenance has been identified as a critical problem in most local government areas. Many local governments do not appreciate the potential benefits such as improved quality of services and prolonged life of facilities that can be derived from good maintenance practices. Furthermore, in most areas, the technical capacity to undertake maintenance is limited. The lack of updated inventory of infrastructure, maps and other basic information hinders proper maintenance planning. Consequently, maintenance is generally regarded as a low priority, is not carried out properly, and is not provided with adequate budgets, skilled manpower, or sufficient materials and equipment. 4.10 To address this problem, the project includes a maintenance component, costing about US$10 million, to be carried out in about 10 project centers on a pilot basis. The concept is to provide local governments with financial and technical support for a limited period to create a maintenance ethic and develop the necessary skills. Participating local governments would be selected from those that are willing to commit the necessary resources to improving their maintenance performance and hav- satisfactorily implemented projects under MDP I. The CPO would provide the local staff with technical assistance and guidance in conducting an inventory of existing infrastructure and developing a four-year maintenance plan. Annual requirements for manpower, equipment, supplies and materials would be developed and agreed with the local government. Labor costs are estimated to account for about half the program costs. Detailed guidelines for the preparation and implementation of the maintenance program have been prepared and would be tested, developed, and refined initially in two pilot centers. 4.11 Local governments carrying out the maintenance program would receive financial support in the form of grants from the National Government through DPWH. During the first year, the grant assistance would amount to 70% of the annual maintenance program; this would be matched by a 30% counterpart contribution from the local government's own resources. Over the following two years, the grant funds would be reduced to 50% and 30% of the annual maintenance program. The local government's counterpart contribution would correspondingly increase to 50% and 70%. In the fourth and subsequent years, the national government grant funds would be eliminated, and the local government would assume full responsibility for the annual maintenance costs. ERal Property Tax Administration (RPTA) 4.12 The proposed project would support expansion of DOF's RPTA program in Regions IV, VII, IX and XII. Following up on the success of the RPTA program funded through USAID and the Bank, DOF has developed a program to implement the RPTA and improve real property tax management in the remaining local governments - 20 e in the Philippines. The project would finance part of this nationwide program. The RPTA component would continue the program carried out under MDP I and would fund additional contractual staff, equipment and supplies necessary to: (a) conduct field surveys to prepare up-to-date tax maps; (b) update assessments to adjust for improvements and changes in land use identified through the surveys; (c) update and streamline tax records; and (d) follow up on collection performance. A detailed Project Implementation Plan, including a schedule of completion of each phase, required inputs (contractual staff, equipment, supplies, office space, etc.) and estimated costs, would be prepared for each participating local government. The project would also include consultant assistance to 'DOF to implement the expanded RPTA program, with special emphasis given to improving maintenance of the prepared maps and updated records. 4.13 Computerization would facilitate management of the real property tax data, production of tax bills and monitoring of delinquent taxpayers. Technological improvements have made computers affordable. However, the critical constraint is the lack of appropriate software. At present, Cebu City operates a computerized real property tax system on a minicomputer, and systems for microcomputers have been developed for local governments in Metro Manila and the Province of Antique. No microcomputer-based system has been field tested and operationalized on a large scale to date. P 10 million has been allocated to computerize real property tax records management on a pilot basis. During negotiations, agreement was reached that DOF would prepare an assessment of the microcomputer-based systems currently being introduced and an action plan for carrying out the computerization component of the RPTA by December 31, 1992. Implementation of the computerization component would be based on the agreed action plan. 4.14 DOF would provide a grant to the local governments to finance part of the cost of additional contractual staff, equipment and supplies required to implement the RPTA. The Bank project would fund the National Government's share of the program, ..e., the national grant to the local government. Cost sharing between the local government and DOF would differ depending on the classification of the local government concerned, with the richer local governments receiving national grants to cover 60% of costs (the remaining 40% provided by the participating local government), intermediate local governments receiving a 65% grant, and the poorer local governments receiving an 80% grant. A Memorandum of Agreement would be signed between DOF and the local government detailing the work program, resource requirements and financing arrangements based on the Project Implementation Plan. The Municipal Trainiua rogram 4.15 The project would include additional training to be conducted through the Local Government Academy (LOA). Training courses of one- to two-weeks duration would be provided in the following areas: (a) orientation for the Bank's municipal development projects; (b) project development and project preparation; (c) municipal finance and revenue administration; (d) detailed engineering; (e) contract management; (f) construction supervision; (g) municipal enterprise management; (h) infrastructure maintenance; (i) equipment maintenance and management; (j) project evaluation; and (k) environmental assessment. Training would be conducted by contract trainers, some of whom may be from government - 21 - agencies, e.g., DPWH for detailed engineering, contract management, infrastructure maintenance and equipment management. Outlines of the training courses are provided in Annex 3. The courses would be targeted to cities and municipalities participating in the project. The effectiveness of the formal training would be enhanced by technical assistance provided by the CPO staff to project cities and municipalities; CPO staff would assist the local staff to use the knowledge they gain through contract management training when they actually award and supervise civil works contracts under the project. An estimated total of about 156 courses would be carried out under the project, with training provided to some 9,000 local government staff. The project also includes consultant assistance to the LGA for project implementation. Technical Assistance 4.16 The project would also include the following studies: (a) MuniciRal lending Institutional Review: Although credit is commonly used along with locally generated revenues and grants to finance local government expenditures in most developed countries, credit has not been widely used in the Philippines to finance local capital expenditures. To improve local government access to loan financing, the MDF was established in 1984 as a revolving fund. An increasing number of local governments have obtained MDF financing and additional local governments are interested in obtaining these loans. There is a need, however, to take stock of experience to date, review the role of credit (relative to grants), debt-related financial instruments that would be appropriate for local governments in the Philippines, and institutional arrangements for providing local governments with access to credit over the long term. The proposed study would address these points, identify alternative institutional arrangements, and develop an action plan for institutionalizing the best option. (b) Urban Environment and Solid Waste Management Study: The increased urban population places a major strain on the urban environment. In most urban centers in the Philippines, the provision of infrastructure and basic facilities has lagged behind population growth, resulting in stagnant water, flooding, uncollected garbage, open dumping of solid wastes, and other health and sanitation problems. Environmentally sound solid waste management tehniques, such as sanitary landfills, are relatively new in the Philippines and are not yet widely understood or accepted. The proposed study would review existing solid waste operations, identify possible investments, and recommend measures to strengthen solid waste management at the local government level in up to four regional cities. The study would also review the legal framework governing solid waste operations and recommend measures for strengthening policy guidance, supervision, technical assistance to local governments, and training of local officials at the national level. Based on the results of the study, a separate Urban Environment and Solid Waste Management Project could be developed tc focus on environmental concerns at the local level. The decision whether to include landfills and their design criteria would be made after the completion of the study. - 22 - Draft outline Terms of Reference for the proposed consultancies are provided in Annex 8 (a) and (b). E. Project Costs and Financing Plan projecA_ot Q2 4.17 The total project cost is estimated at about P 3.9 billion (US$113.7 million equivalent), including taxes and duties of about P 605 million (US$17.4 million equivalent) or about 15% of the total project cost and a foreign exchange requirement of about P 1.7 billion (US$49.4 million equivalent) or 43% of total costs. Project costs are summarized in Table 4.1. The total project cost and Table 4.1: SUMMARY OF PROJECT COSTS La Local Foreign Total Local Foreign Total Foreign -- million peso -- --- US$ million --- as % of Total Subprojects National Components 295 272 567 10.9 10.1 21.0 48% Local Components 738 580 1,318 27.3 21.5 48.8 44% Maintenance Program 123 97 220 4.6 3.6 8.1 44% Real Property Tax Administration 194 129 323 7.2 4.8 12.0 40% Municipal Training 39 26 64 1.4 1.0 2.4 40% Consultant Assistance for Project Implementation DPWH 83 36 119 3.1 1.3 4.4 30% DOF 16 - 16 0.6 - 0.6 0% DILG 13 - 13 0.5 - 0.5 0% Technical Assistance Institutional Study 4 13 17 0.2 0.4 0.6 75% Environmental Study 10 12 21 0.3 0.4 0.7 55% Base Cost 1,515 1,164 2,679 56.0 43.0 99.1 43% (in June 1991 prices) - - - - Price Contingencies 687 527 1,214 8.3 6.3 14.6 43% Total Project Costs 2,202 1,691 3,893 64.3 49.4 113.7 43% -- . - -.0.. . L_ May not add up due to rounding. - 23 - breakdown of subprojects by type are indicative since the Bank is taking a programmatic approach under the proposed project. The overall scale of investments at the local level was determined by the estimated borrowing capaoity of the 78 local governments whiich have expressed interest in obtaining MDF loans and have met the priject's eligibility criteria. The RPTA costs were estimated at P 110 per real property tax unit, based on the actual costs of programs carried out to date. Municipal training program costs were estimated at P 1,200 per training participant per day, based on the average cost of the training provided to date. The base costs are expressed in June 30, 1991 prices. Estimates for training and consultancies exclude taxes. Price contingencies are based on increases of 12% in 1992 and 10% per annum thereafter for domestic prices and 3.9% per annum for international prices. £inacisnn Plan 4.18 The proposed Bank loan of US$68.0 million equivalent (P 2.3 billion) would finance 72% of the total project cost net of taxes or 100% of foreign costs and about 29% of local costs. The Bank loan would be allocated as follows: (a) US$34.4 million equivalent (P 1.2 billion) of the loan would be on-lent through the MDF to the cities and municipalities at the MDF's prevailing terms and conditions; (b) US$19.2 million equivalent (P 657 million) would be passed on as budgetary appropriations to DPWH for the subprojects' National Components, the maintenance program, and consultancies for project implementation; (C) US$10.0 million equivalent (P 323 million) would be passed on as budgetary allocations to DOF for RPTA and consultancies for project implementation; (d) US$2.7 million equivalent (P 90 million) would be passed on as budgetary allocations to LGA for the municipal training program and US$0.4 million equivalent (P 13 million) for consultancies for project implementation; and (e) US$1.3 million equivalent (P 39 million) would be utilized for technical assistance studies. The Government is seeking grants or alternative financing for the municipal training program (US$2.7 million equivalent) and technical assistance (US$1.3 million equivalent). If grant funding is secured, the Bank loan funds would be reallocated to MDF subprojects. 4.19 Counterpart funding would be provided as follows: (a) local governments for the subprojects, maintenance program and RPTA, P 565 million; (b) DPWH for subprojects, P 424 million; and (c) the MDF from accumulated payments of interest and principal, P 594 million. The financing plan is summarized in Table 4.2. In addition, DPWH would provide about P 70 million for the administrative costs of the CPO, DOF and P 50 million for the SPMS, and DILG about P 20 million for the LGA. These arrangements were confirmed during negotiations. 24 - TAblg 4.2: FINANCING PLAN BY AGENCY .L (in P millions) Local Bank Loan Total Govt. DPWH MDF Loan Share Subprojects National Components 848 - 424 - 424 50% Local Components 1,980 198 - 594 1,188 60% Maintenance Program 350 236 - - 114 33% RPTA 438 132 - - 307 70% Municipal Training b 90 - - - 90 100% Project Implementation Consultancies DPWH 119 - - - 119 100% DOF 16 - - - 16 100% DILG 13 - - 13 100% Technical Assistance a Institutional Study 17 - - - 17 100% Environmental Study 21 - - - 21 100% Total 3,893 565 424 594 2,309 59% (100%) (15%) (11%) (15%) (59%) a May not add up due to rounding. Lk The Government is seeking alternative grant financing. V. PROJECT ORGANIZATION. IMPLEMENTATION AND MANAGEMENT A. PZrogect OrgaiZatiOn and ImR1ementing Arrangements 5.01 Implementatior. arrangements for the proposed project are based on those developed under MDP I and MDP II which are described in Chapter III. The project would expand on the institutional development activities of the previous projects by strengthening fund management of the MDF. For this, the key implementing agencies at the national level would be strengthened in line with the anticipated expansion in their work programs. In addition, the institutional study included under the project's technical assistance component would review options to consolidate the existing institutions into a well structured system for providing local governments with access to credit financing. - 25 - LL_ Zrgjec- t2nCmtte (PSC) 5,02 The PSC would continue to be the main governing body and would provide overall policy guidance and coordination among the agencies involved in the project. The same PSC would serve for all the Municipal Development Projects. The PSC would be supported by a separate Technical Subcommittee, consisting of Assistant SecrOtaries and Bureau Directors (or equivalent) of the agencies in the PSC with DPWH as chairman, and would carry out routine coordination between the various agencies and review subproject appraiaals and on-lending agreements, annual budgets, etc., prior to their submission to the PSC.LU $he gentra ],riect Office (_PO) 5.03 The GPO plays a critical role in managing the proposed project. The functions of the CPO would include: (a) j.tAlU8j_J: recommend to the PSC which cities and municipalities are eligible for funding and assistance from the MDF; and appraise subprojects proposed by the local governments for PSC approval; (b) tecnic4a assistance: assist project cities and municipalities in subproject preparation, implementation and monitoring of local components; and coordinate training with the LGA; and (c) imtlementation. monitoring and evaluation: review construction works; monitor compliance with on-lending agreements; review requests for release of funds from project cities and municipalities and DPWH Regional/District Offices and recommend release of Bank loan funds from the MDF; prepare annual budgets and cash flow requirements; maintain a consolidated project account; monitor local government finances (in collaboration with DOF); and evaluate impact of subprojects. 5.04 The CPO comprises a Project Director and staff from DPWH assisted by consultants and is organized into four divisions: (a) Planning and Project Development; (b) Financial Management and Budget Development; (c) Organizational Research and Training; and (d) Administration. Adequate staffing of the GPO would be essential for the success of the project. At present, the CPO handles 42 project centers and subprojects worth P 1.2 billion under MDP 1 with 57 professional, technical and administrative staff and supported by local consultants who provide an additional 26 professional, technical and support staff. The CPO's work is made difficult by the fact that the project centers are distributed throughout the Philippines. LQ The Technical Subcommittee for MDP I would continue to serve as the committee for MDP III. A separate Technical Subcommittee has been established for MDP II which includes agencies for Metro Manila, such as the Metropolitan Waterworks and Sewerage System. - 26 - 5.05 The CPO's staffing and organization would need to be strengthened in line with the increase in the volume of work. Under MDP III, the number of project centers is expected to double to about 80. The increase in workload can be accommodated by simplified procedures and documentation (para. 3.12) and by efficiency improvements as the CPO staff gain experience. However, additional staff would be necessary. It is estimated that to implement the project the CPO would need to increase its staff by 34 professional, technical and administrative staff from 57 at present to 91 by end-1993. On the other hand, local consultants would be reduced to 8 professional and 10 support personnel so that total staff of the CPO would increase from the present 83 to 109. The additional staff would be reassigned from existing project offices, such as the Regional Cities Project Development Office which is expected to be phased out with the closing of the Regional Cities Development Project in 1992. The CPO would also be reorganized into five divisions: (a) Technical Planning and Project Evaluation; (b) Monitoring, Quality Assurance and Impact Evaluation; (c) Organization and Coordination; (d) Programming, Budgeting and Loan Disbursement; and (e) Administration. It was agreed during negotiations that the CPO would be adequately staffed and funded. Spegial Projlet Management Service (SPMS) 5.06 Administration of the subloan releases, billing and collections and the RPTA program is being handled by the SPMS in DOF's Bureau of Local Government Finance. The SPMS also handles disbursements through the MDF for other donor- assisted projects and implements the RPTA program under USAID grant assistance. The SPMS is organized along functional lines into four Divisions: (a) Plans and Programs Development Division, dealing with planning and budgeting; (b) Project Execution and Management Division for RPTA training and technical assistance; (c) Project Monitoring and Evaluation Division; and (d) Central Fund Management Division in charge of financial administration of the MDF. Overlaid on this structure are teams charged with management, monitoring and reporting for RPTA components under MDP I, USAID and MDP II projects, respectively. These arrangements have developed incrementally as the MDF was used for an increasing number of donor-assisted programs. 5.07 The separation of the lending functions of the MDF (para. 3.07) and the increase in the RPTA program require a restructuring of the SPMS and the creation of specialized units. The SPMS would be reorganized along functional lines as follows: (a) Local Loans Management Unit: to handle all lending operations of the MDF; (b) Program Support Account Unit: to handle release of funds for National Components of subprojects together with any direct specific grants or concessional loans made to local governments aside from the RPTA program; (c) RPTA Unit: to handle all RPTA activities; and (d) Planning and Administration Unit: to handle overall coordination and general administration functions. - 27 - This arrangement has the advantage that it would: (a) enable staff to specialize in particular areas of activity; (b) permit senior personnel to concentrate more attention on strategic and policy-orientated issues; (c) facilitate the development and implementation of coherent policies and procedures for MDF lending operations; (d) facilitate the computerization of routine financial accountirng and reporting duties; and (e) be potentially more efficient in the use of accounting and clerical staff. This would not entail a major reorganization of the SPMS, but rather would be a streamlining of assignments within the current divisions, with more emphasis placed on fund management. The SPMS would be supplemented by around 100 additional staff and local consultants who would assist SPMS in administration of the subloans and RPTA program and in improvement of present operational procedures. Some of the additional staff would be assigned to the regional offices of DOF. During negotiations it was agreed that the SPMS would be reorganized by December 31, 1992 and adequately staffed. The Local Qgovernment Acaemy fLGA). 5.08 The LGA was established in 1988 to be responsible for local government training. A Board of Trustees appointed by the President, with the Secretary of DILG as chairman, is responsible for overseeing LGA's operations. DILG's training activities and its existing training facilities at Los Banos were turned over to the LGA at its creation. LGA set up a special unit, supported by local consultants, to handle the Municipal Training Program under MDP I. The LGA has a total staff of 45 and is divided into three divisions: (a) Education and Training; (b) Research and Program Development; and (c) Administration. LGA's primary focus is to act as a broker of training for local governments and will be adding a Contract Management Division and a Management Information Division in 1992 to strengthen its capacity to organize and contract training. LGA will continue to be supported by local consultants in the implementation of the Municipal Training Program under the proposed project. During negotiations it was agreed with the Government that the WGA would be adequately staffed and funded. Project Cities and MuniciRalities 5.09 Subnrojects. Each project city and municipality would implement the subproject through its respective departments. A Local Project Officer, either the Planning Officer or Engineer, would be designated as the local program coordinator. The Planning Office would be responsible for project identification, prioritization and feasibility studies. The Municipal/City Engineer's Office would implement the Local Components and carry out: (a) survey, design and cost estimate preparation based on established standards required under the program; (b) preparation of tender documents and conduct of bidding; (c) construction supervision; and (d) monitoring and maintenance of completed projects. The Treasurer's Office would maintain subproject accounts, adminiister the subloan and prepare the necessary documents to seek releases from the MDF. The City Auditor would audit the subproject accounts annually. The local departments, especially the Planning and Engineer's Office, would be assisted as necessary by consultants. 5.10 2PT&. Implementation of the RPTA Program at the local level would be carried %,t by staff from the Assessor's and Treasury's Offices. For smaller - 28 - municipalities with limited staff, assistance would be provided by the Provincial Assessor's and Treasurer's Offices. Each local goverrnent would enter into a service contract with DOF specifying the additional staff, equipment and supplies required by the local government to carry out the tax mapping, records administration and collection activities. The amount of the DOF grant would be based on this contract. DPWH Regional and District Engineering Offices 5.11 The DPWH Regional Engineer's Offices would prepare detailed design and engineering, conduct bidding and award of contracts, and supervise construction of National Components as part of their regular operations. The Regional Director can delegate some of the work to DPWH's District Offices. B. Implementation Schedule 5.12 Based on past experience, a seven-year project implementation period is expected, extending from the fourth quarter of 1992 to 1998 and concluding by December 31, 1998. The implementation schedule is presented in Annex 9. The Government, however, intends to implement project over five years. The plan for Bank supervision of the project and the monitoring indices to be used are presented in Annex 10. C. Procurement and Disbursement Procuremaent Method 5.13 Civil Works. The estimated value of civil works under the project is about US$77.1 million equivalent. Procurement arrangements for the project are summarized in Table 5.1 below. Most of the contracts would involve minor civil works, estimated to cost below US$750,000, would be scattered in cities and municipalities in various parts of the Philippines, and are not expected to attract foreign bidders. Therefore, the civil works contracts would be awarded in accordance with Local Competitive Bidding (LCB) procedures satisfactory to the Bank. 5.14 Goods. The project would include purchases of equipment by the project cities and municipalities costing a total of about US$4.2 million equivalent. Equipment needs would be based on the individual requirements of the specific cities and municipalities, but are generally limited to a few vehicles or pieces of heavy machinery. Based on experience to date under MDP I, it would be difficult to coordinate t4ese equipment purchases given the diverse location and differences in specifications and timing. Therefore, the equipment would be procured by each project city and municipality based on LCB procedures satisfactory to the Bank. 5.15 Maintenance. About US$5.9 equivalent or 60% of the pilot maintenance program would be contracted out, and about US$2.0 million equivalent of works would be executed by local government staff through force account, using about US$1.9 million equivalent of materials which would be procured by prudent local shoppLng. The maintenance contracts would be based on unit costs of various C, * 29 - Table 5.1: PROCUREMENT ARRANGEMENTS La (in US$ millions) Procurgxement Mthod Total Project Elements ICB LCB Other NBF Cost 1. Subprojects 11.1 Works - 77.1 - - 77,1 (43.9) (43.9) 1.2 Goods - 4.2 - 4.2 (2.5) (2.5) 1.3 Consultant Services - - 0.6 /b * 0.6 (0.3) (0.3) 2. Maintenance 2.1 Works - 5.9 2.0 4p- - 7.9 (2.0) (0.6) (2.6) 2.2 Materials - - 1.9 Ld - 1.9 (0.6) (0.6) 3. RPTA Services - - 13.5 Lg - 13.5 (9.5) (9.5) 4. Consultant Services 4.1 Project Implementation - - 4.4 ,& - 4.4 (4.4) (4.4) 4.2 Municipal Training - - 2.7 L - 2.7 (2.7) (2.7) 4.3 Studies - - 1.3 i - 1.3 (1.3) (1.3) TOTALS - 87.2 26.4 - 113.7 ( - ) (48.4) (19.6) ( - ) (68.0) Lt ALl amounts nclude contingencies. Numbers In brackets are the respective amounts financed by the Bank. NIF a Not Bank Financed. Lb Services to be procured In accordarce wfth World Bank Gufdelines for the Use of Consultants, August 1981. /c. Force account. jd Required for force account. L A=Itional personnel required for the RPTA would be h1red by the local governments as contractual staff for the duration of the RPTA program using their own procedures for hiring such labor. - 30 items of works, adjusted annually for cost escalation, with estimated quantities of each item giving an estimated total value of work to be undertaken. Payments would be made on the basis of actual amounts of work completed. The contracts would be bid in accordance with LCB procedures and bidding documents acceptable to the Bank. 5.16 REBTA.gkryggs. The additional personnel required for the RPTA would be hired by the local governments as contractual staff for the duration of the RPTA program using their own procedures for hiring such labor. 5.17 Consultant Seryvcs. Consultants' services for subproject preparation, construction supervision, project implementation and technical assistance, totalling about US$9.0 million equivalent, would be procured in accordance with the Bank's Guidelines for the Use of Consultants. ImRlementing Agencies and Borrower' s Procedures 5.18 Procurement would be carried out by the following: (a) DPW for National Component civil works included in the subprojects, consultant services for the CPO, and consultant services for the Urban Environment and Solid Waste Management Study; (b) Cities and Municiialities for Local Component civil works, goods and consultant services under subprojects, and service contracts under RPTA; (c) DO for consultancy services for project implementation and the Municipal Lending Institutional Review Study; and (d) LQ& for consultancy services for the Municipal Training Program and project implementation. These arrangements are identical to those under MDP I, which are considered satisfactory. Local governments would receive training in contract administration under the Municipal Training Program and would be supervised closely by the CPO. Both the National Government and local governments under MDP I have been following local procedures for procurement of civil works, goods and services, with some modifications to conform to Bank guidelines. 5.19 The Bank has been conducting an extensive dialogue with the Government on local procedures for procuring civil works, goods and consultant services. Understandings have been reached with the Government on the modification of selected local procedures in order to conform with the Bank's requirements. These modifications are included in a supplemental letter of understanding and were confirmed with the Government during negotiations. Procurement Suoerviaion 5.20 Contract Review. The project is estimated to include over 500 minor civil works, goods and consultant contracts. Standard bid and contract documents acceptable to the Bank would be utilized, and award of the first civil works, goods, maintenance and consultant contracts would be subject to the Bank's prior 31 - review. Subsequent contract documents would be subject to selective post-award review. During the first year of implementation, approximately one in every 10 contracts would be subject to post-review. The frequency of review would be adjusted in subsequent years based on the results of the first year. The CPO is responsible for reviewing subproject bidding and contract awards made by the DPWH regional offices and the cities and municipalities and would maintain the necessary documentation for review by Bank missions. A detailed contract summary would be Included in the quarterly progress reports. This arrangement was confirmed during negotiations. 5.21 Disbursement of the proceeds of the proposed Bank loan would be made against the following categories of expenditures: (a) 70% of MDF releases to project cities anc municipalities for subloans; (b) 60% of DPWH expenditures for national components under subprojects; (c) 100% of DPIJ releases for the maintenance program; (d) 100% of DOF disbursements to the project cities and municipalities for RPTA; and (e) 100% of the cost of consultancies to DPWH, DOF and LGA for project implementation and studies. Since the project would involve a large number of small contracts, disbursements would be made against Statements of Expenditure with the exception of consultant services which will be be disbursed against full documentation. The CPO would maintain the necessary documentation on releases for MDF subloans and the BLGF for RPTA releases, for review by the Bank. 5.22 Disbursements are projected to take place over a seven-year period, based on the Bank's disbursement profile for urban projects in the Philippines. Estimated disbursements are shown in Annex 11. The Loan Closing Date is June 30, 1999. D. Accounts and Audits 5.23 Separate project accounts would be maintained by: (a) DPWH and each project city and municipality for subprojects; (b) LGA for the Municipal Training Program; (c) DOF for the RPTA; and (d) DPWH, LGA and DOF for technical assistance. The CPO would: (a) maintain a consolidated project account of subproject expenditures for monitoring and audit purposes; and (b) prepare an annual financial statement in the form of a Sources and Application of Funds Statement. DPWH, DOF,L WA and each project city and municipality would prepare annual financial statements for the project accounts of their respective agencies, which would be certified by their agency auditors. A consolidated project annual statement would be prepared by the MDF for the project as a whole, based on the audits of the individual project agencies. These arrangements are the same as those for MDP I and have proven satisfactory. Assurances were - 32 - obtained during negotiations that the Bank would be furnished audit reports prepared by independent auditors acceptable to the Bank within nine months of the close of each fiscal year. E. rogres and Monitoring 5.24 The CPO would be responsible for preparing a consolidated progress report every quarter. DOF/BLGF would prepare and forward to the CPO necessary inputs on the RPTA component and LGA on the Municipal Training Program. These arrangements were confirmed during negotiations. VI. PROJECT JUSTIEICATION AND RISKS A. Institutional Impact 6.01 The proposed project would further strengthen institutions both at the national and local government levels to meet the increasing infrastructure and municipal service needs of the Philippines' growing urban population. As such, the project is in line with the Government's decentralization strategy to give more resources and responsibilities to the provinces, cities and municipalities and allow the local governments to play a larger role in the country's economic development. 6.02 At the national level, the project would further develop the institutional frame.work established under MDP I by institutionalizing the lending operations of the MDF. After setting up the Project Steering Committee, the CPO and MDF, the initial emphasis under MDP I was on developing subprojects and carrying out investments at the local level. With the increase in the number of local governments receiving MDF loans, the emphasis under the proposed project is to operationalize the MDF as a revolving fund and introduce procedures to move the MDF toward a market-based approach. The project also includes an institutional study to review the current organizational arrangements. The recommendations of the study are expected to lead to a restructuring of the existing organization, e.g., consolidation of the Project Steering Committee, the CPO, the PMO under MDP II, and the MDF into a separate semi-autonomous government agency. 6.03 At the local level, the proposed project would help the local governments to develop the capacity to identify, plan, evaluate, and carry out investment projects. By being provided access to loan financing for investments, the cities and municipalities would gain an opportunity to "learn by doing." The Municipal Training Program provides local officials with courses in project development and implementation, municipal finance and management. This formal training is complemented by technical assistance provided by the CPO to the project cities and municipalities during subproject preparation and implementation. A pilot maintenance component has also been included to improve the planning and implementation of maintenance at the local level. In addition, the project would improve local financial management through the RPTA program and through its requirement of financial discipline in improving local resource mobilization and introducing improved accounting procedures and pricing policies for municipal markets. - 33 - B. EnyiroUWnen£A l agct 6.04 The project is expected to have a positive health and environmental impact. The supply of municipal infrastructure has not kept positive pace with increased demand, leading to deterioration in living standards and environmental conditions in the urban areas. This has resulted in, among others, dilapidated and unsanitary markets and slaughterhouses, stagnant waters, and flooding during the rainy season. Project subloans are expected to finance investments to correct these problems. Subloans for the rehabilitation and construction of public markets would result in clean and hygienic conditions for the preparation, handling, storage and display of food for human consumption, particularly fish and meat. Slaughterhouses improved with project funds would provide humane and hygienic facilities for the slaughter of animals for human consumption and result in reduced illegal and backyard slaughtering. Project-supported improvements in flood control and drainage systems would reduce flooding, damage to private property and infrastructure, and disruption to economic activities and social life. And, the proper disposal of solid waste permitted by project subloans for development of sanitary landfills would result in reduced air pollution from burning of trash and possible contamination of groundwater from open dumps. Project investments may impact negatively on the environment: e.g. major shore protection, flood control measures and major roads could adversely affect ecosystems, water quality, soil stability and land use, and may even entail involuntary resettlement. Environmental concerns would be taken into consideration in the design of subproject components to avoid and mitigate such potential impacts (Annex 7). C. PovevIma 6.05 It is estimated that in 1988 48% of all households in the Philippines were living below the Government's poverty line, the level of income required to purchase minimum food and basic needs. Since there are significant differences in poverty incidence between Metro Manila, where 24% of the households are estimated to be below the poverty line, and the rest of the country, the proposed project would be targeted at cities and municipalities outside of Metro Manila and its immediate surrounding provinces where the poverty incidence is above the national average and is closer to 55% to 60%. In determining the scope of subprojects, preference would also be given to investments with a higher poverty impact (Annex 6). In particular, public market improvements, which are expected to account for a large part of project subloans, would benefit the poor families who shop at these markets and the local farmers who sell there. D. Economic Analysis 6.06 Economic analysis would be carried out for individual investments costing more than P 6 million (US$250,000) equivalent. Construction of new markets, major rehabilitation/expansion of existing markets, major roads, and major drainage works are expected to fall into this category. A minimum Economic Rate of Return (ERR) of 15% would be required for inclusion of these investments in the project. The remaining subprojects would consist of minor works which are not considered appropriate for a formal economic evaluation. Selection of these investments would be carried out through screening based on need, and the - 34 - proposed designs would be reviewed to determine that the least-cost technical option had been chosen. E. Rigks 6.07 A number of risks relate to the financial aspects of the project, the technical and managerial limitations of the local governments that will participate in the project, and the political uncertainty surrounding the upcoming national elections. 6.08 The first risk is that the local governments may resist the gradual move toward market rates envisioned under the project (para. 3.17). Local executives could be expected to bring pressure on the MDF to maintain lending rates at current levels, especially the marginal borrowers--the financially weaker municipalities. However, increases in MDF lending rates would be phased in to minimize jumps in debt service requirements, and, with the increase in revenue sharing under the revised Local Government Code, the cities and municipalities would receive additional grants from the National Government. Nevertheless, many local governments may be reluctant to pay the higher interest rates and may opt to drop out of the project as a result. At present, it is not possible to predict the reaction of the local executives, but preliminary estimates indicate that the financially stronger cities and municipalities would be able to afford the higher MDF lending rates. 6.09 Second, the CPO may be hard pressed to continue assisting cities and municipalities with project preparation and implementation at current levels. Capacity building at the local level is a long-term process. Regular contacts by CPO staff have been critical in assisting the local governments in various facets of project planning and management, have been a valuable learning process for local staff, and have provided on-the-job training to complement the formal training provided through the Municipal Training Program. With the increase in the number of project cities and municipalities, the CPO may not be able to provide each local government with current levels of follow-up, resulting in poor performance at the local level. However, to minimize this risk, the policies and operations of the CPO would be streamlined to handle larger numbers of borrowers (para. 3.12) and the CPO would be reorganized and strengthened (para. 5.05). The long-term institutional options for the effective management of lending to local governments would also be studied under the institutional study proposed under the project (para. 4.16). 6.10 A third risk is that the presidential, national and local government elections scheduled for 1992 would result in changes both in the national and local governments and may prove disruptive at the time of project start-up. The proposed project, however, is a continuation of an ongoing project, so that changes at the national level may not prove to be overly disruptive since the policies and procedures have been established and accepted. Changes of local executives may result in some of them reversing the decisions of their predecessors, but experience from the changes in 1986 and 1988 indicates that local executives are willing to support projects started by different regimes if they can be shown to be viable. The CPO would, however, need to proceed with project preparation in a larger number of cities and municipalities in anticipation of some dropping out due to political change. - 35 - Vll. AGREX££EtS REAMHED AN RECMMENDATIO 7.01 During negotiations, agreement was reached with the Government on the following: (a) Bank review of subproject appraisal reports and onlending agreements prior to their finalization (para. 4.08); (b) preparation of an Action Plan by DOF by December 31, 1992 for carrying out computerization activities under the RPTA component (para. 4.13); (c) counterpart fund requirements (para. 4.19); (d) adequate staffing and funding of the CPO (para. 5.05) and LGA (para. 5.08); (e) reorganization of the SPMS by December 31, 1992 (para. 5.07); (f) modification of local procurement procedures to conform with the Bank's procurement guidelines (para. 5.19) and contract review requirements (para. 5.20); and (g) auditing arrangements (para. 5.23) and reporting requirements (para. 5.24). 7.02 The establishment of the LIA and PSA will be a condition of loan disbursement (para. 3.08j. 7.03 Subject to the above agreements, the proposed project is suitable for a loan of US$68 million equivalent to the Republic of the Philippines for a period of 20 years, including five years of grace, at the Bank's standard variable interest rate. PHILIPPINES THIRD IUMICIPAL OEVELCPENET PROJECT ComsoLidated Intcme nd Expenditure for Local Govrrncmts (in million cont 1960 peso) 1980 1961 1982 ¶963 1964 1965 1966 1967 198" 1969 1990 A. REVERES Busines Taxes 744 ?03 697 710 513 506 523 494 51 s72 579 Rete Property Taes 821 962 935 1,147 931 820 933 910 938 1,168 1,195 1,565 1,665 1,633 1,856 1,444 1,326 1,457 1,405 1,455 1,740 1,777 Economic Enterprises 274 390 421 42D 314 290 326 315 320 405 364 Few, Chrges & Others 939 1,057 987 88 677 642 576 606 584 870 560 1,213 1,447 1,408 1,305 991 932 902 921 904 1,275 924 Subtotal: Locat Sources 2,774 3,112 3,041 3,161 2,435 2,258 2,359 2,325 2.359 3,014 2,701 m3=z mm _=w== mm ==mx mm mmu== BIR & Specific Allotments 1,238 1,486 1,831 1,876 1,329 1,347 1,364 1,204 1,396 1,379 1,356 National Ade 295 29f 294 272 202 223 182 173 181 199 206 Subtotal: Govt Tramfers 1,533 1,782 2,126 2,147 1,531 1,570 1,546 1.377 1,576 1,578 1,562 3=2222322333= 2e23=33 32 3 333 33 3 5233 N33223 TOTAL REVENES 4.311 4,894 5,166 5,308 3,966 3,828 3,905 3,703 3,935 4,593 4,263 UzZ==Xm= ss=X 8:xm xxzau=z_2 sszf S. EXPENWITURES Cwmral Governint 916 1,185 1,214 1,150 884 858 962 1,019 1,019 1,219 1,193 Pubtlfc Welfare & Safety 718 774 843 922 720 737 798 797 806 765 758 Economic Develop et 982 747 852 924 683 703 693 6S0 708 644 753 Others 1.033 1,276 1,35? 1,236 945 846 862 805 809 1,097 974 Subtotal: Recurrent 3,649 3,981 4,265 4,232 3,231 3,143 3.314 3,271 3,343 3,725 3,678 Capitat Exp nditures 532 594 579 617 443 365 251 225 257 246 243 TOTAL EXPENDIT'RES 4,181 4,575 4,845 4,850 3,674 3,508 3,566 3,496 3,600 3,971 3,922 C. SURPLUS (DEFICIT) 130 319 322 459 292 319 339 20? 335 622 341 Loel Expenditures as a Share of: GOP 1.6% 1.7X 1.72 1.7X 1.42 1.42 1.4X 1.32 1.21 1.3X 1.22 Total Govt. Expenditures 12.82 13.1X 14.32 14.52 14.02 13.02 10.42 8.42 8.02 7.5X 6.62 - 37 - Anne_x 2 Page 1 of 6 PHILIPPINES THIRD MUNICIPAL DEVELOPMENT PROJECT The Real Property Tax Administration Prograr A. Real Property Taxes LI 1. Real property taxes are levied on the assessed value of land, buildings and equipment. These assessments are a fixed percentage of the market value of the property based on actual use, with the percentages (the assessment levels) varying from 15% to 80% depending on use, for land and equipment, and on value for buildings. 2. Each local government establishes its own real property tax rate, within ranges determined by the Real Property Tax Code (PD 464). Provinces and municipalities can impose a tax rate of no less than 0.25% but no more than 1.5%, while cities can impose a tax rate of no less than 1% but no more than 2%. An additional 1% is levied on properties and is earmarked for the Special Education Fund. 3. Government property, nonprofit cemeteries, charitable and religious institutions and other properties exempted by government policy (e.g., preferred industries certified by the Board of Investments) are exempted from paying real property taxes. 4. A general revision of assessments is carried out every three years to take into account changes in property values. Outside of the three-year general revisions, real property assessments can be revised when changes are made to individual properties which are considered to have a significant impact on property values, e.g., construction of new buildings, improvements of nearby public facilities, demolition, etc. 5. Valuation of property is carried out through mass appraisal, with updated standard unit valuations, the schedule of values, prepared for different types of land, buildings and equipment based on market values prior to each revaluation. Information on the physical characteristics of each property is obtained through tax declarations or field visits. The assessed value for each property is then obtained by using the standard unit costs in the schedule of values. Assessments are carried out by the Local Assessors and their staffs. Property owners are notified of their new assessments and property tax obligations through the Real Property Tax Order of Payment (RPTOP). LI Real property taxes could be modified under the revised Local Government Code; if this is done, then this section would be adjusted accordingly. - 38 - Annex 2 Page 2 of 6 6. Property owners are liable for paying the real property tax. Legal ownership need not be fully established for the property to be taxed, and it is common for all parties to pay taxes on disputed properties to bolster their claims. 7. The Local Treasurers are responsible for collecting the real property tax. Real property taxes are due on January 1 of each year and can be paid through quarterly installments or in full by March, in which case the taxpayer may receive a discount. The Local Treasurers are required to notify taxpayers of the payment periods by posting them in the main entrance of the local government building and in a conspicuous public place in each barangay, by publishing in a newspaper, and by public crier. The taxpayer is informed of his individual tax obligation through the RPTOP. Individual tax bills are rarely sent out. 8. In cases of nonpayment, the taxpayers are assessed a penalty of 2% per month on the outstanding amount up to a maximum of 24%. The local government can go to court to collect taxes due or seize the personal property of the taxpayer and auction it off. However, local governments generally have been reluctant to enforce these penalties against delinquent taxpayers. B. Issues Related to the Real property Tax 9. The local governments do not fully exploit their real property tax base. First, the assessed values (and hence their collectables) are low because of postponement of regular revaluation due to political considerations and underassessment of individual properties. Under the existing law, properties should be revalued every three years (para. 4). While the schedules of values have been updated, they have not been introduced or have been phased in over three years to avoid sudden increases in taxes due. As a result, the current assessments are based on market prices from the early 1980s. 10. Second, many land transactions, such as changes in ownership or land-use and improvements, go unrecorded. As a result, information on ownership and land usp becomes out of date; residential land in cities, for example, continues to ii recorded and taxed as agricultural land at lower values. 11. Third, local governments do not collect the full amount of taxes due; on average, only an estimated 60% of property taxes due are actually collected. This occurs for several reasons. First, the information on ownership may be out of date, and the current owners may be unaware of their tax obligations since they are not notified by the local government. Second, there is little systematic follow-up on nonpayment. Third, penalties for nonpayment are generally not enforced. C. The Real Property Tax Administration (RPTA) Program 12. The Real Property Tax Administration (RPTA) Program aims at improving real property tax administrc.tion and increasing tax revenues through the updating of tax records, preparation of tax maps, improvement of records management, and intensification of collection efforts. The RPTA comprises following phases: - 39 - Annex 2 Page 3 of 6 (a) IDjL4aUY^ia: Preparation of base maps; gathering and sorting of property records; preparation of field copies of property records forms; tax mapping team organization, work scheduling and training; survey and field interviews; preparation and finalization of tax maps; assignment of Property Index Numbers; and preparation and finalization of Tax Mapping Control Roles. (b) Records Conversion and _Management: Review of field appraisal data; determination of market values, assessed values and taxable values; and preparation of the assessment section (Part A) of the RPTOP, the form used to notify the taxpayer of his assessment and his real property tax payment obligations. (c) Tax Collection Enforcement: Calculation of property taxes (Part B of the RPTOP) and distribution of the RPTOPs to the taxpayers; updating of Real Property Tax Registers; information drive through the media and community meetings; preparation of delinquency notices and follow-up; and institution of legal remedies. 13. The RPTA is carried out by the Local Assessor's office and the Treasurer's Office in each city and municipality under the supervision of DOF's regional offices. In smaller municipalities, staff from the provincial assessor's and treasurer's offices would augment the local staff. While the process itself is relatively simple, the local governments require additional staff and resources to deal with the large volume of data that need to be processed within a short period of time, given the number of existing real property tax records. 14. The DOF provides a grant to the local governments to finance part of the cost of additional contractual staff, equipment and supplies required to implement the RPTA. The DOF and the local government agree to a detailed implementation plan, including a schedule of completion of each phase, required inputs (contractual and regular staff, equipment, supplies, office space, etc.) and estimated costs. The number of existing real properties on record in the local government is used as a base for preparing these estimates. Field surveys may identify unrecorded properties and the estimates for subsequent phases would need to be adjusted. 15. Cost-sharing between the local government and DOF differs depending on the classification of the local government, with the richer local government units (LGUs) receiving less in national grants. The cost-sharing formula is presented in Annex Table 2.1. In the case of municipalities, the local contribution is shared equally between the municipality and the province, e.g., in the case of first and second class municipalities, the national government finances 60% of the cost, the province 20% and the municipality 20%. - 40 Annex 2 Page 4 of 6 Annex Table 2.1: RPTA COST SHARING Class of National Local Local Government Govt. Grant Contribution First & Second 60% 40% Third & Fourth 70% 30% Fifth and Below 80% 20% 16. The RPTA Program was initiated by DOF with support from the United States Agency for International Davelopment (USAID) in the late 1970s. The USAID continued to finance RPTA through its Local Resources Mobilization Project. 12 The Bank has followed the format developed under the USAID program to maintain consistency. 17. The Bank loan finances the national government grant to the local government. Loan disbursements are made against a service contract between DOF and the local government, which specifies the additional staff and supporting expenditures required by the local government (para. 14 above) and the cost sharing between DOF and the local government. Since cost sharing differs depending on the classification of the local government concerned, the Bank disburses against 100% of DOF grant releases to the local government. D. Evaluation of RPTA under the First MuniciRal Development Proiect 18. The RPTA Program under the First Municipal Development Program was successfully concluded in June 1991. The program included 18 cities and 54 municipalities (in over 27 provinces). As a result of RPTA, the total number of real property tax units in the 72 local governments increased by 45% from 1.1 million to 1.6 million and total assessed values increased by 58% from P 26.0 billion to P 41.2 billion. 19. The increase in assessed values resulted from: (a) the discovery of undeclared properties; (b) discovery of undeclared improvements; (c) discovery of unrecorded changes in land to higher-value uses (e.g., the transformation of an agricultural lot to a housing subdivision); and (d) an increase in the overall assessment levels. On the other hand, elimination of duplicate and/or invalid assessments would have the effect of reducing assessed values. a A description of the RPTA program and evaluation of the initial efforts is provided in William Dillinger, "Urban Property Tax Reform: the Case of the Philippines' Real Property Tax Administration Program," INU Report 16, May 1988. - 41 - Annex 2 Page 5 of 6 20. To assess the impact of the RPTA program, only results from cities and municipalities which implemented the RPTA without increasing assessment levels were considered; these results are presented in Annex Table 2.2. The program has resulted in both a net increase (net of cancellations) in the numbers of real property units and in assessed values. The increase was greater in the cities, where the number of real property units Lncreased by 88% and the assessed values by 68%. This is probably due to the development of agricultural land into residential and coAmercial uses. Annex Table 2.2: IMPACT OF THE RPTA PROGRAM UNDER MDP I (PRELIMINARY RESULTS) La Cities Municipalities Total Real Property Units ('000) Before RPTA 373.5 562.6 936.1 After RPTA 703.3 706.8 1,410.1 Increase 88% 26% 51% Assessed Values (P billion) Before RPTA 8.6 3.8 12.4 After RPTA 14.5 5.4 19.9 Increase 68% 45% 61% La Excludes local governments which introduced new assessment schedules. Source: Department of Finance. 21. The RPTA program also includes a tax collection enforcement component in which funds are made available to conduct information campaigns and follow-up of delinquent taxpayers. Results are not yet available to systematically evaluate the impact of RPTA on actual tax collections. E. The RPTA Program undfer the Pronosed Project 22. It is DOF's objective to carry out the RPTA in all of the over 1,500 cities and municipalities in the Philippines. To most effectively deploy its experienced staff, DOF would implement the RPTA on a region-by-region basls. The proposed project would support expansion of DOF's RPTA program in Regions IV, VIII, X and XI. 23. A computerization component has been added to the program. P 10 million has been allocated to computerize real property tax records management on a pilot basis. While technological improvements have made computers affordable, the appropriate software in not yet available. At present, Cebu City operates a computerLzed real property tax system on a minicomputer and systems for microcomputers have been developed for local governments in Metro Manila and the Province of Antique. No microcomputer-based system has been field tested and - 42 - Annx 2 Page 6 of 6 operationalized on a large scale to date. DOF will assess the microcomputer- based systems currently being introduced and develop an action plan for carrying out the RPTA computerization component by December 31, 1992. A decision on the computerization component would be made after a review of DOF's report. 24. The program is expected to cover over two million real property units in nearly 200 cities and municipalities. The total cost is estimated at about P 438 million (US$13.5 million equivalent), using an average cost of P 110 per real property tax unit, based on the ongoing RPTA programs. The program would continue to be a key activity of DOF's Bureau of Local Government Finance. - 43 - Annex 3 Page 1 of 10 PHILIPPINES TAIRC IMXUCIPAL TRAINING PROGRAM Municigal Training Program A. The Eirst MuniciDal Develogment Project (MD? I) 1. During preparation of the MDP I, the priority areas identified for attention under the project were strengthening managerial, technical and administrative skills at the local level and developing training programs oriented towards local government officials. The bulk of government training at that time had been directed at national government officials. While local government training had been carried out, it tended to deal with broad management concerns rather than the technical requirements of local officials. It was felt that many of the existing training programs could be adapted and used for training local government staff. 2. A training program oriented toward local governments would need to be have built-in flexibility to address the diverse training needs at the local level. Therefore, the project rejected the approach of setting up a local government training institution with its own facilities, training staff, and curriculum. The project instead aimed at establishing capacity within the national government to assess local training needs and match those needs with existing programs or institutions, both government and private, offering training in the appropriate fields. Where necessary, existing programs could be adapted to suit the needs of local officials. 3. The municipal training component under the MDP I (referred to as the Municipal Training Program) included financing for training in municipal finance and revenue administration, municipal enterprise management, planning and budgeting, project development and contract management, municipal engineering and maintenance. At appraisal, the training was expected to be organized into four modules: (a) program development; (b) project management; (c) municipal finance, revenue administration and municipal enterprise management; and (d) infrastructure and equipment maintenance and solid waste management. The Bank loan was expected to finance 90% of the cost of training, with the remaining 10% provided by the participating local governments. However, this was found to be administratively cumbersome, and it was decided that the Bank would finance 100% of national government expenditures for training courses, with the local governments' contribution coming in the form of actual expenses incurred, e.g., travel expenses, rather than cash contributions. The training was to be organized by the Training Division within the Central Project Office. It was estimated that over 4,000 local officials would be trained during the project period. 4. A Study of Training Needs, Resources and Development of a National Training Program was also included under the technical assistance component of - 44 - Annex_3 Page 2 of 10 NDP I, with the Department of the Interior and Local Government (DILG) as the executing agency. DILG was made responsible for carrying out the Municipal Training Program as well as the study and that both be incorporated into one consultancy contract. Since DILG was keen to start the consultancy contract before loan effectiveness in 1984, it was agreed to make DILG responsible for training under the project and include the consultancy contract under the Regional Cities Development Project (Ln. 2257-PH). The actual costs of the training courses organized by DILG would continue to be funded through MDP I. 5. The Training Needs Assessment and National Training Program Study was carried out in 1985, and the consultant's draft final report was issued in early 1986. Completion of the study coincided with the People's Revolution in February 1986, and the subsequent changes in DILG proved to be very disruptive to implementation of the Municipal Training Program. 6. DILG experienced a major turnover of staff as a result of the change of government in 1986. The new staff reviewed all initiatives started by the previous government and had to be convinced that the programs were worth continuing. DILG assigned no full-time staff to the Municipal Training Program and continued to experience senior staff changes. Under these circumstances, it was difficult to maintain continuity or generate momentum for the program. 7. The present government created the Local Government Academy (LGA) in 1988 to be the lead agency for local government training.L Establishment of the LGA was recommended by the Training Needs Assessment and National Training Program Study. Implementation of the Municipal Training Program under NDP I was assigned to the LGA, providing the program with a clear institutional base. In addition to the Municipal Training Program, WA was made responsible for DILG's regular training programs, including the Executive Management Program, oriented toward over 43,000 local executives, and the Sanggunian Bayan training program for some 260,000 local council members nationwide. While the LOA inherited DILG's training facilities and staff at Los Banos, it was a new organization with limited staff and budget. Local consultants therefore had to be brought in to assist LGA implement the Municipal Training Program. 8. Implementation of Municipal Training Program improved significantly after establishment of the LGA. Seven training modules were developed, namely: (a) Module I: Orientation on Management and ImDlementation of the MuniciRal Develogment Project. The course was designed to familiarize city/municipal mayors and key local staff with the policies, procedures and requirements of the Municipal Development Project. (b) Module II: Project Development and Project Preparation. The course was designed to teach local executives, project officers, and local engineering staff about the project cycle, feasibility studies, assessment 21. The LGA was created under Executive Order 262, dated July 25, 1987, reorganizing the DILG (then called the Department of Local Government). - 45 - Annex 3 Page 3 of 10 of borrowing capacity, and the organizational requirements of project preparation and implementation, especially with regard to the Municipal Development Project. (c) Module III: Municinal Financg and Revenue Administratign. The course was designed to provide municipal/city treasurers and assessors, local budget officers, local council members involved with finance with knowledge of recent developments, problems and issues in local government financial administration, the revenue sharing system and other national-local relationships, and revenue generation. (d) Module IV: Detailed Engineering and Contract Management. This module was designed to provide city and municipal engineers, local project officers, and other technical staff with information on detailed engineering, preparation of bid documents, and administration of contracts. This module was subsequently divided into three courses: construction supervision, detailed engineering, and government procurement regulations (PD 1594 and its Implementing Rules and Regulations). (e) Module V: Municipal EXntergXise Management. The course was designed to provide municipal/city treasurers, municipal enterprise managers, local council members (involved with finance), and staff from the financial departments with knowledge of basic management concepts and principles and their application to municipal markets, slaughterhouses, bus terminals and other municipal enterprises. (f) Module MI: Infrastructure Maintenance and Eguipment Management. The course was designed to provide city/municipal engineers, equipment pool supervisors, project engineers and other managers and technical staff involved with infrastructure in the local governments with knowledge of planning, scheduling, budgeting, work organization and monitoring and control of maintenance for civil work projects. (g) Module VII: Community Mobillzation. The course was designed to provide local executives, barangay officials and local community leaders with basic knowledge of project identification, preparation, implementation and maintenance, encouraging local resident participation, and sources of financial assistance. Most of the training courses run for about one week (five working days). Module I is conducted by staff from the CPO and the MDF; Modules IV and VI are based on regular in-house training provided by the Department of Public Works and Highways (DPWH) and implemented by DPWH staff specifically for local officials. The remaining modules are, carried out by external organizations selected through competitive bidding by LGA from a long list of potential training organizations prepared for each module. 9. As of December 31, 1991, a total of 41 training courses were conducted involving 1,728 participants. Training was initially carried out only for modules involving DPWH staff, namely Modules I (Orientation), IV (Detailed Engineering and Contract Management) and VI (Infrastructure Maintenance and - 46 - Annex 3 Page 4 of 10 Equipment Management). Module IV was subdivided into construction supervision (IV-A), detailed engineering (IV-B) and contracting rules and regulation (IV-C) based on the response of participants who wanted more in-depth training in these technical matters. The breakdown of the Municipal Training Program is provided in Annex Table 3.1. 10. Modules involving external trainers have been more difficult to organize. The hiring of contract trainers for Modules II (Yroject Development and Preparation), III (Municipal Finance and Revenue Administration), and V (Municipal Enterprise Management) has taken about one year. Due to the novelty of the approach, confirmation of the procedures to be followed and administrative approvals took much longer than usual. Contracts for the consultant trainers have now been signed, and training will take place during 1991 and 1992. B. Evaluation of the Experience To Date 11. The LGA is still going through a process of learning by doing. As yet, there is insufficient feedback from the training conducted to date to make a full assessment of the training program. The concept of the LGA acting as a "broker" or organizer of training is new to the DILG, and the administrative structure of the department has been slow to process the selection of contract trainers and payments for training courses. As a result, training programs have been rescheduled, which inconvenienced both the trainers and the participants. 12. The LGA is addressing these institutional issues through the establishment of a Board of Trustees, reorganization, and an increase in staff. Under EO 262, the LGA would be under the supervision of a Board of Trustees composed of the DILG Secretary as chairman and four members appointed by the President upon the recommendation of the DILG Secretary. The Board was appointed in early 1991. This is expected to give the LGA more autonomy and speed up decision making. 13. The LGA is reorganizing and establishing a Contract Administration Division to handle contract preparation, documentation and administration, and a Management Information Division for processing information. The total number of staff is expected to double from 45 to 91. This increase in staff is in anticipation of LGA's expanded role in local government capacity-building as part of the Government's decentralization program. The LGA is planning to focus its efforts on improving planning and budgeting at the local level so that the local governments would effectively utilize the additional financial resources being made available to them. The ProRosed Third Municipal DeveloRment Project 14. The proposed project would continue the program developed under MDP I but would include financing for additional training modules to be conducted through the use of contract trainers and staff from DPWH for the technical modules and from the CPO for modules directly related to the project. 15. The modules would be along the lines of those developed for MDP I and would include: - 47 - Annex 3 Page 5 of 10 (a) Module I: Orientation Conference on the Management and Implementation of the Municipal Development Project (b) Module II: Project Development and Preparation (c) Module III: Municipal Finance and Revenue Administration (d) Module IV: Detailed Engineering (e) Module V: Contract Management and Project Procurement Procedure (f) Module VI: Construction Supervision (g) Module VII: Municipal Enterprise Management (h) Module VIII: Infrastructure Maintenance and Equipment Management (i) Module IX: Equipment Maintenance and Management (j) Module X: Project Monitoring and Evaluation (k) Module XI: Environmental Assessment Based on the reaction of participents, the infrastructure and equipment management module has been separated into two courses: one for overall infrastructure maintenance and another for equipment maintenance. A community mobilization module has been dropped since it is expected to be taken up as part of DILG's regular training program. With more project cities and municipalities completing their investment programs under the project, project monitoring and evaluation was added as a new module. A brief description of each module is provided in Annex Table 3.2. The modules are still experimental and their design would be refined as more experience is gained in their implementation, especially those modules to be conducted by contract trainers who are scheduled to begin work during the second half of 1991. 16. The modules would be carried out annually over a four-year period, 1993-96. Implementation of the training program in 1992 would be funded through MDP I. Based on experience gained from the Municipal Training Program under MDP I, it is assumed that all modules would be carried out in parallel each year and that one training session (school) would be conducted every quarter. The trainees would be selected from the project cities and municipalities, but participants from other local governments would be allowed to participate on a space-available basis.. It is estimated that a total of 156 training sessions will be conducted and a total of about 9,000 local government officials trained under the project. A detailed breakdown of the proposed training program is provided in Annex Table 3.3. 17. The total training cost is estimated at P 89.7 milliov (including price contingencies), assuming an estimated P 1,200 per trainee per day and including costs of the trainers, materials and supplies, accommodations for trainers and trainees, and travel costs for trainers. PHILIPPINES THIRD MMICIPAL DEVELOPtENT PROJECT Amex Table 3.1: ONGOING INICIPAL TRIAINING PROGRAN . _....... ................................. . .. ............_.. .. _.._._........................... 198S 1989 1990 1991 1992 Total- ......... ... ........... ------- ------- .......... ........ No. Trainee No. Trainee No. Trainee No. Trainee No. Trainee No. Trainee ... ...__,....... ........ ................ .... ...... _.. .. .. . ... .. . __.... _............. ..................... 1. mnicipal Developent Project Orientation I 78 3 117 4 281 - - - - 8 476 11. Project Developent & Project Preparation - - - - - - 3 103 3 120 6 223 111. MIhicipaL Finance $ Revwnue Akinistration - - - - 5 235 2 100 7 335 IV. Detaited Engineering & Contract Ranagenent - - - 4 242 - - - - 4 242 IV-A Comtruction Supervision - - - 6 221 - - - - 6 221 IV-B Detailed Engineering - - - - 2 63 - - - - 2 63 * C~~~~~~~~~~~~~~~D IV-C Rules and Regulations (PD 1594) - - 2 112 - - - - - 2 112 V. unwicipal Enterprise Managmnt - - - - - - 6 120 - - 6 120 VI. Infrastructure Maintenance & Equipment Mgnt. - - - - - - 5 156 - - 5 156 VIIZ. Commuity Nobitzation - - - 0 0 .... ...... .. - ----- ... ... .... ... .... .. ... TotaL 1 78 5 229 16 807 19 614 5 220 46 1948 0 . ..... .~~~~~~~~~~~~~~ PHILIPPINES THIRD I4ICIPAL DEVELOPNENT PROJECT ASwx Table 3.2: MJICIPAL TRAINING PROGRAM SULMY OF TRAINING NODDULES ... ... .. .._. .. ........ .............. __...._._...._W. .W.. ...................... ................. .. ............ .................... ... .... ,...... ODULE DESCRIPTIOti TARGET MTION TRAINERS ....................................................... .................................................................................................... _.. .. ................... NCDULE I Orientation Conference on the Orientation training progren for Mayors, c mcia Nesbers, 3 days Central nagement wnd Inplent mttion of project policies, preparation and key local officials Project Staff the M4nicipsl Oevelopnt Project imptleentation, including explanation of onlerding, procedures for loan avaitment, utilization, tcan repayment ad monitoring requfrments. ........................... ........................................................... .... ... .. ........ ..... ......... .. ...... ...... .......... . ....... NODULE I 1he module woutd faiNtiarize tocat ayors, development 10 days Contract Project Devloaimnt wmd Preparation staff with the project cycte, including officers, ptaming Trainers the project conceptulization, officers, engineering technical, finaciat and econneic staff, selected council evaluation of projects, assessment of mdbrs borrowing capacity and organization for project irple mtation ... ... .......... .................... .................. ....................................... .. .._. .... ... .... .. ....... .........0. ....... ..... .. .... .................. NXRULE III The odUle would fmiliarize local Treasury staff, 5 days Contract Iunicipel Finance edr Revimwe officiats with the tatest detelopment assesiment staff, budget trainers AcKinistration in the revised Locat Governent Code officers, selected and ewasures to improve revenue councit members cotlection and adfinistration, tncluding best practices frco other local government NOULE IV The module focasas en detailed Locat project staff, 7 days Department of Detailed Engineering engineering for project investments, engineering staff Pibtl ie Works including data requirements, designs and Highways awd design stanwdrds, technical ° specificatiors, preparation of cost estimtes and bid documents. ° ..__.. . ... .... ..... ......... __.... ...... _.... ........... .................... _..................................................... ........ ............ PHILIPPINES THIRD MUNICIPAL DEVELO(WENT PROJECT Amex Table 3.2: PSMICIPAL TRAINING PROGRAN StHRRY OF TRAINING NDULES ODULE DESCRIPTION TARGET DURATION TRAINERS PUMULE V The module would fm tliarize locat City administrators, 3 days Department of Contract NaRgwnnt and Project officials with PD 1594, guideLines on PMAC mebers, local Public Norks Procurenent Procedures consultant selection and other project staff, and Highways goverrnnt procurement requirements. engineering staff, plaening staff NOULE VI The module would instruct Local project Local project staff, 3 days Department of Constructioei Supervision staff on site inspection, monitoring of engineering staff Public Works project accoaqlishw)nt, testing and and Highways quality controt, mnd probltes related to project construction and supervision. ..._,.....................................................__. .... ...... .................. . .. .... ................ ............................. ... .... .. ...... ...... ....... IULE Vn This maodule includes the study of basic Mayors, administrators, varies Contract Mmaicipat Enterprise aunwgement swagamnt toots, key problte in treasury staff, selected trainers rolotion to m,,icipal enterprise coumcil teabers operations, and the role oT manageriaL wad technical staff. Muicipal enterprises inctude markets, slaughterhouses and bus terminals. .............. ............................ ^_.. ....... ......... . .... ... .... ...... ........... . .. . ................... NJULE VIII The molule would instruct local Engineering staff 5 days Department of Infrastructure Nointemwne aId engineering staff in plamning, Puilic Works Equipennt PRarmement scheduling, managing, conducting and and Highways monitoring infrastructure maintenance operations. .. _..... ... ................................... ................................. ....................... ................... ............. l.......... ... ....... ..bW MIOULE IX The module would failiorize local Engineering staff 3 days Department of Equipwnt Kaintearice awd engineering staff with management and Public Works Co Nanagement maintenance of heavy equipuent, with and Highways the emphasis on preventive maintenance. . PH:ILPPINES THIRD IUNICIPAL DEVELOPMENT PROJECT Amex Tsbte 3.2: NMMICIPAL TRAINING PROGRAM SWUIRtY OF TRMINING NMKULES ............ ........................ X_..... ......... ................................................ NRWLE DESCRIPTION TARGT DURATION TRAINERS NODLr.d X The .odute Mould instruct tocat staff Local project staff, 3 days Central Project tr4act Monitoring end on the procexss wd aethods for positive plaming staff Project and Evatu tion ard negative effects of conpleted LGA staff projects. Nf'ULE Xi The mcdete iwoatd fitliarize local Mayors, devetopment 3 days Con tract Envircrmntal Assesu nt govermrnt staff with environnental officers, planning Trainers concenns and instruct them on the officers, engirnering coicct of envirmntal essessnt for staff, selected council local inmestmnt projects. mebers ~0 I- 0o PHILIPPINES THIRD IWMICIPAL DEVELOPMENT PROJECT Am= Table 3.3: PROPOSED IWNICIPAL TRAINING PROGRAM ..... ........ .............................. ................................................................... __......................................... ..... ........... 1993 1994 1995 1996 Total ... ... ....... ------ ............. ......... .. .. . ... ........ No. Trainee No. Trainee No. Trainee No. Trainee No. Trainee ......... ................. ............................. ................................................................. ..... .......... S. Punicipst Del eop met Project Orientation 6 720 6 720 - - - 12 1440 11. Project Deveopitnt & Project Preqaration 4 240 4 240 2 140 2 140 12 760 111. Nuiicipat Finance & Revenue Adninistration 4 240 4 240 4 240 4 240 16 960 IV. Detailed Engineering 4 240 4 240 4 240 4 240 16 960 V. Contract Mnagement & Procuremnt Procedure 4 220 4 220 4 220 4 220 16 880 1 Vt. Construction Supervision 4 200 4 200 4 200 4 200 16 800 VII. Nuaiciput Enterprise Nwamgemmnt 4 200 4 200 4 200 4 200 16 800 Villi. Infrastructure Naintenwce & Equfpment wgst. 4 200 4 200 4 200 4 200 16 800 IX. Equipuent Maintennce & anasement 4 160 4 160 4 160 4 160 16 640 X. Project lepact Monitoring & Evaluation 2 100 2 100 4 200 4 200 12 600 XI. Envirornentsl Assessment 2 100 2 100 2 100 2 100 8 400 OQ~ TotaL 42 2620 42 2620 36 1900 36 1900 156 9040 0 X ..... .......---. ---....... . . . . . . . . . . . . .. .o . . . . . . . .. . . . . . . . . . . . . . . .. . . . . . . . . . . . . Source: The Local Government Academy O PHILIPPINES THIRD NUICIPAL DEVLOPMENT PROJECT Nuicipt Oevelopent Fund Calh Flows (in P uliliors) ACTUAL PROJECTIONS 1987 198 1989 1990 1991 1992 1993 1994 1995 1996 1997 1990 SMNtCES OF FUNDS lutice Brought Forwrd 54.7 173.9 136.2 157.9 68.9 190.6 289.3 252.8 203.0 233.7 212.9 243.4 IBRD Loans EDP 66.3 8,0 4U.7 64.5 22.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 "DP 1 85.9 0.0 37.5 23.4 221.8 382.6 0.0 0.0 0.0 0.0 0.0 0.0 MP 11 0.0 0.0 0.0 11.8 116.5 84.1 114.4 93.6 65.2 0.0 0.0 0.0 NDP III 0.0 0.0 0.0 0.0 0.0 11.9 178.2 190.1 201.9 297.0 178.2 130.7 Other Donor to s 0.0 0.0 0.0 0.0 0.0 17.2 80.2 216.4 236.4 187.9 101.5 10.7 Dcuestic Budlget Contributlons 0.0 0.0 0.0 4.9 -4.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Local Govt. Oebt Service Pay ents 10.1 8.3 17.9 32.5 126.6 126.6 171.6 249.1 382.5 490.8 648.8 738.8 iPPLICATION OF FVIES iBRD Projects RCDP 29.6 35.4 34.6 90.9 22.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 POP 1 13.5 18.6 46.8 132.5 221.8 382.6 0.0 0.0 0.0 0.0 0.0 0.0 Vd UDP 11 0.0 0.0 0.0 2.7 116.5 84.1 114.4 93.6 65.2 0.0 0.0 0.0 ID NDP III 0.0 0.0 0.0 0.0 0.0 17.8 267.3 26.1 302.9 45.5 267.3 196.0 fx o Other Doorm Projects 0.0 0.0 0.0 0.0 0.0 17.2 88.3 253.5 281.3 237.2 144.0 16.1 .' h Local LoWns 0.0 0.0 0.0 0.0 0.0 22.0 110.9 166.8 205.9 313.8 486.7 S41.1 salowe 173.9 136.2 157.9 68.9 190.6 289.3 252.8 203.0 233.7 212.9 243.4 370.4 Annex 4 Page 2 of 2 PHILIEENE THIRD MUNICIPAL DVELOPMENT PROJECT Municipal Development Eund Cash Flows The following assumptions have been used in projecting the cash flows for the MDF: (a) The MDF interest rate is projected to be 14% in 1992, 15.5% in 1993, 17% in 1994, 16% in 1995, 14% in 1996, 12% in 1997 and 12% in 1998. It is assumed that current levels of interest rate in the Philippines would be maintained over the medium term but then begin to drop over the long term. (b) The average repayment period is assumed to be 15 years with 3 years of grace. (c) The average size of subloans under MDP III is assumed to be P 16.2 million in June 1991 prices and the subloan would be disbursed over a three year period, with 20% released in the first year, 70% in the second year, and 10% in the third year. (d) The number of loan commitments is estimated to be 15 in 1992, 10 in 1993, 10 in 1994, 15 in 1995 and 28 in 1996. It is assumed that many of the project cities and municipalities availing of subloans in the latter years would be repeaters, namely those that have successfully completed earlier subprojects. (e) The proposed Philippines Regional Municipal Development Project of the Asia Development Bank and a possible Fourth Municipal Development Project are included under "Other Donor Assisted Projects". (f) "Local Loans" include loans made by the MDF exclusively from its internally generated funds. These loans would be released on the. same assumptions as that of the proposed MDP III. Annex 5 Page 1 of 9 PHILIPPINES THIRD MUNICIPAL DBVELOPMENT PROJECT MDF POLICY GOVERNING BOARD RESOLUTION No._OL14MD PROVIDING GENERAL POLICIES FOR THE LENDING AND PROGRAM SUPPORT OPERATIONS OF THE MUNICIPAL DEVELOPMENT.FUND (MDF) WHEREAS, it is the stated national policy to promote local government autonomy and decentralization in order tO respond to current local infrastructure deficiencies, and ' Tntensifying. pr9ssures arising from demographic, econoame. and-social trends; I WHEREAS, the initiative to respond to the challenges of local development through investment in infrastructure- and. improvements in local services shall rest more strongly upon LQUs under the new decentralized environment; WHEREAS, growing Financial domand levels for local fnvestments cannot be expected to be sourced through National Government channels alone and borrowing is. a potentially important. means by which local governments can augment their regular revenue resources to finance badly needed capital investments; . WHEREAS, in recognition of the need to provide local governments, with greater access to loan finance, tht: Municipal Development Fund eiiDF) was established in 1984 by virtue of P.D. .1914 as a revolving fund; ... * WHEREAS, subsequent explication of P.D. 1914, notably thru DOF-COA-DBM Joint Circular 6-87 in 1V87 established.-a vider MOF role as the principal funding channel- for a.wide array of donor-sourced financing of developmental projectY initiated by local governments; WHEREAS, the MDF Ims accumulated a. substantial balance of loan repayments that is projected to increase very rapidly over the next few years, so that complemented with further donor-sourced on'-.1ndings. it has a potential to form the basis of a major and self-sustaigifig borrowing source for LGU8; . , ., _'. WHEREAS, thdre has been little opportunity to develop a coherent set of policies and operational procedures In relation to the management of lending operations of the MNMr notably the recycling of loan repaymente for. relending. to LGUS, to provide a substantial expansion in the use of borrowing through MDF, on appropriate terms and conditions, to finance capital investment needs for an increasing number of local governments. - 56- . Annex 5 Page 2 of 9 WHERiEAS, the MDF Steering Committee created by virtue of a Joint Special Order No. 1-91 of DOFp DDIp NEDA, DPWH and DILO dated October 1, 1991v was designed primarily to initially institutionalize the operation of the MDFp WHEREAS, the name '"MDF Steering Committee" tends to create confusion in view of the presence of various Project "8teering Committees" also dealing with MDF; WHEREFORE, upon Joint sponsorship of this Body, be it resolved as it is hereby resolved, thati 1. IDF Steeri*'g Committee be renamed as IDF Policy Governing Board (POB) to avoid confusion among different Project Steering Committees. 2Z Effective sourcing, cApitalizing and revolving of liunicipal Development Fund (MDF) shall be governed by a clear %et of supportive policy pronouncements and Institutional re-orientations, as followsu 1.0 PCjlic Direstiorn. wk ja jUDDorl Onerations 1.1 Be it resolved, as it is hereby resolved, that the basic principles, policies and overall direction that wopld govern MDF operations shall be set and formulatioed by the MDF Policy Governing Board hereinafter referred to as the 'DF-PGDp chaired by the Department of Finance (DOF)p and comprising reprAsentative& also from the National Economic Development Authority (NEDA)p Department of Public Works and Highways (DPIWH)p Department of Interior and Local Government (DILO) and Department of Budget and Management (DBMI)p together with a representative of the depository banks set-vicing for the MDF. The POB shall be aided by a Mlanagement Committee headed by the Executive Director of the B4ureau of Local Government Finance (BLGF) who will concurrently act as MDF Administrator. 1.2 Ve it resolved, fLrther, that in, prder to enable attention to be focused specifically on the lending operations as a separately Identifiable progrom within the overall scope of the MDF, there .is hereby created within the MDF a distinct account called the Lical Loans Accountp hereinafter referred to as LLA, which shall cover all transactions relating to lending to local governmentt under the aegis of the MDF, to include the advance of donor-assisted loans and loans made from do-estic somrces (including from accumulated loan repayments). 57 ) Annex 5 Page 3 of 9 1.3 E4e i t reSOlveVd. further,, that a portiorn of the A C-CLUlM.ated and anriual loan-i principal and interest repayments whicth accrteb to the PIDF shall 1be rserved so as to be thiade available -for the finarice crf essential sttppcort activities to the MDF :Lndinir: operations. Irn the interests of clear accou.intability and controll a clistirict accotunrt waou.ld be created withirn the overall scope of the PIDFl, tC7 be known as the Procgramn Suttpport AccorUnt (FPSA) to cover all such -financing of program support activities. ZO ILj%_ijg rn (.._:lves_ *j f .r LLe A 2.1 Be? :L t resolvecl, as it is hereby resolved, that the I...LA.A in the mediutm terni sihoudotli be directed towarcds realizirig the followinq speci fic obJectiveso ,t- To function as a source of credit finance in support of decentralizatioon ouf services from national -tC local levels of, goverrninentu (:) To promo)fnc,-)te the acceptability of borrowinrg as ,a meiaris of f:inanciriq a wide range of local governmvs>|ernt inrvestmentsp (c) 0o promote the selection by local governmento of well-Justified and high qual.ity irvvestnitents in infrastr-utcture and putblic -facilities; (d) To encoturage a cost-recovery approach to the provision of suitable public services through the levy of appropriate levels of user ctarges; arnd 2'2 Be it resolvecd. further, that in order to. neet the above obJectives and sustain the ILA within the MDF as a viable loans fundingi mecharnism, the operational policies pf the LLA woulcl be as -follows u (a) The LLA wouldl be operated on a fully-revolving basis" retaining all its capital and all interest on its lendinrgs (b) 'rernis and conditions of LLA fund deploym*nt would be set so as to maintair' its long-term viability and to pursuLe a significant real termns annual growtht in LLA balance and lend ings; Annex 5 -58- Page 4 of 9 (c) It would be an objective of the fLnd to be eventually self sutstaining. 3.0 L-- UMn i. rLL f the LLf EBe it resolved, as it isd hereby resolved, that on its creationp the LLA would be capitalizedl by an initial allocation of fifty percent (50W) of the MDF acc:umulated balance comprised of accrued repayments of principal and interest -an loan advances made together with accrued interest earned on the MDF cash balances. Thereafter., the thtie LLA would be further funded as follows t (a) As a general rule, all donor-sourceci funds intendedl for on-lending to local goverrnments would be channeled through the LLA. (At present, on-goinq projects such as PhtREMIUMIED and MDP2 have been the prime soturces for relending activities now to be coveredi by the LLA. Future identified projects which would provide further financing for loans include MDP3, F'RMDP and MCDPg other donor-aided local governmnent lending projects yet to be identified wouldl also be administered through the LLA.) (b) All repayments of loan principal by LOUs on their borrowings fr om MDF/LLA. (c) All interest paymerits by LUUs on their MDF/LLA borrowings with the exception of the amounts of such interest to be transferred annually to the PSA under Section 11.0 below. (d) Any domnestically-sourced funds from the General Appropriation Account which are intended to finance loants to LOUs under LLA . terms and conditionsp and (e) Earnings fronm irnvestment of LLo cash balances (such as time deposits and COMBO accounts) subject to applicable rules o.nd regulations. 4_0 s U%srs f Lj-A Punds 4.1 Be it resolved, as it is hereby resolved, that both donor-sourced funds and any OAA and other domestically sourced contributions which are provided for-specific purposes and proiects would be utilized f'or the purposes speci fied in the agreements with the relevarnt donors and in the O3AA. Annex 5 Page 5 of 9 42 Bfe it resolved, further, that earninrgs accrtting to the. LLA from LGUs' amortization payments on their borrowings, -together with any retained interest earnings from investments of LLA cash balances, could be useCd in the -following waysi I. (a) Financing (up to 100%) eligible LOU) investment expendisture proposials as outlined below. (b) Financintg a proportion of acgreed individutal loans as countterpart to. donor-soturced financing of -the balance of such loans (this (night be appropriate where donors require a substantial domestic counterpart contOibution and where it is consisdered jiustifiable to provide all or part of sttch co:Lunterpart funds as loans to LOUs rather than seeking LOU contributions directly from their own revenues)p S.1 Ele it resolved, as it is htereby resolved.. that in principle, any-LOU woauld be eligible to apply for a loan, siubiect- to its passing a credit-worthiness test specified by the MDF-P'O (which would bet based both on the c:urrent financial conditidn and on future projections of financial condition foir the applicant LOU). 5.2 Be it resolved, further, that the MDF-POS shall determine priority eligibility categories of credit--worthy LOUs having regardp inter alia, to the available voltume of. LLA funds and to national policy priorities as expressedi in the Medium Term Philippine Development FPlan. 5.3 Be it resolved, ftlrther, that in the determination of priority categories' "of borrower LGUs, consideiratioti shall be given to the potential ability of strongly credit-worthy LOUs to access alternative sources of credit finance. 6.0 Z:1 i i&J& EA DditUres fr an. FiraLrnce 6.1 Be i t resolved, as it is hereby resolved, that in principle, eligible LOUs sshall be permitted to borrow from the LLA for financing any investments within the range of their .aosigned responsibilities which flulfill specified economic and financial criteria e.g. minimum economic rates of return; disigns which maximize cost effectiveness in relation -to the obJectives seought froem the investmen'ts; and, irn the case of directly -60- Annex 5 Page 6 of 9 revenue-generatinq investments,l full cost recovery, plus other provisions as may be allowed uAnder the New Local Government Code (NLOC). Borrowing for financing of current operational expenditures would not be allowed. 6.2 Be it resolveds furtherp that borrowing for the finance of municipal officer and prestige proJects such as municipal theaters and sports. s tadia shall be considered not eligible. 6.3 Bae.it resolved, fuirtherp that the MDF-PGB would '- from time to time establish priority categories for .investment expenditure to be financed from LLA loans, taking account,, inter alia. of the volume of available LLA funds and of current national priorities as expressed 'in the National Economic Development Plan. In normal cifcumstances, investments approved for LLA loan finance would be expected to have been included in the relevant Local Development Plans. 3 7.0 Terms dnd SgnidUans of Lendig 7.1 Be it resolved, as it is hereby r-esolved, that the .MDF-PGB shall deter-mine the terms and conditions of LLA loans1, including interest rate, repayment periods and allowable grace periods within the framework of the principles outlined below. 7.2 Be it resolved, fturther, that the MDF-P0B shall also determine appropriate penalties to,be applied in the event ofl default by LOUs in making loan repayments of principal and/or interest, including a provision for recovery of arrears through o-ffsetting from defaulting LOUs' Internal Revenue Allotment (IRA) allocations where amounts remain unpaid after a specified period from due payment date in accordance with existing rules and regulations. 8.0 Interest EILj 0.1 Bo it resolved, further1 that the LLA interest rate be determined annually to apply to all loan agreements signed in thw relevant year. The interest rate prevailing during the signing of the sub-loon agreements would remain fixed for the duration of the loan repayment period. These provisions woLuld give borrowing LOUs greater certainty in their futuire repaymen7ts liabilities than the variable interest rate hitherto in use. -61- Annex 5 Page 7 of 9 8.2 Be i.t resolved4, further, that a uniform interest rate vwoulcd apply for all sub-loan a1greemnents signed in a givet-n year4i' irrespective of fund inq saturcc?, o)f borrowing L-OU4.: and of category of investment beinrc, finvancccd . This arrarngement woulId a (a) facilitate the objective o0f fostering real growth in the size (i.e. the net assets) of - he LLA; (b)' simplify the management antid administration of the Ll.A and (c) protmote the objec'tive of selection of well-itustified LOJU investments (by avoiding bias in investment selection which could be occasioned hy differentia:l interest rates). 8.3 De iJt resolved, further, that it is considered that subsidies to LGUs with limited borrowing capacity would better be providedI through explicit capital grants (administered throucah the 1MDF grant mechanisms) allied with loans at a uniform LLA interest rate rather than being hidden in concessional lending terms. 8.4 Be it resolved, further, that in the initial year (1992) of LLA operation, the interest rate would be, set at 14 percent (14%) per annum. The r"ate wottld be increased annually thereafter in increments ofl 1.5 percent (j.5%) until such time as it reached a referernce level of the three month weighted average interest rate (WAIIR) on time deposits of 61-90 days. based on Ceritral Bank statistics, plus a margin of 2 percent (2X). Thereaixfter4 it would be adjutsted annually in line with thtis ireference level. 9 * 0 RtQR,?t Mjni Cr em, .,2 9.1 Be it resolved, as it is hereby resolved. that the, economic or useful life of the investments financed from the LLA lqans would determine the maximum repayment periods (inclutding any grace periods) of loans. From the economic standpoint artd for equity considerations. future generations should riot be burdened, thru taxation, with amortizations for depreciated assets that the earlier generation ihas incurred and benefited fronm. The periods over which loans are repaid (to include the grace rperiods) shotuld thlerefore be -62- Annex 5 Page 8 of 9 made on a per investment category basis. The MDF-PUS shall issue a schedule showing maximum repayment periods per investment category based on estimated average economic lives. 1,71.2 Be it resolved, further, that the grace periods would only be allowed where the borrowing LGU is unable immediately to service fully the _VA. loan debt. In these circumstances, the grace period would be based on two (2) conditions: a) Cash flow of revenue generating projects b) construction period of infrastructure projects. 10.0 Pltt.Pi, oth. L).A. Be it resolved, as it is hereby resolved, that all aspects of the operation and administration of the LLA will be handled, under the direction of the MDF-PGB through the MDO Administrator, by a special management - unit, referred to as the Local Loans Management Unit (LLMU), to be established within the Special Projects Management Service (SPMS) of.the BLGF-DOFo. - L11.0 FE!Jfl4S p.f.. iJa, ,,PQ Be it resolved, as it is herebyresolved, that on its creation, the PSA would be capitalized by sn iniitial allocation of fifty percent (5O%) of the MOF accumulated balance comprised of accrued repayments of principal and interest on loan advances made together with accrued iriterest earned on the MDF cash balances. Thereafter, the PSA would be further funded by, sem,estral transfers determined by the MDF-PGBO, not exceeding .75 percent (.75%), of the total outstanding loan debt of local governments relating to their borrowings from'the MDF/LLA at the beginning of the relevant semester. "Earnings frominvestment of PSA cash balances (such as time deposits and COMBO accounts) would also be retained by the account. 12.0 YS C ibf t .t P? Ewi. 4F,. Be it resolved, as it is hereby resolved, that the permitted uses of thq PSA funds would be confined strictly to the following: (a) finance of releases of installments of agreed types of MDF disbursements pending receipt of Notice of Cash Allocation (NCA) from the DBM, such financing,to be reimbursed to the PSA once NCA is -63- Annex 5 Page 9 of 9 r ece:ived# ¢hJ) fIrinarnce of tral.ninq ac:tivities and ather ex pQII d i ttre essn ta. i A 1 tt ttie ef fective ii. tnp 1ien ta t. iatXI of t he;. procnrams; and pr3 ifctC riariAnced throtth tlti IIDF " for Which r1co altetrnuative fltnd i.nq viouirrce iLs .available. 1 3..O inrsp:l.umsn * i n I r rartqetiier) t I tie i t reso.lved, §final1ly, tthat cletailed .imnplemnetitingu qtutidlines and proceduLmal arranqeiments to effec.t tthe provisiors ot this TJoint Resolution shall be prort lacated v in a sepaa-ate sttppor tinra memforanduim approved by the IID)F-PCEi. Done iLn thrse cit.y of Manila, thi'; 5th d.aY trf F e Unanimouz i (lYlI A: #rpproved: D:USD GAL.. J R. IJnder-se cre ary' Departmerit of F"inance HARRY Sl. FA8MIOC CESAR; N . SARIND Assi stan 1: 11 lrector-G3erieral Actirng Stcmretary 1Matlr.ilo l Ec:conmclnlic bve elopmervt D)eparti men t 1crf Inter or AtA tht-I" ity & Lol T'over'nment S;A,L#PA E)R Ii. r:+ll.iC; E11:F;I r* ENCATIRNACIIt) U d.erlecrte ary Undr secreta rhy tep 1;tutiovs flor hijh cost.. 2/ 3. High cost 2/ 1-3 With a.1ditional conts such as filling, RflW/latl a.qli(isiI.icim *.ndl/or demo- I h-l.iaag diSkl ri.placement. of existing ?%I #114 lut. .. E. OTama ONSIDERATIONS 1. ru1l aupport. from it I ei.Wtrtirs 11i- jas. riii spltirti re-aue lu,gj lg,ty captain, lot.7 *UfflI.i.Sl 1,*llHi. (PO tecth- 111t'&s *'i""'ll. 2. Fjidorsemnt from certain sectors 6-10 Eslortsenmeeut. 1'r xfa lical officials jind CMV t. 0.1o.1 yrnhlsp. 3. With technical recoMendatiOnI -fi RnconirJ,lodh tq% dO techuikcal group. llTQIWtlT SCORE iS s0 POINTS. PASSING; SOORE FOR PRWJEW'r SCREENING IS 26 POItflS AND AWIYWVI. IF PAWWI OITAYINE ADOVIE 26 POTNTI, 1'I.1-4W'4V P1O(fl) 'IV S) l.MPLIFI1i.) rRWINIT RIORUITTZATION - 72 - Annex f Page 9 of 9 >AEXC TABLLE..2: Siumlified Project Priori-tization Criteria PRIORIIY INDICATOR SCORE REMARKS A. URG4ECY 1. Very Urgent 11-15 pts. The need for immediate implementation is very critical. 2. Urgent 6-10 The need for immediate implementation is critical. 3. Less Urgent 1-5 No immediate need to implement the project. B. CRDER OP PRO ORITIIE Based on total score in SPS. 1. First preference 7-9 pts. 42 to 50 pts. 2. Second preference 4-6 34 to 41 pts. 3. Ihird preference 1-3 26 to 33 pts. C. IMPLEMENTABILITY 1. Good Chance 7-9 pts. There is no foreseen problem in implementation such as ROW/land acquisition; squatter dislocation; legal and administrative conflict with other agencies or certain sectors; etc. 2. Fair Chance 4-6 There is/are foreseen minor problems in implementation such as R0W/land acquisition; squatter dislocation; legal and administrative conflict with other agencies or certain sectors; etc. 3. Unlikely Chance 1-3 There is/are foreseen major problems in implementation such as ROW/land acquisition; squatter dislocation; legal aid administrative conflict with other agencies or certain sectors; etc. D. INCIUSION IN PRIORITY LISTINGS 1. National 6 pts. Identified in Regional Development ProJects. 2. Regional 4 Identified in Provincial Development Programs. 3. Provincial 2 Identified in City/Municipal Development Programs Concerned. RAUK FR0ECTS FROM HIGHT (48 PIS.) TO LOWEST (6 PTS.). - 73 - &=nx 7 Page 1 of 4 PHILIPIN THIRD MUNICIPAL DEVELOPMENT PROJECT Environmental As6ects A. Environmental Problems In the Project Cities and Municipalities 1. Most of the cities and municipalities in the Philippines are faced with adverse environmental conditions resulting from, among others: (a) uncollected garbage and open dumping and burning of solid waste; (b) unsanitary public markets and slaughterhouses; (c) dumping of animal waste from slaughterhouses into waterways; (d) inadequate sanitation and dumping of sewage into waterways; and (e) lack of proper drainage, causing stagnant water and flooding. 2. These conditions have been brought about mainly through high national population growth, rising urbanization and a lack of commensurate investment in basic infrastructure and municipal services. During 1980-90, the national population grew at an annual average rate of 2.3%, increasing from 48.0 million people in 1980 to 60.5 million in 1990. Along with the growth in overall population, a significant number of people migrated from rural to urban areas. In 1980 approximately 37% of the population or about 17.9 million people were urban dwellers. By 1990 the urban population was estimated to have reached 29 million people or 48% of the total. Rural life styles, such as the dumping of garbage and human waste in open waterways, were no longer acceptable in the cities with their higher population densities. 3. Now, existing infrastructure facilities are inadequate to meet the demand for services from the ever-increasing urban population. The capacity for service delivery has been further diminished because many of the systems are old and dilapidated and are unable to operate at peak efficiency. The increase in demand for services has also outpaced, by a wide margin, the ability of both tho national and local governments to provide additional capacity. The result is that levels of service are deteriorating and problems relating to environmental pollution and public health are increasing. B. Incorporation_of Environmental Concerns-in-the Proect Design 4. The Third Municipal Development Project (MDP III) comprises a large number of small-scale infrastructure engineering and municipal service components in a wide range of cities and municipalities throughout the country. It offers a good opportunlty to local government to make a significant impact in improving environmental protection. The problems in the areas of public health, water supply, sanitati.on, drainage and solid waste management, are all within the scope of MDP III. Other aspects of environmental protection such as noise control and atmosphetic pollution are beyond the scope of MDP III, although a minor impact in these areas may be achieved through improved traffic management procedures. S. Envircnmental concerns would be taken into consideration in the formulation of investment programs under the project. As part of project - 74 - Annex 7 Page 2 of 4 preparation, the local governments would under the guidance of the Central Project Office (CPO): (a) undertake a careful assessment of the possible environmental impact of each project component. This should include an evaluation of the effects and actions that one sector may have on another. For example, improved drainage may not be fully effective if solid waste collection is neglected, and road rehabilitation may have a limited life if the area is subjected to frequent flooding due to inadequate drainage; (b) give careful consideration to the location and site selection criteria for high-risk facilities with the potential for causing pollution. These include solid waste disposal sites and slaughterhouses; (c) provide alternative sites and adequate compensation to squatters and other residents displaced through the project; (d) obtain locational and design clearances from the responsible regulatory agencies, such as the Department of Energy and Natural Resources and National Meat Inspection Commission, for facilities such as landfills and slaughterhouses; (e) ensure that the project design includes adequate and effective safeguards to mitigate pollution problems; (f) develop, introduce and monitor operational and management plans for facilities such as markets, slaughterhouses and solid waste disposal sites to ensure that pollution and environmental damage do not occur as a result of day-to-day activities; and (g) introduce a system of regular and routine maintenance to keep facilities in good operating condition. This would include activities such as drain cleaning and septic tank emptying. The CPO would review the environmental aspects of the investment proposals submitted by the local governments during the appraisal of the subprojects. 6. Public markets and paving/rehabilitation of urban roads are expected to account for the bulk of the investments under the project. The emphasis will be on the rehabilitation of dilapidated public market facilities and attention will be given to providing: water supply for wet sections (fish and meat); drainage; refuse collection, storage, and removal; public toilets; and traffic management. 7. Landfill site and slaughterhouse investments have the largest potential for causing pollution and other negative impacts on the environment. The landfills and slaughterhouses will be designed to mitigate pollution, e.g., slaughterhouse designs will include facilities for the treatment and disposal of waste products and animals condemmed as unfit for human consumption. Proper sanitary landfill methods of operation will be introduced and facilities designed accordingly; site drainage, fencing to control wind-blown litter and for security, and leachate control systems will be provided. Detailed operational - 75 - Annex 7 Page 3 of 4 and management plans will be prepared for each landfill site showing the sequence of tipping, compacting and covering of cells. The provision of suitable material for covering and capping will be included in the operational plan. 8. The investmen,' program would have to be approved by the local council in each city and municipality. At that time, the program would be submitted to a public hearing, and various interested parties would be given an opportunity to voice their concerns and opinions. 9. To the extent that the environmental problems reflect weaknesses in the system in place in the country as a whole, system-wide solutions would need to be sought. First, although local and national governments are beginning to take a greater interest in the environmental impact of investment projects, the procedures to conduct a full environmental impact assessment are not necessarily in place. The CPO would develop environmental assessment guidelines to be used in the review of subprojects in collaboration with the Bank based on the Bank's Environmental Assessment Sourcebook. This would be carried out through a series of workshops to be conducted with staff from the Bank's Environment Division, Asia Technical Department, during the second half of 1992 and early 1993 and is reflected in the Supervision Plan (Annex 10 (a)). Staff from the Environmental Management Board are expected to participate in these workshops. These guidelines would also provide a basis for local governments to conduct environmental assessment of their own investments and would be part of the environment training under the Municipal Training Program. In addition, the Department of Public Works and Highways (DPWH) will develop the procedures and capacity to conduct environmental impact assessments for national infrastructure Investments through technical assistance to be provided under the Highway Management Project. The procedures developed for DPWH as a whole would be incorporated in the CPO'S guidelines. 10. Second, the prevalence of open dumping reflects the fact that sanitary landfill techniques and practices are not well known in the Philippines. There is a severe shortage of skilled designers, managers and operators able to effectively introduce this system, particularly in the provincial areas. A substantial training program in the planning, design, construction and operation of sanitary landfills is therefore urgently required. The proposed environmental sanitation study under the project's technical assistance component would look into appropriate technical choices, institutional arrangements, and capacity building requirements for sewerage, drainage and household waste disposal, including disposal of solid waste. No landfill components would be funded through the project before this study is completed. C. The Environmental ImDact of the Project 11. The project is expected to have a positive environmental impact. There are significant health benefits to having clean and hygenic conditions at public markets and slaughterhouses for the preparation, handling, storage and display of food for human consumption, particularly fish and meat. Slaughterhouse Improvements financed under the project would provide humane and hygenic facilities for the slaughter of animals for human consumption, reduce the incidence of illegal and backyard slaughtering, and enhance public health standards through more rigorous meat inspection and safer preparation, handling - 76 - AnmexZ Page 4 of 4 and storage practices. Improvements in flood control and drainage systems funded under the project should reduce flooding, damage to private property and infrastructure, and disruption to economic activities and social life. And, the proper disposal methods allowed by project-financed landfill investments should result in reduced air pollution from burning and possible contamination of groundwater. - 77 - Annex 8 (a) Page 1 of 4 THIRD MUNICIPAL DEVELOPMENT PROJ:CT Hunicigal Develonment Fund;InstLtitutional Study Draft Outline Terma of Reference A. Backgroun 1. Credit has been a significant source of financing for local government capital expenditures in most developed countries. By financing capital investments through borrowings, local governments are able to smooth out lumpy infrastructure investments and development costs can be shared equitably between present and future beneficiaries by amortizing payments over the life of the Investment. Credit financing may, among other things, take the form of government loans, borrowing from private and government financial institutions, or bonds. The main source of local government credit may be municipal development banks, as in some European countries, or the bond market, as in the the United States. The actual form of lending reflects the historical circumstances under which municipal lending developed in the country. In many countries, the national government played or continues to play a role in the establishment and growth of municipal lending. 2. In the Philippines, credit is not widely used to finance local government development projects. Local governments have limited revenues and are unable to carry a significant debt burden. Most lending to local governments to date has primarily been for public markets. On the other hand, the need for investment financing is large. The supply of government services and facilities has not kept pace with increased demand, resulting in congested roads, flooding due to inadequate drainage facilities, unsanitary public markets and slaughterhouses, and uncollected garbage. Local governments in the Philippines would therefore benefit from loan financing to meet their investment needs. 3. In 1984, the Government of the Philippines established an institutional framework to provide local governments vith increased access to credit and to coordinate that assistance. In addition to financial resources, the local governments needed assistance in formulating investment programs and Identifying and preparing projects, given their lack of experience in carrying out significant investment programs and limited technical and financial capabilities at the local level. The framework consisted of: (a) an inter-agency steering committee for coordination and policy guidance; (b) a Central Project Office (CPO) under the Department of Public Works and Higiways (DPWH) to determine the creditworthiness of subloan applicants, appraise subloans, and assist project cities and municipalities with preparation of investment proposals and project implementation; and (c) a Municipal Development Fund (HDF) within the Department of Finance (DOF) to administer subloans. This arrangement reflected the institutional strengths and responsibilities of the various government agencies; DPWH had experience in handling investment project and DOF was responsible for administrative oversight over local government finances. - 78 - Page 2 of 4 4. The MDF was established as a revolving fund under Presidential Decree 1914. The fund was to act as a channel for passing on foreign loans, assistance and grants to local governments. Local governments' payment of interest and repayment of principal provided under MDF loans accrue to the Fund and are relent for similiar local investments. In addition to providing loans to local governments, the MDF has been used to monitor and release foreign funds and local counterpart funds for foreign-assisted projects. 5. The World Bank has supported the Government's efforts to assist the local governments through two Municipal Development Projects. The First Municipal Development Project (Loan 2435-PH), aimed at cities and municipalities outside of Metro Manila, was approved in 1984, and a Second Project (Loan 3146-PH), aimed at cities and municipalities wlthin Metro Manila and its immediate surrounding provinces, was approved in December 1989. After a slow start following the political changes in 1986, project implementation has improved significantly in recent years, with increasing numbers of cities and municLpalities expressing interest ln receiving loan financing. The proposed Third Hunicipal Development Project would follow on the first project and provide additional financing for local governments outside of Metro Manila. 6. A key long-term objective of the Bank projects is to institutionalize credit as a form of financing for local government capital expenditures. B. The Need for an Institutional Review 7. The growth in the number of project cities and municipalities under the Bank's Municipal Development Projects (and requests for financing from even more) necessitated a review of the projects' institutional arrangements. The increasing number of local governments and their increasing needs have overstretched the institutional arrangements and procedures originally developed ln the mid-1980s (para. 3). These were established on a pilot basis and were expected to evolve over time as experience was gained with lending to local governments. Adjustments are consequently being made to MDF administrative procedures and a policy statement and implementation plan for the MDF have been developed for implementation under the proposed project. A Loan Loans Account (LUA) will be established in the MDF to separate the Fund's lending operations from its grant adminLstration functions. The policy statement and the LLA are intended to be medium- term measures. A basic revlew of the institutional options would be needed to establish a long-term institutional vision and goals for a system to provide local governments with access to credit financing. This review would be carried out under the proposed project. 8. The Government's decentralizatlon policies are expected to result in basic changes in national-local government relations. The Government has acknowledged that the provinces, cities and municipalities should play a larger role ln economLc and social development and is proposing to shift more responsibilities to the local govetnnments as part of its emphasis on decentralizatLon. The revised Local Govirnment Code, signed by the President ln October 1991, changes many of the existing laws and regulations governing national-local government relationships, Increases resource transfer to the local governments, and devolves many of the functions currently undertaken by natLonal - 79 - Annex 8 (a) Page 3 of 4 agencies to the local governments. Under the revised Local Government Code, the national government agencies would play a policy determination and supervisory role and relinquish most of their direct administrative controls, The Department of Finance would rely more on indirect measures, such as a combination of grants and loans, to guide the financial development of the local governments. There is thus a need to institutionalize the use of credit in a decentralized environment. The proposed study would also address this need. C. Objectives of the Study 9. The objectives of the study would be to: (a) Determine the role of credit, including the relationship to other instruments such as grants, and identify appropriate uses for different debt-related instruments (loans from government and private financial institutions, bonds and guarantees); (b) Identify institutional alternatives for providing local governments with access to credit and recommend the most appropriate arrangement; and (c) Develop an action plan for setting up such a system. D. ScoRe of Work 10. The study would review the existing situation which would include but not be limited to: (a) The financial relationship between national and local governments, including laws and regulations governing the flow of funds between national and local governments and between local governments; (b) Local government operations at the provincial, city and municipal level, including investment planning and budgeting, financial management including debt management, and project execution; and (c) Existing institutional arrangements, including, but not limited to, the PREMIUMED CPO, the MMINUTE Project Management Office, the MDF,(especially experience under the LLA) and other institutions involved with lending to local governments, such as the Development Bank of the Philippines. 11. Based on this review, the consultant would prepare recommendations on: (a) The role of credit and its relationship to grants; (b) Debt-related instruments appropriate for financing local governments in the Philippines; and (c) Alternative institutional arrangements and a recommendation on the best alternative for the Philippines. - 80 - Annex 8 (a) Page 4 of 4 Significant differences in financial, technical and administrative capacity exist between local governments. The national government would consequently need to employ a different combination of grants and loans and other debt instruments to promote local development. The consultant would need to identify critical functions to be performed by the national government (e.g., creditworthiness analysis, monitoring of fiscal performance at the local level) and recommend several alternative insitutional arrangements for carrying out these functions. The future evolution of the CPO, MMINUTE Project Management Office, and the MDF would be taken into consideration in developing the institutional options. 12. After agreement with the Government on the preferred alternative, the consultant would develop an Action Plan for establishing the necessary organizations. The Action Plan would include, but not be limited to, proposed organizativLial and administrative changes, legislative actions required, and technical assistance and training requirements. 13. The study is expected to involve about 48 person-months of both foreign and local consultant inputs over a 12-month period. The Municipal Development Fund Governing Board would provide policy guidance to the study. The consultants would report to the Executive Director of the Municipal Development Fund. E. ReRorts 15. The consultants are expected to produce the following reports during the course of the study: (a) Inceation Report: Within one month, an inception report outlining initial observations and detailed work program. (b) InteSLm ReRoxt: Within six months, an interim report outlining the use of credit, possible debt instruments and alternative institutional options. The Steering Committee would provide the consultants with their response to the interim report within three weeks. (c) Final Rggort: Within 11 months, a draft final report incoporating the Action Plan. The consultants would finalize the report incorporating comments from the Steering Committee. - 81 - Annex 8 (b) Page 1 of 3 PHILIPPINES THIRD MUNICIPAL DEVELOPMENT PROJECT Urban Environment and Solid Waste Manaa&ement Study Draft Outline Terms of Reference A. Background 1. In the Philippines, the provision of infrastructure and basic services has not kept pace with the increase in demand brought about by urbanization. This has resulted in deteriorating environmental conditions in the cities. The urban population increased from 18 million (37% of total population) in 1980 to an estimated 29 million (48%) in 1990. The Government is uniable to provide the rapidly growing population with many basic urban services, infrastructure and facilities, and poor roads, inadequate drainage facilities, unsanitary public markets and slaughterhouses, and uncollected garbage are common in many Philippine cities. 2. A key environmental concern in the cities is poor solid waste management. Traditional dumping of household waste into waterways and open areas, which may have been acceptable in rural areas, is not appropriate in densely populated urban settings. However, this practise continues and significant amounts of garbage are left uncollected, creating health hazards for city residents, clogging waterways and worsening the flooding problem. What is collected is dumped at open sites and often burned, contaminating groundwater resources and causing extensive air pollution. Special provisions are generally not made for dealing with toxic industrial wastes or hazardous hospital wastes. While Smokey Mountain in Manila has become notorious through images of small children and women scavenging on smoke-filled mounds of garbage, the same open dump sites exist in most cities in the Philippines. 3. Experience to date under solid management components in Bank-assisted projects has identified a clear need to review the overall regulatory framework for solid waste disposal and develop technical standards, policies on cost recovery and financing, technical assistance and training programs at the national level to complement operations at the local level. The ongoing Regional Cities Development Project (Loan 2257-PH) built sanitary landfills in Cagayan De Oro and Iloilo. The designs were prepared by foreign consultants who trained city staff in landfill operations upon completion of the sites. However, there was no support for the cities once the foreign consultants had completed their assignment. Similiarly, only modest efforts have been made to date in solid waste management under the ongoing First Municipal Development Project (Loan 2435-PH) because of lack of technical skills at the local level and support in the national government. The Bank is also preparing a Metro Manila Solid Waste Management Project, which has highlighted the lack of both environmental guidelines for solid waste disposal and of technical expertise by both the national and local governments as well as the private sector. In order to sustain environmental improvements in solid waste management, there is now an - 82 - Annex 8 (b) Page 2 of 3 urgent need to develop an institutional capacity in this regard at the national level to provide policy guidance and technical support to local governments. B. -he Need for the Study 4. There is an urgent need to introduce modern solid waste collection and disposal practices in the Philippines. Solid waste management is a responsibility of the local governments which are expected to play a greater role in the country's development process under the revised Local Government Code. Environmentally sound practices, such as sanitary landfills, are relatively new in the Philippines and the technology not well understood or widely accepted. Most cities lack the staff to deal with the technical, environmental and organizational issues related to solid waste management. As a result, inappropriate, traditional methods of collection and disposal continue to be used. S. Environmentally sound solid waste management practices could be Introduced through demonstration projects and development of an institutional capacity within the national government to promote the use of new techniques among the local governments. C. QObictives of the Study 6. The objective of the Study would be to recommend: (a) improvements in solid waste planning, collection and disposal, in about four regional cities; and (b) an institutional framework within the national government to provide oversight, policy guidance, technical assistance and support for solid waste management by local governments in the Philippines. D. Scone of Jork 7. Consultants would be engaged to carry out the following: (a) review solid waste operations in about four regional cities (to be determined), including but not limited to, the planning, budgeting and organization of operations, efficiency of refuse collection and disposal, environmental impact and cost recovery; (b) project waste generation over a 20-year period based on economic and population projections and the -haractpristics of household, commercial and industrial waste; (c) develop alternative solid waste collection and/or disposal methods and Investment plans, and recommend the least-cost option; (d) recommend improvements in the organizetion and financing of solid waste operations, including increased involvement by private operators and/or community groups in the collection and/or disposal of waste; and (a) review the institutional framework governing solid waste operations and recommend measures to be taken to strengthen policy guidance, supervision, - 83 - Annex 8 (hl Page 3 of 3 technical assistance to local governments, and training of local officials within the national government. 8. The study is expected to involve about 24 person-months of foreign and 60 person-months of local consultants over a 12-month period. The consultants are expected to report to the Department of Public Works and Highways. E. Regorts 9. The consultants are expected to produce the following reports during the course of the study: (a) Inntion Re. ort: Within one month, the consultants would produce an inception report outlining initial observations and detailed work program. (b) Interim Report: Within six months, the consultants would produce an interim report outlining: (i) collection and disposal method proposals, possible sites, and investment proposals for the pilot cities; and (ii) issues in the existing institutional arrangements at the national level and developing options for change. (c) Final &Reot: Within 12 months, the consultants would produce a draft final report, including completed prefeasibility studies for investment programs in the pilot cities and recommendations for institutional change and development within the natioral government. -84- AU 'U~~~~~~~~S - 85 - AnnR^XJJQ (L0 Page 1 of 2 PHILIPP THIRD MUNICIPAL DEVELOMENT PROJECT Supervision Elan Bank Supervision 1. The main emphasis of project supervision during the initial stages would be to follow-up: (a) the restructuring and staffing of the Central Project Office (CPO) and the DOF's Special Project Management Service (SPMS); (b) implementation of the Municipal Development Fund/Local Loans Account (MDF/LLA) Policy Statement; and (c) development of detailed environmental assessment guidelines based on the Bank's Environment Assessment Sourcebook through a series of workshops. During project implementation, the supervision missions would need to conduct the following activities in the field on a regular basis in addition to monitoring progress: (a) sample review of bid and award of contracts; (b) adequacy of supervision activities of the CPO and the quality of work in the field; (c) status of the MDF/LLA portfolio. Supervision missions in the field should attempt to visit one or more project cities and municipalities during each trip. This would add to the length of stay in the field. 2. The Bank project team should consist of an economist/financial anaylst and a municipal engineer for regular supervision activities. At least once a year, an detailed supervision should be carried out of the pilot maintenance component, the Municipal Training Program and the Real Property Tax Administration (RPTA) Program for which c:onsultants would need to be engaged. An environmental engineer would assist in development of the environmental assessment guidelines during the initial stage of project implementation. Supervision requirements for the project are expected to be high: about 15 to 18 staff-weeks during the intial period and about 12-15 staff-weeks thereafter. A summary of key inputs is provided on the following page. Contribution by the Borrower 3. The CPO will be overall coordinator for the project and responsible for preparl.sg progress reports and materials for the Bank missions. The SPMS would provide detailed information on the financial status of the MDF and implementation and impact of the RPTA Program. The LGA would provide detailed information on the Municipal Training Program. Supervision missions would present their findings to the Project Steering Committee; the CPO as the secretariat to the committee would assist in preparation of the materials. - 86 - Annex 10 (a) Page 2 of 2 PHILIPPINES THIRD MUNICIPAL DEVELOPMENT PROJECT Supervision Plan Approximate Expected Skill Staff Dates Activity Requirements Input 8/92 Supervision Mission Task manager 3.0 (review project status, impact of local elections and prepare environmental workshop) 11/92 Supervision Mission Economist/Financial Analyst 2.0 review: (i) preparation of 1993 Municipal Engineer 2.0 work program, with special Treining Specialist 2.0 emphasis on training program; Municipal Finance Specialist 2.0 (ii) 1993 MDF lending rate; Environmental Specialist 3.0 (iii) reorganization of SPMS; (v) RPTA computerization action plan; (vi) enviromental workshop 5/93 Supervision Mission Economist/Financial Analyst 2.0 (review project status, special Municipal Engineer 2.0 emphasis on maintenance component Maintenance Engineer 3.0 and environmental workshop) Environmental Specialist 3.0 11/93 Supervision Mission Economist/Financial Analyst 2.0 (review project status, Municipal Engineer 2.0 special emphasis on RPTA Municipal Finance Specialist 3.0 program) 1994 Two Supervision Missions Economist/Financial Analyst 4.0 Municipal Engineer 4.0 Various Specialist 4.0 1995 Two Supervision Missions Economist/Financial Analyst 4.0 Municipal Engineer 4.0 Various Specialists 4.0 1996 Two Supervision Missions Economist/Financial Analyst 4.0 Municipal Engineer 4.0 Various Specialist 4.0 1997 Two Supervision Missions Economist/Financial Analyst 4.0 Municipal Engineer 4.0 Various Specialist 4.0 1998 Two Supervision Missions Economist/Financial Analyst 4.0 Municipal Engineer 4.0 Various Specialist 4.0 - 87 - Annex 10 (b) THIRD MUNICIPAL DEVELOPMENT PROJECT Project Monitoring Indices 992 1993 1994 1995 1996 1997 1998 MUNICIPAL LENDING: Cumulative Suhloan Approvalt (no.) 15 25 35 50 78 78 78 CtawlmtIve Subloan Cosmitments (P million) 270 468 685 1045 1782 1782 1782 Cumulative Subt on Releases (P million) 16 285 570 873 1319 1586 1782 REAL PROPERTY TAX ADNINISTRATION: CLmutltive Coapleted Real Property Tax Units (no.) 837 1503 1984 2090 MUNICIPAL TRAINING PROGRAH: Cumulative Courses Conducted (no.) 42 84 120 156 Total Participants 2620 5240 7140 9040 - 88 - Annex 1 PHIIIZE THIRD MUNICIUPL D[EEVLPMENT PROJECT Disbursement Schedule (in US$ mdllion) Disbursements Profile Semester Bank FY Ending Semester Cumulative Project Country 93 Dec. 31, 1992 0.4 0.4 14 0% Jun. 30, 1993 3.6 4.0 6% 6% 94 Dec. 31, 1993 3.9 7.9 12% 18% Jun. 30, 1994 6.6 14.5 21% 22% 95 Dec. 31, 1994 6.9 21.4 31% 26% Jun. 30, 1995 6.6 28.0 41% 34% 96 Dec. 31, 1995 6.6 34.6 51% 42% Jun. 30, 1996 7.4 42.0 62% 50% 97 Dec. 31, 1996 6.4 48.4 71% 62% Jun. 30, 1997 5.6 54.0 79% 74% 98 Dec. 31, 1997 5.5 59.5 80% 82% Jun. 30, 1998 3.0 62.5 92% 90% 99 Dec. 31, 1998 3.1 65.6 96% 98% Jun. 30, 1999 2.4 68.0 100% 100% Closing Date: June 30, 1999. - 89 - PHILIPPI=E ZJI8D LUEICIPL DEVELOPMENI_ =QACT Documents in Prolect Files 1. PREMIUMED Central Project Office a. "PREMIUMED I1-Peasibility Study", March 1991. b. "Screening/Prioritization Methodologies", July 1991 2. Department of Finance "Revised PREMIUMED 2 (MDP 3) RPTA Project Proposal", July 1991 3. Local Government Academy "Municipal Training Program 2", July 1991. 4. Mission Working Sheet: Cost Estimates and Financing Requirements MAP SECTION IBRD 23396 PHILIPPINES QNIFK1NOFPW/INC VOMRAP>I'm"OfG THIRD MUNICIPAL DEVELOPMENT PROJECT I 1LOCOS VI WrERN 1SAYAS Bosco 20, 1 !loco Norts 38 Aklod So 2 *CO, Sur 39 Ca ° PROVINCE CAPItALS 3 W U1,bnC 40 =Ad,qu* 8TA 4 Plangosinan 41 lloilo BTNEB ® NATIONAL CAPITAL CORDIliEiA ADUN.YJYVE 42 Negro. OclcCdl . 5 Abm I ENTA43 GulnMYA 4 PROVINCE BOUNDARIES 6 Klno.Apayao 44 CEbu > 7 KoIurin PAoviney 44 Nuro-rinfl REGION BOUNDARIES 8 iGoa 46 Bohol 9 5engue 47 Slquljor A - INTIERNATIONAL BOUNDARIES CAGAYAN VALlY v'i EA1Rltu1SAYAS I oBaftne 48Northern Sartr 6 1 1 Cagayan 49 W.brnmin Somor 12 shaela 50 Easrlrn8 amar XD' 9ro I13 Nvov nioo 51 t oAyt4 re 1 4 Quiinoe 52 S 114m Litl Via o4~ I KILOMLTERS 0 100 200 300 III CENMRAL LIUZON lx 53 6111ran I 12~ 0IiO9 a M IE I~ 5 I I 15Nwv0E4ii5 IX I53 4 WETER r 7c oLES b dso *oo io 260 6 Tao`r 54 Zambonga del Norbio 1? Zorolor. 559 amitnboorae5 SanlnSndu r i 1 8 iA1impO1go 56 fBa,iiit ?loo obor 1 1 9 Safgon 57 Suluj, ~ 1 20 Suabre, 58 TcwiIwi uc WtIIONA CAPFEAI. X NOTF N N 0 16' REGION (NCR) 59 $uar1548 de Nods 1 IVSOUTHERNTACOAJO 460 CanmillirA 21 Aurora 61 Auon l lN6ode c 2 22 0 1on 162 MieamisOriel L UZ ON 23 Reae 63 MiamlerOcldenah l9 24 Covb 64 Bukidnron r- 18 25 l0n908 65 AeaondelSur v a 'I3 ) PHILIPPINE SEA 26 Blanrgns Xi SOUTHORNDA C -q7 Wdnduqim 66 $rigoet41lout v 28 MwndoroQrie.ni 67 10oIr.rftla 29 l*dero Occidental 68 Daow. 4e1 Node. 30 Romnbioi 69 DaveorCASArarDUAES 31 A3IO1wo11 70 Sooth C*fbo*o V 81COL XII CEN7 L : NUI°AO A -32 Camacinst Node 71 bnoordel Node 33 Camornin Sur 72 IcnooedlSur 34 ConIorduoen. 73 Notdh Cotabot, IV 35 AJbOy 74 A4guinatdntoe 36 Sorsogn 75 Suan Kudar,t 37 Mtsbto/ .. on 12' 12' SC)UJH CI-liNA PALA This mapl hosfreP°,¢ boonX V I S tes ( d < } S 5 TheWkoilnVosfo ftlil O for th" con,eriea n of 1eadt4s ocd is *xetfsoi_ for the , tPu.rro Parncm ict,noo ao oF Th World Sock CqoupT7bo denordwoeloos us d 3c o,d the bouedoreos showno od this %do not imphonhe o jor 60 nndg 65 pa r c h r 1 ibon n do,j n. 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