Document of The World Bank FOR OFFICIAL USE ONLY Report No: 84223-PH RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF PARTICIPATORY IRRIGATION DEVELOPMENT PROJECT LOAN NO. 7709-PH BOARD APPROVAL DATE: JUNE 24, 2009 TO THE REPUBLIC OF THE PHILIPPINES FEBRUARY 20, 2014 Philippines Sustainable Development Unit Sustainable Development Department East Asia and Pacific Region 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. ABBREVIATIONS AND ACRONYMS COA Commission on Audit DBM Department of Budget and Management DOF Department of Finance IAS Internal Audit Service NIA National Irrigation Administration PGIAM Philippine Government Internal Audit Manual PIDP Participatory Irrigation Development Project Regional Vice President: Axel van Trotsenburg, EAPVP Country Director: Motoo Konishi, EACPF Sector Manager: Ousmane Dione, EASPS Task Team Leader: Maria Theresa G. Quinones, EASPS 2 PHILIPPINES PARTICIPATORY IRRIGATION DEVELOPMENT PROJECT CONTENTS Page A. SUMMARY ........................................................................................................................... 4 B. PROJECT STATUS .............................................................................................................. 4 C. PROPOSED CHANGES ...................................................................................................... 4 3 PHILIPPINES PARTICIPATORY IRRIGATION DEVELOPMENT PROJECT RESTRUCTING PAPER A. SUMMARY 1. The proposed restructuring seeks to cancel a Loan covenant (ref. Schedule 2, Section I.A, paragraph 6) which refers to the engagement of reputable audit consultants to assist in strengthening the internal control systems of the National Irrigation Administration (NIA), including its internal audit unit. The request was made in view of the State Audit Code of the Philippines (Presidential Decree 1445) which restricts government agencies from entering into any contract with any private person or firm relating to auditing, accounting and related services. To comply with the covenant, NIA commits to continue the strengthening of its Internal Audit Service (IAS) and participate continuously in internal audit activities such as those supported by the Department of Budget and Management (DBM) and the Commission on Audit (COA). B. PROJECT STATUS 2. The findings and assessment of the November 2013 mission indicate that project implementation has significantly picked-up since the May 2013 mission. Continued good progress was noted in Component 1 (Irrigation Sector Restructuring and Reform) with the NIA’s Rationalization Plan implementation now complete and the payments to the remaining retirees ongoing. The progress in the implementation of the Irrigation Management Transfer Program is also substantial and there has been continuing improvement in performance in relation to targets. 3. Significant improvements were likewise made in Component 2 (Irrigation Infrastructure Development) in the second half of CY 2013 with the completion of the procurement of big contracts under Core A systems. Ongoing and completed civil works have also been assessed as generally satisfactory. Nevertheless, since this component makes up at least 60% of project activities and resources, further improvements and faster implementation are needed to catch up with implementation delays and bring the project on track. C. PROPOSED CHANGES 4. The proposed restructuring refers to the cancellation of the following Loan covenant (ref. Schedule 2, Section I.A, paragraph 6): “The Borrower through NIA, shall, no later than six months after the date of this Agreement, engage the services of reputable audit consultants, having qualifications and terms of reference acceptable to the Bank, to assist in strengthening the internal control systems NIA, including its internal audit unit.” 4 5. NIA, in consultation with the Bank Task Team, had prepared the Terms of Reference (TOR) as early as during appraisal. However, the provisions under the State Audit Code of the Philippines (Presidential Decree 1445) only surfaced during the procurement stage. Efforts had been undertaken by both the NIA and the Bank (Task Team and Portfolio Team) to discuss this with COA and reach an acceptable solution (or alternative option). The following activities have been agreed to ensure that the strengthening of NIA’s internal control system and the IAS are addressed: a. Continuous participation/attendance in training and seminar-workshops conducted by accredited professional organization through outstanding lecturers and speakers. b. Attendance to the on-going roll out of the Philippine Government Internal Audit Manual (PGIAM) and use of the PGIAM and the National Government Internal Control System as guide/tool in effective internal audit. c. Continuous submission of audit report to the World Bank after the end of each semester in scope and detail acceptable to the Bank. 6. NIA is also in compliance with other financial covenants and the submission of the following reports as required in the Loan Agreement: (a) unaudited Interim Financial Reports (IFRs); (b) annual audited project financial statements; (c) internal audit reports; (d) annual independent validation reports on the severance payments as a result of implementation of the Rationalization Plan; and (e) separate annual audits of transactions pertaining to National Irrigation Management Fund (NIMF) by COA. 7. The proposed change would be effected by means of an amendment of the Loan Agreement which will be signed by the Country Director. 5