Documentof The WorldBank FOROFFICIAL USE ONLY ReportNo. 32141-PH INTERNATIONALBANK FORRECONSTRUCTIONAND DEVELOPMENT AND INTERNATIONALFINANCE CORPORATION COUNTRY ASSISTANCE STRATEGY FOR THE REPUBLICOF THE PHILIPPINES April 19,2005 PhilippinesCountry ManagementUnit East Asia and Pacific Region InternationalFinance Corporation East Asia andPacific Region This document has a restricted distribution andmay be usedby recipients only inthe performance of their official duties. Its contents may not otherwise be disclosedwithout WorldBank authorization. DATE OF LAST CAS April 2002 CURRENCY EQUIVALENTS (As of April 2005) Currency Unit = Peso US$l.OO = P 54 P 1.00 = US$O.O19 WEIGHTS AND MEASURES Metric System FISCAL YEAR January 1- December 31 IBRD IFC Vice President: Jemal-ud-din Kassum, EAP Assad J. Jabre, ClOVP Country Director: Joachim von Amsberg, EACPF Javed Hamid, CEADR Country Manager: Vipul Bhagat, CEARI Task Team Susan Hume, EACPQ Omar Chaudry, CEADR Leaders: Gerald Baldivia, CGMPG FOROFFICIAL USEONLY COUNTRY ASSISTANCE STRATEGY (CAS) THE PHILIPPINES FiscalYears 2006 2008 - Supporting a Stronger Social Contract: Public Institutions that Work for the Common Good TABLE OF CONTENTS ExecutiveSummary ................................................................................... i iii - I. CountryContext and DevelopmentChallenges ................................................. 1 Country Endowments Development Outcomes and Challenges Country Directions II. The Bank Group and PhilippinesPartnership .................................................. 16 Lessons Learned and Messages from Stakeholders Overview of Engagement Strategy National Platform Local Platform Private Sector Platform 111. Deliveringthe Bank Group Program.. ............................................................ 29 Managing the Portfolio Lending Providing Analytical and Advisory Activities and Sharing Knowledge Partnering to Achieve Greater Impact Managing Risks Managing for Results Organizing Ourselves to Deliver Text Tables and Figures Table 1 Accounting for Growth Table 2 Competitiveness Rankingof EastAsian Countries Figure 3 Firms' Perceptionsof Constraints Table 4 Comparison of EastAsian Countries' Infrastructure Figure 5 Distributionof Income Table 6 Student Performanceon Mathematicsand Science Tests Figure7 Governance IndicatorsAmong East Asian Countries Figure8 Overview of EngagementStrategy Figure 9 NationalPlatform Figure 10 Local Platform Figure 11 Private Sector PlatForm Table 12 CAS Trigger Matrix FYO6-08 Table 13 CAS-Level Results This document has a restricteddistribution andmay be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. Text Boxes Box 1 Millennium Development Goals: Summaryof the Philippines'Progress Box 2 Supporting Reconstructionand Developmentin Mindanao Box 3 Strengtheningthe Anticorruption Arsenal Box 4 Using Sector-Wide Approaches (SWAps) in NationalProgram Support Operations Box 5 Reaching Out: Knowledgefor DevelopmentCenters CAS Annexes Annex 1 CAS Completion Report Annex 2 CAS Consultationand Client Survey Summary Annex 3 Country FinancingParametersfor the Philippines CAS Standard Annex Tables Annex AI Key Economicand Program Indicators Annex A2 CountryAt a Glance Annex B2 Selected Indicatorsof Bank PortfolioPerformance and Management Annex B3 IndicativeList of Possible Projects Annex 84 Povertyand Social Development Indicators Annex 85 Key Economic Indicators Annex B6 Key Exposure Indicators Annex B7 Operations Portfolio Annex B8 Statementof MIGA's and IFC's Held and Disbursed Portfolio Annex B9 CAS Results Framework Annex BIO Bank Group Activities MappedAccording to CAS Themes and Platforms Annex B11 Environment Indicators Map of the Philippines(IBRD 33466) ACRONYMS AND ABBREVIATIONS AAA Analytical and advisory activities IFC InternationalFinanceCorporation ADB Asian Development Bank IMF InternationalMonetary Fund APL Adjustable Program Loan JBlC Japan Bankfor InternationalCooperation ARCDP Agrarian Reform CommunitiesDevelopment JSDF Japan Social Development Fund Project KDC Knowledgefor DevelopmentCenter ARMM Autonomous Region in Muslim Mindanao LGU Local Government Unit ASEM Asia-Europe Meeting MDG Millennium DevelopmentGoal BIR Bureauof Internal Revenue MlGA MultilateralInvestmentGuaranteeAgency BOC Bureauof Customs MlLF Mor0 Islamic LiberationFront CAS CountryAssistance Strategy MNLF Mor0 National LiberationFront CDD Community-DrivenDevelopment MRDP Mindanao Rural Development Project CG Consultative Group MTPDP Medium-TermPhilippine Development CPSD Consolidated PublicSector Deficit Plan DA Departmentof Agriculture MWCl ManilaWater Company Incorporated DAR Departmentof Agrarian Reform MWSS MetropolitanWaterworks and Sewerage DBM Departmentof Budget and Management Systems DENR Departmentof Environmentand Natural NEDA National Economicand Development Resources Authority DepEd Department of Education NFPS Non-FinancialPublic Sector DOF Departmentof Finance NGO Non-GovernmentalOrganization DOH Departmentof Health NPC National Power Corporation DPL Development Policy Lending ODA Official DevelopmentAssistance DPWH Departmentof PublicWorks and Highways OED Operations EvaluationDepartment DSWD Departmentof SocialWelfare and PHRD Policy and Human Resources Development Development Fund FSAP FinancialSector Assessment PSALM Power Sector Assets and Liabilities FY Fiscalyear ManagementCorporation GDP Gross Domestic Product QAG QualityAssurance Group GEF Global EnvironmentalFacility SEMP Social ExpenditureManagementProject GFI Government Financial Institutions SME Small and Medium Enterprise GNP Gross National Product SWAP Sector-wide approach GOCC Government-Ownedand Controlled TA Technical assistance Corporation TEEP Third Elementary EducationProject IBRD InternationalBank for Reconstructionand UNDP United Nations Development Program Development VAT Value-added tax IDF InstitutionalDevelopment Fund WBI World Bank Institute Executive Summary Country Context and DevelopmentChallenges i. The Philippinesenjoys a tremendous range of assets to draw upon for its development. Government, business,and academia benefitfrom world-class talent and the high level of overseas employment reflect internationaldemand for its labor force. It is considered one of the most biologicallyrich and diverse countriesin the world, with substantial mineral, oil, gas, and geothermalpotential. Being located in the dynamic East Asia region,the private sector is well-positioned to exploit trade opportunities. And, the country benefitsfrom a very active civil society that can be an importantagent for change. ii. Despitethese endowments,however, overall developmentoutcomes in the Philippines over the last decades have fallen short of potential. Per capita growth has lagged significantly behind other East Asian countries. Relatively low domestic and foreign investmentflows reflect weaknesses in the investmentclimate. Firms consider macroeconomicinstability, corruption, and poor infrastructureas significant constraints. Macroeconomicinstability,in particular, is attributedto weak fiscal performanceand a high level of public debt. Closely linked to these challenges is the lack of social inclusion. Income inequality remains high, excluding the poor from their share of the income benefits generated by growth. iii. The contrast between the country's human and physicalassets and its modest development outcomes is perplexing. Ultimately, this can be explained by the limited ability of public institutionsto resist capture by special interestsand to work effectively for the common good, a sign of a frail social contract between the governmentand its citizens. Put succinctly, this has created a vicious cycle of weak public services, lack of trust in the government, and an unwillingnessto provide adequate resourcesto it. As a result, the Philippines has been unable to achieve its development potential. iv. There is widespread consensus concerningthe basic institutionaland political diagnosis of the developmentchallenges. This createsthe opportunityfor change. If citizens begin to see that public institutionsare improvingtheir governance and delivery of services, they are more likelyto vest authority and provide resourcesto the state. A stronger state will be able to increase social inclusionand cohesiveness. Increased revenueswill improvefiscal balances, increase investor confidence,and thus spur a virtuous cycle of more effective public institutions,growth, and poverty reduction. v. The economicand social aspects of the reform agenda supported by this CAS are inseparable. The Philippinespoverty reduction strategy, in fact, is integrally embodied in the developmentstrategy of this CAS with its two objectives (economicgrowth and social inclusion) and two levers (fiscal stability and improvedgovernance). Higher and sustained growth would need to be the major driver of poverty reductionthroughjobs and income creation (despite the lesser effect of growth on poverty reduction under high income inequality). With more social inclusion the poor would be empowered and enabled to participate in the opportunities afforded by economic growth, supported by public spending targeted to the poor as well as institutional reforms for market access and participation in decision processes. Fiscal reforms, in turn, are essentialfor growth, for the prevention of crises that inevitablywould hurt the poor severely, and for building-upeffective social spending that reaches the poor. Finally,governance improvements would focus on institutionalchanges that let the state deliver its core services to all citizens, especially the poor who are often excluded. ii uAt the national level, ~ ~ ~ ~ ~ ~ i ~ # ce and f i ~ ~ n ~within i n g g b ~wit1 require~ ~ e ~ iii tool to monitor progress, evaluate impact, and adjust accordingly. In doing so, we will apply a key lesson:the need for the Bank Group to be realisticin what it can influenceover the CAS period in a middle-incomecountry in which Bank Group resources are comparativelysmall. Deliveringthe Bank Group Program ix. Our strategy seeks to providethe most value throughthe appropriate level and blend of lending, advice, and knowledge sharing. The Bank Group's effectiveness will depend, to a large degree, on the extent of politicalappetite for reformand the pace of change. Thus, the CAS is designed to be opportunisticin respondingto reform efforts. Under any scenario, the approachfocuses on the medium-terminstitutionalchallenges and addresses the complexity of the country's broader developmentchallenges. x. The scale of IBRD commitmentswill be determinedby progress on fiscal reforms, reflecting the overarchingimportanceof fiscal adjustment in the short-termand the needto mitigate and manage risks. If the opportunityarises, the CAS can aggressivelysupport urgent fiscal reforms. Assuming a scenarioof modest fiscal reform, the Bank's base case program would fall within a range of US$450-900millionof investment lendingfor the three- year CAS period. In a high case scenario, reflectingsubstantialand sustainedfiscal reforms, the Bank would be preparedto provide total lending, including development policy lending (DPL), of up to US$1.8 billion over three years. Entry into the high case could occur once a track record of policies and associated outcomes have been established,with a reduction of the consolidated public sector deficit of 2 percent of GDP relativeto 2004, compatible with a deficit reductionof 3 percent of GDP during the 2005-07 period. Substantial progresstoward the high case would be considered in an enhanced base case, characterized by steady progress in strengthening public sector revenuesand reducing the public sector deficit. IFCoperationsfor the three-year period are anticipatedto be about US$350 million. xi. In the Philippinesthere has been remarkable receptivityfor the Bank Group's analytical and advisory activities (AAA). Given the impact of such activities,AAA support will be essential irrespectiveof the size of the lending program. Trust funds will continue to play a critical role in supporting AAA. Knowledgesharing will also continue to be an integral business line of the Bank Group. We will leverage both our financial and non-lending support through deeper coordinationwith development partners. SuggestedTopics for Board Discussion xii. Board members maywish to discuss, among others, the following aspects of this CAS: The suitability of the core design elements of the CAS, intendedto maximizethe Bank Group's impact. 0 The adequacy of the proposed lending scenarios. 0 The scope of collaborationbetween the Bank, IFC, and MIGA. The realism of the resultsframework for a middle-income borrower like the Philippines,where past development achievements have been limited and the Bank Group's financial contribution is a modest one. 1. Country Context and DevelopmentChallenges Country Endowments I. ThePhilippineshasatremendousrangeofassetstodrawuponforitsdevelopment. Perhapsthe greatest asset of the Philippines is its people. Government, business,and academia benefit from world-class talent. While there are concerns about the quality of education and thus of the labor force going forward, the Philippines is still reapingthe benefits from its past investmentsin education. The huge proportionof overseasworkers (7.8 million in 2003 or 25 percent of the active labor force) may reflect the lack of adequate employment opportunities at home, but it also representsthe global demand for the skills, English proficiency,and adaptabilityof the Filipinowork force. 2. Interms of natural resources, the Philippines is considered to be one of the world's most bio-diversecountries. Mineral resourcescover about 30 percentof total land area. Oil, gas, and geothermal potentialare substantial, as are the opportunitiesfor expandingworld-class tourism. And, the Philippinesis located in the dynamic East Asia region,which has grown significantlyfaster than other regionsand is now growing at its swiftest pace since beforethe 1997financial crisis. Economicgrowth in the region (excludingJapan) is expectedto exceed 7 percent in 2004. Intra-regionaltrade has expanded sharply, supported particularlyby strong demand from China. The Philippineshas benefitedsubstantiallyfrom this growth. Between 2001 and 2003, China's imports from the Philippines grew by 224 percent, significantly outpacing other EastAsian comparatorsand the regionalaverage (81 percent), albeit from a low base. 3. The Philippineseconomy has the basis for a vibrant private sector -- outward orientation with a strong export sector, liberal domestic and foreign investment regimes, and good entrepreneurialand managerialtalents. And, the country is well-positioned in several dynamic sectors. In particular,electronics account for over 60 percent of total exports. As a locationfor offshore informationtechnology (IT), the Philippinesalready compares relativelywell in terms of financial competitivenessand human resource skills. Tourism is growing fast worldwide and the Philippineshas the comparativeadvantageto tap this growing market. 4. The country also benefitsfrom a very active civil society. The level of public debate is high. The dense network of non-governmental,civic, and religious organizations,free mass media, and articulate urban class constitutea potentialagent for change unlike any found in other EastAsian societies. DevelopmentOutcomes and Challenges' 5. Despitethe Philippines'considerable resourcesand advantages, overall development outcomes over the last decades have fallen short of potential. Per capita growth has been much lower than in neighboring countries, and the reduction in poverty has been only modest. Becauseof weak fiscal performance and the accumulationof debt following the 1997Asian financial crisis, the country has experienced substantial macroeconomicvulnerability. The contrast betweenthe country's human and physical assets and its modest development ' Detailed analysis of the country's economicsituation is presentedin the DevelopmenfPolicy Review, to be distributedto the ExecutiveDirectors of the World Bank in tandem with this CAS. For additional analysis coveringa broad range of themes and sectors, see the DiscussionBriefs preparedin 2004 by Bank staff to informthe policydialogue among various levels and branchesof governmentas well as other development partners(availablethrough the website: www.worldbank.org.ph). 2 outcomes is perplexing. This CAS is built on the emerging consensusof manywithin the country that this conundrum is due to the inabilityof public institutionsto resist capture by special interests and thus promotethe common good. As the result of a weak state and its limited ability to provide public goods and services,the Philippines has been unable to achieve its development potential. 6. Many scholars assess that relics of traditional governance structures, establishedduring colonial rule, have endured in the form of informal networks of power outside of the state that remained influential,while the state itself remainedfractured.* Parts of public governance have not kept pacewith the modernizationof other parts of society and the economy leading to a curious coexistence of modern institutionsand a sophisticated economy with elements of a patronage-basedpolitical and publicsector system. Within the country, there remainsa common perceptionthat elements of the state serve fragmented groups and narrowvested interests. 7. The weakness of many public institutions and their difficulties in working for the common good reflect a frail social contract betweenthe state and its citizens. Becausecitizens perceive that they do not receive the services that they deserve, they are reluctantto vest authority in the government and provide it with sufficient resources. This leads to inadequate public sector finances that further hamperthe government'sability to effectively deliver services, particularly social servicesto the poor, like education and health. Becauseweak publicfinances reduce investor confidence,the economy is also deprived of much needed investmentsthat are critical to growth. Together this creates a vicious cycle in which economicgrowth is less than its potential,thus impeding poverty reductionand social inclusion, in the context of weak public finances. 8. Given broad agreement on the basic diagnosis and the directionof needed reform, the Philippines has the opportunity to turn the vicious into a virtuous cycle. Stronger growth since 2001, the election of a new administration, and early actions to improve revenuesand strengthen governance,providea valuable opportunity to address development challenges. The government'splans for dealing with these challenges are laid out in the 2004-2010 Medium Term Philippine Development Plan (MTPDP), released in November2004. Developedwith close involvement of the President and wide participationof government agencies,the MTPDP is based on a number of pillars that cover sector reforms and cross-cuttingissues, including inter alia: buildinga performance-oriented,service-based public sector; enhancingfiscal discipline; enforcing anti-corruptionmeasures; increasinginvestment in human resources; and improving overall competitiveness and private sector development. Some of the key result targets of the MTPDPare identified under Country DevelopmentGoals in Annex B9, as context for the specific goals of this CAS. 9. The economicand social aspects of the reform agenda supported by this CAS are inseparable. The Philippinespoverty reductionstrategy, in fact, is integrallyembodied in the development strategy of this CAS with its two objectives (economicgrowth and social inclusion) and two levers (fiscal stability and improved governance). Higher and sustained growth would need to be the major driver of poverty reductionthroughjobs and income creation (despite the lesser effect of growth on poverty reduction under high income inequality). With more social inclusion the poorwould be empowered and enabled to participatein the opportunities afforded by economic growth, supported by public spending targeted to the poor as well as institutional reformsfor market access and participation in decision processes. Fiscal reforms, in turn, are * See references in Corruption's Obstructions: Assessing the Impact of Rents, Corruption, and Clientelism on Capitalist Development in the Philippines, by Paul D. Hutchcroft, University of Wisconsin-Madison,April 11, 1996. 3 essential for growth, for the preventionof crises that would inevitablyhurt the poor severely, and for building-upeffective social spending that reaches the poor. Finally,governance improvements would focus on institutional changes that let the state deliver its core services to all citizens, especially the poor who are often excluded. The following sections consider these country developmentchallenges in more detail. I O . Growth Over the past several decades,the Philippineshas not been able to enjoy the overall high levels of growth of other East Asian countries. With a high average annual populationgrowth rate of 2.6 percent (comparedto 1.7 percent in the region) over the 1961- 2003 period, the Philippines has had a correspondingly modest 1.4 percent average annual per capita GDP growth rate. This comparesto an average increaseof 5.4 percent in per capita GDP for seven East Asian comparatorcountries over the same period. 11. Economicgrowth in the Philippines has been on a rising path since 2001, however, averaging4.5 percent in 2002-03 and accelerating to its fastest pace in 15years of 6.1 percent in 2004 (reflected particularly by growth in the service sector of over 7 percent). The stronger growth performancesince 2001 represents the confluence of severalfactors. The economy has benefitedfrom reforms instituted in the late-I980s. These measureshave restructured the economy to a considerable extent, helping it to integrate more closely to regionaland global trade and investment patterns. The Philippines has also benefitedfrom a favorable external environment including: robust growth in global ITlelectronicsmarketswhich comprise over two- thirds of exports; stronger demand in its major markets (Japan and the US); rapid export growth to China; ample liquidity in government debt markets in bothforeign currency and peso financing; and agricultural growth of about 5 percent in 2004, well above its historicalnorm. 12. Questions remain about the sustainability of higher growth, as growth in the Philippines has been driven largely by consumption rather than by investment. The contributionof consumption to growth has been among the highest in the region, accounting for over 85 percent of average growth in the Philippines since 1990,fueled by a high level of remittances from overseas Filipinoworkers. Remittances increasedfrom US$1.2 billion in 1990to US$8.3 billion in 2004. Savings and investment as a share of GDP remain lower than other EastAsian countries. Table 1: Accounting for Growth , Growth in Output Contributionto Growth of: per Worker Physical Human Total Factor Capital Capital Productivity Philippines(1961-2003) 1.o 0.8 0.4 -0.2 OECD (1961-2000*) 2.4 1.o 0.4 1.o Developing Economies (1961-2000*) 1.4 0.8 0.3 0.3 East Asia (7 countries) (1961-2000*) 4.4 2.4 0.5 1.4 4 13. Real GDP per worker, a broad measureof labor productivity, increased by only 1 percent a year on average compared to 1.4 percent in all developing countries, and 4.4 percent in other major East Asian economie~.~(See Table 1) Similarly, growth in both physical capital and total factor productivity has been much lower in the Philippines. Total factor productivity growth was slightly negative on average over the whole period, comparedto increases averaging 1.4 percent a year in other EastAsian economies, underscoring private sector inefficienciesin the Philippines. 14. Another key determinant of Table 2: growth is private investment. Both Competitiveness Ranking of volume and productivity of domestic I East I Asian Countries investments and foreign direct 2000 2001 I2002 12003 I 2004 I investment inflows have been lower than other EastAsian countries and China 24 26 28 29 24 investment horizons of private firms in Indonesia 43 46 47 57 58 Philippines tend to be short term. Malaysia 26 28 Between 2000 and 2004, the 24 21 16 Philippine competitiveness ranking Philippines 35 39 40 49 52 deteriorated, while that for Malaysia Singapore 2 3 8 4 2 and Thailand improved (China and I Thailand I 1 I I 1 1 Singapore did not change). (See 31 34 31 30 29 Table 2) Note: These rankingsare amongst all countriesworldwide;the lower the number, the more competitivethe country. Source: World EconomicForum (2004) 15. The lackluster investment climate in the Philippines can be attributed to: a fragile fiscal and debt position; perceived corruption; infrastructureweaknesses; uncertainty and inconsistency in the applicationof regulations, especially in the infrastructure sector; concerns about law and order; the high costs of doing business; and a sluggishfinancial system. This assessment was reflectedin a recent InvestmentClimate Survey of more than 700 firms conductedjointly by the Asian Development Bank (ADB) and the Bank Group in which firms rated macroeconomic instabilityand corruptionas the two main constraints. Other constraints commonly cited included tax administration and regulatory policy uncertainty. (See Figure3). 16. The banking system is constrained by a high level of non-performing assets, insufficient provisioning, and a low capital base. The Central Bank is progressivelytaking steps to improve compliancewith internationalsupervisory and regulatory practices and adopt a consolidated risk-based supervisory framework. Progress, however, is impeded by weak legal protectionfor examinerswhich limits their abilityto intervene and resolve distressed banks. Moreover, bank secrecy laws limit supervisors'access to deposit information. A positive development is the recent confirmation by the internationalFinancialAction Task Forcethat the Philippines is effectively implementing anti-money laundering measures. 17. Credit to the private sector is increasing,but only very slowly. Credit growth is muted becauseof high public sector credit demand, which offers banks relativelyattractive rates and lower perceived risks. Thus for robust and sustainable growth, which will induce greater credit flows, the governmentwill need to curb its demand for funds from the domestic financial system. This underscoresthe importanceof tax and other fiscal reforms to rein in the fiscal deficit. Encouragingly,lendingto micro and small and medium enterprises is improving. A new and more inclusive credit information system which is under developmentwill help increase access Calculationsof growth and contributionsto growth in this section draw on the database in Bosworth and Collins (2003),which covers 22 developed and 62 developingeconomiesover the period 1960-2000. Datafor the Philippineswas updated through 2003 by the Bank. The seven other EastAsian economies referredto in this discussion are China, Indonesia, South Korea, Malaysia, Singapore, Taiwan (China), and Thailand. 5 to credit to small borrowers (especiallyto the poor in urban and rural areas), lower credit transaction and borrowingcosts, and improve management of credit risk in general. Figure 3: Firms' Perceptions of Constraints Percent of PhilippineFirms Indicating "Major" or "Very Severe" Telecomnications Worker skills and education Access to financing I I Licensing and perrrits I I Access to Land I I Transportation hstom and trade regulations Cost of Financing Anti-conpetitivepractices Labor regulations Tax adrrinistration Crime, theft and disorder Regulatory policy uncertainty Tax rates Eectricity Corruption Macroeconomicinstability 0 10 20 30 40 Source: Asian DevelopmentBank and World Bank (2004); 716 Philippinefirms surveyed. 18. Two other segments of the financial market that raise concerns are the pensionsand pre-needs sectors, the latter providing pre-funded funeral, education, and pension/savingplans. The slow pace of pension reforms is disquieting and the financial conditionand long-term sustainability of the contractual saving institutionsremains tenuous. infrastructure is 19. Inadequate Table 4: considered a serious Comparison of East Asian Countries' Infrastructure constraintto investment. The percentageof roads paved in the Philippinesat around 21 percent is lower than in Indonesia (46 percent) or Thailand (97 percent). (See Table 4) The cause for the weakening state of infrastructure in the Philippinescan be attributedto many of the Source: World DevelopmentIndicatorsDatabase;sourcefor telephoneand internet data is ITU,Asia-PacificTelecommunicationsIndicators(2004). same factors affecting the business environment. In particular,inadequate public resources and inefficientuse of existing ones, result in few available resourcesfor infrastructure. Maintenanceof infrastructurehas been neglected;funds allocated to road maintenance,for example, have been typically less 6 than 30 percent of estimated needs over the pastfive years, and half of the paved roads are in poor condition. Also, there has been weak long-terminfrastructureplanning by the public sector; major efforts have tended to be more reactiveto crisis situations rather than proactive. And, despite their expanded mandate, local governments have not increasedtheir expenditures on infrastructure. 20. Experiencein particularsectors, however, has demonstratedthe Philippines' ability to achieve striking advances underthe right circumstances. The rapid growth of the electronics industry during the 1990s is the prime example of this. Lookingforward, Philippinefirms have tremendous opportunities to benefitfrom high growth in China and other East Asian countries if they are able to specialize in specific niche markets. In electronics hardware,for instance, the Philippinescould becomea specialized supplier to the Chinese electronics industry. Infact, this is already happening,with China's imports of machineryand transport equipmentfrom the Philippines (principally electronic components) surging by over 250 percent between 2001 and 2003. 21. Another promisingarea is the IT EnabledServices sector,which includes segments like call centers, business process outsourcing, transcriptionand translation services, content development (e.g., animation),and other services such as software development, and research and development. Growth in this sector has been high. The number of "seats" (the key performanceindicator in the call center segment) increasedfrom less than 4,000 in 2001, to around 35,000 in 2004, and by end-2005 estimatedto be 60,000. Prospectsgoing forward are good for this sector, thanks to the supply of an English-speakingeducatedworkforce, relatively low cost of commercial space, and access to a decent telecommunication infrastructure. 22. The mining sector also offers considerable potential. Mining exports declined from around 20 percent of exports in the mid-1970sto only a 1.6 percent average in 2000-02. A recent Supreme Court decision has reduced regulatory uncertaintyin this sector and initial investor response has been very positive,with over US$3 billion of new investments identified. Successfuldevelopmentwill depend very much on improving environmental and social practiceswhich caused substantial problems in the past. There is also considerable potential for development of agribusiness, in particularfor tropicalfruits. In the agro industrysector banana production and exports increased by 83 and 53 percent, respectively,between 1997 and 2003; fresh pineappleexports went up by 40 percent. The tourism sector also holds great promisegiven the increasing number of East Asian tourists lookingfor new destinations. Internationaltourist arrivals in 2004 increasedby more than 30 percent over 2003 and tourism receipts increased by more than 40 percent, but there is still tremendous growth potentialgiven the country'sattractive destinations and relatively small share of tourists visiting the region. Good environmental managementwould be a key factor for exploiting the growth potential in this sector. 23. The extent to which the Philippineswill be able to exploit its considerableassets and achieve growth in high potentialsectors will rest on its ability to improve the investmentclimate. This, in turn, requiresstrong public administrationand governance, essential to achieving macroeconomicstability, enforcement of the rule of law and anticorruptionmeasures,and consistent application of regulations. As part of this growth agenda, the MTPDP recognizes that over the mediumterm the private sector will play an increasing role in financing of infrastructure projects. Hence, the plan's emphasis on improving public-privatepartnershipsin infrastructure provisionis appropriate (e.g., review the Build-Operations-Transferlaw and its implementing rules and regulations). Improvingthe investmentclimatewill also be linked to strengthening the regulatory capacity and effective protectionagainst non-competitive practices. Stronger public sector management and regulatory capacitywill also be criticalfor protectingthe environmentto 7 foster sustainable growth in tourism and mining, and for city planningto ease traffic and make urban centers more attractive. 24. Social lnclusion Lack of social inclusionis a serious obstacle to development, one that is closely linked to the country's economic and social challenges (as discussed in paragraph 9 on the framework for poverty reduction in the Philippines). Inequality remains high in the Philippines. Coupledwith low growth over the longerterm, this has translated into slow progress on poverty reduction. The richest 5 percent of householdsaccount for nearly one third of national income,while the poorest20 percentaccountsfor only 6 percent. (See Figure 5) Maybe as a result of unequaldistribution of incomes and opportunities, many Filipinos, especially the poor, are skeptical of economic reforms since they are unable to reap the benefits of growth. Moreover, they are often not involved in the decision-making process. Thus the abilityof the state to take collective decisions Figure 5: and provide public goods and services is Distribution of Income impaired. Householdpopulaeon Nationalincome 25. The incidenceof poverty, based on household consumption,has declined marginally from 27.6 percent in 2000 to 26.1 percent in 2003, after an increase of 2 percentage points between 1997and 2000.4 Poverty severity remainedabout the same between2000 and 2003 (living standards of those who remained poor have not improved). Between2000 and 2003, poverty incidencefell in most (11 out of 16) regions, 4th the Household National income exception of the Mindanao and CARAGA Source: PhilippinesStatisticalYearbook 2003 regions. The highest poverty incidences in 2003 were found in the Autonomous Region in Muslim Mindanao (ARMM) at 61 percent and Western Mindanao at 49 percent,followed closely by Bicol and EasternVisayas at around 45 percent. 26. Poverty is highest in the agriculturesector and the sector also experienced the slowest poverty reduction. Agriculture-dependent householdsaccount for over two-thirds of the poor while they represent only 40 percent of the population. The self-employed and the wage earners in the sector are equally likely to be poor. The incidence of poverty declined twice as rapidly among households dependent on industryand services than on agriculture. Educational attainment is a key determinant of poverty. Over three quarters of the poor lived in households where the head had no morethan an elementary education. 27. Notwithstanding small progress on the povertyfront, persistent high income inequality implies that the poor do not share many of the income benefitsgenerated by growth. In addition to the lack of growth-relatedemployment opportunities (unemploymentrate was about 12 percent in 2004), the poor are often unable to access quality public services. For example, less than 10 percentof the lowest 20 percent has access to adequate infrastructureservices. This implies that the poor are receiving little or no service, and therefore likely to be benefiting less from nationalgovernment programs and subsidies. Moreover, wide income disparities among regions can be attributed,in part, to regionaldifferences in the level of infrastructure The poverty estimates are basedon householdconsumption. The consumption-basedpovertyline of US$0.72/person/dayis constructedto reflect a consumptionbasketof basic-needs,consisting of a food basket that provides2,000 calories per person per day valued at consumer prices in each province, plus a basketof non-foodspending. 8 development. The country's poorestregion,the ARMM, has the country's lowest level of access to safe water, electricityand sanitation, as well as the lowest road density level in the co~ntry.~ 28. Environmentaldegradationis a significant contributor to poverty, inequality, and loss of livelihood. The Philippines is one of the most hazard prone countries in the world, and natural disasters have been aggravated by environmentaldegradation. The impact of environmental degradation is acutelyfelt by the rural population,the majority of whom live either in the uplands or the coastal fringe and substantially relies on their habitat'snatural resourcesfor their sustenance. Pressureson these resources, however, meanthat only about 7.2 million hectares remain forested, comparedwith 21 million in the early 1900s. Similarly,fish stock has declined and nearly all of the coral reefs are under medium to highthreat by environmental pressures.' In urban areas, air and water pollution continueto escalate due to weak enforcement of industrial regulatory policies, exacerbated by overcrowding and an increase in slum areas. Relatedto these social costs, the deterioration of the environment also constrains productivity and economic growth, particularlyin such high potentialgrowth sectors as agricultureand tourism. 29. Low incomes among the poor are aggravated by low outcomesfor other social indicators. Infant and under-five mortality rates are 2.3 and 2.7 times higher, respectively,for households in the poorest 20 percent compared to those in the richest 20 percent. School enrollment rates are 28 percent lower in the poorest group comparedto the richest;similarly, female literacy rates (age 15-49)are 9 percent lower for the poorestgroup comparedto the richest. Geographicdisparities in healthand education outcomes also remain high. The average life expectancyof adults in the ARMM region in 2000, for example, is 10years lower that the national level and is at the comparable national level reached in 1970. Elementary school enrollment rates in the ARMM are around 10 percentage points lower than rates in the rest of the country; female literacy (age 15-49) is 15 percentage points lower. 30. Educationoutcomes in the Philippinesare low comparedto the rest of the East Asia region. The Philippines ranked nearly last in student performance on mathematics and science tests (See Country Mathematics Science Table 6). In addition, about one third of score & rank score & rank those who enter grade one and about one Singapore 604 (1) 568 (2) quarter of those who enter first year high Korea 587 (2) 549 (5) school do not reach the last grade in the Taiwan 585 (3) 569 (1) cycle. High populationgrowth rates and a Hang Kong Not available 530 (15) Japan 579 (51 550 (41 I tight fiscal situation contribute to these outcomes. I Malaysia I 519 (16) I 492 (22) I 31. The Philippines is likely to reach Thailand 467 (27) 482 (24) several of the MillenniumDevelopment Indonesia 403 (34) 435 (32) Goals (MDGs), including reducing the Philippines 348 (36) 345 (36) See the World Bank report Meeting the Infrastructure Challengein the Philippines (2005forthcoming), Philippines EnvironmentMonitor 2004,World Bank. 9 maternal mortality, contraceptive prevalence, and other policiesto address very high population growth. (See Box 1) Progresson addressing child malnutrition has been particularlyweak, declining only from about 34 percentof children (0-5 years) underweight in 1990to 28 percent in 2003, far above the MDG target of around 17 percentfor 2015. Placingthe Philippinesback on track to realize these MDGs will require better growth and employment opportunities,as well as concerted efforts to improve the delivery of basic public services to the poor. 32. Finally,social exclusion is manifestin, and reinforced by social conflicts in Mindanaoand in other parts of the country, as well as a sense of a lack of personalsecurity.' (See Box 2) While public decision-makingis formally open to all membersof society, the effective participation of the poor and other marginalized groups is often limited. Their diminishedsocial inclusion and sense of disenfranchisementmake policy making, especiallythe implementation of hard reforms, all the more difficult because many groups of the populationmay not expect to share in the benefits of public services and reforms. 33. Allowing the poor and vulnerable groups to benefit more from the gains of economic growth requires significant investmentsin human development. The MTPDP'sfocus on key anti-poverty areas will be important, namely: accelerationof asset reform; provisionof human development and social services (health and education); livelihoodand employment; social protection and securityfrom violence; and participationof the poor in decision-making. financesFiscalmacroeconomicstability. Non-FinancialPublicSector (NFPS) debt has grown at 34. Stability A weak fiscal position is the main cause of concern regarding public and an unsustainablepace in recent years, exceeding 101 percent of GDP in 2003. Debt of the national governmentwas nearlyfive times its revenue,significantly higherthan average ratios for emerging markets. Interestpayments of the nationalgovernment reached 5.4 percentof GDP in 2004, and total public sector interest paymentsare estimated at about 7 percentof GDP. While the debt profile has been carefully managed and pushed out to longer maturities, the public sector's borrowingrequirement remains high. Until debt levels and financing requirementsare broughtdown, the Philippineswill remainvulnerable to shifts in investor sentiment and market conditions. 35. The rapid increase in NFPS debt has been driven by large deficits due primarilyto declining tax collection,and rising power sector lossesthrough 2004. Tax revenuedropped from 17 percent of GDP in 1997to 12.3 percent in 2004. Several measures to strengthentax administrationwere taken during the past two years, which slowed but did not stop the decline in tax effort. Poortax collection reflects both policy and administrativeweaknesses. VAT exemptions,for example, remain significant, with dispensationfor select groups (e.g., independent power producers, lawyers, doctors). Despitethe perception of widespread tax evasion, successful prosecution has, up to now, been rare. 36. Public debt figures reflect not only past deficits, but also the calling of numerous contingent claims on government and bailouts of government-ownedcorporations. But NFPS debt does not include existing contingent liabilities of the government arising from such commitmentsas: guarantees on risks from build-operate-transfercontracts; currency risks associatedwith foreign loans intermediated by government financial institutions; liquidity support to troubled banks;and future obligations of the government-run contractual savings system. Of particular concern are the finances of the social security system, which given the present package of benefits and contributions is expected to suffer increasing losses and eventually deplete its assets in about ten years. Crime, theft, and disorderwere considered to be a major constraintto business by over 25 percentof firms surveyed in the 2004 InvestmentClimate Survey. 10 37. The country's tenuous fiscal and debt situation is ultimatelythe result of deeper causes related to weak public institutionsand a frail social contract, discussed earlier. The difficulties faced by the state in improving its revenues not only underminesmacroeconomic stability, but it also has profound implicationsfor human development and growth prospects. Spendingon essential services has sufferedfrom expenditure compression. Publicsector investments declined from 3.3to 2.8 percent of GDP during 2000-03. Since 1997real per capita spending by the nationalgovernment on educationand health has fallen by 19 and 43 percent, respectively,causing deterioration in these services. Public investmentas a share of GDP 11 remains among the lowest in the region. High domesticand external publicfinancing requirements have driven spreads upwards and increasedrisk premiafor the country. Emerging Market Bond Index spreadsfor the Philippinesstand at about 500 basis points (as of early 2005). The high interest incomefrom government bonds, coupledwith their zero risk weighting for bank capital requirements,have created a correspondingdisincentive for banks to lend to the private sector. credible signal to the domesticand internationalfinancial marketsthat the government -- both 38. Overall, a considerableupfrontfiscal adjustmentwill be essential to send a strong and the executive and legislative branches-- is committedto serious reform. This would improve policy credibility and lower perceivedrisks by investors,yielding direct benefitsof lower interest rates, a stronger peso, and higher investmentand growth. The subsequent savings in financing costs alone would be largeenough to support funding for several of the improvements in services and infrastructureidentified in the MTPDP. 39. Recent progressis encouraging-- actions to increase excise taxes and adjust power tariffs, as well as progress in Congresson revenue bills have sent a positive signal about the ability to enact policy. Inaddition to reducing public spending in responseto revenue constraints,the government has also implementeda process to review budget proposals against core agency mandates and performance indicators Of course not all necessary actions can be initiated simultaneouslyand manywill require further consensusbuildingand Congressionalaction. 40. The MTPDP outlines several legislative and administrative measuresto improvethe fiscal situation. Beyondthe VAT reform,these measures include raising petroleum excise taxes and rationalizingthe present configuration of fiscal incentives. Equally important,tax administration needs to be strengthened, specificallyactions to reduce corruption, improve discipline, and recognize and reward integrity in the revenue agencies. In additionto revenue enhancement,the government aims at imposinggreater discipline in Figure 7: Government-Ownedand Controlled Governance IndicatorsAmong East Asian Countries Corporations (GOCC) financing; addressing contingent liabilities, particularlyrelatedto the power sector ElAverage of and pensionobligations; and making Corruption 9 other E Asian adjustments in inter-governmental Rule of Law Countnes finances. The MTPDP also includes aPhilippines measures to rationalize government Regulatory Quality spending, improve budget allocation, and streamline the bureaucracy. Government Effectiveness 41. Effectiveness of Public Political Institutions The issue of governance Stability in the Philippines presents another Voice & Accountability paradox. The country enjoys an active and vocal civil society, open media,and -1.o -0.5 0.0 0.5 1.o vibrant public debate. In addition,the public administration benefitsfrom Note: The six indicatorsaggregate several hundred survey-basedvariables on many highly competent individuals, perceptionsof governancefor almost 200 countriesand territories. The especiallyat the top levels of the indicators are normallydistributedwith a mean of 0 and a standard deviationof 1. The nine other EastAsian economies are China, Hong Kong (China), bureaucracy. Despitethese attributes, Indonesia, Korea, Malaysia, Singapore, Taiwan (China),Thailand, and Vietnam. there remainsa strong perceptionof Source: Kaufmann, Kraay, and Mastruzzi(2004), WBI Governance Indicators. "capture of the state" that biases public decision-makingtowards favoring narrow interests. 12 Indeed,governance indicatorsfrom a cross-countrydatabase indicatethat, despite democratic processes, rule of law, politicalstability, and control of corruption are lower in the Philippines than in other East Asian comparator economies. (See Figure7) 42. Like other countries, the Philippines is "A consensus has also emerged in the past decade in a transitionfrom traditional, clientilistic among scholars that, first, the Philippines has had a governancetowards a modern state in which weakstate; and, second, that the weakness of the citizens provide resourcesto, and vest powers Philippinestate has been the country's overarching in their government in returnfor accountability problem that explains its inability to develop the for the delivery of public goods and services. economy and alleviate poverty. There are two The country is seeking to build a stronger state, essentialattributes of a strong state. First, it is not necessarilya bigger one, which can raise autonomousof dominant classes and sectors, so that it represents the people's interest, both minority adequate public finance and deliver public and powerful groups. Second, it has the capacity, goods and services efficiently. As the represented mainly through a strong bureaucracy, to experience of many of its East Asian neighbors implement its policies.I' illustrate, a stronger state is a preconditionfor robust private-sector-drivengrowth and greater Source: Quotefrom RigobertoTiglao,Adviser to President social inclusion. Macapagal-Arroyo,Newsbreakmagazine,January 6,2003 43. Progress is slowly being madeto improve the effectivenessof the state. Innovative approaches are beingtaken to strengthen public institutionsand constrain graft and corruption. The "Lifestyle Checks" of public servants which has been adoptedformally by the National Office of the Ombudsman and the consequent dismissal of several senior level bureaucrats have sent a clear message that ill-gottenwealth will be prosecuted. (See Box 3) The implementationof landmark procurementlegislationis helping improvetransparencyand accountabilityin government contracting. 44. Various home-grown efforts at reshaping public sector agencies have been initiated including most prominentlythe recent promulgationof ExecutiveOrder 366 authorizingthe rationalizationof the bureaucracyin order to reduce the fiscal burden and improvethe delivery of public services. At the local level,the passageof the Local Government Code in 1991has led to the emergenceof a significant numberof well-performinglocal governments. There have in fact already been several instances in which well-governed LGUs have radiated their success by influencingother LGUs. Similarly, community-drivendevelopment programs like Kalahi- ClDDs which promotetransparency and community involvement in decision-making, have become powerfulmotivatorsfor changing"business as usual" at the local level. The agenda going forward will need to build on such initiativesto improvegovernance, reduce corruption, and ultimatelyreenergize the social contract. 45. It will be importantto encourage and support positivedomestic experiences -- "islands of good governance"--that demonstrate how progress can be made within the context of the Philippinesand can potentiallycreate spillover effects. When citizens see concrete benefits, they will be morewilling to vest authority and provide resourcesfor their public institutions. Moreover,when public institutions (e.g., regulatory bodies) become more effective, the private sector will make productive investments and devote increasingly less resourcesto unproductive rent-seekingactivities. The result: a virtuous cycle. 13 Country Directions 46. The Philippines is at a criticaljuncture, facing a window of opportunityto address its development challenges. The beginningof a six year term for the new government could become a turning point toward creating a favorable policyenvironment. Implementing reformswill, of course, be politicallychallenging. Indeed,since the beginningof the current administrationthe reform agenda has alreadygenerated a much welcome and lively discussion and an emerging sense of an impendingcrisis if actions are not taken. Widespread acceptance of the reform programwill depend upon how well the benefits of reform, as well as the downside risks of no reform, are communicatedto the public. Citizenswill need to knowthat the initial burdens of reform are shared across all sectors and classes of society. Most importantly, the publicwill need to have confidence that the reformswill strengthen governanceand that governmentwill be held to account. Inthis regard, the success of the administration'santi- corruption drive and efforts to prosecutetax evaders will be critical. (See Box 3) 47. An effective reform effort -specifically a more aggressive reduction in the public sector deficit -would help sustain the strong pace of growth attained in 2004. Reducingthe public sector deficit by about 3 percent of GDP during 2005-07 would lead to significantlyimproved 14 perceptionsof stability,as measured,for example, by debt sustainabilityindicators and bond spreads. Private investmentwould likely increase becauseconcerns about macroeconomic vulnerabilitywould ease. With improvedinvestor sentiment, higher private investment could fuel economic growth to an average of at least 6 percent per year. Under this scenario in which a virtuous cycle is achieved,the NFPSdebt would fall significantly by about 25 percentage points of GDP, from its current level (2003) of 101percent of GDP. The ability to take a more aggressivefiscal adjustmentwould likely reflect greater political consensus and thus be accompanied by faster improvementsin tax administration, expenditure management,and civil service reform. 48. With more public resourcesand greater effectiveness of social expenditures, the higher growth, thanks to a favorable policy direction, would have a significant impact on poverty reduction. If the Philippinescan sustain growth of 6 percent per year with rapid employment generation,the proportionof the population living on less than US$2 per day could be reduced from 47 percent in 2000 to around 30 percent by 2010, and some 15 million more Filipinos would rise above the poverty line of US$2 per day, with associated improvementsin social outcomes. 49. The country hastaken importantsteps toward the virtuous cycle described above, underlyingthe high growth path. However,implementation of the needed reforms will face many challenges. Gradual progress in the policy environmentwould imply reducingthe public sector deficit over the next three years and continued efforts to enhance public sector management, including improvedtax administration,civil service reform, broadening implementationof the procurement law, and strengtheningjudicial functioning. 50. But in this situation the gradual pace of reforms is not enough to create the necessary momentumto make increasedtax efforts and improvements in government spending sufficient and sustainableand thus attain a virtuous cycle. These factors, together with the expectation that the external environmentwill be less favorable and that agricultural growth will return to historical patterns,could lead to a moderate growth path of about 3 to 4 percent per year during the 2006-08 CAS period. 51. Negative policy circumstances, by contrast,would likely reflect gridlock in government and lack of political consensus, undermining progress on fiscal and public sector reforms. Without a concerted effort to contain public deficits, the public debtlGDP ratio could continue upward. This could also create pressure to rollback progress made in other areas such as trade, financial sector, and regulatory policies, further undermininggrowth. Ultimatelypublic resourcesfor infrastructure and human developmentwould become even more constrained. A reversal of progress on the policyagenda and fiscal adjustment could trigger a cycle of higher deficits and debt, reduced access to external finance, and thus add to financial market volatility. 52. Such a negative situation is unlikelyto be sustainable as the country would continueto remain vulnerable to shifting investorattitudes and the external environment. In particular, the Philippinesremainssusceptible to deterioration in investor sentiment given high public sector amortizationrequirements, a relativelyopen capital account, and the concerns expressed by a number of international banks and credit rating agencies about the slow pace of fiscal adjustment. A damaging shift in sentiment could possibly be triggered by external shocks such as higher oil prices or a decline in the export market to China; social or politicaldisruptionsthat would distract from the policy agenda or merely perceptionsof growing policy drift; and with local banks'growing exposure to the government, a fiscal crisis could envelope the banking system as well. Protracted conflict in Mindanaoor a deteriorationof the general social and security situation could interactwith economicvulnerabilities and further undermine investor 15 confidence. Clearly, this is a direction that the Philippineswill have to avoid if it is to achieve its development potential. 16 II. The Bank Group and Philippines Partnership Lessons Learned and Messagesfrom Stakeholders 53. The Country Assistance Strategy (CAS)for FY2006-08builds on the lessons of the past and the messages heardduring a series of consultations and client survey with a wide range of stakeholders. The CAS Completion Report reviews the Bank Group's8effectiveness over the past five years and indicatesthat the Bank Group supported several key country development objectives, including:expansionof basic infrastructure in rural areas; reconstruction efforts in Mindanao; and improving procurementand financial processes in several key agencies. (See Annex 1) Extensive CAS stakeholderconsultationsand a client survey revealedthat the institution'sknowledge resources,technical assistance, and informationsharing are particularly valued. The Bank Group's outreachefforts to involve civil society and beneficiaries in project preparationand implementationare considered especially successful. (SeeAnnex 2) 54. The CAS preparation also drew extensivelyfrom a series of formal and informal meetings with a broad range of stakeholders. Small meetings were heldwith key opinion leaders from various sectors and with government officials from oversight and implementing agencies. Separate meetingswere held with bilateraland multilateral development agencies. Largeworkshops involved nationaland localgovernments; civil society;the business community/privatesector; academia; labor groups; and other development partners. The Bank Group also held workshops around the country with youth representatives. Through these small and large gatherings,the Bank Group heard the views of its various stakeholders. In many of these fora, the imperative to make public institutionswork for the common good was emphasized, raising the question of whether our assistancecan be more strategicallyfocused towards this objective. 55. While the feedback suggeststhat the Bank Group's contributions have been valuable and much appreciated, it also indicatesthat internationaldevelopment partners, including the Bank Group, may have fallen short of their potential impact. This perception mirrors, and is likely relatedto, the perceptionof the country's own development shortfall. The lessons learned include the following: 0 Both the government and the Bank Group have, at times, been tempted to pursue an overly-ambitious policy reform agenda. Complex plans have been developed by highly capable counterpartsonly to fall short during implementation,often after responsibility had passedon to other individuals. This applies to overall economic reform as well as to sector reforms, for example in health and energy. A key lesson calls for less complex designs and greaterfocus on implementation of future reformefforts, supported in particularby development policy lending or reform-orientedinvestment lending. 0 The Bank's proposed support for fiscal reformwas not achieved, due to lack of progress on reducingthe public deficit,thus preventing adjustment lending. Further, Bank investment lending (still often perceivedas financing outside the government'score program) was severely constrained by the tight fiscal situation even though it could have substantiallybenefitedthe countrythrough low-costfinancing as well as technical contributions by the Bank. The key lesson is the need to align Bank lending more closely to the prioritiesexpressed in the government'sown investment program and finance priority expenditureswithinthe existing national budget in support of a well- * Referencesin this document to the "Bank Group" encompass the World Bank, the InternationalFinance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA). Referencesto the "Bank", "IFC, or "MIGA generally relate to the specific agency. 17 defined programof reforms. This requiresa shift away from financing discrete projects toward more programmaticengagementwith selected key agencies. 0 Many sectoral projectsand programssupported by the Bank and other international development partnersdirectly or indirectlywork with or through LGUs. A number of these programs have led to fragmentation of financing and proceduresthat do not necessarilystrengthenthe ability of LGUs to determineand pursuetheir own development priorities. Moreover,the nationalgovernment is reviewing its approach toward the financing of localgovernmentactivities through on-lending and on-granting. These factors have led to a slowdown in implementationand approval of support for locally implemented projectswhile the demand for support from LGUs and their relevance to the developmentagenda have in fact increased. The key lesson is the need for an approachthat encourages LGUsto pursue and finance their own development priorities, but at the same time allows the nationalgovernment to use separate instrumentsto pursue national developmentobjectives and priorities requiring strong local implementationand partnership between national and local governments. While there have been examples of good collaboration across the organizations of the Bank Group, there is a perception of unexploitedsynergies in creating successful models of public-privatepartnership,particularly in infrastructure. The key lesson is the need for closer integration of operational approaches of the Bank Group members. The previous CAS attemptedto identifyresults basedon broad and multiplestrategic objectives. With hindsight, such a wide-ranging approach proved to be a difficult framework for assessing the effectiveness of Bank Group contributions. The key lessons are to: further strengthen the resultsfocus of the CAS and make it a more effective managementtool; focus on less ambitious yet more monitorable result indicators; and distinguish between country-level results, CAS-level results,and program level results. 56. Throughoutthe development of this CAS, the Bank Groupteam has struggled to directly address the identified obstacles and integratethese lessons in order to make a relevant contributiontoward the two primary objectivesof the Bank's mission -- economic growth and social inclusion. The strategy described below seeks to respond,a challenge that will no doubt continue beyond this CAS period. Overview of EngagementStrategy 57. The Philippines could attain substantiallybetter developmentoutcomes given the available ingredientsfor more rapid development,as outlined in Chapter 1. These better outcomes, however, will require strong and sustained policy implementation. Discouragedby slow progresson policy reforms, the Bank, as well as other development partners,has scaled back its programover the years. There is no questionthat the impact of the Bank and other development partners'support has been disappointingin some areas. We are, nonetheless, confident that we can contributetoward country development outcomes substantiallymorethan our relatively small financial role would suggest. To this end, we intend to be proactiveand help address critical underlying institutionalproblems. The country is receptive to Bank Group support and, encouragingly, many of those stakeholdersconsulted expressed confidenceand high expectationsfor the Bank Group's role. Meeting these expectationswill require a continuing strong presence and program in the Philippines. 58. To achieve the desired outcomes on growth and social inclusion,this assistance programwill need to be more strategicallyfocused on addressing two key levers:fiscal reforms as the essential short-termchallenge;and more effective public institutionsas the critical governance and financing within the existing budget will require an 19 61. To achieve greater impact in the Philippines -- especiallyhelping to improve the governance of public institutions --the full range of our instrumentsneedto be better integrated, leveraged, and used more flexibly. This requires that we exploit our comparative advantageto work at both the macro and sector levels; use our analyticalwork to informour lending and policy dialogue; combine international best practice with in-depth local knowledge (thanksto a substantial in-country presence); offer a range of financial and guarantee products at more attractive terms than commercial sources; and continueto play an honest broker role. Our engagement must also be consistentwith the severefiscal constraintsand realitiesfaced by the government. 62. The assistance strategy implies a "back to basics" approach: on the margin, focusing more on the ability of agencies to deliver services on the ground and make real implementation progress, rather than on sophisticated reformdesign. We will be realistic about the relatively modest role of the Bank Group in building good governance. Our success will depend upon how we are able to help replicateand scale-upexperiences in which the public sector effectively delivers on its social contract. The strategy will require that we be more selective in approach under this CAS is functional and not sectoral. We will focus on "islands of good governance"-- but opportunistic in specific engagementswithin the chosen approach. Moreover,selectivity national agencies, local governments, or economic sectors for which the basic governance arrangements are sufficientlysound to provide a reasonable chance of success. National Platform 63. The national platform reflectsa transitionfrom a project-basedapproach towards a program-basedone which offers greater flexibility with lowertransactions costs. Our program will move us closer to supporting the government's own priority needs and away from disaggregated project-orientedfinancing which the government cannot afford given the fiscal constraints. By offering within budgetfinancing, the Bank Groupwill be better placedto support improvements in the capacity of nationalgovernment agencies to deliver their core mandates. . 20 64. The Bank Group's national Figure 9: platformwill providefinancing to National Platform agencieswhich show promisefor becoming examples of fiscal responsibilityand good governance. This should lead to improved service delivery. Our program comprises a combination of cross-sectorand sector-specific investmentoperations and non- lending activities, illustrated in Figure 9. 65. Cross-Sector Engagement The government has been undertaking a number of efforts to strengthen finances and service delivery, oftenwith support from the Bank Group. In this CAS, Bank Group supportfor cross- sector activities could address the following government priorities: 0 fiscal reforms: implement measuresto improve tax policy and administration and address contingent liabilities(in the social security system and the GOCCs, includingthe power sector); 0 budget and expenditure reforms: focus on core mandates and functions, service delivery improvements,and performance-based budgeting, using sector efficiency reviews and identifying measures of Major Final Outputsfor key departments. An important performancemeasure is citizen satisfaction with government services; 0 civil service reforms: establish merit-based performance processes,financing incentives for departing employees,and modernizationof the compensation regime; 0 streamlining of agency staffing: permit more targeting of staff and expenditures to core functions and services delivery; 0 procurement reform: enhance capacity of new Procurement Policy Board to provide oversight and monitoring,support the civil society monitoring of bid and award committees, strengthen the internal procurement audit function of government agencies and establish a framework to assess the progress and effectiveness of the public procurement reforms, and continue to build capacity for the use of the recently harmonizedbidding documents; 0 anti-corruption measures: increase capacity of government agencies to more effectively respond to corrupt practices (e.g., NationalOffice of the Ombudsman,Supreme Court). 66. The basicthrust of our support will be in linewith our ongoing policydialogue in these areas, consistentwith the key reform goals of the new administration for which many building blocks are already in place (e.g., new procurement procedures,the developmentof Major Final Outputs,and a new nationalgovernment accounting system).' Inthis regard, the criterionfor Bank Group assistancewould be tied to the quality and implementation of reforms,as well as See DevelopmentPolicy Review (2005) and the Discussion Briefs (2004). 21 for groups that show the most promise of becoming islandsof good governance. Our support will encompass a range of ongoing and new analytical and advisory activities. In particular, Bank budget and trust fund grants will support continued technical assistanceon such subjects as: public sector expenditureand debt management;banking supervision; pension reform; civil service reform; procurementreform; and strengtheningthe Office of the Ombudsman. 67. An important element of our cross-sectoralapproach is a possible investmentoperation to support civil service reform in several agencies,with emphasis on performance-based objectives and outcomes. The proposed National ProgramSupportfor Public Expenditure Rationalizationwould providefinancial supportfor Executive Order 366 which outlines a plan to inducevoluntary departures from national agenciesthrough voluntary separation packages. Its success depends on developmentof restructuring plans for each agency which identify rationalizationopportunitieswith clear benefits in improved service delivery. 68. If conditions are appropriate, the Bank could provide development policy lending, which offer quicker disbursing funds. (See Chapter 3) This could support cross-sectoralreform efforts in the areas of tax policy and administration, public sector expendituremanagement including civil service reform, banking and pensionsystems, the power sector, investmentclimate, and capital markets, among other possibilities. 69. We will also support another critical cross-sectoralobjective of the government - improving devolution of nationalgovernment functions to LGUs. By freeing-up resourcesnow being spent by national agencieson devolved functions, the agencieswould be better able to focus their support on helping LGUs increasetheir own capacity to take on those functions (discussed below in the section on the local platform). 70. nationalSector-Specific Engagement In additionto addressingthe cross-sectoralissues,our platformwill provide national programsupport to specific sector agencies, based on the following principles: use programmaticsupport, within the existing budget,for the agency's most effective programs,focusing on core mandates and functions; assist well-articulated plans for strengthening agency effectiveness and service delivery; support efforts, where possible,to strengthencountry systemsfor environmentand social safeguards, procurement,fiduciary control, fund allocation, and accountability across the agency, rather than limited to project transactions; up-scale successful earlier project experiences (e.g., in education); and connect with cross-cutting programs (e.g., E0366 and the proposed National Program Support for Public Expenditure Rationalizationproject). 71, Depending upon the readiness of sector agencies for reform and rationalization,these national program support operations would take a sector-wide approach (SWAP)to well- performingor reformingentities over a period of years. (See Box 4) Applying the principles objectives and would focus on resource prioritizationand management -- improvingservice noted above, such national program support operations would clearly specify development deliverythrough better policy, planning, budgeting, and monitoring & evaluation systems. In addition, nationalprogram support operationswould address such agency-specific issues as expenditureprioritization,staffing mix, incentives/ compensation, accountability,and performancemanagement. Possible candidatesfor national program support projects include: the Department of Education (DepEd), the Departmentof Agriculture (DA), the Departmentof PublicWorks and Highways (DPWH), the Departmentof Social Welfare and Development 22 (DSWD), and the Departmentof Environmentand Natural Resources (DENR), buildingon and broadening in many cases ongoing operations in support of these agencies. Where appropriate, a sector projectcould be linkedto restructuringefforts underthe proposedNational Program Support for Public Expenditure Rationalizationproject. 72. Progress is already being madefor the preparationof a multi-financierSWAPwith the Department of Health (DOH). The proposed NationalProgramSupport for Health projectwould assist the DOH and selected provincesto implement the government'shealthsector reform agenda. This SWAPoperation would be undertaken in coordinationwith several development partners and would provide budgetarysupport for the department's financial managementand procurement reforms, performance-basedbudgeting, and re-engineeringof DOH regional offices to promote effective decentralization of the health system. Local Platform 73. The Local Government Code of 1991devolved service responsibilitiesand revenue authority to LGUs, placingthem at the forefront of developmentand poverty alleviation. A remarkable outcome of the new code has beenthe emergenceof good models of LGU performance and service delivery under dynamic local leadership,as recognized by programs such as the Galing Pook Award and the Asian Instituteof Management`s Competitiveness Ranking. Successfuland well-managed LGUs have become a visible example of islandsof good governance. These LGUs not only inspire neighboring LGUs, but in a few cases they have achieved a track-recordof performanceacross several administrations,thus showing some signs of institutionalizationof good governance. Some analysts consider these successful LGUs as the most promisingseed for the modernizationof public institutionsand the adoption of good governance practices in the Philippines. 74. This CAS intendsto support a strand of LGUs committed to performanceimprovement by helping them to achieve a cycle of improved service provisionwhich in turn generates citizens' trust and increased resourcesto the public sector. These LGUswill serve as replicable modelsfor an emerging culture of service delivery and a stronger social contract. At the same time, Bank Group support will help streamline and structure the government'sbroader policy approach towards all LGUs, including relativelyweaker ones, in order to create conditionsfor them to join the ranks of the stronger and well-managed LGUs. Overall,our assistancewill support decentralizationby empowering LGU decision-makingand supporting Figure IO: LGU-led programs. This emphasis reflects a shift to dealing with LGUs as clients, rather than implementersof national projects. 75. Our local strategy is outlined in Figure 10. Itwill be based on a clear performance and capacity framework, to be developedjointly with the national agencies, LGUs, various other stakeholders,and development partners. The performanceand capacityframework will guide the technical assistance program and the selection of financing instrumentsofferedto LGUs - national government, government financial institutions,and/or private financing 23 (discussed below). Eachelement of the framework embodies incentivesto increase the LGUs' own-sourced revenue;this is fundamentalfor achieving sustainabilityand ultimatelythe CAS goals. 76. Performance and Capacity Framework Benchmarking LGUsthrough a credible, commonly-acceptedperformanceframework will be key to strengthening LGU accountability, thereby reinforcingthe decentralization process. Correspondingly,LGUs need to increase their capacity, particularlyin the areas of governance, local service delivery, and investment planning and preparation. LGU capacity building programs will be more effective if closely associated with a performanceframework. 77. The key elements of the performanceand capacity buildingframework would include: revenue mobilization,planningand budgeting,fiduciary control systems, and local service delivery. In all these areas, participatory approacheswould be encouraged to promote greater transparency and accountability in localgovernment decision making. During CAS consultations,stakeholders strongly endorsed such a framework, but also voiced quite strong preferencefor it to be implemented independentlyoutsidethe government system. 78. Technical Assistance To help build LGU performanceand capacity,the Bank Group will providetechnical assistance to support core governance capacity building,sector-specific competencies,and LGU capacity in preparing and implementinginvestment projects. The core governancecapacity building program will be closely linked to the performanceframework, aiming to assist LGUs in attaining governance improvementsmeasurable according to the framework. Our technical assistancein this area will draw on our close partnershipswith the leagues of local governmentsthat have been nurturedthrough the Bank and Cities Alliance- supported City DevelopmentStrategies program. The World Bank Institute(WBI), localtraining institutions,and international development partners are expected to play an active role in the program and should coordinate their respective programs. For LGU investmentprojects,the Bank will help LGUs develop the ability to prepare feasibility studies,designs, and procurement packages suitable for financing. 79. It is envisaged that the nationalagencies will offer better and a greater range of technical assistanceto LGUs. This reflects the transitionof national agencies from implementing services that have been devolved to LGUs to instead, providing technical assistanceto LGUs to execute their own sector programsand investments. This representsthe link between the CAS' local and national platforms -- by helping to develop sector-specificcompetencies of national agencies, LGUs will benefit from improved support. 80. While technical assistance and other support to LGUsfrom the Bank Group, bilateral and multilateral development agencies, and the nationalgovernment has been good, it has been fragmented. Some of these programsare supply-driven, often overlapping, tied to specific program needs, and inconsistentwith each other. This fragmentation underminesplanning and capacityat the local level. To address this, a Development PartnersWorking Group on Decentralizationand Local Government,which has been created to work with the Departmentof Interiorand Local Governments and other government agencies,will help promote consistency among technicalassistance activities provided through a rangeof loan, grant, government, and development partner programs. To reflect core concerns and ensure ownership,this work will involve extensive consultations with LGUs, national government agencies, NGOs, academic institutions,and development partners. 81. National Government Financing The Local Platformwill support the government's efforts in rationalizinginter-governmenttransfer arrangements to LGUs. This is a complex 24 process and the Bank Group is helpingthe national government sketchthe options for doing this. 82. The evolving financing framework for LGUs could eventually includea significant role for conditional transfers. Conditional grant financing would support national prioritiesand public goods (e.g., environment, public health). Sector based grants, channeledthrough sectoral departments of the nationalgovernment, can be used to provide incentivesfor LGUs to achieve performance improvementsin priority sectors. The grant programs in this area (such as the National Program Supportfor Mindanao Rural Development2 projectand the NationalProgram Support for Health project)would be on a matching basis, requiring counterpart LGUfunding, either from borrowing or from own-source revenue. Grants could also be targeted to LGUswith the poorest communities and would thus receive minimumsupport for poverty alleviation. The government is also consideringthe possibility of a performance-based,cross-sectoral, conditional grant program,for which LGUswould receive funding linked to pre-determined performance criteria based on governance. 83. For the poorest municipalities,the nationalgovernment provides matchinggrants using a community driven-development(CDD) approach,which promotes local-levelcollectiveaction for empowerment and poverty reduction. Inthe Bank-supportedKalahi-CIDSS program,for example, the DSWD directly transfers grants to local communities in the poorest municipalities. Communitiesthen follow a planningand implementationprocess that is managed by DSWD in cooperationwith LGUs. As LGUs develop greater commitmentand capacityto implement the key principles of the Kalahi-CIDSSprogram- participation,accountability,transparency, and shared responsibilityfor costs- LGUs (rather than the national DSWD) are meant to take increasing responsibilityfor managingthe interactionwith communitiesand adoptingthe CDD approach as a way to allocate resourcesand make decisions at the local level. 84. According to a Bank evaluation,the CDD approach is an importantfeature in almost half of the Bank's current portfolio. While the basic objectives of such projectsare the same, the mechanisms used to achieve the objectives differ significantly. While there may be legitimate reasonswhy approaches are different, too many different approachesare likely to lead to confusion, duplication, and inefficiency,especiallywhen several Bank-financedprojectsoverlap in the same LGU. Conflicting advice and capacity building programs in different projectswith varying standardsfor preparing and implementing communityactivities can also place an undue burden on local capacities. Where possible, many aspects of CDD projectswould benefitfrom tighter exchanges'of experience and harmonization,including: common proceduresfor selecting and engaging communities; optimal cost-sharingtechniques; the provisionof quality technical assistance; mechanismsfor effective operationand maintenance;and the measurementand evaluation of outcomes. 85. Becauseso many CDD approachesare being carried out in the country -- through through the private sector -- the Philippinesprovides a unique environmentfor comparing LGUs, bypassing LGUs, through a social fund, through a municipalfund, through a line agency, approaches. To this end, a cross sectoral CDD working group was established to exchange experiencesand a multi-sector supervisionof several CDD projects was conducted. Among other things, this has resulted in a CDD harmonizationexercise in Mindanaowith the goal of identifyingcommonstandards and best practicesfor conflict affected areas. Goingforward, we will continueto support and consolidate CDD approaches in close partnershipwith client agencies and other donors. The Spanish government has set a good example in donor harmonizationfor CDD by expanding Kalahi-CIDSSin areas not already coveredthrough a Euro I.2 milliongrant to the DSWD, ratherthan introduce yet another approachto supportthe poorest communities. 25 86. Government Financial institutions Financing Distinctfrom grants to LGUswhich serve the broader policy goals of the national government, loanfinancing to LGUs through government financial institutions (GFls) would increase basedon sound banking principles. Bank financing may be on-lent to LGUsthrough the Land Bank of the Philippines,Development Bank of the Philippines,and the newly-created Municipal Finance Corporation,which together provide the majority of credit financing to LGUs. Possible Bank operations implemented by the GFls include the Local Government Supportfor City Development (through Land Bank), and the Local Government Supportfor Municipal Finance (throughthe Municipal Finance Corporation). (A list of possible projectsis presentedin Annex B3). 87. Past experience with lines of credit through GFls indicate problemswith low demand and slow disbursements. This is attributedto low LGU revenue base; presenceof alternative financing sources (including political"pork barrel"funds); lack of capacity at LGUs to develop "bankable" projects; complicated proceduresof funding windows; and the bureaucraciesof the Bank Group and GFls. New credit lines, therefore,will offer a broad menu of eligible subprojects, rather than limit financing to specific sectors. This will empower LGUsto finance activities which they deem to be their development priorities. In addition, financing will be expedited due to simplified proceduresfor subprojectappraisal, approval, and supervision. 88. Bank financing through GFls would proceed prudently, with particularattentionto improving GFI service quality.l0 GFls would conduct thorough creditworthinessassessments and move toward taking-up real LGU credit risk (currentlyall GFI loans are fully secured by LGU deposits or intercepts of inter-governmenttransfers). For LGUswhich meet governance performance criteria, considerationmay be given to GFI loansfinancing a share of the LGUs' overall expenditure needs in selected sectors, instead of specific investmentprojects,thereby reducing project-leveltransactions. The Bank's local currency loan productwill be explored in supporting such on-lending arrangements. 89. Private Financing In addition to lendingto LGUs through GFls, the Bank Groupwill also support the development of the privatefinancial marketfor LGUs (consistentwith the CAS' private sector platform). Privatefinancing to LGUs has been limited. Causes rangefrom lack of interest to lack of access to secured collateral (i.e., LGU deposit accounts). The Bank will provide policy advice in this area. Through its financial products, IFCwill explore ways to enhance privatefinancial institutions'to access to long-termfunds that would be retailed directly to LGUs for purely commercial projects. In addition, IFC may supportthe developmentof specialized privatefirms necessaryfor the smooth functioning of a municipal bond market. The Bank may also use its guarantee instrumentsto enable GFls to mobilize resourcesfor LGU financing via debt issuance in the domestic capital markets. Private Sector Platform 90. The privatesector platform aims to support successful experiencesof private-public collaborationthat can be replicatedand lead to dynamic private-sectorled growth. These visible successes would include private investment in infrastructureand dynamic private sector activity in high growth potentialsectors or geographic areas. To help improvethe enabling environmentfor such successes and to support the government's MTPDP reform agenda, the Bank Group assistancewill focus on: lowering the costs of doing business; lo Both Land Bank and the Development Bank of the Philippines have recently improvedtheir profitability, strengthenedtheir capital base, and mobilized more domestic resources. Moreover,since late 2004, they have made effortsto disposeof non-performingassets to private asset management companies. 26 0 improving financial intermediation; 0 strengthening regulatoryagencies; and 0 financing public-private infrastructure investmentsand investments in sectors with high growth potential. 91. By creatingjobs, generating incomes, and improvinginfrastructure,the visible successes will stimulate political support for the reformagenda, as embodied in the first three focus areas outlined above. This symbiotic relationshipis illustrated in Figure 11. 92. The private sector platform strategy is designedto complementthe national and local platforms. In particular,the national platformstrategy seeks to help the government establish fiscal stability and build the governance structures to address serious macroeconomic, policy, and institutionalconstraints to private investment. For the local platform, private financing is an important option for LGUs and the CAS seeks to help develop the performance and capacity of LGUsto attract such financing. 93. The strategy envisages a close collaboration betweenthe Bank, IFC, and MIGA. The Bank's analytical and lending support will aim to maximize IFC investment opportunities in sectors with high growth potentialor where IFC investmentscan have strong demonstration effects (e.g., housing finance, infrastructure, capital markets,small and mediumsized enterprises). 94. Lowering the Cosfs of Doing Business Despite an overall private-sector Figure 11: friendly environment, the Philippines is a costly Private Sector Platform place to do business. Our private sector platformwill focus on helping to bring down those transaction costs by improvingthe applicationof the rule of law. The Bank is already providing assistance to reformthe judiciary", which could be deepened in order to improvethe efficiencyof judicial processes relatingto dispute resolution,corporate restructuring,and loan recoveries. The Bank will also continueto support improvementsfor land managementand titling so that security of tenure encourages investments.I2 The IFC is supporting Land Registration Systems, a private entity engaged to provide services for the Land RegistrationAuthority on a public- private partnership basis. 95. The Bank Group could respond positivelyto opportunities to help the government identify and eliminate constraintsto marketcompetitionas well as to increase deregulation, enterprises (SMEs). Through SWAps, investment projects, and advisory services -- especially particularlyvital for sectors with high growth potentialas well as for growth of small and medium in the agriculture, mining, and transport sectors -- the Bank can assist nationalagencies in the simplificationand harmonizationof procedural regulations and liberalizationof rules governing private investments. This can be supported by technical assistance programsdirected at 11 Judicial ReformSupport Project, FY04 l2 LandAdministration and Management Project 2, FY05 27 improvingthe competitivenessof SMEs especially in rural areas. IFC is working on establishing with other development partners a programfor SMEs based in Mindanao. Through its analytical and advisory work, the Bank can help the government establish a competition policy regime and reduce the multiplicity of regulationsand special investmentincentivesthat give larger firms an unfair advantage. 96. lmproving FinancialIntermediation The Bank Group could support financial deepening by offering technical assistanceto key regulatoryagencies to improvethe prudential and supervisoryframework for banks, insurance companies, pensionfunds, the pre-needs sector, and capital markets. The Bank Group would also providefinancial support to intermediariesthat serve the needs of microenterprises, rural households,and SMEs. 97. IFC'sfocus in the financial sector is: developing housing finance, deepening the capital market, and strengtheningthe banking sector. IFC is investing in a mortgage servicing institutionand helping in the restructuringof the National Home Mortgage Finance Corporation. IFC's work on deepeningthe capital markets also includes technical assistance to the PhilippinesStock Exchangeand supportto the Fixed Income Exchange. IFC is looking to support the resolution of non-performingloans of the banking sector through asset managed companies. IFC is also keen on providingacquisitionfinancing to strong banks to assist in the consolidation of the banking sector. For support to LGUs, IFC is considering entering into a financial relationshipwith the LGU GuaranteeCorporation to establish a municipalfunds market as well as providing direct financing to selected municipalities. And, as noted above, IFC is considering a programto help develop investmentopportunities for SMEs in Mindanaoand improve their access to financing. Concerning MIGAs role in the financial sector, it can offer guaranteesby supporting banks whose foreign partners require them to strengthentheir capital base. Based on demand, MlGA can also offer capital marketguarantees in order to increase tenors and decrease ratesfor local lending. 98. Strengthening RegulatoryAgencies To increase private investments in infrastructure,the private sector platformwill support improvements in the governance framework of key regulatory agencies. Inthe water sector, the Bank Group will continue to help strengthen the regulatorycapacity and independence of the MetropolitanWaterworks and Sewerage Systems (MWSS), includingthe implementationof tariff structures and adjustments and cost recovery mechanisms, as well as strengtheningenforcement of anti-pollution measures. To support the goals of fiscal stability and attracting private investments in the power sector, we will assist in enhancing the capacity of the Energy Regulation Committee,the privatization of PSALMassets, and the functioning of the Wholesale Electric Spot Market. This support will be provided by the Bank through technical assistance and by IFC through its advisory services and direct financing for the privatization. To facilitate private investment cross-sectorally, and linkedto a SWAPfor DENR (part of the national platform),the Bank could support streamlined environmentalpermitting and clarificationof environmental requirements, programsfor improved environmentalinformationdisclosure, and enhanced environmental management systems. 99. seeks toFinancinginfrastructureprojects since they reflect urgent and medium-termstructural lnfrastructure and lnvestments in High Growth Potential Sectors IFC invest in constraints to development. IFC is providing advice to the government on attracting private sector investmentfor the Light Rail Project (LRT-1 extension),to the Departmentof Energy's Small Power UtilitiesGroup for its privatization,and to the Build OperateTransfer Center related to projectsfor bulk water supply for water districts. It also has investments in toll-roads, water, and power utilities. In its future program IFCwill focus on power, particularlyrenewableenergy, rural electrification,and transportation. It is anticipated that IFC operationsfor the three-year CAS periodwill be about US350 million under a base case scenario. 28 100. One investmentarea in which Bank and IFC collaboration is already noteworthy is the Manila Water Company Incorporated(MWCI), the privately-ownedwater distributionconcession operating Metro Manila's eastern zone. Previously, IFC had invested US$60 million in loans and US$15 million in equity in MWCI. In addition, the Bank had also invested US$20 million in MWCI, through MWSS,for sewerage and sanitation investments. A new FY05 projectwill provide additional financing for capital expenditures in sewerage and sanitation. Without the Bank's support and the morefavorable terms of its loans, the sewerage and sanitation improvement projects would not have taken place since such investmentsare generally not commercially attractive. These investments are reinforced by the Bank's ongoing dialogueto strengthen MWSS' regulatory capacity, as notedabove. 101. More broadly, the Bank can assist in the development of the government`s newly-formed investment vehicle, the Philippine InfrastructureCorporation, by providing advice on its design and financing. Through this new entity, the governmentintendsto incubate,jump-start, and later privatize a numberof key infrastructureprojectssuch as the South Luzon Expressway. Complementing initial assistance by the Bank, the IFCcould later provide directfinancing to the new projects on a commercial basis. 102. The Bank can also provide funding and partial risk guarantees where requestedto support public infrastructureinvestments and catalyze private co-financing. This includes a possible partial risk guarantee for power sector reform, lendingfor MWSSfinancial rehabilitation, rural power development, logisticsdevelopment, toll roads, and other infrastructurewhere the private sector's interest can be magnifiedwith public support. In addition, through innovative approaches such as output-basedfinancing, the Bank's lending would help leverage private sector investmentto achieve greater impact. 103. MIGA's offerings, coordinated with Bank and IFCefforts,would also support public- private partnershipsfor infrastructuredevelopment. MIGA's politicalrisk guarantees can complement the Bank and IFC programs, includingguaranteesfor privatizations(acquisitionsof existing assets, restructuringof existing assets, etc.) in the infrastructuresector. MIGAs technical assistance to the Philippineshas included a needs assessment of the Bureauof Investment,accompaniedby capacity buildingworkshops. MlGA has also provided capacity building support to sub-nationalinvestment promotion agencies in conjunctionwith a Canadian- funded initiative. 29 111. Deliveringthe Bank Group Program 104. The Bank Group's FY 2006-08 assistancestrategyfor the Philippinesoffers a significantand timely opportunity to supportthe government'sreform efforts by focusing on the strengthening of public institutions. 105. Underthe platform approach,the Bank Group's assistancewill be opportunistic in terms of sectors and areas of engagement, but selective in adjusting the range and level of our Bank Group productsto respondto the paceof the public reformeffort. Iffiscal reforms should slow, for instance,there would still be considerable scope to provide non-lending support and to finance selected projectswith strong sectoral reform. We will leverage both our financial and non-lending support through coordinationwith development partners. We will also place greater emphasis on managingthe portfolio and managingfor results. Managingthe Portfolio 106. The Bank'songoing portfolio in the Philippinesincludes 21 active loans with net commitments at US$1.14 billion, along with about 79 grant projectswith total value of US$46 million and other analytical and advisory activitiesfinanced from the Bank's administrativebudget. The size of the loan portfolio has declined steadily in recent years, from US$2.9 billion in 1999to US$1.I4 billion currently. This has been the result of a conscious decisionto limit commitments given littlefiscal space in the national budgetand limited absorptive capacity of implementingagencies. Morethan half of the ongoing projectssupport programsat the local level. 107. Portfolioperformance has improved in recentyears, but still faces considerable challenges. Disbursements declined from 1996to 2001, but have since improved and are currently about 20 percent of undisbursed balances. Older projects with implementation problems were restructured and non-performing componentsand activitieswere dropped to respondto budget constraints. The riskiness of the portfolio has been fairly stable since 2001, with the number of problem projects remaining steady at three to four and commitments at risk now at about 10 percent. The realism and proactivity indices remain above Bank targets. Assessments of quality at entry and quality of supervisionhave registeredoverall satisfactory-and-above ratings. Project outcome ratings have also been improving and there has been considerable progress in harmonizing procurement and other procedureswith those of the government. These changes can be attributed to improved portfoliomanagement by both the government and the Bank, with regularjoint portfolio reviews and increasedfocus on results. 108. The existing portfoliois, in many ways, in line with the strategicfocus of the new CAS and the government's development priorities,particularly in the areas of increasing access to basic services for the poor and disadvantaged groups and in strengthening systems and institutions to improve service delivery both at the nationaland local levels. For newly-approvedprojectsthe shift towards a programmatic approach is already being taken, for example in the FY04 SWAP-type DiversifiedFarm Income and Market Developmentproject. FY05 projectswill also incorporatethe new CAS emphasis on simplified procedures, harmonizedrules, and capacity building (e.g., secondWomen's Health& Safe Motherhood project). A few existing projects,however, may require restructuringto improve their implementationand ensure consistencywith the new country assistance strategy (e.g., LGU Financeand Development project). 30 109. While portfolio improvementsare noteworthy and provide a foundationto build upon, there are a number of cross-cutting implementationchallenges that limit the program's effectiveness and constrain the achievementof planned outcomes. These challenges include: adequacy of budget resources and timely cash releases; improvingproject implementation readiness,including the pace and quality of project preparationand startup; strengthening government implementationsystems particularlyat the local level; and better monitoring and evaluation. 110. Going forward, we will continue to undertakejoint portfolio reviews with the government, the Asian Development Bank (ADB), and the Japan Bank for International Cooperation (JBIC). Effortswill also continue with the government to improve project readiness and to mainstreamproject activities within implementingagencies. In addition, we will strengthen our results-basedapproach to portfolio monitoringwhich was piloted during the August 2004 project level review conductedjointly with the government. Outputs and outcomes of all projects under implementationwere summarizedusing a common resultsframework that helped identifyshortfalls in expected achievementsand weaknesses in project monitoring. A preliminaryassessment was also made of results achieved under technical assistance providedthrough grants. This processwill be extended to include analytical and advisory activities in future project-levelreviews. And, of course, the results framework developed for this CAS will be the basis for regularlyassessingthe outputs and outcomes of the ongoing portfolioeachyear. We will use this ongoing monitoringand evaluation process to draw lessons to continuouslyinform all of our program interventions. 111. Important steps to improveproject implementationare the harmonizationof Bank procedureswith those of the government, which help to strengthenthe government`s fiduciary functions. Considerableprogresshas been made in improvinggovernment procurement systems and harmonizing the proceduresof the Bank, ADB, and JBIC with those of the governmentfor nationalcompetitive bidding. Focus is now on dissemination and monitoring of the new procedures,including requirementsfor increasedtransparency and the new role of civil society observers. Financial management improvementsare also becoming harmonizedaround the effective use of the New GovernmentAccounting System, which is being adopted consistentlyacross all levels of government. The Bank is also leading the Development PartnersWorking Group on Decentralizationand Local Governmentto promoteconsistencyin the LGU engagement strategy. 112. The government has welcomed the Bank's new approach to expenditureeligibility, reflected in the new countryfinancing parametersapproved in February2005. This providesfor increasedflexibility in the treatment of cost sharing, taxes, recurrentcosts, and local costs. (SeeAnnex 3) The Bank's overall financing share is not expectedto change significantly at the aggregate level,with expected increase in sector-wideassistance (in which the Bank'sfinancing share is typically low). One-hundred percent Bank financing could be providedfor some projects and activities with strong evidence of ownership and commitment. Recurrentcost financingwill be considered where consistentwith project objectives,subject to strong demonstrationof arrangements to ensure sustainabilityafter Bank financing ceases. Integrationof Bank financing in the budget process ensuresthat increasedrecurrent cost financing would notjeopardize overall debt and fiscal sustainability. 113. The Bank is working with the government to strengthen capacity to implement and monitor proceduresto safeguard importantsocial and environment policies. In particular, proceduresrelatedto land acquisition, the rights of indigenous people, and resettlement 31 have been identifiedas problem areas. Joint discussions have led to preparationof a draft law to address some of the land and resettlementissues. Similarly,while many government policies and procedures on the environmentare appropriate, their implementationfaces a number of challenges,includingstreamlining the DENRand prioritizing monitoringefforts within limited budgets. There is also a need to strengthen environmental management capacity at the local government level. 114. In line with the Bank's effort to gradually move to greater relianceon country systems, the Bank is also undertakinga diagnosticreviewto help the government identify social and environmentalpolicyand institutionalneeds based on gaps betweenthe Philippines' and internationalgood practices. The review will also identify concrete actions that can be taken in the areas of environmentalassessment, involuntary resettlement,and institutional capacity. The longer-termgoal -- supported by the platformapproach-- is to help build capacityfor planning,implementing,and supervising social and environment safeguards. In linewith our local platform,discussions have begun among the various development partnerson harmonizingproceduresrelatedto these safeguards, with consistent approaches designed to enhance local government capacity. Furtherefforts on harmonization in the social and environmentalareas will be carried out as part of portfolio management during the CAS period, and will pave the way for greater reliance on country systems in these areas. 115. The Bank Group is actively supporting governmentanti-corruptionefforts with the Office of the Ombudsman, PresidentialAnti-Graft Commission, Supreme Court, Government Procurement Policy Board, and civil society organizations. At the project level, the Bank Group has supported improvedfiduciary proceduresin health, education,and social welfare, including large reductionin textbook costs and civil society monitoringof book deliveries. Innovativecontractingapproaches,for example in roads and solid waste disposal, allow payment on performancerather than inputs. Fiduciary reviews check procurementand financial managementprocesses,and growing use of community-driven development provides greater local involvementin planning and monitoring local expenditures. Lending 116. The new assistancestrategy proposes a graduated responseto policy scenariosfor the Bank Group to achieve systemic impact. Our financing is moving towards more mainstreamedsupport for the government's own programs. Significantly,it will not create a substantial additionalfiscal burden on the government. Moreover, the government has indicated its preferenceto rely more on official developmentassistance (ODA) over commercial borrowing, because of its potential to promote key reforms and lower costs. Finally,the new assistancestrategy will offer flexibility to respond quickly to opportunities and scale-up lending if warranted. (See Table 12) 117. The scale of IBRD commitmentswill be determined by progresson fiscal reforms reflectingthe overarchingimportance of fiscal adjustment in the short term and the need to mitigate and manage risks. Assuming a scenario of gradual policy reform, the Bank's base case programwould fall within a range US450 - 900 million of investmentlending only, for the three-year CAS period. This level is less than the base case scenarios of about US$1.I - 1.3 billionfor the two previous CAS periods, but more than the actual level of lending over 32 the previous period^.'^ Lower than anticipated lending levels were due to fiscal constraints for regular investment operations and limitedprogresson fiscal reformsthat held back development policy lending.14 118. The base case represents a scenario in which there are no major policy reversals and no widening of the fiscal deficit, but progresson implementing key reforms is uneven. Under this scenario, Bank lendingof up to US$900millionwould not include development policy lending (DPL). The actual amount would be driven by country demand and would depend on the number of agencies and LGUs willing and able to take on reforms. At the national level, this would imply the continuation of efforts to: reducethe public sector deficit, strengthen public expenditure management,service delivery, and tax administration. For Bank financial support at the sub-national level, greater clarity in the financing framework would be expected. At both levels, lendingwould also be linkedto the national government and LGUs' ability to prepare high quality operations in a timely manner. Good performance of the existing portfoliowould also need to be maintainedto increase lendingwithin the base case, If progress on reformsand capacity is weak and if the portfoliodeteriorates, Bank lendingwould fall commensurately. 119. In a high case,the Bank would be prepared to provide total lending, including development policy lending, of up to US$?.8 billion in response to an accelerated reform scenario. Entry intothe high case could occur once a track record of policies and associated outcomes have been established, with a reductionof the consolidated public sector deficit (CPSD) of 2 percent of GDP relative to 2004, as part of a sustained adjustment effort compatiblewith a deficit reductionof 3 percent of GDP during 2005-07.'5 A significant portion of the fiscal adjustmentwould be expectedto derivefrom increases in the tax revenue to GDP ratio, reflectingprogress on both tax administrationand tax policy improvements. This fiscal adjustmentwould likelygenerate improvementsin financial market indicatorsand a significant reduction in the cost of borrowing. With improving confidence in the macroeconomicpolicyframework, the share of private investmentin the economy would also grow. Lower public deficits and growth from strongerfinancial markets and higher investmentswould combine to significantlyreduce public debt/GDP. Substantial progresstoward the high case would be consideredin an enhanced base case, characterizedby steady progress in strengtheningpublic sector revenues and reducingthe public sector deficit (see footnote in Table 12). 120. In additionto fiscal adjustment,development policy lending, whether in a high case or an enhanced base case, would support structural reforms in areas such as tax policy and administration,public expenditure management including civil service reform, banking and pensionsystems, the power sector, investmentclimate and capital markets, among other possibilities. The pace and quality of the reforms implementedwould influence the size and timing of DPL. Eachof a series of annual DPLs could cover fiscal reforms plus other key reforms from the list above. 121. A low case scenario would be characterized by inadequate fiscal adjustment contributing to heightenedconcerns regarding fiscal and debt sustainability, limited progress l3 The actual lendingwas US$472 million for the FY2000-02 CAS period and US$379 million (projected)for the FY2003-05CAS period. l4 Developmentpolicy lending was included in the base case in the FY2003-05 CAS but was not actually committed. l5 The CPSD in 2004 is reported at 5.0 percent of GDP. Adjustments to the CPSD would be measurednet of privatizationreceipts. 33 in other key policy areas, and deteriorationin the quality of the Bank's portfolio. Under such circumstances, Bank lendingwould fall below US$450 millionand lendinginstrumentswould focus more narrowlyon a selected number of investmentprojectsto support direct poverty reduction and delivery of critical publicservices (e.g., National ProgramSupportfor Health, Basic Education, Social Protection,and Kalahi2 (CDD) projects). Table 12: CAS Trigger Matrix FYO6-08 Low case Base Case High Case a' Lending envelope Up to US$450million Up to US$900 million Jp to US$1.8 billion (for three-year CAS Deriod) Development Policy No No fes Inadequatefiscal Appropriate reform Entry into the high case adjustment agenda with track record of Widening fiscal deficit No major policy policiesand associated Limited progressin reversals, but progress outcomesestablished other key policy on implementingkey with CPSD reductionof outcome areas reforms is uneven 2 percentof GDP No widening of the fiscal relativeto 2004 deficit Compatiblewith CPSD reductionof 3 percent of GDP during 2005-07 Significantportion of adjustmentdue to increases in ratio of tax revenueto GDP a/ An enhanced base case would also be considered. In this case, DPL up to US450 millioncould be included,with the proviso that total Bank lendingwould not rise above US$1.2 billion. Entry into the enhanced base case could occur once a track recordof policiesand associatedoutcomes have been established,with a reductionof the CPSD of about 1.O - 1.25percentof GDP relativeto 2004, as part of a sustained adjustment effort compatiblewith a deficit reductionof 2 percentof GDP during 2005-07. A significant portionof the fiscal adjustmentwould again be expectedto derivefrom increasesin the tax revenueto GDP ratio. 122. To allow for flexibility to respond to emerging needs, a menu of potentialprojects and estimated lending amounts,aligned to the platforms, has been prepared. (SeeAnnex 83) This indicative list of possible projectswill be updated periodically. Some projects would drop out depending upon evolving needs, and new projects may be added that are consistent with the CAS framework. 123. Bank exposure to the Philippines is estimated at US$3.3 billionat the end of fiscal year 2005, versus a peak of US$5.5 billion in FY95, reflecting negative net disbursements from the Bank in each of the past ten years. Negative net transfers (including interest payments) averaged nearly US400 million per annum in the past decade. Consequently, exposure ratiosfall well within Bank guidelines and debt to the Bank accounts for about 5 percent of the country's externaldebt. Given projected principal repayments during FY2006-08averaging about US$400 million per annum, Bank exposure would continueto decline during the next three years underthe base case. Indeed, even with an enhanced 34 base case (up to US$1.2 billion), exposure would not increase. Exposurewould only increase with an aggressive expansion in development policy lending predicated by an improved policy environment under the high lending case. The number of investmentloans that could be relativelyfaster disbursing (SWAp operations, for example, typically disburse over a fewer number of years than do other investment operations)would be limited to remain within these broad categories of exposure. 124. For IFC, the Philippines is among the Corporation'stop ten country exposureswith a committed portfolioof US430 million in 31 projectsmainly in the infrastructureand financial sectors. (See Annex 88) MIGA's current exposure in the Philippines stands at US$103 million of gross exposure in the infrastructureand finance sectors. (See Annex 88) This is well below the country limit (US420 million net), giving significant roomfor additional guarantees. Providing Analytical and Advisory Activities (AAA) and Sharing Knowledge 125. In the Philippines there has been remarkablereceptivityfor the Bank Group's analytical and advisory activities (AAA), drawn from its global knowledgeand international experience. These activities are particularlyimportantfor achieving impact, in view of possibly limited lending volumes. The Bank Group will continueto invest in high-quality, demand-drivenAAA. This work will encompass:economic & sector work, which will underpin our policy dialoguewith the client as well as providethe foundationfor effective lending; and technical assistancewhich can be flexibly used to help the client implement reforms. 126. Given the premiumplaced in this CAS on seizing opportunitieswhen they arise and being able to adjust to the evolving client priorities,a definitive list of new AAA tasks is not provided as it will evolve over the CAS period. AAA will focus on several important broad areas in which an ongoing dialoguewill take place, in particular: Fiscal reforms: AAA will build on recently completedwork such as the Development Policy Review. Our policy dialogue will focus on the direction of tax policy as the main vehicle for managing macroeconomicstability and achieving sustainable growth. This could also involvedebt sustainabilityanalysis and assessmentof the impact of fiscal stimulus on growth and poverty reduction. To complementsuch fiscal analysis, AAA could also be conductedon contingentliabilitiesand pension reform. The medium to long-termAAA agenda could includetechnical assistanceto improve the quality, effectiveness, and efficiencyof public institutions,processes, and systems (e.g., medium-term budget plans, budget systems, monitoring, oversight, and possibly the formulation of a fiscal responsibilityact). 0 Growth and the investment climate: AAA will support the development of policiesto enhance productivityand competitiveness. Work will aim to improvethe developmentof new policy approaches and to build capacitythat will help the Philippinesderive greater domestic productivitygrowth benefitsfrom reforms. This could include analysis on improving supply chain logistics,the regulatoryframework for private investment,and related financial sector issues. In addition to national issues on growth and competitiveness,AAA could help identify targeted measuresto support productivityimprovements and employment among the rural poor and to strengthen alliances between public and private stakeholdersat regionaland local 35 levels. This could include support for better agricultural trade policy and infrastructure development. Social development and inclusion, socialprotection, and poverty: The AAA program will encompass advice on how to improvethe coverage and quality of basic social services and social assistance and how to reducevulnerabilities(e.g., mitigatethe impact of shocks on the poor). The work will build on updated poverty analysis using the recently completed national poverty map to improve budget allocations. This could involve assistanceto design a social protectionframework, includinga strategy to scale-up effective programs, achieve synergies betweensocial services, and empower the poor. Other AAA activities could include developingdifferent poverty targeting mechanismsand interventionsto support more objective, equitable,and less political allocation of resources. These activities would be closely linkedto work on fiscal and decentralizationissues. Additional AAA work may include policy notes on human resource reform in the health sector, building knowledgeon public-private partnerships in the social sector, as well as developing a deeper understanding of regional poverty by continuingwork on poverty mapping. 0 Governance,political economy ofreform, and anti-corruption: AAA work in this area will focus on developing rigorous stakeholder models to analyze the impact of policy reform proposalson different stakeholder groups and improvethe understanding of the political economy of reform in the Philippines. Buildingon ongoing work with the judiciary and other oversight agencies, support is likelyto focus on increasing transparency and accountabilitywithin government agencies and within private corporations, strengtheninginstitutionsof government, and increasing involvementof civil society and elected officials in the oversightof governmentactivities. Specific areas of attention could be on improvements in financial management practices, public administration management, andjudicial effectiveness. LGUs, municipal finance, and fiscal decentralization: PotentialAAA for this topic would focus on three areas: rationalizingthe existing inter-governmentaltransfer system; introducinga performanceorientationto it; and improvingthe ability of local governmentsto enter into sustainable public-privatepartnershipswhich support growth and employment. Meeting infrastructure needs: Buildingon the Meeting lnfrastructure Needs report (to be completed by end-FY2005),forthcomingAAA will address specific infrastructurereform topics that are of particular interestto the government,such as the power and water sectors and preparingpolicy notes on wastewater and solid waste management issues. In addition, advice could be offered to the Philippines lnfrastructure Corporationand the BOT Center on logistics development. 127. Another important aspect of our AAA programwill be to discuss, disseminate, and draw on several ongoing multi-year initiatives. In particular,the policy recommendationsof the Meeting lnfrastructure Needs report will be discussed extensivelywith the government, and will provide the groundwork for future lendingas part of both the national and local platforms. Similarly, the Investment ClimateAssessment, once published,will aim to inform a broad rangeof stakeholders about critical private investment related issues, and thereby promoteagreement on the reform agenda. 128. Trust funds will continue to play a prominent role in our entire program. Besides supportto specific lending operations or recipients' programs,trust funds allow us to undertake a range of AAA that would be difficult to finance otherwise, in such areas as 36 poverty monitoring and analysis; governanceand anti-corruption; corporate social responsibility in the miningsector; strengthening LGU accountability; and managingwater resources. In addition, a multi-partnertrust fund that supports reconstructionand development efforts in Mindanao is being established, to be administered by the Bank. (See Box 2) 129. Overall, we will also put greater emphasis on just-in-time AAA, to respondto immediate client needs. Through the use of videoconferences,written materials, and dialogue, the Bank Group can offer its clients quick advice on a range of topics, based on our in-house experts, global knowledge network, and technologysystems. A prime example of this was a videoconferenceheld in late-2004which gave four government secretariesa chance to discuss social protection policies and options, with a panel of Bank Group experts who had wide-ranging global experience. 130. Knowledge sharing of our AAA is an integral business line of the Bank Group. We intend to package our research and internationalexperiencewith local knowledgeand innovatively disseminate it to achieve maximumimpact on target stakeholders. To support the government's reform program,the Bank Group could promote Knowledgefor Development Networksat the nationaland local levels. These would be co-organizedand mobilized in partnershipwith government and civil society institutions,and associationsthat support knowledge sharing and networkingthrough communities of practice. The networks could serve as channels for informationdissemination,advocacyof policyagenda, and promoting islands of good governance and replication of best practices. 131. Distancele-learningwill be part of our knowledge sharing strategy. Through our partnershipwith Asian Instituteof Management and the Bank Group's network of Knowledgefor DevelopmentCenters (KDCs), virtual courseswill be offered on project and procurement management and disaster risk managementfor nationaland local agencies. (See Box 5) Such activities will be supported by the WBI and the Bank Group's Global Distance Learning Network. In addition, we will continue to co-organize with Asian Institute of Management,the KDCs, and other nationaland international partners, real-timefora and policy dialogue on relevant development themes. 132. As one of its focus countries,WBl's program for the Philippineswill be closely aligned to the new CAS. A multi-year program of customizedWBI activitieswill be linked to AAA, as well as to operationalwork. The National Disaster Coordinating Council, in partnershipwith WBI and three Philippine KDC universities, launched in 2005 an online course on disaster risk management. The course was the first of its kind in the Philippines as well as for the Bank Group at the country level and in collaborationwith local country partners. A broader program of capacity building targeted to strengthenthe core competenciesof LGUs is also being developed. Topics will include strategyformulation and development planning process; budgeting,financial management,and creditworthiness; and revenue mobilization. In addition, Philippinegovernment officials will participatein a WBI- sponsored course to build capacity to combat money laundering and terrorismfinancing. Partneringto Achieve Greater Impact 133. A network of strong partnerships is critical to knowledge sharing, and to delivering our lending and AAA programs. Over the past decade the Bank Group has had a proactive outreach programin the Philippines. We have established robust partnershipsnot only with our main client, government, butwith a range of stakeholders such as international 37 development partners, civil society, the businesssector, academia, and the media. We will sustain and build on our long-established relationshipsand actively explore new ones. 134. The Bank Group's partnershipwith ADB and JBIC is especially critical. ADB, in particular, is facing similar program challenges as the Bank Group and it is responding by also adjusting its engagement strategy. With its strategic focus on fiscal consolidation, improved investmentclimate, and support for faster achievement of the MDGs, there is strong complementaritybetween ADB's 2005-2006 Country Strategy and Program and the Bank Group's new CAS. Looking ahead there is scope for closer collaborationand synchronized efforts in several areas including assessment of and supportfor the government'sfiscal program, planning processes, governance and anti-corruptionagenda, and decentralizationand LGU engagementstrategy, and the resultsframework. Together, ADB, JBIC, and the Bank Group programs comprise approximately 90 percent of the country's total ODA resources. With the government, the three institutionswill continue harmonizationefforts. In addition, we will continueto coordinate closelywith the IMF, particularly in the areas of fiscal and banking, and the assessment of macroeconomic policies. We will also continue our collaborationwith the United Nations countryteam on addressing the MDGs and other common activities. 135. At the project and sectoral level, partnershipswill continueto be pursued. SWAp- type operations, in particular,offer excellent opportunitiesfor coordinationwith development partners where there is a common agenda with the government and strong commitment from the line agency. A good example is our ongoing coordinationwith the European Commission and ADB during the preparationof the NationalProgramSupportfor Health project (FY06)given their active support of the government'sagenda in this area. Overall, we will seek to develop a more harmonized, less fragmentedframework for assistance among partner programs, especiallyfor local governments. We especially intend to create better synergieswith bilateral agencies, which have a range of programstargeted to the local level. Extensive coordinationwith both bilateral and multilateraldevelopment agencies on the creation of the MindanaoTrust Fund is a good example of how the Bank Group will leverage its programs with development partners. 136. Global partnershipson the environment are an emerging and important business line for the Philippinesprogram. One of the region'sfirst agreements under the global Carbon Fund Emission ReductionsPurchase Programwas recentlysigned for the Philippines. As the first wind farm in the Philippines,the project will have a significant demonstration effect in acceleratingthe commercializationof wind power in the country, consistent with the CAS private sector platform. The Multilateral Fundfor the Montreal Protocol is also supporting a number of on-going projects in the Philippinesto reduce ozone-depletingsubstances. In addition, the Global Environmental Facility (GEF) is supportingglobal researchfor Coral Reef Managementwhich has significant focus on the Philippines. Going forward and in line with the programmatic approach of this CAS, the GEF will also support a cross-sectoral and integrated environment and natural resources management project. 38 rom academia government sector use th tatives are the main KDC 137. We will also enhance our strategic coordinationwith other external partnership programssuch as the Water and Sanitation Program, which supports capacity building and knowledgesharing. The Public-Private InfrastructureAdvisory Facility (PPIAF)will be counted on to provide continued support to the Philippinesto strengthen the investment environmentfor infrastructure. 138. The Cities Alliance will also continueto support City Development Strategies and other urbandevelopmentassistance especiallywith the reported successes of the early CDS program. This program has plantedthe seed for implementing and institutionalizing participatoryurban governance processes in urban development decision making (e.g., 39 economic development planning,addressing poverty issues, project prioritizationand capital investment planning). Insteadof the originally planned strategies for ten cities, the program has generated city developmentstrategies in 31 new cities due to a strong responsefrom city mayors. These will be further supported through the Local Government Supportfor Cities Development (FY06). The approachwill deepenthe Bank Group's assistance and policy dialogue under the local platformof this CAS. 139. In playing an honest-brokerrole, our dialoguewith civil society leaders and opinion makers will be vital, especially in expanding relationshipswith congressional leaders. We will support the government'seffortsto build coalitionsfor reform and help promote public discussion and healthy debate, particularlyrelatedto the CAS themes of governance and fiscal stability. 140. The Panibagong Paraan ("NewWays") Development Marketplace programwill also serve as a venue for building partnershipswith and betweenthe branches of government, development partners, civil society, and the private sector. This event, programmedevery 18 to 24 months, promotes innovative ideas in poverty reductionand encouragesthe replication and scaling-up of successful projects. 141. The Bank will continue its coordinatingrole among external developmentpartners through our organizationand co-chairing,under the government's leadership, of the Consultative Group (CG) meetings. Under the CG umbrella,activitiesof other development partners are already in linewith the four CAS themes and are being coordinated through various existing and newworking groups. For instance, CG working groups on the MDGs, health sector reforms, and education reformsare underway and support multi-agency dialogue and coordinationin the social sector, including social inclusionissues. New CG working groups on decentralizationand local governments,governance and anti-corruption, economic and fiscal reforms, and growth and investmentclimate, are expectedto continue beyond the formal CG meetings, and will undoubtedlyfurther the CAS' goals in each of these areas. 142. In March 2005, for the first time the CG meeting involveda broad range of stakeholdersfrom civil society, Congress,the business community,academia, as well as government and developmentpartner representatives,and to reflect its changed approach was renamed the PhilippinesDevelopmentForum. The interactivediscussion provided an opportunity for all groups to develop a better understandingand perspective on the reform agenda, and hence fostered consensus. This Forumwill continue and will focus on key development issues and encompass broader participationand deeper development dialogue. Managing Risks 143. This entire CAS is focused on support for the Philippinesto grasp opportunities and manage substantial risks. A serious risk would be fading political supportfor key reforms. The CAS is driven by the desire to minimize this risk by urging front-loaded reformsand helping the country acceleratethe benefits that are expected from fiscal and other reforms. 144. More specifically,the Bank Group's program over the next three years will face risks related to its effectivenessand ability to attain outcomes. The Bank Group's effectiveness will depend, to a large degree, on the extent of politicalwill for reformand the pace of change. In particular, failure to rein in fiscal deficits would create greater economic 40 vulnerability and requirefurther expenditure contraction. This would negativelyimpact the Bank portfolioand investment lending. Possibleexternal shocks could also weaken the economywith the same impact. 145. Social and politicalevents can pose unpredictable,yet serious risks to our program and to overall developmentoutcomes. Significant constitutional reforms are contemplated and could change the politicallandscape significantly and in ways that are difficult to predict at this time. 146. The failure to achieve a sustained peace arrangement in Mindanaoposes one particular risk. Without a peace agreement betweenthe government and the MILF, the MindanaoTrust Fundfor reconstructionand development (for which the Bank Group is playing an active role in coordinatingamong development partners) would be limitedto modest capacity-buildingactivities. Security concerns in Mindanaoand elsewhere could also hamper private investmentand the preparationand supervisionof Bank-financed projects. To mitigate the possible impact of such risks on the Bank Group's program, we will maintain our broad and deep partnershipswith development partnersand country stakeholders. While this can help reduce the impact on our program, such risks may nonetheless have serious implicationsfor the country itself. 147. Overall,the CAS is designedto not only capture opportunitiesfor reform, but also to mitigate and managethe risks to the Bank Group'sfinances and reputation. This is achieved through a strategy that scales Bank lendingto the Philippines'progresson policy reforms and implementation,as outlined above. The platformapproach itself is fundamental to risk managementsince it strives to improve effectiveness of public institutionsand the ability to sustain reform measures. 148. Risks will also be reduced as we rely more actively on the resultsframework as a managementtool. As noted, monitoring and evaluationof CAS outcomeswill be integral to our annual programmingand portfolio reviews. This will allow us to identify potential problems early on. And, the SWAPlending approach providesenough flexibility to adjust lending levels quickly depending uponthe circumstances. 149. Our strong relationshipwith multiplestakeholderswithin the country as well as with external development partners is another importantway for the Bank Group to minimize its risks and ensure its effectiveness under changing country circumstances. Managingfor ResuIts 150. The CAS resultsframework (Annex B9) will be used to managethe assistance program on an ongoing basis. It identifies result targets at three levels: Country development goals, extracted from the 2004-10 MTPDP, and some of the more challenging MDGs for the Philippines. (See Box 1) These are shown in the far left-hand column in Annex B9, and representthe country's development objectivesto which the Bank Group can contribute but for which we do not control the outcome. They provide the medium-term context for monitoringof the Bank Group's assistance. 0 CAS outcomes, expressed as "top-down" measures of visible successesthat can be replicated and thus achieve greater impact. These are based on the four CAS themes (e.g., governance) and the three implementationplatforms (e.g., national 41 platform) and are noted in the center column of the resultsframework. These CAS outcomes (summarizedby theme and platform inTable 13) link program-level milestones to country development goals. The results outlined seek to identify higher-level changes leveraged by Bank assistance. These are intentionally less project-specificthan in traditional CAS approaches(e.g., number of roads built, drinking water systems established,etc.). This is to ensure relevanceand impact of Bank assistance in a middle-incomecountrywhere the Bank'sfinancial resources account for a very small share (recentlyabout 0.2 percentof GDP). Program-level milestones, or a "bottoms-up"approach, reflectingthe outcomes of the Bank Group assistance program of loans and AAA, includingthe existing portfolio. These are summarized in the fourth column in Annex B9. The indicators here are at a more aggregate levelthan the indicators providedfrom individual projects, allowing for broader assessmentof the overall impact of current and proposed Bank Group activities. Annex Table B10 provides more detail by mapping the ongoing and new lendingand non-lendingactivities (including relevant programs of partners)against the CAS themes and platforms. 151. Taking account of past experience,the targets for program-level milestones of the Bank Group programare modest and selective, providing a broad framework for assistance without over-promising on outcomes or over-prescribingthe approach which may be adopted to achieve these goals. In some cases, the identifiedtargets are new and further work will be required to identify baselines and measurementtechniques. The approach to finalizing these will be documentedas part of the forthcoming portfolio review. We will explore with the governmentthe possibilitiesfor sharing these reviewswith external stakeholders, so that CAS consultation can become a more continuous process. 152. The government is also working on results-based management of its expenditure programs. With assistance from the Bank,the government has identifiedMajor Final Outputs for each of 13 national government agencies, highlightingkey results associated with their core functional mandates and key indicators for their achievement. These will be used during 2005 to review and improvetargeting of budgetallocationsfor 2006. At this stage the indicatorsbeing developedfor this purpose are not necessarily good indicators of achievement of Bank assistance targets. We plan to monitor and compare both approaches and expect the CAS results monitoring process to gradually convergewith government`s performancemanagement indicators. 153. A potentiallist of projects has been developed and will help in formulating annual work programs as needs evolve. (See Annex B3) While these goals provide clear targets, the framework is intended to be sufficiently flexible to respondto evolving priorities over the CAS period. Hence, projects and programs may change. 154. This a three-yearCAS covering fiscal years 2006-08. The decisionwas made to cover a three-year period, insteadof the now more commonfour-year Bank Group strategies,to align betterwith the government's six-year electoral cycle and six-year period for the MTPDP, both which commenced in mid-2004. This timeframe, therefore, will allow the next three-year CAS to assess the Bank Group's impact in tandem with the current administration's mid-term review of its MTPDP, and to respond accordingly. In addition, the Bank Groupwill undertake a focused progressreport about half-way into the CAS periodto ensure that the strategy continues to be relevantand the implementationis broadly on track. 42 Table 13: CAS-LevelGoals Organizing Ourselves to Deliver 155. To deliver the CAS, the Bank activities will be organized in clusters based around key client relationships. These are also more closely aligned with the result areas described earlier, allowing more clear accountabilityfor results and promoting greater roomfor prioritizationof efforts within the platformteams. This implies a significant shift away from the managementof individual(sometimesfragmented)tasks toward the managementof client relationships and related clusters of work. 43 156. At the national level, the work programwill be organized into clusters alignedwith key client institutions, such as the line departments responsiblefor rural development, environment, health, and education. The CAS' national platformwill provide a coordinated approachfor cross-cutting support of government efforts to improve public sector performance,efficiency, governance,and service delivery. Key analytic work on sector- specific and cross-sectoral issueswill also be included in these clusters. 157. Activities at the local levelwill be clustered to ensure consistentand effective assistanceto local institutions. Tt7e CAS' local platformwill providea commonframework for local performance assessment, capacity building, implementing procedures,financing, and community-drivendevelopment. This cluster will include loans and technical assistance provideddirectly to localgovernmentsand institutions in support of local development plans. Since some national programsalso include support for priority programs implementedat the local level, the local platformwill need a strong cross-sectoral approachto ensure compatibilitybetween national assistanceand localfinancing, needs, and capacity. The local platformwill also work with government on identifyingoptionsfor rationalizingnational grant programsto improve performanceincentivesand targeting of national priorities. WBI assistance is also expectedto be targeted on local performanceand capacity building efforts. 158. The private sector platformwill include work clusters dealing with the key infrastructureareas (power,water, transport), IFC investments,financial sector, and other Bank Group efforts to improve the investmentclimate and support increased private investmentsin the Philippines. We envisage increasedcoordination between Bank and IFC teams, and increasedattention to support governmenteffortsfor private participation in infrastructure. 159. Eachwork cluster is expectedto include a number of tasks grouped under a team with clear accountabilityfor client relationships. The CAS resultsframework also identifies clear result areas for each platform. The countryteam will ensure smooth coordinationof work program clusterswith the Bank's sector teams and other Bank Group units contributing to the assistance strategy. Annex 1 Page 1of 13 Annex 1 Philippines Country Assistance Strategy FYO3-05 Completion Report 1. Introduction 1. The objective of the PhilippinesCountry Assistance Strategy (CAS) Completion Report is to evaluatethe effectiveness of the Bank'sassistance programto the Philippines and draw lessonsfor preparation of a new assistancestrategy for the FYO6-08 period. While the focus is on the most recent CAS which covers FYO3-05, the reviewalso looked at the 2000-2004 period to take a medium-termview of the program. This CAS Completion Report: reviewed the Bank's previous CAS' to determine the Bank's strategic objectives and their link to government goals in the Medium-Term Philippines DevelopmentPlan (MTPDP); reviewed portfolio performanceand selected Bank documents and assessments carried out to date; 0 interviewedBank staff and managers (both inWashington and Manila),government counterparts, and selected individualsoutsidethe government who are knowledgeable of Bank operations*; assessed to what extent the Bank was successful in meeting CAS objectives;and 0 drew lessons for future Bank assistance. 2. The report draws heavily on the work done to date in Manila on assessing the results of the Bank's portfolioand the technical assistance program. This work is being conductedas part of the move towards results based managementof the portfoliowith the government. II. Government's Strategic Goals 3. The government's strategic objectivesfor the CAS period are presentedin the MTPDP (2001-04). The plan consisted of four key strategic areas: macroeconomicstability with equitable growth based on free enterprise; 0 agricultureand fisheries modernizationwith social equity; comprehensive human development and protecting the vulnerable; and good governance and the rule of law. 4. The plan laid out a comprehensiveand ambitious agenda3. Among others, it aimed to: promote macroeconomicstability; generate employment; enhance competitivenessof industry and services;accelerate infrastructuredevelopment; modernize agriculture and fisheries; further ' The World Bank Group's Country Assistance Strategy for the Philippines2003-2005: Improvingthe Lives of the Poor through Growth and Empowerment.,April 30, 2002; The Philippines CountryAssistance Strategy, May 11, * 1999. A total of 43 peoplewere interviewed:23 Bank staff, 14 senior government officials (primarily at the undersecretary,and assistantsecretary level); 3 senior officials of government corporations (including the Development Bank of the Philippines; and 3 people outside the government. The maintext of the MTPDPwas 289 pages. Annex 1 Page 2 of 13 agrarian reform; promote sustainable use of natural resources; strengtheneducation and training; enhance health care; expand access to shelter; protect vulnerable groups; pursue balanced regional development; secure peace in Mindanao; improve law enforcement and administrationof justice; and promotegood governance. 111. Bank Strategic Objectives and CAS Outcomes 5. The Bank's FYO3-05 CAS was also broadand aligned with the government`s strategy. The Bank's strategy was defined in terms of two broad objectives: to help achieve more rapid sustained growth, and support national efforts to empower the poor to increasetheir participationin development. To facilitate effective partnershipwith government, the Bank aligned its strategy with the four-part framework of the MTPDP, and the CAS described in detail how the Bank program supported the MTPDP4. The CAS was presentedto and endorsed by the President and the Cabinet. This formality confirmed government ownership and allowed the Bank to stand by the lending scenarios laid out in the CAS. 6. The CAS'Scomprehensivenessreflectsthe breadth of the MTPDPand the scope of the Bank's engagement in the Philippines. The FYO3-05 CAS presentedan overview of the Bank's program, but it did not include a concise statement of strategic objectives nor providesufficient basis to assess whether the Bank was successful in meeting its objectives. The main text of the CAS (Table 3-1) listed 22 objectives subdivided by the two CAS objectives and the four MTPDP themes, but it did not articulatewhat outcomes the Bankwas attemptingto achieve. The CAS Program Matrix (Annex B9) outlined 38 strategic objectives (whichwere in linewith, but not necessarily identicalto, the 22 in the maintext), presented country and Bank performance indicators,and specified Bank instrumentsfor each objective by the four MTPDPthemes. While the Program Matrixwas designed to be an experimentalresultsframework at that time, it did not fully develop a picture of what the Bankwas hopingto achieve by the end of the CAS period. This was because: (i) it did not help establish priorities;(ii) base lineswere generally not given for performance indicators;and (iii) targets were set mostly as directions ("increase"/"decrease") with no specific outcome against which to measure progress. Publicfinance was an exception in which the Bank set clear targets for increase in tax revenuesand decrease in national government deficit, using it as a trigger for adjustment lending in the Base Case scenario5. The Program Matrixwas not kept up-to-date nor apparently used during program implementation'. IV. ResultsAssessment 7. The following sections summarize country progress and Bank actions by Bank strategic objective. A simple assessment is made on the Bank's success in meeting its objectives. These objectiveswere derived by summarizing the stated strategic objectives in the maintext and the Program Matrix. They are clustered along the four strategicthemes in the FYO3-05 The contributionof the Bank'sassistance program to the four strategic areas of MTPDP are described in detail in pages 35-44 of the FYO3-05CAS. The Base Case triggers included improvements in fiscal performance:taxlGNP ratio to increase by 0.4 percent per year in 2002-2005; nationalgovernment deficitlGNP ratioto decline by 0.5 percent per year through 2005. Havinga limitednumber of strategic objectives, baselines,and targets does not ensure that they would be used. The FYOO-02CAS includedseven strategic objectives and a similar program matrix (Annex B9), outlining strategicobjectives and performance indicators. The matrix did includesome performance measureswith base lines and targets, but was comprehensive, covering 18 pages. The FYO3-05CAS did not refer to these indicatorsin its reviewof previous experience and it does not appear that this matrixwas used for Bank program management. Annex 1 Page 3 of 13 CAS. A detailed discussionof the objectivesand country and Bank performance is included in Attachment 1. A. Macroeconomic Stability and EquitableGrowth Based on Free Enterprise 8. Strengthen fiscal policy by improving tax effort and containing contingent liabilities: The government'sfiscal situation continuedto worsen with the ratio of national governmentfiscal deficit to GDP increasingfrom 4.0 percent in 2000 and to 4.6 percent in 2003 and non-financial public debt increasingfrom 88 percent of GDP in 2000 to about 101 percent in 2003. The government's inabilityto increase revenues is a key factor in this decline. While the government was able to control budget expenditures,with expenditures remaining around 19 percent of GDP, tax revenue to GDP droppedfrom 13.7percent in 2000 to 12.5 percent in 2003. The government is taking measuresto strengthen tax administration,but a key constraint has been the unwillingnessof the legislatureto enact policy measures neededto increase revenues, especially tax increases. Similarly, regulators had not approved revisionto power and water tariffs, a key factor for the deficits in Government Owned and Controlled Corporations (GOCCs). Following the election in May 2004, the government is beginning to turn the deficit situation aroundwith the CY2004 deficit below target, substantial progressbeing made on three tax bills, and power tariffs increased. While the fiscal situation is improving,it is unlikely that this objectivewill be met by the end of the FYO3-05 CAS period. 9. The Bank refrainedfrom planned adjustment lendingsince the government did not meet the fiscal trigger^.^ The Bank prepared development policy reviewsand policy briefs which helpedfocus public attention on key development challenges, includingthe fiscal deficit. The Bank helped the governmentto meet essentialeducation, health, and social service expenditures, such as textbooks, desks, and vaccines, through two Social Expenditure Management Projects (SEMP I and 11). In addition, these projects promoted reform in procurement and financial managementin the implementingagencies. The Bank supported improved public sector managementthrough resources provided by various Asia Europe Meeting (ASEM) Trust Funds and InstitutionalDevelopment Fund (IDF) grants: improving tax administrationin the Bureau of InternalRevenue; promoting procurementreformand supporting implementation of a ProcurementReformAct; and pilotingof results based budgeting. A Public Expenditure Procurementand FinancialManagement Review, conductedjointly with the government and the Asian Development Bank (ADB), paved the way for the systemic implementation of, and capacity buildingcalled for, by the ProcurementReformAct and thereby contributed to substantial procurementreform, includingthe harmonizationof procurement between the government,ADB, the Japan Bankfor InternationalCooperation(JBIC), and the Bank. reform,Address I O . banking sector problems and deepen capital markets: Banking sector which gained momentumfollowing the 1997 East Asia crisis, proceeded very slowly. The Banking System Reform Loan, an adjustmentoperation, was cancelled in 2001 because conditionality for the second and third tranches was not likely to be met within a reasonable ' The base case lending program includeda proposed Public Finance Strengthening Loan (FY03) and a Public Sector Reform Loan (FY04). Base case triggers included improvements in fiscal performance:taxlGNP ratio to increaseby 0.4 percent per year in 2002-2005; national government deficit/GNP ratio to decline by 0.5 percent per year through 2005. These were not met. The government itself had more ambitious targets for deficit reduction. The MTPDP targeted the consolidated public sector deficit to decline from 4.3 percentof GNP in 2001 to 0.6 percentby 2004 and become a surplus of 0.4 percent by 2006. Annex 1 Page4 of 13 timeframe. While some progress is being made', many of the issues remain; high level of non- performing assets, insufficient provisioning, and weak legal and regulatory environment. Debt markets have grown, but government debt is crowdingout private borrowings. The Bank and the IMF conducted a FinancialSector Assessment (FSAP) and two Report on the Observance of Standards and Codes (ROSC) modules (accounting and corporate governance); both institutions have maintaineda dialogue with the government in the context of the FSAP follow up. While progress is being made on banking reform,weaknesses in the financial sector are still a major concern for private sector development in the Philippines. The Bank fell short of meeting this strategic objective. 11. lmprove the investment climate and enhance competitiveness: Concerns over the fiscal deficit, handling of contractual dispute on private infrastructurecontracts,and political uncertainty have dampened private sector enthusiasmfor the Philippines. An Investment Climate Assessment carried out by the Bank in FY04 showed that at least 30 percent of the firms surveyed saw macroeconomic instability,corruption,and electricity and tax rates as an important investment constraint. The Bank is addressingthese issues through its macroeconomicdialogue,work with the government on governance (see Section D below), and operations and dialogue in the power and transportation sectors. Consensus building and capacity development on corporate social responsibilityin the mining sector were supported through workshops, internationalexperience sharing, and capacity building. While the Philippinesenjoys many advantages in natural resources, laborforce and location in a fast growing region, it still lags behind other SoutheastAsian countries, such as Thailand and Malaysia,as a destinationfor investors. Therefore, the Bankfell short of meeting this strategic objective. sectorsAlleviate 12. infrastructurebottlenecks: Increasedprivatization in power and water and sustainabilityof key infrastructureinvestmentand institutionsthrough, among others, better cost recoveryand financial management,were key country outcomes in the CAS. The Bank has helpedthe government address some of their major infrastructure needs: 254 km of national roadswere improved and 500 KV lines were installed between Sua1and Masinloc. While Bank-supported projects have been able to provide and/or improvesome physical facilities, implementationwas significantly slower than expecteddue to procedural delays and budget constraints. Moreover, the sustainabilityof these investments is in doubt becauseof continued institutionalweaknesses in key agencies: lack of progress on strengthening maintenanceand road management in the Departmentof PublicWorks and Highways and the financial weakness of the NationalPower Corporation. There was little progress in privatization in the power sector, and substantial problemsarose in private infrastructure projects in other sectors. Infrastructurein the Philippinesstill lags behind that of other EastAsian countries and is consideredto be a constraint to investment. The Philippinegovernment undertook an ambitious program of privatizing infrastructureto address the country's needs. This has proven to be a complex undertaking. Privatizationis proceeding, but slower than originally anticipated. The supply of power and water and sanitation in Metro Manila has improved, but infrastructure is still seen as a constraint by private investors. Therefore, the Bank has only partially achieved this strategicobjective. * For example,two large batches of non-performing loans were transferred from the banking system to private asset managementcompanies, the Philippines Deposit Insurance Corporationcharter has been amended, and staff affordedgreater protectionin the discharge of their regulatory duties. Annex 1 Page 5 of 13 B. Developmentwith Social Equity 13. Enhance agriculture sector competitivenessand productivity: At the local level, the Bank continued to provide support to rural communitieswith a package of infrastructure and services. As of June 2004, various Bank projects have funded 1,280 km of rural roads, irrigated 28,410 ha of land, and constructed 19 post harvest and 50 multi-purpose centers. The ImplementationCompletion Reportfor the first Agrarian Reform Community Development Project (ARCDP I; completed in FY04) indicates that these investments have a positive impact on agricultural productivity and household incomes: real household incomes have increased63 percent,yields increased34 percent in project areas. At the national level, the Bank is assisting the Department of Agriculture (DA) strengthen its capacity to improve agricultural productivity and competitiveness in key crops. The Diversified Farm Incomeand Market Development Project (approvedin FY04 after several years of dialogue on reform)supports DA's efforts to move from a traditional public sector, supply-driven approach to a more private sector, marketed oriented approach with emphasis on market development, market information. It also seeks to strengthen DAs regulatory functions. The Bank is meeting this objectivewithin its project areas. 14. Scale up land administration and rural finance: The Bank continuedto support the government`s efforts to improve land administration and increase access to finance in the rural areas. The Land Administration and Management Project did not deliver the expected 10,000 new titles, but assistedthe government to develop capacity and streamline procedures to provide land titles (347 titles issued, one-stop-shop established),which promises greater benefits in the future. The Bank's third Rural Finance Projectsupportedthe Land Bankto increasefinance in rural areas, creating close to 10,000 ruraljobs. However,there is concern that the funding mostly reached medium-sized enterprises and is not necessarily getting to small poorfarmers. The Bank is making progress in strengtheningland administrationand rural finance, but the progress is falling short of initialexpectations(in the number of titles provided, reachingthe poor). This objective has been partially achieved. 15. Protect the environment and natural resource base: The Bank has been assisting the government to address natural resource management through projects and Analyticaland Advisory Activities (AM).Bank projects have led to 88,890 ha of marine areas, 1,594 ha of mangroveareas, and the placementof 6,690 ha of upland areas under environmental management. The Bank has also assisted the government to improvewater resource management (water resource plans and watershed improvement plans) and helpedto build consensus for a nationalminerals policyfor environmentallysustainable mining. Bank projects (Community Based Resource Managementand Laguna De Bay Institutional Developmentand Community Participationprojects) have engaged local governments in the preservationof their local environments. The Bank has raised awareness of environmental issues through its AM and instituted protectionmeasures in project areas. This objective is being met in projectareas. 16. Ensureparticipation, benefit, and ownership of local stakeholders: Community- based approaches (increasingcommunityvoice in developing investments in linewith their needs) is a growing feature of the Bank's local infrastructureand service operations. All recent community-oriented projects (ARCPD II, KALAHI-CISS, and ARMM Social Fund Projects)have strong community participation. Participationis now an essential part of Bank community oriented operations and KALAHI is seen as an important program by the government. The Bank has achievedthis objective. Annex 1 Page 6 of 13 17. Focus on the poor in developmentprograms and targetpoorer regions, especially Mindanao and the Autonomous Region of Muslim Mindanao (ARMM): A large proportionof the Bank's portfolio aimed to promotedevelopment and increase incomes in poor regions, especially in Mindanao, which has become a focal point for Bank operations. The Bank has conductedstudies to assess the specific needs of Mindanao: Human DevelopmentStudy for ARMM and a Mindanao needs assessmentfor reconstructionin Mindanao,conductedjointly by several bilateral and multilateraldonor agencies,which provided a wider assessment. Specific operationsfocused on Mindanao (the MindanaoRural Development Project and the ARMM Social Fund) provided basic infrastructureand identified priority services by the communities. The Bank is working with other donors to coordinate aid in Mindanao,organizing and co- chairingwith the government the MindanaoWorking Group in FY04, championing the creation of the Mindanao DiscussionGroup (co-chaired by UNDP and Japan), and supporting the efforts to establish a multi-donor MindanaoTrust Fund once a peace agreement is signed between the government and the Mor0 Islamic Liberation Front (MILF). The Bank is meeting this objective. C. Comprehensive Human Development Through Access to Basic Services accessImprovepoor: In education, the Bank assisted the Departmentof Education (DepED)to 18. investments in human resources (education and health) and ensure by the provide basic supplies (text books, desks, etc.) and school repairthrough its projects(the Third Elementary Education Project (TEEP), SEMP I & 11). To date, Bank projects have constructed or improved 25,912 school buildings, provided around 800,000 desks, and supplied over seventy million text books. The Bank is also assisting DepEDto improve education through pilotingschool-based management (throughthe restructuredTEEP project) and to enhance procurementand internalcontrols (SEMP ISll). Education policy notes addressed issues such as educationquality, teachers' performance, school-based management,improving educational outcomes among the poor and disadvantaged, and perfectingthe efficiencyof the education system, As for health issues, Bank-supported projects ensured provisionfor vaccines and basic supplies,facilities, and capacity development. To date, close to 130,000 people have received tuberculosisdrugs and thirty healthcareclinics have been constructedor improved through Bank-supportedprojects. SEMP IIstrengthenedprocurement and financial managementwithin the Departmentof Health. The Bank delivered policy notes on lmproving the Poor's Access to Affordable Drugs and On Making Philhealth Policies More Pro-Poor. The Bank has assistedthe government improvethe delivery of education and health supplies which would benefitthe poor who are not able to afford privatealternativesand rely more on the government. The Bank is meetingthis objective. 19. Provide basic services more efficiently (e.g., shelter, water supply, and sanitation) and ensure their environmental sustainability: The Bank has madefunding available to communities, localgovernments, and water districts for water supply and sanitation investments through rural development projects (for rural communities) and water supply projects (for cities and urbanized municipalities). To date, 265 rural water systems have been constructed through Bank projects. Take-up of Bank funding for water systems in the cities and municipalities has been much lower than anticipated becauseof a combination of factors: changes in administrationand prioritiesfollowing elections; local governments' pursuitof financing at most favorable terms (including lobbyingthe legislature for grants); the "cost of doing business"; and the perceived high transaction cost of Bank loans. Within major urban areas, urbanization is exacerbatingproblemsof solid waste management and sanitation, with many poor people living in unsafe environments. Industrializationand traffic congestion are worsening water and air pollution in the cities. The Bank has supported the development of key legislation: the Clean Air Act, the Ecological Solid Waste Act, and the Clean Water Act. The Bank's annual Annex 1 Page 7 of 13 Environmental Monitor publication is increasing awarenessof these issues. The productionand screening of an audio-videoversion (i.e., a video on water quality) has been effective in reaching a wider audience and generatingpublic interest on the issue. While it has been successful in raising awarenessof urbanenvironmental issues and assisted the government improvewater supply and sanitation in Metro Manila,the Bank has been less successful in reaching out to secondary cities. Difficultiesin tariff reforms raise questions of sustainabilityof water and sanitation investments. The Bank has only partially achieved this objective. D. Good and EffectiveGovernance 20. The Bank's objectiveswere to: (i) keep a tight "firewall"against graft and corruption in Bank financed operations; (ii) improve citizen'saccess to information promoting participation; (iii) strengthen publicsector capacity (increaseconfidence in the rule of law, improve governanceto strengthen service delivery); and (iv) improvegovernance in both the public and private sectors, thereby helping to rebuild investor confidence and improve investment efficiency. The Bank is meetingthese objectives. 21. The government,with supportfrom the Bank and others, is making some progress in improvinggovernance. The Bank saw the strengtheningof government procurementand financial managementcapacity as well as a greater transparency through civil society participationin government as some key country outcomes. The Bank channeledover US$5 million in grants (ASEM, IDF)to support improvementsin governance. These grants, together with the Public Expenditureand Procurementand FinancialManagement Reviews (carried out jointly with ADB and the government) paved the way for the systemic implementationof the ProcurementReformAct (passed in 2003). Civil society observers are involved in public bid committees, providing a greatertransparency in the bidding process. As mentioned above, the Bank is working with the DepED,the Departmentof SocialWelfare and Development, and the Departmentof Healthto strengthentheir procurementand financial management(SEMP 11). The Judicial Reform Project is assisting the Supreme Court implement institutional reformsto strengthen public confidence in the judiciary system. To guard against corruption in Bank projects,the Bank has strengthenedits procurementand financial managementstaff in the Manila office and brought in its Departmentof Internal Integrityto investigatea GEF grant. The Bank has been making progress in these areas, but more effort is neededas corruption generally continues to be a significant problem in the Philippinesg. 22. In sum, the Bank has been relatively successful in assisting the government maintain education, health, and social services and in providing basic infrastructureand servicesto rural communities and less developed areas, such as Mindanao, through its projects. The Bank has reachedout to poor communitiesand promoted community participationin the identification, development and implementationof local investments. The Bank has been successful in assistingthe government strengthen its procurementand administrativeprocedures. However, the Bank was not able to meet it macro-economicobjectives. The public sector deficit and high levelsof public debt will continue to limit the government`s ability to provide infrastructure, facilities and services. The Philippines is seen as lagging behind Indonesia, Thailand, and other Asian countries in key economic areas, such as provisionof infrastructureand the ability to attract private investment. Many key constraints were politicaland outside of the Bank's immediate sphere of influence. While progress is being made, strengtheningthe government's ability to deliver services (especiallyat the local government level) remains a key challenge. About 35 percentof the firms surveyed in the Investment Climate Survey saw corruption as a major constraint , making it secondonly to "macroeconomic instability". Annex 1 Page 8 of 13 V. Bank Performance 23. Lending: Bank lendingfor FYOO-04 has been lower than planned. Actual lending was US$472millionfor FYOO-02 compared to a base case of US$1.O-1.3 million in the FYOO-02 CAS and about US379 million projectedfor FYO3-05 compared to a base case of US$1.I billion in the FYO3-05CAS. Lack of adjustment lendingwas a key factor: the FYO3-05 CAS included US$750 million in three adjustment loans in the base case scenario. The Bank did not go ahead with adjustment lending becausethe government did not meet the fiscal triggers (fiscal deficit reductionand revenue enhancement). The FYO3-05CAS had anticipated political opposition to fiscal reformsas a country risk. Investmentprojects often took longer than anticipated to prepare so that projectswere eventually delivered but in many cases not in the fiscal year for which they were programmed. The proposed lending programand actuals for FYOO-04 are presented in Attachment 2. Of the 23 projects proposed'', 6 were implemented in the programmedfiscal year, 6 were implemented later than programmed, 2 are now programmedfor subsequent fiscal years, and 9 were dropped. In addition, two additional projects, not scheduled in the original program,were approved." 24. Although lending levelswere lower than expected, the Bankwas able to initiatesome innovative projects:engaging the judiciary and lendingto the Supreme Court underthe Judicial ReformProject (FY04); reaching out to communities through KALAHI (FY03); and addressing national policy/agencyreform issuesthrough support for improved efficiency of expenditures within the government's budget under SEMPll (FY02) and the Diversified Farm Income and Market Development Project (FY04). Ownership and engagement by the leadership in the relevant government agencieswas a critical factor in projectdevelopmentand implementation. 25. Analytical and Advisory Activities: While lending has been limited, the Bank has maintainedan active AAA program respondingto the government`s need for knowledge and technical assistance. AAA activities are listed in Attachment 3. As discussed under Section Ill above, many have had a significant impact on the government:the DevelopmentReviews (FY02 and FY04) helpedfocus discussion on key issues such as the fiscal deficit; the Country ProcurementAssessment Report/ Country FinancialAccountabilityAssessment (FY02) and related technical assistance contributed to the development of the ProcurementReformAct; and the Environmental Monitorsfor air and water quality raised awareness of the issues. 26. In order to improvethe impact of its AAA program,the Bank has been reachingout to the public at large, in addition to the traditional government and immediatestakeholder audiences. Through greater outreach, the Bank aimed to: (i) increase awareness of the challenges facing the Philippines;[ii) develop an understandingand foster trust of the Bank and its operations; and (iii) influence the public's thinking, especially since many of the issues require political action. In addition to the traditional launchevents and press releases, the Bank expandeddisseminationof AAA products through roundtables in the provincesand the production and distribution (where appropriate) of audio-video products (i.e., a water quality video). lo Three projectsscheduled in FY02 (River Basin Development, Rural Electrification, and Agrarian Reform) in the FYOO-02CAS were reprogrammed to FY03 and FY04 in the FYO3-05CAS and are only counted in their original fiscal year. The LandAdministrationManagement Project was added in FYOI and the Diversified Farm Incomeand Agriculture ModernizationProject was advanced from FY05to FY04. Annex 1 Page 9 of 13 27. The Bank has establishedseven Knowledgefor DevelopmentCenters (KDCs) nationwide, making available not only Bank publications but also development literatureand other materials. KDC usage is averaging400-600 visitors a month. A Global Distance LearningCenter was set up in the Asian Instituteof Managementin FY02, beginningwith about 12 courses and sessions in that year. These increasedto 75 sessions in FY03and 101 in FY04, enabling the center to post profits in FY03 and FY04 and to strengthen its financial sustainability. The Bank actively engaged civil society in the preparationof the FYO3-05CAS and similarly has done so during preparationof the FYO6-08 CAS. 28. ParaanAn "New Ways". Itforged partnerships between key leaders from civil society, academe, Innovation Market Placewas held in January 2004 with the title of Panibagong or the business community,development partners, and the government. The Bankwas able to leverage its US$300,000 allotment,with the total award fund growing to more than US$1 million. More than 1,800 proposals were received under the theme "Making Basic ServicesWork for the Poor" and grants were given to more than 50 winners. 29. Portfolio Management: The Bank made portfolio managementa priorityduring the CAS period and actively managed its portfolioin partnershipwith government and other donors. A summary of the portfolio indicators is provided in Attachment 4. This shows that overall portfolio performance improvedover the past two CAS periods. Disbursement improved with the disbursement ratio'* improvingfrom 12 percent in FYOI to over 20 percent in FY03and FY04, as problem projectswere restructured and non-performingcomponents and activities were dropped. 30. The Bank continued to work with the government and development partners to improve portfolioperformance. The move to joint ODA portfolio reviews (initiated by the Bank in FYOO) spurred positive changes, including:focusing senior government officials on portfolioissues; development of a "project readinessfilter" adopted by government and development partners (JBIC,ADB); streamliningof government review processes; strengthening government agencies that oversee the ODA portfolio;and focusing attention on effective monitoring and evaluation. The Bank intensifiedefforts to improve implementation capacity,with seminars and workshops on procurement, financial management,disbursement, and social and environmental assessmentfor various implementingagencies. An IDF grant financed the improvementof the government'soversight functions. Semi-annual,joint project-level reviews have resulted in more continuous assessment and resolutionof portfolio issues. 31. The Bank is also working with the government to strengthen the focus on results in portfolioreviews. Outputs and outcomes of all projects under implementationwere summarized using a common resultsframework, which helped to identify shortfalls in expected achievements, and weaknesses in project monitoring. A preliminary assessmentwas also made of results achieved under technical assistance provided through grants. This processwill be extended to includeAAA in portfolio reviews beginning in early 2005. This work, combined with the development of a resultsframework under the new CAS, will allow the Bank and government to use results to manage the country assistance program in the Philippines. 32. The Bank is also strengthening coordination among projects involving local governments, The Local Government Code of 1991devolved many functions carried out by national government agencies and significantly increased the responsibility of localgovernments. Both '* The ratio of disbursements during the year to the undisbursed balance of the portfolioat the beginning of the year. Annex 1 Page 10of 13 national and local governments have been struggling to adjust to this new environment. The Bank's sector-focusedapproach, working primarilythrough national governmentagencies, promoted a number of successful models for improved delivery of devolved functions, but did not necessarilyencourage a consistent approach across localgovernments. The Bank took steps to address this issue by: (i) creating the Local Government Portalwhich allows local governments to obtain information on Bank support available to them through the Bank's website; (ii) developingan Interactive Project Map that allows people to view Bank projects in their localitiesthrough the website; and (iii) conducting a workshop onjoint supervisionof all projects providing services at the local level. This workshop identified the potentialfor streamlining and simplifying proceduresfor localgovernment,with increasedfocus on the core development prioritiesand capacity requirements of localgovernments. A development partnersworking group on local governments is being reactivatedto promotegreater harmonizationof localdevelopment efforts. The government`s decision in late 2004 to limit national governmentgrant financing of devolved activitiesto localgovernments requiredfurther rethinking of the Bank's approach towards localgovernments. 33. Aid Coordination: The Bank worked effectively with its development partners. The Bank continuesto collaborateclosely with the IMF, ADB, JBIC, and key development partners through its leadership in the ConsultativeGroup and the Quarterly DevelopmentPartners Breakfast Group. The Bank is taking an active role in coordinating assistanceto Mindanao through a needs assessment completedjointly with other development partners and the preparationof a proposed multi-donorMindanaoTrust Fund. 34. On harmonization, the Bank: (i) regularlyconductsjoint quarterly reviews of the portfolio with government, ADB, and JBIC; (ii) completeda joint Public ExpenditureProcurementand Financial Management Reviewwith ADB (togetherwith the government);and (iii) harmonized procurementaround the government`s new procurementlaw. The Bankworked with the government and other partnersto completestandard national competitive bidding documents for goods, works, and consultingservices, which are now beingwidely disseminated. Some progresswas also made on harmonizingfinancial reportingformats and developing a common approachto land acquisition and resettlement VI. Client Feedback 35. As part of the CAS Completion Report,senior Filipinoofficials who have been involved with Bank operations were interviewedto obtain feedback on the effectiveness of the Bank in the Philippines. These interviews focused on their perceptionsof the Bank's key accomplishments and shortfallsduring 2000-04 and the Bank's contributionto meetingtheir agency's strategicobjectives. 36. Overall, the Bank's clients gave a favorable view of the institution. When asked to rate the Bank performance on a scale of 1-10 (with 1 being totally ineffectiveand 10 being extremely effective), most respondedwith a 7 or 8. They clearly saw the value of working with Bank staff. The increasingdecentralizationof Bank operations to the country office was seen as beneficial. Many officials talked about how they had benefitedfrom the knowledgethey obtained through interactionwith staff, especially on experiencesfrom other countries. Based on this feedback, the Bank's strengths are in its: Annex 1 Page 11of 13 Convener role: leadershipamong donors; "honest broker"among conflicting stakeholders. Knowledge: quality of analysis; knowledgetransfers (bothformal and informal); and strength of a global institution. 0 Willingness and ability to develop approachesthat address client needs: The Bankwas seen as "innovative", "responsive",and "flexible". 37. The Bank also created opportunitiesto "learn by doing". For example, Bank projects provided a model for the Departmentsof Agrarian Reform,Agriculture, and Environment and Natural Resourcesto work with localgovernments in a decentralizedenvironment; SEMP I & II allowed the Departmentsof Health, Education,and SocialWelfare to implement procurement and financial management reform. 38. Clients often cited as keys to success experiencesin which they felt they and the Bank had been able to work well together during project developmentand restructuringin a truly collaborativemanner. Similarly, some clients cited cases where they felt they had not been agency project?3. engaged durin project preparation as a shortcoming -often a non-leadagency in a multi- 39. Through nterviews,complaints emerged over the "cost of doing business"- procurement review delays, safeguards "over-kill,"and special account amounts. However, there was no overarching issue, with different agencies citing problemswith diverse aspects. Several agencies appreciated the Bank for having a greater number of local procurement and financial managementstaff in Manila. 40. There is still area for improvement. When asked where the Bank could do more,one respondent mentionedthe need to returnthe focus more on strengtheningeconomic competitiveness. Another suggested taking a systematic approachto local government capacity building. For instance,significant resourcesgo into capacity buildingthrough multiple projects, but as these activities are not well coordinated,the country may not be getting full returnon the overall investment in capacity building. VII. Conclusionsand Lessons Going Fotward 41. The Bank has responded flexibly in assisting the Philippinegovernment address its development challenges,at a time when the sense of urgency for change following the East Asia financial crisis may be fading. The Bank continued to assist the Philippine government address their infrastructureand service needs not only through traditional investment loans, but also through budgetarysupport for key social expenditures (SEMP I & 11). The Bank also reached out to communitiesto help address their immediate needs (KALAHI), initiated innovativeapproaches (e.g., Judicial Reform), and worked with the government to strengthen administrative practices (e.g., procurementand financial management). Many challenges remain, however. Poverty continues to be a concern with over 35 million people (44 percent) living on less than US$2 a day in 2003. The Philippines continues to face the degradation of naturalresources despite the progress being made in Bank project areas. Macroeconomic l3 For example,the Water Districts Projectwas initially preparedwith the Departmentof the Interiorand Local Government in the lead and the DevelopmentBankof the Philippines was later brought in when the needfor a financial intermediary becameapparent. Annex 1 Page 12of 13 instability, corruption, and poor infrastructure continue to be identifiedas key constraintsto private investment. 42. -- increasing tax revenues and reducing the fiscal deficit -- the Bank adapted to the situation, While the country has not been able to meet a key macroeconomicobjective of the CAS concentrating on AA4 to address constraints which were within the Bank's (and the government's) area of influence. The Bank identifiedpolitical reluctanceto proceedwith critical aspects of the reform programas a country risk and pro-actively managed it by reachingout to a variety of stakeholders,opinion leaders,and the public at largeto raise awareness of the challenges facing the Philippines. While lendingvolumes have been below targets, the Bank was correct to set clear fiscal triggers for adjustment lending and to stand by them. 43. Overall, the Bank's performance in the Philippines is satisfactory. The CAS did not provide a clear statementof what the Bank intendedto achieve, makingthis evaluationdifficult. The Bank did not achieve some traditional markers,such as the volume of lending planned. At the same time, the Bank adapted to the situation in the Philippines, exploringways with the government to address their priorities. Strong positivefeedback from the government on the Bank's performance,especially itswillingness to listen to and to work with the client, is an endorsementof this flexible approach. 44. Key lessons going forward are as follows. The Bank should: Build on its strong relationshipwith the client and continueto strengthencountry ownership of the program. The Bank will need to: (i) collaborate closely with its clients in operations and fully incorporatetheir needs and priorities;and (ii) ensure that clients continue to see the Bank's inputs as relevant, responsive, and innovative. Being innovativedoes not necessarily mean taking state-of-the-artsolutions to problems, but working with the client to adapt experiences and knowledgefrom other countries to the situation in the Philippines. Continue its outreachto political leaders, opinion leaders (i.e., the media),and civil society to build awareness of and promote consensus on the challengesfacing the Philippinesand the Bank's positionon these issues. Increasing revenues,reducing the fiscal deficit, and containing contingent liabilitieswill continue to be core challenges facing the government. Many of the solutions are political, requiringaction by the legislature. The Bank will need to continue its "honest broker role," but should be realisticabout what can be accomplished in the near term. 0 Continue to focus on improving portfolio performance. While the CAS tends to highlight new operationsfor the coming years, a significant amount of resourcesremain to be transferredto the Philippines. As of September 2004, there was an undisbursed balance of about US686 million out of total commitmentsof US$1.2 billion over 23 projects(includingGEF). These projects will have a more immediate impactthan operations currently in, or to be included in, the pipeline. Further coherence among Bank projects involving local governments. In the past, local governments were often seen as critical implementers of various sectoral strategies, rather than as units of government in themselves. Going forward, local government programsshould: (i) strengthen local ownership by addressingtheir priorities;and (ii) take a systematic approach to key cross-cutting areas such as capacity building and revenue enhancement. Annex I Page 13of 13 Continue to strengthen its focus on results. The move to results-based CASs provides an opportunityto get a better handle on key strategic outcomes at the country level around which the Bank shouldfocus its program. It is critical to: (i) select a limited number of core medium-termoutcomes; (ii)develop indicatorsto measureprogress towards these outcomes; and (iii) establish clear links with the portfolio, proposed lending, and proposedAAA. These should be developed with the government and used to jointly monitor progresson the program. The Bank needs to be selective, but this does not necessarily mean selectingwhich sectors the programwill focus. The Bank should be selective in what it realistically can achieve during the FYO6-08CAS period. Various operations should be assessed based on the contributionthey can make towards achieving these objectives. Attachments: 1. CAS CompletionSummary 2. Lending Summary- PlannedVersus Actual 3. AAA Summary - PlannedVersus Actual 4. PortfolioPerformance Summary 5. List of Key People Met a I I a a a a 0 a a a a a I I. a c I a a a m U ca, .-B fn Qa, pui " DC m fn n P . o C a a a 1. 0 b a a I I I b . m Annex 1. Attachment 2 Page 1 of 1 Planned Lending Programand Actual Deliveries (FY00-04)a' CAS Plans Current Status (as of June 2(3I ~~ FY Project IBRD Status IBRD 2000 Mindanao Rural Development (APL) 30.0 Actual 27.5 Nat. Roads Improvement Mgmt (APL) 100.0 Actual 150.0 SEMP I 100.0 Actual 100.0 Public Sector Reform Loan 100.0 Dropped Housing FinanceTechnicalAssistance 8.0 Dropped Sub-total 338.0 Sub-total 277.5 2001 Metro Manila Urban Transport 89.0 Actual 60.0 SEMP II 100.0 Slipped to FY02 LGU UrbanWater & Sanitation(APL) I1 60.0 Slipped to FY02 CALA RegionalDevelopment 80.0 Dropped Financial& CorporateSector Reform 100.0 Dropped Solid Waste & EcologicalEnhancement 40.0 Dropped Additional Actual Projects LandAdministration Mgmt. Project 4.8 Sub-total 469.0 Sub-total 64.8 2002 Lake Laguna Environ. Mgmt. (APL) 100.0 Slippedto FY04 Rural Electrification(APL) 200.0 Slippedto FY04 Agrarian Reform Project 50.0 Slippedto FY03 River Basin Development(APL) 50.0 Slippedto FY04 Fourth Elementary Education 100.0 Dropped Actual Projects from Other FYs SEMP II 100.0 LGU Urban Water & Sani. (APL)-II 30.0 Sub-tota 500.0 Subtotal 130.0 2003 Agrarian Reform Community Project4 50.0 Actual (from FY02) 50.0 ,i KALAHI CDD Project 100.0 Actual 100.0 ARMM Social Fund 35.0 Actual 33.6 Judicial Reform 18.0 Slipped to FY04 Public FinanceStrengthening 200.0 Dropped Sub-tota 403.0 Subtotal 183.6 Rural Power 1 (APL) 25.0 Actual (From FY02) 10.0 PopulationMgt.NVomen's Health II 30.0 Slipped to FY05 Health Sector Reform 40.0 Slippedto FY07 River Basin Development 75.0 Dropped (From FY02) Program Loan (Public Sector Reform) 150.0 Dropped Actual Projects from Other FYs Laguna Lake Inst.Strengthening 5.0 and Community Participation Judicial Reform 21.9 Diversified Farm IncomelAg. 60.0 Modernization Sub-tota 320.0 Subtota, 96.9 / All amounts in US$ millions Annex 1, Attachment 3 Page 1 of 3 Analytical and Advisory Services (AAA) Planned and Actual Deliveries (FYOO-04) CAS Plans CurrentStatus DecentralizationStudy leferred to FY03 Health Services Under DevolutionStudy nput into the DecentralizationStudy Rural Power Sector Action Plan 3ural Power Sector Study Recent Developmentsin Economy, Financial Srowthwith Equity: The RemainingAgenda Sector, and Poverty Indicators 'overty Assessment Recent Trends in Social Development Recent Trends in Agriculture, FoodSupply and 3ural Developmentand NRM: Trends and Environmental Indicators Strategy, Implementation, and Framework 'erformance System 3vironment Scorecard 4dditionalActual Products: JudicialAssessment (informalpaper) Vational Urban Partnerships(informalpaper) Provincial Roads Study Dropped Recent Developmentsin Economy, Financial Sector, and Poverty Indicators Recent Trends in Social Development Filipino Report Card on Pro-poorServices Recent Trends in Agriculture, Food Supply and Rural Development& NRM Trends Update Environmental Indicators Note Environmental Monitor Update Note. AdditionalActual Products: Mindanaowatching briefs Policy Notes- briefs for new administration ROSC Reports- CorporateGovernance Update Notes on water and power sectors Recent Developmentsin Economy, Financial Development Policy Review Sector and Poverty Indicators RecentTrends in Social Development Out-of-SchoolYouth Report; Health Policy Notes: Improving the Poor's Access toAffordable Drugs and On Making Philhealth Policies More Pro-Poor Recent Trends in Agriculture, FoodSupply and EnvironmentalMonitor 2001 (SolidWaste Environmental Indicators Mgt.) Additional Actual Products: Public Expenditure, Procurement(CPAR)and Financial Management(CFAA)Review Private Sector DevelopmentStrategy Urban Strategy Financial Sector Assessment (FSAP) ROSC Reports- Insolvencyand Creditor Rights, FinancialAccountability TechnicalAssistance: Rural Developmentand Natural Resources Mgt. Monitoring (IDF Grant) Annex 1 Attachment 3 Page2 of 3 Economic Monitoring Continuous DecentralizationStudy Completed (Phase 1) TransportationCost Review Strengthening Incorporatedinto the FY04 Meeting InfrastructureNeeds Study Human DevelopmentStudy (ARMM) Human DevelopmentStudy for ARMM Gender Coordination Gender PortfolioReview completed EnvironmentalMonitor EnvironmentMonitor 2002 (Air Quality) Natural Resource ManagementStudy Started in FY03 and completed in FY04 East Asia RegionalStudies Inputsto the Half-YearlyEconomic Brief TechnicalAssistance: Civil Service Reform TA provided under a PHRD grant to DBM Civic Engagementin ExpenditureTracking TA provided under an IDF grant to DBM Capacity Buildingof BIR TA provided under an IDF grant to BIR ImprovingPublic Sector Governance TA provided under ASEM, UDF and PHRD grants FinancialSector (FSAPfollow up) Provided under trust fund work CorporateGovernance Providedto the Instituteof Corporate Directors under an ASEM grant MindanaoPost-ConflictAssistance TA and advisory support through Dev't Grant Facility- Post-ConflictFund Additional TechnicalAssistance TA to DENRon strengthening environment regulations enforcement Study tour on Budgetand Appropriations Processfor DBM, DOF, NEDAand Congress Economic Monitoring Continuous Development Policy Review Development Policy Update Urban Infrastructure Incorporatedinto study on Meeting InfrastructureNeeds HealthSector Issues Completedin FY02 Support RegardingViolence Against Women Integrated inWomens Health Project Country EnvironmentalAnalysis EnvironmentMonitor2003 (Water) Mindanao Post-ConflictAssistance MindanaoJoint NeedsAssessment East Asia Regional Studies Inputsto the Half-Yearly EconomicBrief NationalDisaster Mgmt. Study (initiated through regional initiative) Additional Products: DiscussionBriefs for the New Administration Education Policy Notes TechnicalAssistance: PovertyAssessment Povertymonitoringand analysis (ASEM grant: Capacity Buildingof BIR Continuing - ongoing IDF grant to BIR ImprovingPublic Sector Governance Continuing- ongoing ASEM, PHRDand IDF grants Selected Public Enterprise Reform Trust-fundedwork on restructuringof water authorities Annex 1. Attachment 3 Page 3 of 3 Financial Sector (FSAPfollow up) TA for financial risk monitoringunder pension reform TA for strengtheningcapacityfor bank supervision Corporate Governance Completed in FY03 Gender Coordination Coordination with other donors in Gender and Developmentworking group Mindanao Post-ConflictAssistance Continuing TA and advisory supportthrough Post-ConflictFund Additional Technical Assistance: Sustainable Developmentin Mining Annex 1,Attachment 4 Page 1 of 1 Selected Indicatorsof Bank Portfolio Performanceand Management I I FYOO I FYOI I FY02 I FY03 1 FY04 I IIPortfolio Assessment I No. of Projects Under Implementation 25 24 21 21 23 IIAverage ImplementationPeriod (Years) ` II b/ 3.4 3.7 3.9 4.2 4.0 Percent of Problem Projects By Number" I 16.0 IIII 12.5 III1 19.0 IIII 0 IIII 13.0 IIII ~ Percent of Problem Projects By Amount 33.5 9.1 20.1 0 20.7 Percent of ProiectsAt Risk BYNumber dl 16.0 12.5 19.0 0 13.0 Percent of ProjectsAt Risk By Amount d/ 33.5 9.1 20.1 0 20.7 Disbursement Ratio (%) e/ 17.3 11.9 14.9 23.4 21.2 Disbursements(US$ million) 203 125.9 136.3 205.2 167.2 OED Disconnect 12.5% 50% 33.3% 0% 0% QAG Quality at Entry NS 100% 100% 100% NA IIQAG Quality of Supervision NS 100% 100% - NA QAG Quality of Economic Sector Work II 100% II 100% II 100% II - II NA 1I I Portfolio Management I I I I I I CPPRS During the Year (Yes/No) Yes Yes Yes Yes Yes SuDervisionResources(Total US$ `000) 2,024 I 1754 1431 I 1731 1946 I 1 I I I I I Average Supervision (US$ `0001project) I 67.0 73.1 68.1 82.4 84.6 a/ As shown in the Annual Report on PortfolioPerformance blAverage age of project in the Bank`scountry portfolio cl Percentof projects rated U or HU on DevelopmentObjectivesandlor ImplementationProgress dl As defined under the Portfolio Improvement Program el Ratioof disbursementsduring the year to the undisbursedbalance of the Bank`s portfolio as of the beginningof the year (investmentprojectsonly) NS No PHL projectselectedfor review NA Not available Annex 1,Attachment 5 Page 1 of 2 CAS CompletionReport Mission List of Key People Met (Excluding Bank Group Staff) Government: Ms. Laura Pascua, Undersecretary Departmentof Budget & Management Mr. RobertoTan, Assistant Secretary - IFG Departmentof Finance Mr. Roland0Tungpalan, Assistant Director General National Economic& DevelopmentAuthority Mr. ReneVilla, Secretary Mr. Jose Mari B. Ponce, Undersecretary Departmentof Agrarian Reform Ms. Corazon Juliano Soliman, Secretary Luwalhati F. Pablo, Undersecretary Mateo G. Montano,Assistant Secretary Departmentof Social Welfare & Development Mr. Edmund Sana, Undersecretary- RegionalOperations Departmentof Agriculture Mr.Alex Padilla, Undersecretary Departmentof Health Mr. Juan Miguel Luz, Undersecretary- Finance& Admin. Department of Education Mr. Austere Panadero,Assistant Secretary Departmentof Interior& Local Government Local GovernmentAcademy Mr. Rafael E. Camat Jr., Assistant Secretary FASPO - Departmentof Environment& Natural Resources Mr. Teodoro Encarnacion PresidentialAdviser on Procurement Concerns Office of the President Annex 1, Attachment 5 Page 2 of 2 List of People Met (continued) Government Corporations: Mr. Orlando Hondrade,Administrator MetropolitanWaterworks & Sewerage System EufemiaC. Mendoza, FirstVice President MarissaV. Soriano, Senior Assistant Vice President, Fund Sourcing DevelopmentBank of the Philippines Others: Dr. Robertode Ocampo, President Asian Instituteof Management Ms. Luz Rimban, Broadcast Director PhilippineCenter for InvestigativeJournalism Mr. Vipul Bhagat, Country Manager InternationalFinanceCorporation Annex 2 Page 1 of 7 Annex 2 CAS ConsuItations and Client Survey Summary 1. The preparation of the FY2006-08Country Assistance Strategy of the Bank Group drew on various dialogue and feedback mechanisms,including a CAS Completion Report (Annex I), a client survey, in addition to a series of formal and informalmeetingswith key opinion leaders from various sectors and with government officials from oversightand implementingagencies. Feedbackwas also receivedfrom a government CAS counterpart group, set up to coordinate with the Bank Group on the CAS process and its substance. 2. In collaboration with NGOs, the private sector, and the government, the Bank Group also held various conferences and workshops around the country with youth representatives. The findings of these gatheringswere incorporated by the government in its Youth Assessment Study and National Youth DevelopmentPlan, and were also considered in the formulation of the Bank Group's CAS. Youth groups voiced some pessimismabout their future, as reflected in discussions on: substance abuse, reproductive health, education,and employment opportunities. The underlyingtheme of all the discussions, however,was the needfor the youth to think more critically about their own situation, articulate their needs, and do everythingthey can to pursue their dreams and visions for a better life. 3. Separate meetings were also held with other development partners, both bilateraland multilateralagencies. Through small and large meetings,the Bank Group heardthe views of its various stakeholders on the development needs of the country over the next three years and views on how the Bank Group can assist the government and other development partners in addressingthese needs. 4. This Annex reports on the process and results of the more structuredand formal multi- stakeholder meetingsand the client survey, which complementedthe other forms of consultations. MuIti-StakehoIder ConsuItations 5. Building on the consultations conductedfor the previoustwo CAS'Sprepared in 1999 and 2003, as well as its regularoutreachand dialogue activities, the Bank Group organized multi-stakeholderconsultation workshops across the country. These workshops involved national (executive, legislative, and judicial) and local governments; civil society; the business community/private sector; academe; labor groups; and other developmentpartners. The workshops were designed to gather the views of the stakeholders on: the critical problems facing the country, policyoptions and programsthat will lead to betterdevelopment outcomes over the medium-term; and, how the Bank Group can improve its programs of assistanceand operations in the country. 6. Close to 300 participantsattended the workshops held betweenAugust and October 2004. The nationalgovernment representativescomprised the bulk of the participants (38 percent),followed by representativesfrom civil society and labor (28 percent), LGUs (16 percent), and academe (12 percent). All consultation workshops were done in partnershipwith the government's central planning agency, the National Economic DevelopmentAuthority (NEDA). As the government's MediumTerm Philippine Development Plan (MTPDP)was also Annex 2 Page 2 of 7 beingfinalized during the same period of the CAS consultations, it was an opportunetime for the government to presentthe draft MTPDPto a wider group of stakeholders. 7. Two meetingswere held in Manila, and one meetingeach was held in Tuguegarao, Cebu, and Davao. The active participation of high-level local chief executivesfrom Mindanao (Davao) and the Visayas (Cebu) regionswas quite impressive. Exceptfor one meeting in Manila, all the CAS consultationswere organized in partnershipwith the Bank's Knowledgefor DevelopmentCenters: St. Paul University, University of Southeastern Philippines,University of San Carlos, Silliman University,and the Asian Instituteof Management. 8. Consistentwith the thrust towards making the CAS more thematic (focusingon cross- sectoral rather than purely sectoral issues) and results-oriented,the consultationsalso followed a process that: validated the broad themes and the critical measuresthat would comprise a strategic action agenda for the country, initiallyformulated by the Bank Group. In general, the consultationsconfirmedthe importanceof the four emergent CAS themes -- growth, social inclusion,fiscal stability, and governance. The Bank Group also used consultationsto discuss the proposed platformapproach to implement its assistance strategy (nationalgovernment, local government, and private sector). 9. The key messages and implicationsfor Bank Group assistancegatheredfrom the consultationworkshops are summarized in the table below. A detailedfeedback reportwas sent to all the participants and more details were posted on the Bank's Philippineswebsite to inform the general public about its messages and recommendations. As the goal was to listen to a wide spectrum of voices and not to build a consensus, these details would show some divergent views and opinions of various sectors across the country. I O . An elaboration of the main messages relatedto the four CAS themes is discussed below. The stakeholder's views on the proposedplatformapproachto implementthe Bank Group assistancestrategy is also considered. 11. Growth While the Philippineshas been able to grow at a modest rate in the last three years, the growing population requiresa more acceleratedeconomicgrowth performancein order to significantly reduce poverty. There was consensusthat economic growth will be difficult to achieve if the current fiscal and governance issues are not addressed. There was a very strong clamor for the government to: show politicalwill in pursuing revenue measuresto avert a possible economic crisis; and to rally the people towards supporting necessary measureswhich may be painfulto implement but which may be more bearablethan a full-blown economic crisis. 12. Basedon the consultations,the attainment of economic growth in the medium-termwill hinge on: addressing infrastructurebottlenecks; raising investments particularlyin identified priority sectors where the country has comparativeadvantage; developingfurther the financial market; arresting the decliningcompetitivenessof the country; developinga globally competitive labor force; and promotingthe sustainable use of natural resources. Annex 2 Page 3 of 7 Key Messages to the Bank Group from Multi-StakeholderConsultations Growth Social Inclusion Promoting pro-poor growth will not only Support provision of povertytargeted grants require more investments at the national and expand community-drivendevelopment level but should also: (i) address projectsto promote improvedgovernance impediments to local development; (ii) at local levels. encourage community-basedindustries. Support rural infrastructure,advocacy to Addressing growth and social inclusionwill improve institutionaland regulatory increasingly require looking at greater roles environmentfor farmers, and human capital for LGUs and bettercoordinative development. mechanisms between nationalgovernment Support delivery of social services to poor agencies and LGUs. communitiesby converging poverty-related Explore more active involvement of the IFC services at the local leveland improving in local level investments. coordinationbetween national and local governments Support marginalized groups to voice their needs and to be involved in community undertakings. Assist the government in formulating safety nets for vulnerable groups. Fiscal Stability Governance It is urgentto undertakefiscal reform. Growth and human development are Support advocacyfor fiscal reformamong contingent on improvinggovernance at all different sectors; share experiences of tax levels. and other measures implemented by Support a governance reform packagewith countriesduring crises. LGU and nationalgovernment level Coordinatewith other development partners componentsto make decentralization work in packaging a comprehensive programloan better; include capacity building in planning, linked to policy reforms. poverty targeting, management, monitoring Provide credit enhancements to the and evaluation, etc. government's capital marketoperations Private direct assistanceto LGUs; adopt linkedto policy reforms. innovative models for financing. Assist the government in addressing GOCC Support projectsand programsthat problems (e.g., NPC), and in strengthening improve efficiency and transparency of oversight agencies like DOF, NEDA, and government operations similar to the e- OA. procurement project. 13. There was also a strong call to localize economic growth and to institute policies that would promote a more balanced rural-urbangrowth through increased investmentsoutside Metro Manilafor the developmentof community-basedindustries. Annex 2 Page 4 of 7 greaterSocialinclusion and more equitable distributionof income in the country. The 14. lnclusion Consistentwith the pursuit of growth is the need to work towards social consultations highlightedthe need to: a promote sectors that can generate employment and improvingthe productivity of workers; 0 improve access of the people to productiveassets (e.g., land) and to services like education and health; 0 empower marginalizedand vulnerable groups through social protectionand safety net programs to prevent them from being poor or from falling deeper into poverty,especially with the vulnerability of the Philippines to crisis situations; a address population issues; a provide programsfor youth; and a enjoin civil society groups, the community, and the private sector in general to participate more actively in the planning, implementation, and monitoring of social sector projects. 15. The consultationsalso discussed the increasingrole of LGUs in the delivery of basic social services at the community level. More efficient service delivery to poor communities, which is partly dependent on the convergenceof poverty-relatedservices at the local level, however, requires improving the coordinationbetweenthe national government and the LGUs. At the same time, the consultations also called for more participatory governancethrough the implementationof more community-driven development projects,replicable in other poverty areas in the country. 16. Fiscal Stability Ingeneral, workshop participantsexpressed impatiencewith the pace of the government's response to the fiscal problem. This was partly due to the slow action of the legislativebranch, perhapstraced to the lack of appreciationof the gravity and urgency of the fiscal situation, as well as to the perceived need for stronger leadershipof the executive branch. The consultations called on the government to recognize the seriousness of the problem and to rally the people towards supporting solutions. Itwas also suggested that individualsand academicgroups work together as policy champions, giving briefingsto the public on the implicationsof a possible economic crisis and of the proposed revenue measures to the lives of ordinary Filipinos. 17. Recognizingthe difficulty of legislatingthe needed revenue measures proposed by the executive branch, the consultations suggested to: formulate contingency measuresconsisting of a "second best" reform agenda in case congress fails to pass the revenue measures which could includetemporarily closing sources of revenue leakagessuch as duty free shops and alternative tax measures used in countries with similar problems; pursue expenditure managementreforms such as the reorganizationof government; and focus on cash-strapped government-owned and controlled corporations (e.g., NPC and NFA) and oversight agencies (e.g., DOF, NEDA, COA); and implement procurement reforms, especially at the local levels. 18. Governance Weak governance at the national and local levelswas generally perceived as derailing the country's development. The discussionswent beyond the usual concerns about corruption towards a discussion on the means of making public institutionswork Annex 2 Page 5 of 7 betterfor the common good with greater accountabilityand quality of service being required from public servants. 19. There was also a strong clamor for promotinggood governance at the local level, where there has been exemplary models of effective service delivery or "islands of good governance" in recentyears, which were proposedto be replicated. Itwas generally believed that the effective implementationof the Local Government Code offers potentialopportunities for improving public service delivery at the sub-national levels. 20. Promotingjust and sustainable peace especially in Mindanaowas, likewise,identified as a critical factor for the country'sdevelopment. A combination of peace-keepingefforts and social development interventionsis important in the pursuitof lasting peace in the country. 21. Strengthening the National Government The attainmentof the country's development agenda is premisedon the nationalgovernment's ability to exercise strong political will and leadershipto implement needed economic and politicalreforms.The consultations highlightedthe politicsof policy makingas an important considerationin the pursuit of growth particularly: consistent implementationof policieseven with changes in administration; 0 participatorypolicy making which calls for constant consultationwith stakeholders, including localgovernment officials; and improved coordinationamong branchesof government,and betweenthe nationaland local governments, in policyformulation, implementation and monitoring. 22. The necessity of closer coordination is more crucial between the nationalgovernment and the LGUs in the effort to make decentralizationwork betterthrough the LGUs' increased responsibility in the delivery of basic services. In relationto this, the consultationscalled for the transformation of the nationalgovernment's role vis-a-vis the LGUs, in which the former focuses on standard or performance benchmarking,incentive setting, and performancemonitoring rather than the traditional project implementationeven for devolved functions. To assist the nationalgovernment in the implementationof the MTPDP at the local level, the LGUs are proposinga "burden-sharing,"scheme based on a two-way arrangement in which LGUs will be tasked with more responsibilitiesand accountabilityfor the implementationof critical MTPDP- related projectswhich are to be matchedwith resourcesfrom the national governmentfor project implementation. 23. In line with the objective of improving good governance is the importanceof streamlining government operations involvingthe entire public sector from the executive to the judicial branches,as a means to improvethe efficiency and effectivenessof service delivery. Specifically, the consultations pinpointedthe importanceto: address graft and corruption in "high profile" agencies like tax collecting agencies; 0 make agencies accountableto the public; and focus efforts on the agencies that are critical to the attainment of economic growth such as peace-keepingagency levels (e.g., Philippine National Police) and the judicial system. 24. The consultations identified examples of "islands of good governance" both at the nationaland local agencies which need to be more systematicallyscaled-up nationwide. Annex 2 Page 6 of 7 25. Building LGU Capacity To make decentralizationwork better, LGUs should be assisted through capacity-building measuresin planning, including poverty reduction, income generation, project programming,and budgetingand monitoring. Recognizingthat many LGUs are dependent on central government transfers through the InternalRevenueAllotment (IRA), the consultations recognized the importanceof assisting LGUs to be financially independent of the nationalgovernment by improving their capability to raise revenues and other capital resources. In line with this, the LGUs have appealed to both the nationalgovernment and multilateraland bilateraldevelopment agencies to review existingfinancing mechanisms availableto LGUs in order to increasetheir access to both grants and direct loans and/or to facilitate the processingof their loan requirementsthrough existingwindows like the Municipal Development Fund. 26. Part of LGU strengthening is the promotionof participatorygovernance, which partly entails enjoining communities to have a stronger role in planningand implementing local projects most beneficialto them. This would be implementedpartly by strengthening civil society's partnershipwith localgovernments in all aspects of governance. 27. engine lncreasing the country, the government has called on the business community to play a of growth inPrivate Sector Role in Development While the private sector remains the greater role in attaining social development goals, especially given the present fiscal problems. On service delivery, the private sector can partnerwith government in its poverty reduction programs.To improvegovernance, the private sector is encouragedto set up systems for monitoringpublic sector performance in publicworks, procurement,among others. 28. In line with participatorygovernance,the consultationsaffirmed the importance of greater involvementof civil society organizations not only in monitoring public sector performancebut also in the planning and implementationof projectsand programs. lncreasing involvement by civil society organizations, however,would entail not only their participationin meetings and conferences but also increasingtheir capacity to understand,analyze, advocate, and monitor policies as well as programs and projects. Client Survey 29. All workshop participantswere invitedto provide their opinions on the Bank Group's assistanceto the country by participatingin a client survey. A total of 148stakeholders (54 percent) participatedin the client survey through a self-administeredquestionnaire. The survey requestedrespondents'views on: overall attitudes toward the Bank Group; its greatest value and weakness; the importanceof specific areas of its work and its effectivenessin those areas; its effectiveness in the way it does business; their level of agreement with a series of statements about the Bank Group's projectsand programs;and questions about general issues facing the Philippines,includingwhether the country is headed in the right direction and its highest priority development challenges. In addition, respondentswere asked about the Bank Group's communication and outreach efforts and how it should best be involved in the country's development. 30. The client survey results indicate that the Bank Group is performing at a high level in certain areas, with some indicationof areas that may require more attention and focus. The resultsalso showed that the relationshipsbetween the Bank Group and its stakeholders (those represented at the meeting in which the client survey was distributed) are strong and positive. Annex 2 Page 7 of 7 31. Other interestingfindings from the client survey include: e Respondents identified poverty reductionand corruption as the top development priorities in the Philippines. They reported that the Philippines is not moving in the right direction in terms of reducing corruption. e This view of corruption may be the prismthrough which stakeholders view development progress. Respondentsmay be less optimisticabout the overall progresstaking place in the Philippines(in terms of development) becausethey do not believe much can really change until this challenge is managed more effectively. As possible evidence of this, more than 40 percentof respondents reported that the Philippines is moving in the wrong direction (overall). In contrast with their views on corruption, stakeholders believe that a fair amount of progress is being madeon a number of other areas including ensuring access to clean water, managing the economy, and promoting growth. Stakeholderssee a broad rolefor the Bank Group in the Philippines-- particularly related to sectors -as well as a fair amount of support for more Bank Group involvement. At the same time, while a bit less than half of respondentsreportedthat the Bank Group should continue its strategy of working in "all areas with all players,'' many others said the Bank Group should either work primarily with local governmentsor local communities. The survey findings do not indicate a "mandate"for any of the approaches described. e The Bank Group is considered fairly effective in a broad range of areas, includingmany of the areas that are considered high priority such as poverty reduction. However, there are a number of areas that are tangentially related to corruption,where expectations exceed performance. These includetransparency and governance,and improving accountabilityin the use of publicfunds. eThose outside government have a much lower levelof familiarity with the Bank Group than those inside government (based on this specific sample of meeting attendants). In most surveys related to the Bank Group'swork, it has been shown that the morefamiliar stakeholdersare with the Bank Group, the more effective they consider the institution. According to data analysis, this is true in the Philippinesas well. e There is nearly unanimous support for increased community-drivendevelopment in the Philippines. Most stakeholders are familiar with CDD; a large percentagethinks it is effective,and nearly all stakeholders believe that this approach should be more widespread. Annex 3 Page 1of 2 Annex 3 Country Financing Parameters for the Philippines (January, 2005) The country financing parametersfor the Philippines below have been approved by the RegionalVice President,EastAsia and Pacific Region. Item Parameter RemarksI Explanation Costsharing Limit on the up to The Bank's overallfinancing share proportion of individualproject is not expectedto change costs that the Bank may finance. 100 percent significantly in aggregate level,with expected increase in sector-wide assistance (inwhich the Bank's financing share is typically low). Projects implementedby local governmentswill likely include some counterpartfunding. For projects implemented by government-owned corporations,evidenceof ownership and commitmentwould be assessed, taking account of budget and planning processesand project cost sharing. One hundred percent Bank financing could be providedfor some projects and activities with strong evidence of ownership and commitment. Recurrent cost financingAny No country Integrationof Bankfinancing inthe limits that would apply to the overall limit, but budget process ensuresthat amount of recurrentexpenditures strong increasedrecurrentcostfinancing that the Bank may finance. emphasis on would notjeopardize overalldebt and arrangements fiscal sustainability.The Bankwill to ensure continueto monitorthe overallfiscal sustainabiIity situation and its implicationsfor recurrentcostfinancing. At the project level, recurrentcost financing could be consideredif consistentwith project objectives, providedthere is strong demonstrationof arrangements to ensure sustainabilityafter Bank financing ceases. Annex 3 Page 2 of 2 Item Parameter RemarksI Explanation Local cost financing Are the Yes The two requirementsfor Bank local requirements for Bankfinancing of cost financing are met. Therefore local expenditures met, namely the Bank may finance local costs in that: (i) financing requirementsfor the proportions needed in individual the country's development program projects. would exceed the public sector's own resources (e.g., from taxation and other revenues) and expected domestic borrowing; and (ii)the financing of foreign expenditures alone would not enable the Bank to assist in the financing of individual projects. Taxesand duties Are there any None Taxes and duties are considered taxes and duties that the Bank reasonable. At the project level, the would not finance? Bankwould consider whether taxes and duties taxes and duties constitutean excessively high share of projects costs. The Bank would monitor localtaxes for possible distortions and that these maintain consistent acceptable practices. 7 c ? " 0 2 Annex A2-1 Page 1 of 2 Philippinesat a dance 4/21/05 East Lower- POVERTYand SOCIAL Asla 8 mlddle- Philippines Paclflc Income 1 Development diamond. 2003 Population,mid-year (millions) 81.5 1,855 2,655 GNI per capita (Atlas method, US$) 1,020 Life expectancy 1,080 1,480 I GNI (Atlas method, US$ billions) 82.8 2,011 3,934 I T Average annual growth, 1997.03 I Population (%) 2.2 1.o 0.9 Labor force (%) 2.4 1.1 1.2 primary Most recent estimate (latest year avallable, 1997.03) capita enrollment Poverty(% ofpopulationbelownationalpovertyline) 30 Urbanpopulation (% oftotalpopulation) 61 40 50 I Life expectancyat birth (years) 70 69 69 Infant mortality (per 1,000livebirths) 29 32 32 Child malnutrition (% ofchildrenunder5) 32 15 11 Access to improvedwater source Access to an improvedwater source (% ofpopulation) 86 76 61 i Illiteracy ("A ofpopulation age 75t) 4 10 10 Gross primaryenrollment (% ofschool-agepopulation) 113 111 112 -Philippines Male 114 112 113 Lower-middle-incomegroup Female 113 111 111 KEY ECONOMICRATIOSand LONG-TERMTRENDS 1993 2002 2003 11 Economicratios` GDP (US$ billions) 54.4 78.0 80.6 Gross domestic investmenffGDP 24.0 19.3 18.7 Trade Exportsof goods and serviceslGDP 31.4 48.9 48.3 Grossdomestic savingslGDP 15.5 18.8 16.2 i T Grossnationalsavings/GDP 18.6 26.1 24.5 CurrentaccountbalancelGDP -5.5 5.6 4.2 Interest paymentslGDP 3.3 3.6 3.2 Total debffGDP 66.5 77.1 77.8 Total debt servicelexDorts 25.6 20.6 18.4 1983-93 2002 2003 2003-07 I Indebtedness (average annualgrowth) GDP 2.1 4.4 4.5 5.3 1 -Philippines GDP per capita -0.3 2.3 2.5 3.3 Lower-middle-incomegroup Exportsof goods and services 6.0 3.6 3.3 8.1 STRUCTURE of the ECONOMY 1993 2002 2003 (% of GDP) Agriculture 21.6 14.7 14.5 industry 32.7 32.5 32.3 Manufacturing 23.7 22.8 22.9 Services 45.7 52.8 53.2 Privateconsumption 74.4 69.1 72.3 Generalgovernmentconsumption 10.1 12.1 11.4 Importsof goods and services 39.8 49.4 50.7 I 1993-03 2002 2003 1 h (average annualgrowth) Agriculture 2.3 3.3 Industry 3.8 3.7 Manufacturing 3.5 3.5 Services 4.7 5.4 Private consumption 4.0 4.1 -z j Generalgovernmentconsumption 2.6 2.4 Grossdomesticinvestment 3.3 -3.5 -Exports +Imports Importsof goods and services 4.4 4.7 10.3 -301 The diamondsshow four key indicatorsin the country (in bold)comparedwith its income-group average. Ifdata are missing,the diamondwill be incomplete. Povertyfigures are government estimates basedon FamilyIncomeand ExpenditureSurvey (FIES)2003 data. Annex A2-2 Page 2 of 2 Philippines PRICES and GOVERNMENT FINANCE 1993 2002 2003 Domestic prices Inflation (%) (% change) I15T Consumer prices 7.6 3.2 3.1 Implicit GDP deflator 6.8 4.9 3.7 Governmentflnance (% of GDP, includes current grants) 98 99 00 01 02 03 Current revenue 17.7 14.1 14.4 Overall surolusldeficit - -5.2 -4.6 -GDP deflator -CPI TRADE 1993 2002 2003 (US$ millions) Export and import levels (US$ mill.) I Total exports (fob) 11,375 34,383 34,842 40,000 Electronicsmeiecom 3,551 18,583 18,300 30,000 Garments 2,272 2,391 2,348 20,000 Manufactures 8,729 31,181 1,252 10,ooO I Total imports (cif) 17,597 33,975 36,095 0 Food 714 1,384 1,340 97 98 QQ 00 01 02 03 Fuel and energy 2,016 3,273 4,169 Capital goods 5,610 13,532 15,023 Exports Imports BALANCE of PAYMENTS I9g3 2002 2003 (US$ millions) Currentaccount balanceto GDP (%) Exports of goods and services 16,048 37,439 37,812 12 T Importsof goods and services 20,700 38,042 40,292 10 Resourcebalance -4,652 -603 -2,480 8 8 Net inwme 937 4,475 5,215 4 Net current transfers 699 503 2,445 2 0 Currentaccount balance -3,016 4,375 3.347 2 Financingitems (net) 2,850 -5,035 -2,898 4 8 Changes in net reserves 166 660 -449 8 Memo: Reservesincludinggold (US$ millions) 5,922 16,180 16,115 Conversionrate (DEC, local/US$) 27.1 51.6 54.1 EXTERNAL DEBT and RESOURCEFLOWS 1993 2002 2003 (US$ millions) Total debt outstandingand disbursed 36,143 60,090 62,663 IBRD 4,598 3,325 3,445 IDA 167 208 215 Total debt service 4,920 9,374 9,207 IBRD 669 480 478 IDA 3 7 8 Compositionof net resource flows Officialgrants 270 178 120 Officialcreditors 972 -31 -12 Privatecreditors 584 357 1,123 Foreigndirect investment 1,238 1.733 161 Portfolioequity 1,912 -706 World Bank program Commitments 428 200 116 A IBRD E - Bilateral Disbursements 673 178 202 B IDA D -Other multilateral F Private Principal repayments 340 327 345 C IMF -.- G Short-term -- Net flows 333 -149 -143 Interestpayments 332 159 142 Net transfers 1 -308 -285 DevelopmentEconomics 4/21/05 Annex 82 Page 1 of 1 Annex B2 Selected Indicatorsof Bank PortfolioPerformance and Management 2002 2003 2004 2005 lndicafor as of 3/3 1/05 Portfolio Assessment Number of Projects Under Implementation 21 21 23 21 Average ImplementationPeriod (years) 4.0 4.5 4.3 5.2 Percentof Problem Projectsby Numberb 8 d 19.0 0.0 13.0 14.3 Percentof Problem Projectsby Amount bs 20.1 0.0 20.8 9.8 Percentof Projectsat Risk by Numberb,d 19.0 0.0 13.0 14.3 Percentof Projectsat Risk by Amount bs 20.1 0.0 20.8 9.8 DisbursementRatio (%) 14.9 23.4 21.2 14.0 Portfolio Management CPPR duringthe year (yesho) Yes Yes Yes Yes Supervision Resources (total US$'OOO) 1,431 1,731 1,946 1,893 Average Supervision (US$OOO per project) 68 82 85 82 Memorandum lfem Since FY 80 Last Five FYs Proj Eva1by OED by Number 130 13 Proj Eva1by OED by Amt (US$ millions) 8,305.1 770.4 % of OED Projects Rated U or HU by Number 30.2 46.2 % of OED Projects Rated U or HU by Amt 31.5 42.3 a/ All indicatorsare for projects active inthe portfolio,with the exceptionof disbursement ratio, which includesall active projects as well as projects which exited during the tiscal year. b/ As shown in the Annual Report on Portfolio Performance (except for current FY). c/ Average age of projects in the Bank's country portfolio. d/ Percentof projects rated U or HU on development objectives (DO) and/or implementation progress (IP). e/ As defined underthe Portfolio Improvement Program. f/ Ratio of disbursementsduring the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: investment projects only. Annex 63 Annex B3 Page 1 of 1 Indicative List of Possible Projects a' FY2006 2008 - Fiscal IBRDAmount platform CAS Year Project Name (US$ millions) c/ Focus d/ 2006 National Program Support for Basic Education 100 NG National ProgramSupport for Health 40 NG National ProgramSupport for Public ExpenditureRationalization 80 NG National ProgramSupport for Participatory Irrigation 30 NG Local Government Supportfor Cities Development 35 LG Development Policy Loan (if in enhanced base or high case) tbd NG 2007 National ProgramSupportfor National Roads 2 (NRIMP2) 200 NG National Program Support for the Environment& Nat`l Resources Mgmt 30 NG National ProgramSupportfor Mindanao Rural Development 2 (MRDP2) 75 NG Local Government Supportfor Municipal Finance 50 LG Private Sector Development Support for MWSS Financial Rehabilitation 100 PS Development Policy Loan (if in enhanced base or high case) tbd NG 2008 National ProgramSupport for Social Protection 50 NG Local Government Supportto LGUs Through PerformanceGrants 50 LG Local Government Supportfor RegionalWater Supply 50 LG Private Sector Development Support for Rural Power 2 40 PS Private Sector Development Support for Logistics/ Infrastructure 75 PS Development Policy Loan (if in enhanced base or high case) tbd NG a'This table presentsseveral possibleprojects under considerationfor the three-year CAS period under the base case (except for DPL if in the enhanced base or high case). Dependingupon evolving country needs and priorities (e.g.,within the MTPDP), new projectsmay be introducedand others may be dropped in consultationwith the government; actual deliverableswill fall within the CAS ceiling.Additional projects under consideration include: National Program Support for Agrarian Reform, National Program Support for Agriculture (DFIMP2), National Program Supportfor Kalahi-CIDDS2, NationalProgram Support for Disaster Preparedness,NationalProgramSupport for Judicial Reform 2, PrivateSector Development Support for Rural Finance, PrivateSector DevelopmentSupport/Guaranteefor Power Reform, Private Sector DevelopmentSupportfor Private Participationin Infrastructure. `All b'Projecttitles are subject to modificationas project details are further refined. amounts are tentative. dlCAS Platforms: NG: NationalGovernment; LG: Local Government; PS: Private Sector Annex 84 Page 1 of 2 Annex B4 Social Indicators I Latestsingle year I I I I Sameregionlincomegroup I Lower- 1970-75 I1980-85 I1997-2003 Pacific I income I POPULATION Total population, mid-year (millions) 42.0 54.2 81.5 1,854.5 2,655.2 Growth rate (% annual average for period) 2.8 2.4 2.2 1.o 0.9 Urban population(% of population) 35.6 43.1 61.O 39.7 49.7 Total fertility rate (births per woman) 5.2 4.5 3.2 2.1 2.1 POVERTY (% ofpopulation) Nationalheadcountindexa' 30.4 Urban headcount index Rural headcount index INCOME GNI per capita (US$) 380 530 1,080 1,080 1,480 Consumer price index (1995=100) 10 43 159 Food price index (1995=100) 46 142 INCOMElCONSUMPTlONDISTRIBUTION Share of income or consumption Gini index 46.1 Lowest quintile (% of incomeor consumption) 5.4 Highestquintile (% of incomeor consumption) 52.3 SOCIAL INDICATORS Public expenditure Health (% of GDP) 1.5 1.9 2.6 Education(% of GDP) 2.0 1.3 3.2 3.2 4.0 Social security and welfare (% of GDP) Annex B4 Page 2 of 2 Annex 84 Social Indicators (Continued) Latest single year Same regionlincomegroup 'I Asia & I middle- I 1 Pacific I income Net primaryschool enrollment rate (% of age group) Total 97 96 93 92 91 Male 94 97 92 92 92 Female 99 96 94 92 91 Access to an improvedwater source (% of population) Total 86 76 81 Urban 91 93 94 Rural 79 67 70 Immunizationrate (% of children ages 12-23months) Measles 49 73 70 78 DPT 59 70 78 84 Child malnutrition (% under 5 years) 50 33 32 15 11 Lifeexpectancy at birth (Years) Total 59 63 70 69 69 Male 58 61 68 68 67 Female 61 66 72 71 71 Mortality Infant (per 1,000 live births) 60 55 28 32 32 Under 5 (per 1,000 live births) 90 81 37 42 40 Adult (15-59) Male (per 1,000 population) 376 323 249 184 214 Female (per 1,000 population) 314 259 142 129 135 Maternal(modeled, per 100,000 live births) 200 Births attended by skilled health staff (%) 58 68 Note: 0 or 0.0 meanszero or less than half the unit shown. Net enrollment rate: break in series between 1997and 1998due to change from ISCED76to ISCED97. Immunization:refers to children ages 12-23 months who receivedvaccinations before one year of age. World DevelopmentIndicatorsdatabase (August2004), World Bank aiSource: NationalStatistical CoordinationBoard, based on 2003 Family Income and ExpenditureSurvey. NSCB is currentlyreviewingurbanhuralheadcount index for 2003. Annex B5 Annex B5 Key Economic Indicators Page 1of 2 Actual 3timate Projected Indicator 2001 2002 2003 2004 2005 2006 2007 2008 National accounts (as % of GDP) Gross domestic producta 100 100 100 100 100 100 100 100 Agriculture 15 15 14 14 14 14 14 14 Industry 32 33 32 32 32 32 31 31 Services 53 53 53 54 54 54 55 55 Total Consumption 82 81 84 82 84 84 84 83 Gross domesticfixed investment 20 19 18 20 19 20 21 22 Exports(GNFS)b 49 49 48 49 46 45 45 45 Imports (GNFS) 52 49 51 51 50 49 50 51 Gross domestic savings 18 19 16 18 16 16 16 17 Gross national savings' 25 26 24 25 23 24 24 25 Memorandumitems Gross domestic product 72,043 77,954 80,573 87,069 99,485 109,805 120,090 130,712 (US$ millionat current prices GNI per capita (US$, Atlas method) 1,030 1,030 1,020 1,180 1,250 1,350 1,480 1,590 Real annual growth rates (%, calculatedfrom 1985 prices) Gross domestic product at market prices 3.0 4.4 4.5 6.1 5.0 5.0 5.2 5.2 Gross Domestic Income 1.3 7.4 5.7 5.4 5.4 5.2 5.5 5.5 Realannual per capita growth rates (%, calculatedfrom 1985I ces) Gross domestic product at market prices 0.7 2.3 2.5 4.1 3.0 3.1 3.3 3.3 Total consumption 1.8 5.2 6.8 1.9 3.9 2.9 2.8 2.9 Privateconsumption 2.8 5.7 7.9 2.1 4.3 3.2 3.1 2.4 Balance of Payments (US$ billions) Exports(GNFS)b 34.4 37.4 37.8 42.3 45.8 49.4 53.8 59.4 Merchandise FOB 31.2 34.4 34.8 38.3 41.2 44.4 48.1 52.9 Imports (GNFS)~ 37.2 38.0 40.3 44.6 49.5 54.3 59.5 66.4 Merchandise FOB 32.0 34.0 36.1 39.5 42.7 46.4 50.4 55.4 Resourcebalance -2.8 -0.6 -2.5 -2.3 -3.7 -4.8 -5.7 -7.1 Net current transfers 0.4 0.5 2.4 -3.4 -3.8 -3.5 -3.3 -3.0 Current account transfers 1.3 4.4 3.3 4.0 3.4 3.7 3.9 4.0 Net privateforeign direct investment 1.1 1.7 0.2 0.5 0.6 0.8 1.1 1.3 Long-term loans(net) 1.4 1.5 1.8 -1.9 0.4 -2.7 -1.7 -2.4 Official -0.2 0.0 0.0 0.8 0.6 -0.1 -0.5 -0.6 Private 1.6 1.5 1.8 -2.7 -0.1 -2.5 -1.3 -1.8 Other capital (net, including errors and ommissions) -3.7 -8.3 -4.8 -2.9 -2.4 0.4 -0.8 0.0 Change in reservesd -0.2 0.7 -0.4 0.2 -2 -2.2 -2.5 -3 (Continued) Key Economic Indicators Annex 85 (Continued) Page 2 of 2 Actual 3timate Projected lndicator 2007 2002 2003 2004 2005 2006 2007 2008 Memorandum items Resourcebalance (% of GDP) -3.9 -0.8 -3.1 -2.6 -3.7 -4.4 -4.8 -5.4 Publicfinance (as % of GDP at market prices)* Current revenues 15.3 14.1 14.4 14.4 14.9 15.0 15.2 15.3 Current expenditures 17.7 19.3 16.4 16.0 16.2 16.3 16.0 16.0 Current account surplus (+) or deficit (-) -2.3 -5.2 -2.0 -1.5 -1.3 -1.3 -0.8 -0.7 Capital expenditure 0.0 0.0 2.5 2.5 2.3 2.2 2.2 2.2 Foreignfinancing 0.6 2.8 3.3 1.7 1.o 0.7 2.8 -0.7 Monetary indicators M21GDP 41.5 42.1 40.0 38.0 36.7 35.8 35.1 34.8 Growth of M2 (YO) 6.8 9.5 3.3 7.5 8.5 8.0 8.5 9.0 GDP deflator (%change) 6.4 4.9 3.7 5.5 6.8 5.5 5.0 4.5 a/ GDP at market prices bl "GNFS denotes "goods and nonfactorservices." c/ Includes net unrequited transfers excluding official capital grants. d/ Includes use of IMF resources. el Consolidatedcentral government. f/ "LCU" denotes "local currency units." An increase in US$/LCUdenotes appreciation. Annex B6 Annex B6 Page 1 of 1 Key Exposure Indicators Estimate Projected 2004 2005 2006 2007 2008 Total debt outstanding and disbursed (TDO) (US$millions)a 58.5 60.1 62.7 62.5 62.7 60.3 59.3 57.6 Net disbursements (US$billions)a 1.6 -0.5 1.I -2.7 0.2 -2.4 -1.I -1.7 Total debt service (TDS) (US$billions)a 9.1 9.4 9.2 9.4 9.4 10.1 8.6 10 Debt and debt service indicators (%) TDO/XGs 140.5 132.0 135.0 111.7 104.3 92.8 84.3 74.8 TDO/GDP 81.2 77.1 77.7 71.8 63.1 54.9 49.3 44.0 TDS/XGS 21.9 20.6 19.8 16.8 15.6 15.6 12.2 13.1 ConcessionallTDO 19.2 20.8 22.6 25.0 26.7 28.6 29.3 29.9 IBRD exposure indicators (YO) IBRD DS/public DS 8.8 7.8 7.5 8.3 8.1 7.1 8.0 6.3 Preferredcreditor DS/public DS (%)" 17.7 22.1 23.9 25.5 21.7 16.7 18.0 11.8 IBRD DS/XGS 1.2 1.I 1.o 0.9 0.9 0.8 0.7 0.7 IBRDTDO (US$millions)d 3.2 3.3 3.4 3.4 3.2 3.0 2.8 2.7 IFC (US$millions) Loans 243.7 389.3 374.1 347.3 Equity and quasi-equitye 77.8 71.9 70.5 87.2 MlGA MlGA guarantees (US$millions) 139.5 124.9 117.0 112.0 a/ Includes publicand publicly guaranteeddebt, privatenonguaranteed,useof IMF credits and net short- term capital. b/ "XGS"denotes exports of goods and services, includingworkers' remittances. c/ Preferredcreditors are defined as IBRD, IDA,the regional multilateraldevelopment banks, the IMF, and the Bank for InternationalSettlements. d/ Includespresentvalue of guarantees. e/ Includesequity and quasi-equitytypes of both loan and equity instruments. 6 m Annex B8 Annex 88 Operations Portfolio (IFC & MIGA) Page 1of 2 Statementof IFC'sCommittedand Outstanding Portfolio as of 02/28/05 (In US$millions) Statementof MlGAGuarantees Annex B8 as of 2/28/05 Page2 of 2 (In US$ millions) As of end of fiscal year FY2001 FY2002 FY2003 FY2004 FY2005 through Sectorai Distribution Finance 52.5 37.9 30.0 30.0 21.o Infrastructure 87.0 87.0 87.0 82.0 82.0 Mining 0.0 0.0 0.0 0.0 0.0 Oil & Gas 0.0 0.0 0.0 0.0 0.0 AgribusinesslManufl 0.0 0.0 0.0 0.0 0.0 139.5 124.9 117.0 112.0 103.0 MiGA's Risk Profile Transfer Restriction 139.5 124.9 117.0 112.0 103.0 Expropriation 139.5 124.9 117.0 112.0 103.0 War & Civil Disturbance 82.0 82.0 82.0 82.0 82.0 Breach of Contract 0.0 0.0 0.0 0.0 0.0 MIGA's Gross Exposure in Country 139.5 124.9 117.0 112.0 103.0 YOShare of MIGAs Gross Exposure 2.7% 2.4% 2.3% 2.2% 1.9% MlGA Net Exposure in Country 129.1 115.9 108.8 103.8 94.8 % Share of MIGAs Net Exposure 4.1% 3.6% 3.4% 3.2% 2.9% List of Active MlGA Projects Original Project Name investor Name investor Company Business Sector Effective Amount Date Issued (W ING Bank Manila ING Bank Netherlands Financial 1211I95 30.00 Manila North Toolways Wesdeutsche Corporation Landesbank Germany Infrastructure 6/29/01 82.00 A A A A A A A A 'c 0 A A A A U c ([I A A A 3 v) al a8 E U 3 A A A A A A D fn Q S U 0 -z fn ,- Q - A z1 3 3 !? fn z UE8 3 a -fn 0, 0 U Q 8'0c fn Q fn A A - Q fn S fn A A . A A A A A A A .I- C A A A A a v) al C c, - 0 v) z al A A A A A A A A A A A A A A A A A A A 3 v) a CI E8 3 - a -Q v) 0 a U 8U v) a C v) - Q 3 v) v) A A A a 3 v) E aY 0 v) 0 a - a -a, v) 0 U Q 8U v) C Q v) - Q 3 VI v) A A A A A A A A A A A A A A A A A A A a v) a, E U 0 -.-E v) a, A A A A A A A A A A A A A A A A A A A A A A A A A A A E b -h Q z 0 C 2 0 S A A A A A A A I % A (2A A C I 9 m C C 0 b A A A A i A A ,Z'A A A A A A 0 U C S A A A S A A A A A A A A E A A A A S A A A ~ A A A A A A A Z A A Annex B11 Page 1of 2 Annex B l l EnvironmentIndicators CountryData Group Data East Asia & Lower middle Pacific income AgricuIture Land area 91,000 sq km) 298 15,885 54,034 Agricultural land (% of total) 40 50 35 Irrigated land (% of crop land) 14.6 34.7 20.5 Fertilizerconsumption (100 grams/ha arable land) 1,383 2,077 1,060 Food production index (1989-91=loo) 136 171 158 Populationdensity, rural (people/sqkm arable land) 564 568 492 Forests ForestArea (1,000 sq km) 58 4,238 19,065 ForestArea (YOof total land area) 19.4 27.2 31.8 Annual deforestation(%change, 1990-2000) 1.4 0.2 -0.1 Biodiversity Mammal species, total known 153 Mammal species, threatened 50 Birdspecies, total breeding 404 Birdspecies, threatened 67 Nationallyprotectedarea (% of land area) 5.7 Energy GDP per unit of energy use (PPP$/kgoil equiv) 6.8 -- 3.7 Energyuse per capita (kg oil equiv) 538 854 1,226 Energyimports net (% energy use) 53 -3 -21 Electricpower consumptionper capita (kWh) 489 816 1,304 Share of electricity generated by coal (%) 40.6 65.1 42.5 Emissionsand pollution COzemissions per unit of GDP (kg/PPP$GDP) 0.3 0.6 0.7 COzemissions per capita (mt) 1.o 2.1 3.0 Consumptionof CFCs (ODP metric tons) 1,632 42,259 47,373 Particulatematter (pop-weightedaverage-ug/m3) 49 69 48 Passengercars (per 1,000 people) 10 10 26 Annex B11 Page 2 of 2 CountryData Group Data EastAsia & Lower middle Pacific income Water and sanitation Freshwater resources per capita (m3) 5,992 6,020 9,401 Freshwaterwithdrawal total (% total water resources) 11.6 7.2 5.4 agriculture (YOtotal freshwater withdrawal) 88 81 73 Access to an improved water source (%total pop) 86 76 81 rural (% rural pop) 79 67 70 urban (% urban pop) 91 93 95 Access to sanitation (% total pop) 83 47 59 rural (% rural pop) 69 36 42 urban (% urban pop) 93 72 81 Under-5 mortality rate (per 1,000 live births) 37 42 40 Nationalaccounting aggregates 2002 - Gross national savings (%GNI) 24.5 38.8 30.8 Consumption of fixed capital (% GNI) 7.9 9.2 9.9 Educationexpenditure (%GNI) 2.9 2.2 3.2 Energy, depletion (% GNI) 0.0 3.4 6.6 Mineraldepletion (% GNI) 0.1 0.3 0.3 Net forest depletion (YOGNI) 0.2 0.1 0.1 C02damage (% GNI) 0.7 1.8 1.7 Particulateemission damage (% GNI) 0.4 0.8 0.7 Adjusted net savings (%GNI) 18.0 25.5 14.6 Source: The Little Green Data Book, World Bank, 2004 MAP SECTION