PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No. AB7468 (The report # is automatically generated by IDU and should not be changed) Operation Name SUPPLEMENTAL FINANCING FOR THE PHILIPPINES SECOND DEVELOPMENT POLICY LOAN TO FOSTER MORE INCLUSIVE GROWTH FOR POST TYPHOON RECOVERY Region East Asia & Pacific (EAP) Country Philippines Sector Central government administration (43%);General industry and trade sector (22%);General education sector (14%);Health (14%);General transportation sector (7%) Operation ID P148862 Lending Instrument Development Policy Lending Borrower(s) Republic of the Philippines Implementing Agency Department of Finance 5/F DOF Bldg., BSP Complex Roxas Boulevard Manila, Philippines The Department of Finance is the main liaison with the World Bank on budget support operations, but policy dialogue, monitoring and evaluation of the program supported by this DPL is shared with DBM, DOH, DepEd, DTI, DILG, DPWH, DoT, GCG, DSWD, DA, DOTC, and NEDA. Date PID Prepared November 18, 2013 Date of Appraisal November 20, 2013 Estimated Date of December 5, 2013 Board Approval Review Decision Following the corporate review, the decision was taken to proceed with the preparation of the operation. I. Key Development Issues and Rationale for Bank Involvement Before Typhoon Haiyan, locally named “Yolanda�, struck the Philippines, economic prospects looked excellent. Remarkably, the Philippine economy had grown by 7.6 percent in the first half of 2013, outperforming major economies in the region. Growth was the highest among the five largest South-East Asian economies1. The country’s strong macroeconomic fundamentals, characterized by low and stable inflation, healthy external balances, and strong government finances, shielded the economy from the persistent weaknesses of the global economy. The Philippine Government was also making progress in implementing its inclusive growth agenda before the typhoon struck. Guided by the principles contained in President Aquino’s Social Contract with the Filipino People,2 the administration has implemented an ambitious reform program. For instance, the passage of the highly contested alcohol and tobacco tax (the “Sin Tax�) 1 The ASEAN-5: Philippines, Indonesia, Malaysia, Thailand and Vietnam. 2 http://www.gov.ph/about/gov/exec/bsaiii/platform-of-government/ 1 at the end of 2012 was an important political and tax policy win for the Government. A recently conducted mid-term review by Cabinet has brought strong cross-sector coordination and focus to the reform agenda. Typhoon Yolanda hit on November 8 with an estimated 10 million people affected across nine regions, per initial reports of the National Disaster Risk Reduction and Management Council (NDRRMC).3 As of November 25, a total of 3.4 million persons are displaced with 240,365 persons inside 1,093 evacuation centers, and around 3.2 million persons outside the evacuation centers. The Government has so far reported 5,235 fatalities. Initial reports indicate that economic and social infrastructure has sustained significant damage. A total of 1,130,406 houses are reported damaged of which 555,514 were totally destroyed. While nine regions out of a total of seventeen were affected, four regions bore the brunt of the typhoon: Western, Central and Eastern Visayas, and MIMAROPA4. Within these regions, the provinces of Eastern Samar, Leyte, Oriental Mindoro, Masbate, Sorsogon, Negros, Capiz, Romblon and Palawan—already among the poorest provinces in the Philippines—were the worst affected. The typhoon has struck areas with particularly vulnerable populations. Eastern Visayas, where the entire population was reported to have been affected by the typhoon, has one of the highest poverty incidence rates (45.4 percent) in the Philippines.5 With very limited savings capacity, the disruption in economic activity and incomes as a result of the typhoon is expected to bring severe hardship to these populations. The fiscal costs of the relief and reconstruction program, based on very preliminary initial estimates, could range between US$3.1 and US$4.6 billion (between 1.1 to 1.5 percent of GDP).6 They include the costs of a comprehensive recovery program of humanitarian relief, the reconstruction and rehabilitation of public infrastructure,7 social safety net programs, and the public grant element of targeted interventions to replace some of the private assets for the poor and most vulnerable (e.g. housing construction grants, agricultural and fisheries asset replacement). The magnitude and speed of the implementation of the recovery program has substantial implications for the ultimate post-typhoon impacts on poverty, job losses and economic growth. The Government is leading a major humanitarian effort, in coordination with the United Nations Office for the Coordination of Humanitarian Affairs (UNOCHA) and in partnership with national and international agencies. As of November 21, the Government has distributed approximately US$10 million worth of relief assistance (NDRRMC). Meanwhile, the Government reported on a new website called the Foreign Aid Transparency Hub (FAiTH)8 that pledges from the international community for post-Yolanda support had reached US$343 million. In addition, the Asian Development Bank and the World Bank Group committed to provide US$500 million each in fast-disbursing budget support. 3 NDRRMC Update, SitRep No. 32, November 21, 6.00 am. 4 This region consists of five provinces: Occidental Mindoro, Oriental Mindoro, Marinduque, Romblon and Palawan. 5 The national poverty rate is 27.9 percent (first half of 2012). Eastern Visayas is the third poorest region in the country. 6 2013 projected GDP. 7 These estimates are based on the initial assumptions about the share of assets damaged, the reconstruction to damage cost ratio, and the additional markup to “build back better�. 8 http://www.gov.ph/faith, November 25 2 The disaster response and recovery will constitute a considerable financial burden on the budget of the national government and affected local governments. While typhoon damage is a recurring phenomenon for which the Government is usually logistically and fiscally prepared, the unprecedented magnitude of this typhoon has led to an unanticipated financing gap that could jeopardize the Government's on-going reform and development spending program. This reform program is on-track and supported by the DPL series, the Bank’s other lending operations and various technical assistance programs. Dealing rapidly and decisively with the aftermath of the typhoon, without jeopardizing or slowing down the implementation of the on-going development spending program, is therefore essential. On November 12, the Government requested immediate assistance from the World Bank Group to assist its reconstruction efforts in the typhoon struck areas. The Government requested: the rapid reprogramming of resources from the on-going projects towards reconstruction efforts; fast disbursement of upcoming projects, including through allowing the retroactive financing of eligible expenditures; and the preparation of an emergency response budget support operation of US$500 million. II. Proposed Objective(s) The quick-disbursing budget support operation is a US$500 million Supplemental Financing to the second operation in the programmatic development policy lending series (DPL2). The Philippines DPL series, launched in 2011, aims to support the Government’s objective of fostering more inclusive growth. The proposed Supplemental Financing to the DPL2 will assist in addressing the unanticipated financing gap caused by the unprecedented magnitude of the typhoon which could jeopardize the Government's reform program. III. Preliminary Description The Supplemental Financing is part of World Bank’s comprehensive package of recovery and reconstruction support. The package consists of: (i) technical assistance and knowledge sharing on damage assessment and reconstruction planning; (ii) restructuring of existing investment IBRD projects; (iii) new IBRD operations, including delivery of an operation in final stages of preparation, the proposed quick-disbursing budget support operation, and a possible new investment or results-based operation to support medium and long-term reconstruction efforts; and (iv) IFC support to the private sector (banks, small and medium-sized businesses, power companies, etc.). IV. Poverty and Social Impacts and Environmental Aspects Policies supported by the DPL 2 and the proposed Supplemental Financing are not expected to have a significant environmental effect on the Philippines. Risks and Mitigating Measures The risk assessment made for the Second DPL remains. The main risks are internal (political and institutional constraints to implementation of the reform agenda, including constraints on revenue mobilization); external (deteriorating global economy); and catastrophic (particularly a vulnerability to typhoons). The risks are being mitigated by selective and close alignment to core reform priorities by the Government; complementary policy dialogue, technical assistance and 3 investment lending to support the reforms, the strengthening of the social safety net through conditional cash transfers, and improving disaster risk management. The public financial management and public procurement systems are adequate for this operation. Since approval of the DPL2, improvement in the policy environment for fiscal transparency has continued. Since 2011, DBM has been publishing quarterly allocations and obligations by line agencies. The Philippines achieved an overall score of 48 out of 100 in the Open Budget Initiative 2012. This was up from a score of 55 in 2010. The country was among the initial group that signed up for the Open Government Partnership when launched in 2011. To track the status of foreign aid, the Government has also launched the Foreign Aid Transparency Hub (FAiTH), an online portal of information on calamity aid and assistance. Poverty and Social Impacts The Second DPL’s poverty and social impacts would remain broadly positive, as described in the Program Document distributed to the Board on February 15, 2013. V. Tentative Financing The IBRD loan, in an amount equivalent to US$500 million, will be disbursed in one tranche upon effectiveness. VI. Contact Point Rogier van den Brink The WORLD BANK 26th Floor One Global Place 5th Avenue corner 25th Street Bonifacio Global City, Taguig City, Philippines Tel +63-2-4652658 | Fax +63-2-4652505 Email: rvandenbrink@worldbank.org Borrower: The Republic of the Philippines through the Department of Finance Contact Person: Stella Laureano Title: Director, International Finance Group Tel: +63-2-5239223 Email: slaureano@dof.gov.ph VII. For more information, contact: The InfoShop, The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop Please note this is an evolving document and subject to change. 4