39178 PHILIPPINES 2007 PhilippinesDevelopmentForum Cebu, Philippines March 8-9,2007 Reportto theWorld Bank's Boardof ExecutiveDirectors Background 1. The 2007 PhilippinesDevelopmentForum(PDF) was heldinCebu, Philippines from March 8 to 9,2007. The PDF evolved from the Consultative Group (CG) process, and was initially positioned in2005 as a meetingo f the CG group with a few additional representations from other groups o f stakeholders (private sector and civil society). Since then, the PDF participation has broadenedand deepened, transforming into a multi-stakeholder forum that facilitates substantive policy dialogue amongparticipants from national and local government units, the executive, judicial and legislative branches, civil society, academe, private sector, andthe international development partners on the country's reform agenda. 2. As inpast PDFs, the Government o f the Philippines, ledby the Department o f Finance, organized and chaired the 2007 PDF. The World Bank served as co-chair for the meeting. Vice- President Noli de Castro delivered a speech on the first day, and President GloriaMacapagal-Arrroyo attended the closing sessionon the second day and delivered the keynote address. Government representatives at the meeting included 11Cabinet secretaries and other high-level officials from various Government agencies. Twenty-six delegations fi-om multilateral and bilateral agenciesheams were represented; representatives from other stakeholder groups totaled approximately 40.The total number o f participants was about 250. 3. Similar to previous PDFs, this particular meeting didnot include a pledgingsession, and instead focused on substantive policy dialogue among the various stakeholders, with the objective o f developing consensus and generating commitments toward a limited set o f critical actionable items o f the reform agenda. The format o f the meetingincludedplenary and parallel break-out sessions; the break-out sessions were especially designedto provide an opportunity to delve into more detail on the key issues, as well as allow meaningful dialogue amongthe various stakeholders on selected high- priority areas. Summaw of Agenda andDiscussion 4. The overall theme of the 2007 PDFwas "AchievingBroad-Based Growththrough SustainedReforms andHigher Investments." The four break-out sessionswere organized along the following themes: (i) Achieving broad-based growth; (ii) Sustaining fiscal progress; (iii) Enhancing competitiveness; and (iv) Nurturingregional and local growth. 5. This meeting acknowledgedthe past year's major progress infiscal management. The successful implementation of the ExpandedValue Added Tax (EVAT) in2006 was notedto have raisedthe tax effort significantly for the first time ina decade, and highlighted that the ongoing turnaround inpublic finance has opened a credible path to fiscal sustainability. The meeting cautioned, however, that the initial success o f fiscal and economic management could lead to dangerous complacency. At the plenary session, Government laid out significant plans to address three challenges: (i)First, an overall investment rate inthe Philippines, which, at 15% ofGDP, represents an extraordinarily low level, raising questions about sustainability and achievability o f higher growth; (ii) Second, unemployment andpoverty that remain highdespite growth; and (iii) Third, growthwhose benefits arenotyet sufficiently shared across sectors,regions andcommunities. 6. At the break-out sessions, the participants discussed specific actions neededto respondto these challenges, by addressing the following issues: (i) to sustain and deepen fiscal reforms and How improve the efficiency and governance of public spending; (ii) Howto Increase the Country's Competitiveness; (iii)How to NurtureGrowth at the Regional and Local Levels; and, (iv) How to share the benefits of growth and achieve the Millennium Development Goals (MDGs) through investment inpeople and social policies. Representatives from each break-out session reportedback to the plenary the specific action plansrecommendedbythe eachbreak-out group, andplenary discussions focused on implementation o f these recommendations.(Please see the attached Co- Chairman's Closing Statement for more details on the discussions. Statements, presentations and other documentation onthe PDF are also beingpostedinthe PDF website: pdf.ph) Closinp Session 7. Inthe Co-Chairman's closing statement deliveredinthe presence ofPresidentGloria Macapagal-Arroyo, it was noted that the single overall message at the meeting was that fiscal reforms and the favorable international environment have created a window of opportunity for taking actions that can translate recent financial improvements into higher investments, morejobs, increased incomes and more rapidpoverty reduction. The one measure o f success that the participants expect for these actions would be an increase inthe investment rate from the low 15% o f GDP to rates more typical o f comparable economies o f 20% o f GDP or higher. 8. The Co-Chairman notedthat the Governmenthadlaidout clear and credibleplans for using the current window o f opportunity andtranslating financial improvements into higher investments and poverty reduction. It was emphasized that ifthese plans are implemented and actions taken, at the next PDF participants should be able to acknowledge that the investment rate has indeedbegun to rise, jobs have been created, income has risen, andpoverty has fallen. 9. Onbehalfofthe international developmentpartners, Mr.Joachimvon Amsberg, WorldBank Country Director for the Philippines and Co-Chairman o f the PDF, assured the Government and other participants that the international developmentpartners care about these outcomes, and that they stand ready to support the country on the actions discussed at the Forum. The2007Philippines Development Forum or PDF 2007, was held on March 8-9, 2007 in Cebu City, Philippines under the chairmanshipof the Government of the Philippines (represented by Finance Secretary Margarito Teves), with the World Bank as co-chair (represented by Philippines Country Director Joachim vonAmsberg). Thethemefor the PDF 2007 was 'Vchieving Broad-Based Growth through Sustained Reforms and Higher Investments.'' ThePDF is an interactive andparticipatory forum where different stakeholders from the national and local governments, executive, legislative andjudicial branches, civil society, academic, businessgroups, and the international development community. discusspossible actions and agree on specific outcomes to the main reform challenges of the country. ThePDF 2007Meeting was attended by delegationsfrom Australia, Austria, Canada, China, CzechRepublic, Finland, France, Germany, Indonesia, Italy, Japan, Korea, Netherlands, New Zealand, Spain, Sweden, UnitedKingdom, and the United States of America. The international organizations participating in the meeting includes the Asian Development Bank, European Commission, International Monetary Fund, Kuwait Fund, OPECFundfor International Development, Saudi Fundfor Development, various UnitedNations Agencies and the World Bank Group. The last PDF meetingfor the Philippines was held on March 30-31, 2006 in Tagaytay City,Philippines. 2007 PHILIPPINES DEVELOPMENT FORUM March 8-9,2007 Marco PoloHotel, Cebu, Philippines ClosingStatementby the Co-Chairperson Mr.Joachimvon Amsberg CountryDirector,Philippines,WorldBank Her Excellency, PresidentGloria Macapagal Arroyo Honorable Secretary Margarito Teves and Chairman HonorableNational and Local Government Officials Honorable Ambassadors and Representatives from the International Development Community DistinguishedRepresentatives from the Private Sector and Civil Society Ladies and Gentlemen Introduction We are coming to the end of two days o f extraordinary richand productive discussions that brought us, who Icall the Friendsof the Philippines together with leaders o f the country-the leaders o f Government as well as representatives o f private sector, civil society and academe. The spiritofthis meeting hasbeenone ofopen exchange o fideas andofpractical support for the implementation o f policies andprograms that would improvethe lives o f Filipinos. Onbehalfo f the international development partners, Iwishto express the most sincere appreciation to the Government o f the Philippines, particularly the Department o f Finance, for its outstanding organization of this event and to Secretary Teves personally for the leadership of the PhilippineDevelopment Forum. Iwould like to express thanks for the participation and commitment o f the Vice President Noli de Castro, the members o f the Cabinet, and all participants o f this event. We deeply value the honor o f your presence, MadamPresident, and your willingness to listen and to speak to us today. Please allow me to share with you, very selectively, due to constraints intime, and from the perspective o f the international developmentpartners, some o f the highlightso f our discussion. RecentProgress This meeting acknowledged the past year's major progress infiscal management. The successful implementation o f the ExpandedValue AddedTax (EVAT) in2006 has raised the tax effort significantly for the first time ina decade. The ongoing turnaround inpublic finance has opened a credible pathto fiscal sustainability. Madam President, we congratulate you for the economic management and performance o f this Government under your leadership! The benefits o f fiscal reforms are clearly apparent from the lower interest costs and borrowing spreads, the strength o f financial markets, lower inflation, and the surge inforeign direct investment. The global equity sell-off o f last week indeed highlights the importance o f the Philippine fiscal adjustment. Without the impressive reduction o f the public sector deficit and debt over the past two years, there would have beenfar more cause for concernabout damage to the Philippineeconomy from events such as those currently affecting global markets. 1 Thisinitialsuccessoffiscal andeconomic management couldleadto dangerous complacency. However, basedon the presentations and contributions o f the Cabinet members, we perceive that success inspires this government to be more ambitious and determined to pursue further reforms withrenewedenergy for better results. This is most welcome. Government laidout significant plans to addressthree challenges: First, an overall investmentrate inthe Philippines, which, at 15% of GDP, represents an extraordinarily low level, raising questions about sustainability and achievability o f higher growth. Second, unemployment andpoverty that remainhighdespite growth. Third, growth whose benefits are not yet sufficiently shared across sectors, regions and communities. All our discussions canbe summarizedina singlemessageinresponse to these challenges: And that is, fiscal reforms and the favorable international environment have created a window of opportunity for actions that can translate recent financial improvements into higher investments, morejobs, increased incomes and more rapidpoverty reduction. The one measure o f successthat we expect for these actions will be an increase inthe investmentrate from the low 15% o f GDP to rates more typical of comparable economies of 20% o f GDP or higher. We discussed specific actions needed to grasp this window o f opportunity. Given the richness o f the discussions andthe limitedtime, Iwill only be able to highlighta few key illustrative issues and actions, most of which represent plans presented to us by the Government leaders. We see these selected actions as both doable and having the potentialto achieve significant impact. MadamPresident, we will send you the full records o f the discussions and reports from the breakout groups. (i)Howtosustainanddeepenfiscalreformsandimprovetheefficiencyandgovernanceof public spending? Fiscal stability has laid the foundation that allows more investmentinthe Philippine economy. Recent global market events have reaffirmed the importance o fpressing ahead with the Government's target o f balancing the budget in2008-given still highlevels o fpublic debt. Sticking to such target will strengthen the credibility o f fiscal policy. Credibility inturnreduces financing costs andthus allows more public investment. Credibility i s hard earned over many years o freformbut couldbe quickly lost ifcomplacency, or even the perception of complacency, was to set in. Itis also critical that the fiscal consolidation bebased on increasingrevenues since further expenditure compression is neither desirable nor sustainable. We acknowledge the plans to increase public investment while meetingthe fiscal targets through further increases inthe tax effort. To boost the administrative effort inthe Bureau o f Internal Revenue (BIR), (a) monitorable targets under the ongoing tax reform administration group (TUG) have beenidentified andwill be monitored; (b) highprofile cases under the RunAfter Tax Evaders (RATE) and RunAfter The Smugglers (RATS) would be successfully prosecuted, and bottlenecks to prosecution identified; and (c) informationsharing across agencies would be improved to limit the present substantial tax evasion-by linkingthe databasesofBIR, Social Security System (SSS), Securities and Exchange Commission (SEC), Land Transportation Office 2 (LTO) among others. Auditingo ftax assessments by the Departmento f Finance @OF) or an independent agency was also highlighted. Revenue enhancing measures under consideration to take effect from 2008 include the rationalization o f fiscal incentives to phase out redundantincentives, measures to fight smuggling, and possibly other additional measures. Ongoing reforms to improve the quality o f government spending would be continued and deepened.These include government-wide rollout o f the medium-term expenditure fiamework, organizational performance indicator framework, and the new national accounting system. In addition, the government would prioritize expendituremanagement reforms to contribute to the broader challenge of better governance and anti-corruption. Pushing ahead on procurement reforms andmeasures to enhance budget transparency-by disclosing greater details of budget execution data on the government website-are important examples. Strengtheninggovernance and management insome of the large government-owned and -controlled corporations (GOCCs) such as the NationalFoodAuthority (NFA) would be a welcome related measure. NFA reform was seen by some participants as a possible source o f fiscal savings that couldbe used elsewhere with stronger impacts on growth andpoverty reduction. W e discussedhow to intensify governance reform and address the perceptionthat many good existing anti-corruption initiatives do not yet add up to a fully credible program of good governance. It would be useful to establish clear and monitorable indicators that can serve as a tool for gauging the effectiveness of the ongoing measures. A promisingpossibility i s the use of the Integrity Development Reviews not only to assess selected agencies' vulnerability to corruptionbut also to monitor, over time, their progress inreducingthe identifiedsources o f vulnerabilities. One effective way o f signaling the government's serious commitment to governance reforms, and indeed enhancing its impact, would be to prioritize allocation of budgetary resources to this area. There was a call to increase the budget o f the Office of the Ombudsman. Ina similar vein, it would seem opportune to direct a portion o f the recent fiscal gains to other equally important governance reform items, such as investment incritical informationsystems and capacity- building. (3) How to Increase the Country's Competitiveness? With constraints such as infrastructure limitations andthe highcost o f inputs(for example, electricity), the Philippines still ranks poorly ininternational competitiveness surveys. To meet these concerns, reforms would aim at: (a) competitive and higher quality infrastructure, @) more privateinvestments ininfrastructure, (c) lower costs of doing business, and (d) more competition in protected sectors. The government indicated that itwill coordinate and align its Infrastructure and Competitiveness Agenda. The Government presented 10 specific and significant infrastructure projects. The private sector also presented20 projects. This clear prioritizationof a small number of projects i s considered most valuable for success. Most ofthese projects are inthe advanced stages o f preparation, and discussioni s ongoing with development partners present inthis room for financing and implementation o f these projects. Participants emphasized the importance of the 3 Investment Coordinating Committee (ICC) process to coordinate priorities and review soundness ofpublic investment plans and their potential fiscal implications. Theworking group proposedto identify five additional public-private partnership(PPP) projects to be developed together with a PPP policy andregulatory framework. As part o f this PPP discussion, the working group highlighted the urgency of a comprehensivepolicy and institutional framework for the water sector. Highcosts andlow investmentsalso stem from lack ofcompetitionwhich, insome cases, reflects capture ofregulatory agencies. The lack of effective competition hurtsconsumers and small and medium enterprises (SMEs), and discourages entry and investment by domestic start-ups and foreign investors.The Forumidentifiedcivil air transport, ports and shipping, and cement production as areaswith substantialpotentialfor reducing costsby allowing increased effective competition. The creation ofjobs inthe Philippine informationtechnology (IT) and business process outsourcing (BPO) industry,made possible by telecoms deregulation, demonstrates the most significant potential gains for sector such as tourism and agriculture that could arise from effective competition inthe transport sectors. To sustain the power sector reform efforts under the Electric Power Industry ReformAct (EPIRA) framework, the working group welcomed plans to acceleratethe privatization of generation assetsin2007 and to continueto pursue TRANSCO privatization. Such privatization can promote competition inWholesale Electricity Spot Market (WESM), augmenting long-term power supply capacity, and yielding operational efficiencies and ultimately cost reduction. (iii)HowtoNurtureGrowthattheRegionalandLocalLevels? Whether investments happen ina certain location depends not only on the national but equally on the local investment climate. The perception of a still fi-agile peace and order situation inparts ofMindanao and other conflict- affected areas remains a major disincentive for investment. The breakout session thus reaffirmed the importance o f concluding a peace agreement with the Mor0 Islamic Liberation Front (MILF)that wouldprovide anenvironment conducive for growth. Growthanddevelopmentin turnwould reinforce peace.Last year, MadamPresident, you called onus for scalingup international support for peace and development inMindanao. We are happy to report that new programs have been established and additional resources been investedby several development partners. Across the country, the discussions confirmed the importance ofjointkonsolidated capacity building programfor Local Government Units(LGUs) and rollout of governancereforms at the locallevels. There was also recognition that economic growth i s often constrainedby inadequate access to financing and affordable credit for the development o f infrastructure and services by LGUs.The meeting welcomes the emerging cooperation o f LGUsinplanning and financing their common needs for infrastructure inrecognition o f scale economies, and the need to span electoral cycles. The need to ensure competitivenessand profitability of agriculture, as well as ensuringthe right strategic focus and direction for land use administration and distribution, remain critical and urgent issues to address. As such, there was broad agreement for support to 4 rationalize public expenditures and investmentsinthe sector, and carry out concrete programs which will expand agricultural market access, promote comprehensive convergence o f support service deliverybetween national agencies and LGUs insustainable rural development. Related to this, Government is strongly encouraged to provide the strategic direction andposition to resolve the Comprehensive Agrarian ReformProgram(CARP) extension issue. (iv) How to share the benefits of growth and achieve the MillenniumDevelopment Goals (MDGs)through investmentinpeople and socialpolicies? The economic and social policy agenda are intricately linked. For growth to benefit all Filipinos, growth itself must be broad-based and equitable, by segment, sector and location, so thatjobs and incomes benefit all segments o f the population. Inaddition, the improved fiscal revenues that result from growthprovide the opportunity to enhance the delivery o f services. At the same time, public policies that promote equality also allow more Filipinosto contribute to growth. They also improve the investment climate. There was consensus for the need for enhanced financing for the social sectors. The increase inspending ineducationlastyear was a step intherightdirection afteryears offiscal compression. The next step would be a sustained increase inallocations to these sectors. Participants stressed the importance o f developing and adheringto a multi-year financing fi-amework. Improvingbudget execution would go a longway inimproving service delivery. So would increasedpartnerships with the private sector. Government's intentto fi-ont-load investments for basic educationwas welcomed, while inthe health sector it was notedthat enhanced financing couldbe complemented with regulatory efforts to constrain the cost o f drugs and health service provision andto enhance financial protection. Equallyimportant for social economic progress would be to ensure better maternal health and to contain the threats o f HIV/AIDSandAvian Influenza. W e stressedthe importance of improved governance in service delivery and sustaining anti- corruption efforts. There is scope for more expenditure efficiency through improved economic governance. Channeling funds to fiont-line providers are steps inthe right direction. Improved monitoring o f data on key indicators, at a disaggregated level o f local government, i s an important aspect o f the agenda for better governance. Participants expressed concern that the country's high population growth rate was increasingthe challenge of achieving broad based growth and poverty reduction. Currently, the burden o fpopulation management i s on local governments. There needs to be more efforts for concrete solutions and partnerships to operationalize more effective population policies. The meeting discussedthe importance of effective design and implementation of social protection and risk mitigation strategies. Participants supported Government's intent to develop a social protection strategy that matches expenditure programs to address the actual risks faced by the vulnerable and the poor. A critical step i s the development o f an objective and accurate targeting system leading to the development o f a national database o f the poor. Furthermore, the meeting stressedthe importance o fpreparedness and response to natural disasters. There i s also a real threat and risk o f pandemics includingHIV/AIDS and Avian Influenza, not only to vulnerable populations but indeedto the entire country and its growth. 5 Closing Insummary, MadamPresident, the Government haslaidout very clear andvery credible plans for usingthe current window of opportunity and translating financial improvements into higher investments and poverty reduction If plansareimplementedandactionstaken,wecanlookforwardtothePDFof2008 these where we will be able to recognize that the investment rate has begun to rise, jobs have been created, income has risen, and poverty has fallen. We care about these outcomes, and we standready to support you and the country on the actions we discussed. Thank you, MadamPresident, for your patience. Andthank youto all participants of the PDF. Mabuhay andhave a good day. 6