Document ofThe World Bank

FOR OFFICIAL USE ONLY

Report No. 24042-PH

MEMORANDUM OF THE PRESIDENT

OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

AND

THE INTERNATIONAL FINANCE CORPORATION

TO THE

EXECUTIVE DIRECTORS

ONA

COUNTRY ASSISTANCE STRATEGY

OF THE WORLD BANK GROUP

FOR

THE REPUBLIC OF THE PHILIPPINES

April 30, 2002

Philippines Country Management UnitEast Asia and Pacific Region

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bankauthorization.

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CURRENCY EQUIVALENTS(As of April 30, 2002)

Currency Unit = Peso

US$1.00 = PhP50.82

PhPl.00 = US$0.019

WEIGHTS AND MEASURES

Metiic System

FISCAL YEAR

January 1 - December 31

l:BRD IFCVice President: Jemal-ud-din Kassum, EAP Assaad J. Jabre, CIOVPCountry Director: Robert V. Pulley, EACPF Javed Hamid, CEAHKTask Team Leader: Heidi Hennrich-Hanson, EACPQ Dileep Wagle, CEADR

FOR OFFICIAL USE ONLYACRONYMS AND ABBREVIATIONS

AAA Analytical and Advisory Services JSDF Japan Social Development FundADB Asian Development Bank KALAHI Kapitbisig Laban sa KahirapanAFMA Agricultural and Fisheries LAMP Land Administration and

Modernization Act Management ProgramAPL Adaptable Program Loan LGU Local Government UnitAPJR Action Plan for Judicial Reform LIL Learning and Innovation LoanARCDP Agrarian Reform Communities LOGOFIND Local Government Finance &

Development Program Development ProjectARMM Autonomous Re-ion in Muslim MDG Millennium Development Goals

Mindanao MIGA Multilateral Investment GuaranteeASEM Asia-Europe Meeting AgencyBSP Bangko Sentral ng Pilipinas MILF Moro Islamic Liberation FrontCAS Country Assistance Strategy MNLF Moro National Liberation FrontCDD Community-Driven Development MRDP Mindanao Rural DevelopmentCG Consultative Group ProjectCIDA Canadian International Development MTPDP Medium-Term Philippine

Agency Development PlanCIDSS Comprehensive & Integrated Delivery NEDA National Economic and Development

of Social Services AuthorityCOA Commission on Audit NG National GovernmentDA Department of Agriculture NGO Non-Governmental OrganiiationDAR Department of Agrarian Reform NIA National Irrigation AdministrationDBM Department of Budget & Management NPC National Powver CorporationDENR Department of Environment & Natural NPLs Non-Performing Loans

Resources NRM Natural Resources ManagementDOF Department of Finance ODA Official Development AssistanceDPR Developinent Policy Review PAGC Presidential Anti-Graft CommissionDPWH Department of Public Works and PEPFMR Public Expenditure, Procurement and

Highways Financial Management ReviewECD Early Childhood Development PFSL Public Finance Strengthening LoanEXT External Affairs Division, World Bank PHRD Policy and Human ResourcesFDI Foreign Direct Investment DevelopmentFSAP Financial Sector Adjustment Program PPI Private Provision of InfrastructureFY Fiscal Year SEMP Social Expenditure ManagementGDLN Global Distance Learning Network ProgramGDP Gross Domestic Product SPAV Special Purpose Asset VehicleGNP Gross National Product SSR Social & Structural ReviewGOP Government of the Philippines TA Technical AssistanceHSRA Health Sector Reform Agenda UNDP United Nations DevelopmentHSRP Health Sector Reform Project ProgrammeIBRD International Bank for Reconstruction USAID United States Agency for

and Development International DevelopmentIFC International Finance Corporation WBI World Bank InstituteIMF International Monetary Fund WTO World Trade OrganizationIRA Internal Revenue AllotmentJBIC Japan Bank for International

Cooperation

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

FOR OFFICIAL USE ONLY

PHILIPPINESCOUNTRY ASSISTANCE STRATEGY

Fiscal Years 2003-05

CONTENTS

Page No.

EXECUTIVE SUMMARY .......................... i

1. COUNTRY CONTEXT .. 1A. Political Developments since the last Country Assistance Strategy .1B. State of the Economy .IC. Main Challenges and Government Priorities. 3D. External Environment, Country Risks, and Economic Prospects. 8

2. PROGRESS WITH RESPECT TO THE 1999 COUNTRY ASSISTANCESTRATEGY .. 10A. Own Assessment .10B. Findings of the Quality Assurance Group and the Operations Evaluation Department . 13C. Client and Country Team Surveys .14D. Key Lessons Emerging for Future Assistance .14

3. BANK ROLE AND STRATEGIC OBJECTIVES IN THEPHILIPPINES FOR FY2003-05 .. 15A. The Country Assistance Strategy Process .15B. Bank Strategy .16C. Bank's Assistance Program .18D. Assistance Instruments .31E. Multistakeholder Approach, Partnership, and Selectivity .36F. Lending Program: Scenarios, Exposure, and Triggers .37G. Risk Management and Country Program Monitoring .39

TEXT TABLES2-1 Lending, Nonlending Activities, and Portfolio Performance .123-1 Linking the Bank's Assistance Strategy with the Medium-Term Philippine

Development Plan .173-2 Lending Program Triggers .......................... 38

TEXT BOXES1-1 Poverty Profile .......................... 41-2 Philippines Progress with respect to Millennium Development Goals. 62-1 Working in Partnership with Others .13-1 Philippines Gender Profile and Strategy .24

ANNEXESAl Key Economic and Program IndicatorsA2 Philippines at a glanceB2 Selected Indicators of Bank Portfolio Performance and Management & Development

Effectiveness ReportB3 Proposed IBRD/IDA Lending Program for Next Three Fiscal YearsB3 IFC and MIGA Program, FY 1999-2002B4 Summary of Nonlending ServicesB5 Social IndicatorsB6 Key Economic IndicatorsB7 Key Exposure IndicatorsB8 Operations Portfolio (IBRD/IDA and Grants)B8 Statement of IFC's Held and Disbursed PortfolioB9 CAS Program (2003-05) Matrix Based on the Medium-Term Philippine Development Plan

(MTPDP) 2001-04B110 CAS Summary of Development PrioritiesC World Bank Philippines-NGO Collalboration, by Project Cycle, Fiscal Years 1999-2001D CAS FY2000-02 Capacity Building Initiatives Implemented and/or Mobilized During CAS

PeriodE Achievements and Sector Objectives during the Previous Country Assistance Strategy PeriodF Alignment with Corporate PrioritiesG CAS Consultations and Stakeholder RecommendationsH Private Sector StrategyI Programs of other ODA Partners in the Context of the Medium-Term Philippine

Development Plan

MAP OF THE PHILIPPINES (IBRD 27408R2)

This Country Assistance Strategy was produced by a team led by Heidi Hennrich-Hanson, and includingCarol Figueroa-Geron, Leonora Gonzales, Arvind Gupta (in particular on the Private Sector Strategy),Teresa Ho, Lloyd Mckay, Keith Oblitas, May Olalia, Rajashree Paralkar, Christian Rey, Ma. BellaTumaliwan-Belizario, Ming Zhang and Maribelle Zonaga as core team members. Dileep Wagle led theteam on the IFC side. Many other members of the Bank-wide Philippines Country Team (includingIBRD, IFC and MIGA) also contributed. Dharshani de Silva and Monserrat Balce assisted with documentprocessing.

PHILIPPINES COUNTRY ASSISTANCE STRATEGY

FISCAL YEARS 2003-05

EXECUTIVE SUMMARY

i. This Country Assistance Strategy (CAS) builds on the directions set in the last CAS (May1999)', taking an integrated approach to development that balances macroeconomic andstructural, human, and physical development needs. Based on the Philippine government's longerterm vision and strategy, it was developed in consultation with both government and non-governmental stakeholders. Building on lessons from the implementation of the 1999 CAS, it sets outsome strategic adjustments in the Bank Group's instruments to respond to the country's needs,including renewed program lending and more lending in support of local and community needs.

Recent Developments

ii. Following the transfer ofpower in January 2001, the administration adopted sounderpolicies that enhanced public confidence in its capacity to manage the economy. The Philippineshad gone through a turbulent political period from 1999 to early 2001, with modest economicgrowth, weak poverty performance, and faltering investor confidence, undermnined by governanceconcerns. But since the transfer of power to the new administration in January 2001, the governmenthas managed to lessen macroeconomic concerns by adhering to macroeconomic (includingbudgetary) targets, initiating governance reforms, and moving ahead with structural reforms such aspassage of the Power Sector Restructuring Bill. The new administration has also emphasized a"peace and development" approach to conflict-affected Mindanao, but risks remain high. Economicgrowth held up reasonably well in 2001, interest rates and inflation came down, and the stock marketrecovered sharply from its October 2001 low. The economic outlook for the Philippines hasimproved overall since a year ago. Nonetheless, some indicators related to public finance and thefinancial sector raise concerns and economic vulnerability persists, with external risks related toglobal demand and internal risks related to peace and order and possible policy slippage.

Development Challenges

iii. The Philippines' main challenge for the medium-term remains to reduce poverty. Povertyis still largely a rural phenomenon. Its causes include: high dependence on agriculture whereproductivity has been declining and per capita economic growth is low; lack of adequate social safetynets, especially for poor women and children; and lack of educational attainment in terms of schooldrop-outs and low educational quality. Population pressures and a declining natural resource basehave exacerbated these problems. To alleviate poverty, the Philippines has to overcome external andinternal challenges. On the external side, it must cope with fluctuations in global markets on which itdepends heavily. On the internal side, it needs to win back the confidence of investors in order toraise the currently low volume of investment that is necessary for the country's development.

'World Bank, Country Assistance Strategy 1999-2002 (Washington, May 1999).

Moreover, institutional capacity must improve, esjpecially at the level of local governments whoseresponsibility for delivering development services is growing.

The Government's Program

iv. Based on the overarching goal of reducing poverty, the administration's medium-termpolicy agenda, as expressed in its updated Medium-Term Philippine Development Plan (MTPDP,200104)2 is designed alongfourfocal areas: (1) macroeconomic stability and equitable,accelerated, and broad-based growth, based on free enterprise; (2) socially equitable modernizationof agriculture and fisheries to achieve sustainable increases in rural-incomes and to include improvedaccess to land tenure, extension services, rural infrastructure, and credit; (3) comprehensive humandevelopment, addressing quality and access to education, health and housing services, protecting thevulnerable, and addressing regional disparities and the particular challenges of Mindanao; and (4)good governance and rule of law, including improved service delivery, institutional strengthening,and judicial reform. The Bank supports the MTPDP's focus and believes it could be sharpened byindicating priorities among proposed actions, costing of public investment projects, and elaboratingon plans to strengthen public revenue mobilization and ensure adequate financing for developmentprograms.

Lessons from Past Experience

v. The World Bank Group CAS for FY2003-05 is based on a detailed analysis of the outcomeof the 1999 CAS. The overall finding is that, despite good progress in some areas, the Philippines'economic performance and some of the outputs and development outcomes were less than projectedand less than the potential in1999-2001. Over the past three years, financial assistance to thePhilippines was much lower than expected, while nonlending activities, including knowledge sharingand technical assistance for capacity building, exceeded plans. Investments in the Philippines by theInternational Finance Corporation (IFC) have been on an upward trend over the past five years, andthe Multilateral Investment Guarantee Agency (MIGA) has provided both political risk insurance andadvice on investment promotion. A client survey among government and non-governmentstakeholders shows that clients have a relatively positive view of their interactions with Bank Groupstaff and the institution's effectiveness and value the collaboration and partnership with the BankGroup. However, the survey also identified areas where the Bank Group was seen as relatively lesseffective, notably in reducing poverty, building capacity at community level, and providing practicalrecommendations. Key lessons point to the need to emphasize capacity building, work at the locallevel, focus on measurable outcomes, and prepare high-quality but less complex operations.

The World Bainik Group Program

vi. The World Bank Group's objective for the next three years will be to assist the Philippinegovernment in reestablishing a pattern of rapid and sustained poverty reduction. This will requireactions both to accelerate growth and to empower the poor to participate more fully in development.

vii. To help accelerate growth, the Bank Group plans to help the Philippine government ensurethat the key building blocks-increased investment and productivity within both the private andpublic sectors-are firmly in place. This involves supporting the Philippine governrnent's efforts to

2 The Medium-Term Philippine Development Plan 2001--2004 with the 2001 State of the Nation Address byPresident Gloria Macapagal-Arroyo, Manila, October 2001.

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(i) strengthen fiscal policy by improving the tax effort and containing contingent liabilities; (ii)address banking vulnerabilities and deepen the capital markets; (iii) enhance competitiveness throughtrade and regulatory reforms, especially in the agriculture, services, and small and medium enterprisesectors; (iv) raise productivity by alleviating key infrastructure bottlenecks, especially transport andrural power; and (v) improve governance in both the public and corporate sectors. The CAS alsoincludes a joint Bank Group-Private Sector Strategy which outlines ways of addressing some ofthese areas. Accelerating rural development and reversing the decline in agricultural productivity areparticularly important for equitable economic growth.

viii. To support national efforts to empower the poor to participate more fully in development,the Bank Group's assistance will focus on (a) improving investments in human resources (educationand health) and ensuring access by the poor; (b) the efficient provision of other basic services such asshelter, water supply and sanitation, and rural infrastructure; (c) increasing access to productiveassets such as land, technical extension services, and credit; (d) strengthening the organizational andfinancial capacity of the poor so they can more actively engage in local development activities; and(e) initiating programs to protect the environment and natural resource base so these resources can besustained over time. Strengthening resource management and governance improvements will beimportant for both of these major pillars of the Bank Group's assistance program.

ix. This strategy links directly with the four-part framework of the Philippine government'supdated MTPDP. In addition, the CAS also addresses four challenges that cut across these areas: (i)helping local government units to deliver public services more effectively; (ii) providing assistance tothe conflict-affected region of Mindanao, which has large development potential, but poor serviceprovision; (iii) ensuring environmental sustainability; and (iv) improving performance monitoring tomeasure progress with regard to both economic growth and empowerment of the poor.

World Bank Group Instruments

x. Instruments to pursue these objectives will include lending and nonlending services of theInternational Bank for Reconstruction and Development (IBRD), as well as interventions by IFCand MIGA. IBRD will continue to emphasize improvements in ongoing World Bank-financedoperations, particularly with regard to accelerating project implementation and delivery ofdevelopment benefits. Portfolio management will address this challenge and also be a key instrumentto improve long-term implementation capacity and governance at the national and local governmentlevels.

xi. The composition of new IBRD lending to the Philippines is expected to shift over the CASperiod. Lending will continue to include Adaptable Program Loans in areas such as water supply,national road improvement, and rural development in Mindanao, and through continuation ofprojects intended to improve management of budgeted expenditures. Other new project lending willbe poverty-focused, respond more directly to local and community needs, and draw on experiencewith workable delivery mechanisms in both the Philippines and neighboring countries includingsocial funds. Renewed program lending as a strategy for effective assistance to the Philippines isbased on an enhanced commitment by the Philippine authorities to an extensive medium-termprogram of policy and institutional reforms, especially in the areas of public finance, including fiscalmeasures to support investment spending directed towards development objectives.

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xii. Nonlending assistance will remain an integralfeature of IBRD's assistance progranL It isdesigned to enrich policy debate, help government design and implement effective reforms, underpinfuture lending operations, and systematically build capacity. The assistance will continue to be ablend of core-diagnostic assessments and other advisory work.

xiii. IFC's strategy is intended to help the Philippines meet the challenges of increasingcompetitiveness, promoting inflows offoreign direct investment, and improving corporategovernance. Its focus is on assisting the government in: (a) addressing structural weaknesses in thecorporate sector; (b) supporting viable projects and strengthening the regulatory frameworksnecessary to enhance internal competition in the infrastructure sector; (c) stimulating growth of smalland medium enterprises; (d) expanding private sector participation in social sectors; (e) strengtheningthe financial sector; and (f) developing the private contractual savings sector and local debt markets.

xiv. MIGA will continue to provide guarantees based on demand and may expand technicalassistance for investment promotion.

xv. The Bank Group will continue to work with both government and non-governmentalstakeholders in the Philippines. The preparation of this CAS included multi-stakeholderconsultations. Selectivity in the Bank Group's assistance must be seen in the context of its partners'activities in the country, including the private sector, civil society organizations and ODA partners.

xvi. The CAS foresees a most likely IBRD base lending program of about $1.1 billion over thethree-year period of FY2003-05, including three to four investment operations a year and twoadjustment operations, provided that policy reforms and portfolio management measures proceedas planned. The IBRD is prepared to increase its financial assistance up to $1.7 billion in FY2003-05 in response to improvements in portfolio performance, absorptive capacity and deeper policyreforms.

Risks

xvii. An open economy, high public debt, fiscal risks from contingent liabilities, banking andcorporate stress, and substantial externalfinancing requirements make the Philippines vulnerableto both external shocks and policy slippage. Bank-financed operations face additional project riskswith regard to procurement, financial management, and safeguard issues due to capacity constraints,plus additional security risks in Mindanao. The strength of the Philippine government's policyactions will determine the scope of Bank interventions. In the most likely base case lending scenario,the IBRD's exposure in the Philippines is expected to decline slightly. Close monitoring of risks andproject performance is a key feature of this CAS. So, too, are close supervision and up-frontassessment of institutional capacity, as well as assistance to strengthen capacity where needed.

Issues for Board Discussion

xviii. Executive Directors may wish to address the following questions:

* Are lessons learned from the implementation of the previous CAS sufficiently taken intoaccount in the design of the assistance program for the next three years?

* Do the priorities of the assistance programs, including the joint Bank Group Private SectorStrategy, respond adequately to the Philippines' current development challenges?

* Are the size and composition of the proposed lending and nonlending program adequate?

* Are risk management and performance monitoring features appropriate?

MEMORANDUM OF THE PRESIDENT OF THEINTERNATIONAL BANK FOR RECONSTRUCTIONAND DEVELOPMENT AND THE INTERNATIONAL

FINANCE CORPORATION TO THE EXECUTIVEDIRECTORS ON A COUNTRY ASSISTANCE

STRATEGY OF THE WORLD BANK GROUP FORTHE REPUBLIC OF THE PHILIPPINES

1. COUNTRY CONTEXT

A. POLITICAL DEVELOPMENTS SINCE THE LAST COUNTRY ASSISTANCE STRATEGY

1.1 The Philippines has gone through a turbulent political period since the last World BankGroup' Country Assistance Strategy (CAS, May 1999).2 President Josef Ejercito Estrada, elected bypopular vote in 1998, was removed from office in January 2001 following allegations of corruption,impeachment proceedings, and withdrawal of support by his cabinet and the military. The politicaleconomy in the southern island of Mindanao also deteriorated in 2000, and the president was unableto quell the resurgence of armed conflict with his policy of "all-out war, to be followed by peace andthen development." Renewed hostage taking by the Abu Sayyaf Group as well as kidnapping forransom of business people in Manila inhibited the country's investment climate, tourism, anddevelopment in general.

1.2 Since the transfer ofpower in January 2001, improving governance and reducing povertywere reinforced as national priorities, a new policy toward Mindanao is yielding progress, and theadministration has taken a firm stance against terrorism. Vice President Gloria Macapagal-Arroyowas sworn in as the new president in January 2001. She consolidated her support in congressionalelections in May 2001 and gained political support for difficult policy measures. Her administrationhas emphasized the need for good and effective governance and has initiated a number of measuresto improve governance. The new administration made a strategic shift in Mindanao to pursue "peaceand development in tandem," opening space for negotiating a ceasefire with the Moro IslamicLiberation Front (MILF) and relatively peaceful elections of local government officials in theAutonomous Region in Muslim Mindanao (ARMM) last May, followed by an ARMM-wide electionin November. Concomitantly, the Government of the Philippines was able to fulfill its obligationsunder the 1996 Peace Agreement with the Moro National Liberation Front (MNLF).

B. STATE OF THE ECONOMY

1.3 The Philippines has gone through four years of modest economic growth and weak povertyreduction performance. The country recovered to some extent in 1999 and 2000 from the negativegrowth of 1998 as it emerged from the East Asian financial crisis. GDP grew by 3.4 percent and 4percent in 1999 and 2000, respectively. However, export growth declined to single digits (9 percentin U.S. dollar terms) in 2000, and exports fell sharply in 2001 (16 percent in U.S. dollar terms). Awidening "governance deficit" in 2000 (e.g., a widening of the fiscal deficit to more than double its

' Henceforth referred to as the "Bank."2 World Bank, Country Assistance Strategy1999-2002 (Washington, May 1999).

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planned level and growing accusations of corruption against national leadership), together withrenewed conflict in Mindanao, adversely affected business confidence and investor sentiment. Thepeso (PhP) depreciated about 20 percent for the year, breaking the PhP 50 per U.S. dollar level, stockvalues declined and the percentage of nonperforming loans in bank portfolios continued to rise. ThePhilippines has failed to achieve substantive increases in per capita income since 1997, due to thecombined effect of modest economic growth and continued high population growth.

1.4 After the transfer ofpower in January 2001, the confidence in the administration 'scapacity to manage the economy was boosted by its adherence to macroeconomic targets,including the size of the budget deficit, adoption of sounder policies, and acceleratedimplementation of important antipoverty programs. Despite a deteriorating external environment in2001-in particular, the global downturn in the electronics sector (which accounted for close to 60percent of Philippine exports) and weakening demand in the Philippines' two largest export markets(the United States and Japan)-economic growth in 2001 held up reasonably well (GDP growth of3.4 percent and GNP growth of 3.7 percent). Indeed, it was one of the highest among marketeconomies in the region despite the 16 percent fall in export earnings. Inflation has continued to fallfrom 6.3 percent in January 2001 to 3.6 percent in March 2002, and the budget deficit target for 2001was essentially met despite the difficult environment. The exchange rate has also stabilized. TheCentral Bank has eased interest rates as inflation has declined, and T-bill rates have dropped to 4.3percent, an all-time low. The stock market fell to a 10-year low in early October, but has recoveredby 46 percent since then (as of April 4, 2002) in response to improved investor sentiment. However,export, investment and banking sector performance still raise concern. Export receipts fell by 9percent in U.S. dollar terms in January 2002 (year-on-year). Nonperforming commercial bank loanshave increased to comprise about 18.4 percent of total loan portfolio (end-February 2002). Theinvestment-to-GNP ratio has remained low (17-18 percent for 1998-01, compared with 23 percent inthe mid-1990s). 3

1.5 Government's move to sounder policies was demonstrated by passage of critical reformssuch as the Power Sector Restructuring Bill and the Anti-Money Laundering legislation. Improvinggovernance became a national priority, and several new initiatives were launched to improve theprivate and public sector governance environment. Examples are initial steps to streamline the publicprocurement process and enhance transparency and accountability by promoting e-procurement,adoption of a new government accounting system, steps to strengthen internal and external auditingof government agencies, and adoption of the Action Plan for Judicial Reforms (APJR). ExecutiveOrder No. 12 also created the Presidential AntiGraft Commission (PAGC) to combat graft andcorruption by high-ranking government officials. Recognizing that most of the poor in the countrylive in rural areas and depend on agriculture as their main source of livelihood, governmentaccelerated the implementation of the Agriculture and Fisheries Modernization Act (AFMA).4

Moreover, in its efforts to directly target the poor and vulnerable population, the governmentaggressively implemented the Comprehensive Integrated Delivery of Social Services (CIDSS), amajor antipoverty program. Based on the CIDSS approach, a new antipoverty program, Kapit BisigLaban sa Kahirapan (KALAHI), was launched by the government. In addition to basic services, thisprogram focuses on asset reform and participation of the poor in governance and so far has beenimplemented in three regions. Finally, in terms of ODA use, the government took steps to improveODA portfolio performance and address implementation problems.

3 For further details on economic developments, see World Bank, Philippines Development Policy Review: AnOpportunity for Renewed Poverty Reduction (Washington D.C.: February 22, 2002).4National Economic Development Authority, Socioeconomic Report 2001 (NEDA: Manila, March 2002).

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C. MAIN CHALLENGES AND GOVERNMENT PRIORITIES

Long-Term Vision and Poverty Focus

1.6 "Our development visionfor the 21" century is to create a modern and humane society,raise the quality of life of all Filipinos-children, youth, women and men alike-and bequeaththis society in an ecologically healthy state tofuture generations. " This was the country's long-termgoal in 1998 as articulated in the Philippine National Development Plan (Plan 21), which wasanchored on the global agenda for change resulting from the 1992 Earth Summit. In attaining thatvision, the plan recognized the need for industrialization, agricultural modernization, investments inhuman capital particularly through education, protection of the environment and natural resources,and global competitiveness. Plan 21 is still the long-terrn framework for the Philippines' medium-term development plan.

1.7 "Our challenge is clear: to eradicate poverty."5 The government's main challenge for themedium-term remains to reduce the number and proportion of people living in poverty. Theincidence of poverty in the Philippines fell rapidly from 34 percent in 1991 to 25 percent in 1997, butpoverty reduction has stagnated since then. The administration is aware that the key to winning itsfight against poverty is its success in maintaining macroeconomic stability, achieving and sustainingincreases in growth and income, and achieving broad and geographically disbursed participation inthis growth, as well as progress in containing the rapid population growth (Box 1-1).

External and Internal Challenges

1.8 To reduce poverty, the government has to overcome external and internal challenges. Onthe external side, the slowdown in global economic growth, combined with lower demand forelectronics, has implications for export, the main growth engine over the last few years. Findingalternative sources of growth will relieve pressure on the export sector, which needs to work towarddiversifying products and markets over the medium-term.

1.9 On the internal side, the major challenge is to win back the confidence of now cautiousinvestors in order to increase the currently low volume of investments by improving the credibility ofgovernment actions and programs. This is all the more important as the national government's ownability to intervene is severely constrained by low revenue collections, high nondiscretionaryexpenditures (personnel and debt service), and the large Local Government Unit (LGU) share of thenational budget. In this respect, focusing attention on the sources of growth, improving thegovernance environment, and establishing peace in Mindanao will be critical. Moreover, in view ofthe constrained fiscal environment, it is doubly important for the national government to focus onrevenue collection to generate resources for key development priorities and programs, and enhancethe efficiency and equity of public expenditures as far as possible.

5 President Gloria Macapagal-Arroyo, State of the Nation Address to the Twelfth Congress of the Philippines, QuezonCity, July 23, 2001.

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Box 1-1 Poverty Profile

Poverty reduction has stagnated The incidence of poverty in the Philippines fell rapidly from 34 percent in 1991 to 25 percentin 1997, but poverty reduction has stagnated since then.' Preliminary data collected from the Family Income and ExpenditureSurvey (FIES) for 2000 suggests that the incidence of poverty actually rose slightly. In addition, there were no reductions in thepercentage of the population living on less than $1 per day (12-13 percent) or in the percentage living on less than $2 per day(between 45 and 46 percent) between 1997 and 2000. This means that many near-poor remain vulnerable to slipping into povertywith only a modest reduction in their income.

The preliminary official poverty estimates using income-based poverty lines that are substantially higher than the needs-basedpoverty lines underpinning the above estimates, indicate a somewhat larger increase in poverty incidence, from 36.8 percent ofthe population in 1997 to 40.0 percent in 2000. Meanwhile, income inequality changed little between 1997 and 2000, with a Ginicoefficient of about 0.46 in both years.

Poverty in the Philippines still remains apredonmnantly ruralphenomenon, with a rural poverty incidence of 37 percent vis-a-vis an urban poverty incidence of 12 percent in 2000. The four regions with the highest incidence of poverty in 2000 wereARMM, Bicol, Western Mindanao, and Eastern Visayas.

The Bank's recent poverty assessment (2000) concluded that the underlying causes ofpoverty are still heavy dependence onagriculture, lack of adequate social safety nets, and lack of educational achievement. It suggested that achieving higher growthand enhancing the ability of the poor to participate in that growth by building up their assets through investments in their humancapital and their physical environment would be the main engine for poverty reduction. In this context, the poverty assessmentrecommends liberalizing rice policy, fast-tracking the implementation of the Comprehensive Agrarian Reform Program, andtargeting development programs in the poorest regions like the Eastern Visayas and Muslim Mindanao. Building the humancapital of the poor is important for enhancing productivity and for empowering them. Local government units in the rural areasare the key in this process, especially if strengthened and equipped to provide adequate and timely agricultural, environmental,and natural resource management extension services. Finally, the report suggested that pursuing sound macroeconomic policieswill not only be important for attaining sustained higher growth but also for helping reduce the vulnerability of the economy andthe poor to another adverse shock. These findings have been integrated into this Country Assistance Strategy.

The 2000 Social and Structural Review pointed out that higher population growth is constraining increases in per-capita incomesand concluded that curbing population growth will make the poverty reduction task much easier. The Philippines has a highfertility rate by Asian standards (3.5), despite its decline in recent years. As a result, population growth (2.1 percent in 2000)remains one of the highest in the region, which puts a higher burden on economic growth to reduce poverty. According to thepopulation projections conducted for the review, if the current trend continues, population will increase to about 95 million in2010 from about 78.6 million in 2000. This has implications for delivery of basic services (food, health, education), especiallymaternal and infant health care and health insurance systems, and on the need to enhance growth of incomes in rural areas,especially in impoverished regions.

a/ This analysis employs consumption-based poverty lines constructed to reflect a basic needs consumption basket-access to a food basketproviding 2,000 calories per person per day valued at consumer prices in each province, plus a basket for nonfood spending. The government'sofficial poverty estimates, which are higher, are based on a more expensive basket of goods.

1.10 The second internal challenge is to build capacity and strengthen institutions and processes atthe LGU level. LGUs have been taking increasing responsibilities in service delivery, projectimplementation, and infrastructure development, yet often lack sufficient capacity to deliver requiredservices, despite the national government's training and technical assistance initiatives. Nor is thereany effective process to link national and LGU-level planning, priority setting, and implementationof poverty alleviation programs and pro-poor services. As the relative importance of nationalgovernment-led activities declines, empowering LGUs and local formal and informal institutionswith appropriate skills (planning, appraisal, procurement, financial management), knowledge andresources (financial and human) will help ensure that the poor benefit from LGU-led activities.

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Medium-Term Plan

1.11 Based on the overarching goal of reducing poverty, the administration's medium-termpolicy agenda, as expressed in its updated Medium-Term Philippine Development Plan (MTPDP,2001-04) is designed along four strategies: (1) macroeconomic stability and equitable growth basedon free enterprise; (2) agriculture and fisheries modernization with social equity; (3) comprehensivehuman development and protecting the vulnerable; and (4) good governance and the rule of law.While working toward the United Nations member countries' Millennium Development Goals (Box1-2) is not specifically mentioned, the MTPDP does implicitly share these objectives. It incorporatesthe government's poverty reduction strategies: (i) asset reform, including agrarian reform and urbanhousing; (ii) human development services, especially basic education, health and nutrition, water andsanitation shelter for the poor; (iii) employment and livelihood opportunities for the poor andstrengthening the capacities of marginalized groups to engage in productive activities; (iv)participation of the poor in governance and institution building and inclusion in policymaking atnational and local levels; and (v) security from violence.

(1) Macroeconomic Stability and Equitable Growth Based on Free Enterprise. TheMTPDP emphasizes the need for accelerated and sustained broad-based growth, as well aspromotion of full, decent, and productive employment to make a significant dent in poverty.To fulfill this broad objective, the government strategies are directed toward: (a) achievingmacroeconomic stability by improving the fiscal stance, maintaining price stability and soundexternal balance, strengthening the banking and capital markets, and promoting corporaterecovery and governance; (b) generating, preserving, and enhancing productive employment;(c) enhancing international competitiveness in services and industry; (d) pursuingdevelopment and increased use of information and communications technology; (e)promoting tourism; and (f) strengthening the government and private sector partnership ininfrastructure development.

(2) Agriculture and Fisheries Modernization with Social Equity. The majority of poorFilipinos still reside in the rural areas and depend on farming and fishing as their mainsources of livelihood. Growth in per-capita rural incomes has been slow and is alsothreatened by a declining natural resource base due to high population pressures and weakresource management of land, forests, water, and coastal fisheries. To increase rural incomesand reduce poverty in a sustainable manner, rural development through agriculture andfisheries modernization, linked with sound natural resource management should beundertaken aggressively. This includes access to secured land tenure, reliable and predictableagricultural and extension services, value-enhancing post-harvest facilities and markets,support systems for improving productivity, infrastructure development, (farm-to-marketroads, irrigation, rural water supply), provision of a well-functioning rural credit andmicrofinance delivery mechanisms, and introduction of community-based natural resourcemanagement practices. Asset distribution reform is seen as an integral component of ruraldevelopment. To accelerate comprehensive rural development, the government intends to: (a)improve the effectiveness of public sector interventions in the rural sector, including servicedelivery and capacity building programs for LGUs; (b) mobilize private sector investment inagriculture and fisheries; (c) encourage value-added technology-based activities inagriculture, fisheries, and natural resources; (d) promote equitable access to productiveresources, particularly land through agrarian reform; and (e) promote sustainablemanagement and use of natural resources by supporting environmentally sound practices.

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Box 1-2 Philippines Progress with respect to Millennium Development Goals (MDGs)

The MDGs as formally endorsed in September 2000 by the member countries of the United Nations, focus ondeveloping countries achieving 7 major goals and targets by 2015 (UN Millennium Declaration, September 18,2000)Y:(i) Eradicate extreme poverty and hunger (halving share of poor andpeople sufferingfrom hunger over 1990)

The Philippines made good progress in reducing the mnmber of poor living under $1/day until 1997, as the share ofthe population living on less than $1/day fell from 19.1 percent in 1990 to 12.1 percent in 1997, but progress hasstagnated since then. If economic growth increases in line with the MTPDP targets, the Philippines is likely to reachthe target by about 2006. However, analysis based on official estimates of national poverty lines (consumption-based) is not so encouraging. The incidence of poverty was reduced from 34 percent in 1991 to 25 percent in 1997but has yet to fall further. The incidence of poverty can still be halved well before 2015, but doing so will necessitatea combination of sustained economic growth of at least 5 percent per year and pro-active efforts to increaseparticipation by the poor, the two pillars of the Bank's CAS.

(ii) Achieve universalprimary education (boys and girls to complete primary schooling)The Philippines has made significant progress at the universal primary education level with a current net primaryschool enrollment ratio of 100 percent. However, it still has a long way to go in terms of improving primaryeducation completion rates (66 percent in SYOO-01). Government's target is to reach 81 percent by SY04-05. TheCAS addresses the issue of drop-outs.

(iii) Promote gender equality and empower women (elininating gender disparities at aUl levels of education)Elementary enrollment is almost equal between boys and girls, secondary enrollment is slightly higher for girls.Functional literacy has been found higher for women.

(iv) Reduce child mortality (by 2/3 over 1990)Reducing infant mortality rate (49 per 1,000 live births in 1998 according to the National Statistical CoordinationBoard data) remains a challenge. Government's target is to bring this number down to 35/1,000 by 2004. HealthSector Reform Agenda (HSRA) includes interventions to achieve this goal and the Bank plans to support this reformprogram.

(v) Improve maternal health (reducing maternal mortality by 3/4)

Maternal mortality declined to an estimated 60/100,000 live births (Department of Health statistics), but not at apace required to meet the MDG target. Moreover, discrepancies among provinces remain large. Government's targetis to reach 40/100,000 by 2004. The Bank will support the government's efforts through the Health Sector ReformProject and family planning interventions.

(vi) Combat HIVIAIDS, malaria and other diseases (reversing the spread of HIVIAIDS and incidence ojmalaria and other major diseases)

The number of confirmed HIV/AIDS cases and rate of increase in number of cases are low. The Bank, jointly withother donors, is monitoring the situation. Tuberculosis is a major issue. The HSRA and the Bank's SocialExpenditure Management projects are providing support in this regard.

(vii) Ensure environmental sustainabiity (reversing loss of environmental resources, halving share of peoplewithout safe drinking water, and improving lives of slum dweUers)

Reducing carbon dioxide emissions and arresting the adverse impacts of a deteriorating natural resource base onproductive assets such as arable lands and fishing grounds are major challenges. A high share of urban poor still donot have access to shelter. Water supply coverage has increased to 77 percent in 1998. Government's target foraccess to safe water is 92 percent in 2004. The Bank's program focuses on water supply through an adaptableprogram loan (APL).

The Country Program Matrix (Annex B9) shows the lik between the strategic objectives and expected outcomes ofthe CAS and those MDGs where significant effort is needed over the next few years.

a/ UNDP has sponsored a detailed analysis on the Philippines' progress with respect to MDGs which is expected to be available shortly.

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(3) Comprehensive Human Development and Protecting the Vulnerable. The MTPDPstresses that achieving and maintaining growth across every sector, region, and grouprequires investment in human capital and targeted social sector programs that reach thecountry's most vulnerable people. First, addressing low quality and limited access toeducation, health services, and housing remains a challenge. Specifically, improving thecohort survival rates in elementary schools and enhancing the health care and housingfinancing systems are some of the key issues in these subsectors. Second, in addition totargeting the poor population, the government is also committed to protecting vulnerablegroups. The 1998 financial crisis revealed the government was not very effective inprotecting these groups through well-placed social welfare, social security, and social safetynet programs. Third, the differences in poverty incidence across regions reflect unbalancedgrowth within the country. LGUs can play a significant role in this area. Finally, thegovernment also realizes that Mindanao, the Philippines' second largest group of islands,already contributing about 18 percent to GDP, holds high prospects for agri-industrialdevelopment. However, the recurrence of armed conflict and the existence of diverse culturespose a major developmental challenge in this region. In the above context, the government'sprogram focuses on: (a) enhancing human development services for education, health,housing, water, and electricity; (b) implementing social protection and assistance programsfor the poorest and vulnerable sectors; (c) reducing regional disparities through regional andurban development; and (d) pursuing sustained peace and development in Mindanao.

(4) Good Governance and the Rule of Law. Governance problems that emerged during1999 and intensified during 2000 had an adverse impact on the economy in terms ofincreasing the perception of corruption in the eyes of local as well as international investors.The government, recognizing the perverse environment that bad governance can create forimplementation of productive pro-poor activities, has made good governance one of the keypillars of its administration. In this context, the MTPDP envisions advancing goodgovernance through the collaborative efforts of government, business, and civil society by:(a) improving service delivery; (b) improving ethical standards in government and society;(c) creating an enabling environment for sustainable private sector-led development; (d)strengthening public and private sector institutions, and engaging civil society; (e) improvingpeace and order, law enforcement, and administration of justice; and (f) cooperating ininternational collective actions.

1.12 The Bank as well as other ODA partners, supports the MTPDP's focus on equitablemarket-oriented growth, agriculture, human resources and protection for the vulnerable, andgovernance but believes that it could be sharpened by indicating priorities and closely costing outpublic investment projects. The Medium-Term Public Investment Program (MTPIP), whichcomplements the MTPDP and costs out needed investment expenditures, also needs to be assigned apriority within the context of available financing. If everything planned could be achieved at thesame time, poverty would quickly contract. But budget constraints make it unlikely that everythingcan be done at once. This suggests two areas in which the MTPDP could be strengthened: first,elaborating on plans to strengthen revenue mobilization and increase government revenue as a shareof GNP, as this is critical for investing in development programs; and second, clearly indicatingwhich of the many subparts of the MTPDP are the most important or critical for attaining the desiredoutcome of renewed rapid and sustained poverty reduction. Finally, the challenge of integratingnational and subnational planning remains. However, government, in its 2001 Sectoral Efficiency

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and Effectiveness Review-SEER) has taken important steps to evaluate the effectiveness ofexpenditures in the various sectors in an attempt to link sectoral inputs to outcomes described in theMTPDP.

D. EXTERNAL ENVIRONMENT, COUNTRY RISKS, AND ECONOMIC PROSPECTS

1.13 Political vulnerability is lower now than it was before the change in administration, buteconomic vulnerability persists because of both external and internal risks. Concurrent slowgrowth in the United States, Japan, and Europe in 2001 constrained exports and contributed to slowergrowth in the Philippines. Continuation of this unfavorable external environment would delay thePhilippine export recovery. Recently renewed growth in the United States provides hope for an earlyrecovery, but a risk of "double dip " recession persists, with the associated difficulties it would posefor exporters. The Philippines is one of the Asia cotntries most exposed to the U.S. economy and isheavily dependent on electronics exports. Its tourisrn industry is likely to continue to suffer from thenegative impact of heightened security concerns both internationally and domestically. Earliergrowth of worker remittances has also been interrupted by the adverse global economicdevelopments of 2001, although they still amount to about $5.5 billion and are expected to expandagain as global economic growth recovers. Through all this, the Philippines has managed to maintainan external account surplus since 1998, though sharply reduced in 2001. Looking ahead, as exportgrowth returns, import growth should also rise due to a combination of the high import content ofexports, consumer demand, and renewed investment, thus further compressing the current accountsurplus. But renewed rapid export growth depends in part on renewed foreign investment, and henceon the success of efforts to rebuild foreign investors' confidence and to strengthen thecompetitiveness of the Philippines as an attractive investment destination. This points to theimportance of ongoing efforts to improve governance and to alleviate infrastructure constraints.

1.14 Although the Philippines high external debt increases its vulnerability to external shocks,6 thedebt-service ratio remained comfortable at about 12 percent of exports of goods and services in 2000.However, this ratio rose sharply in 2001 to 17 percent, as debt-service obligations rose and exportearnings declined. Renewed export growth will be important to keep this debt-service ratio fromfurther deteriorating and to provide the foreign exchange needed to finance renewed imports ofinvestment goods and the continued rise in consumer imports. The high public debt7 results in a largedebt-service burden, increases vulnerability to extemal as well as domestic shocks, and constrains thescope for counter-cyclical fiscal policy in response ito such shocks. Significant contingent liabilitiesand declining tax revenue in recent years heighten this risk. Addressing the decline in publicrevenues and improving the management of fiscal risks are central parts of the government's agenda.Finally, structural weaknesses, persistent high stress levels in the banking and corporate sectors, andcontinued concerns about public governance and accountability may keep private external financingcosts high-although those costs have declined since late 2001. Large debt-service obligations willmaintain the need for significant external financing in the medium-term.

1.15 The adverse impact of external developments on growth has also made tacklingfundamental policy issues more difficult. These issues include containing the fiscal deficit andpublic debt, reviving the banking and corporate sectors, and mobilizing long-term savings.Domestically, the main risks are delays in undertaking key reform measures, especially in the public

6 The external debt to GDP ratio increased from 53 percent at end-1996 to 72 percent at end-2000, largely due to exchangerate effects.7Total nonfinancial public sector debt as a share of GNP rose from 72 percent in end-1996 to over 90 percent at end-2000due to the combined effect of peso depreciation and new public debt.

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sector, effectively implementing the recently passed laws (Power Sector Restructuring Bill, Anti-Money Laundering Act), and pressing ahead with further structural reforms. Bad weather, naturaldisasters, and the security situation in southern Philippines could compromise these tasks. Theworsening fiscal deficit up to 2000 and public debt have curtailed public expenditures on otherfundamentally important services and programs as well (e.g., education and health services;programs for biodiversity conservation, protection and management of watersheds, maintenance ofnationally managed irrigation systems, protection of municipal fishing grounds; and delivery ofextension services in agriculture and natural resources).

1. 16 Steps to manage internal risks will be crucialfor long-term stability and investorconfidence. These steps include implementation of recently passed legislation (e.g., power sectorreform and anti-money laundering), effective visible measures to reduce corruption, sustainingrenewed trust in economic management by consistently meeting targets for limiting the fiscal deficit,improving revenue mobilization, managing fiscal risk and public expenditure at both the national andlocal levels, and improving the country's security situation.

1.17 GDP growth in 2002 is projected at around 4 percent. The MTPDP projects averagegrowth of more than 5 percent a year in 2001-05. Growth on this order can be achieved only ifsound, confidence-boosting economic measures are undertaken to renew investment and improveproductivity and if the global downturn of 2001 is short-lived. The major risks to the success of thePhilippines' renewed efforts to reduce poverty are slippages in the implementation of policy reforms,inadequate progress in addressing law-and-order problems and achieving peace, and exogenousfactors such as El Niho or other natural disasters, a prolonged downturn in world growth, orincreased risk aversion vis-a-vis emerging economies in global capital markets. Hence, thegovernment's continued commitment will be critical to improving governance, developinginfrastructure and human resources, seeing through structural reforms, for example, in the publicsector, as well as to bringing peace and order to Mindanao. On the external side, exports are assumedto bounce back over the medium-term and once again play a vital role in economic growth. But, asnoted, this depends on the success of the export sector in attracting new investments and remainingcompetitive in the increasingly integrated export market.

1.18 The outlookfor the Philippines has improved over the pastyear. The new administrationdemonstrated its resolve by undertaking crucial reform measures and by keeping the budget deficitfor 2001 under control, a first milestone toward its commitment to move toward fiscal consolidation.Although external debt has increased, the maturity profile of outstanding debt is still favorable, withmedium- and long-term debt share of about 89 percent of the total debt and weighted averagematurity of more than 16 years. The Philippines' foreign reserve position also remains sound, withgross international reserves slightly more than short-term debt plus amortization due within 12months on medium- and long-term debt. Moreover, improved investor perceptions since late 2001have reduced lending spreads and increased Philippine access in the global bond market.Continuation of this trend would help the country mobilize private capital to meet its externalfinancing needs.

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2. PROGRESS WITH RESPECT TO THE 1999 COUNTRY ASSISTANCESTRATEGY

2.1 Monitoring CAS implementation and progress toward its objectives is an important featureof the 1999 CAS, which was designed as a self-evaluation pilot. Its framework includes both self-evaluation features (indicators in program matrix., portfolio indicators, provisions for monitoring ofbusiness processes) and emphasis on country-performance monitoring (indicators in program matrixand provisions for enhanced monitoring of progress toward comprehensive development). The CASwas also designed as a "living document," with provisions for fine-tuning, in consultation withpartners. In this regard, the Bank carried out a comprehensive CAS mid-term review with thePhilippine government in October-November 2000 that resulted in some adjustments in Bank-supported activities for the remaining CAS periocl. In developing this CAS, the Bank is drawing onits own findings regarding progress in implementing the 1999 CAS and reaching its objectives, aswell as those of independent evaluations, both in the Bank (Quality Assurance Group and OperationsEvaluation Department) and through a client survey.

A. OwN ASSESSMENT

2.2 The Bank's overallfinding is that good progress was made in putting in place the keyelements of the 1999 CAS, particularly the strongerfocus on poverty reduction, governance-improving initiatives, long-term development, partnership, and participation. Applying a country-driven approach, the Bank increased selectivity and focus on a few key long-term issues throughAdaptable Program Loans (APLs, three ongoing); increased its outreach, external communications,and transparency in Bank-financed operations; made progress toward mainstreaming civil societyand beneficiary participation in all assistance activities (Annex C); worked in partnership with others,including ODA partners, private sector and civil society (Box 2-1), increased knowledge-basedservices and capacity-building initiatives (Annex D), and improved monitoring and evaluation ofoperations.

2.3 At the same time, the country's economic performance and some CAS outputs andoutcomes were less than projected and less than their potential in 1999-2001. During the period ofdeteriorating investor confidence and growing deterioration in governance in 1999-2000,implementation of all development activities suffered including the Bank's portfolio, and a recoveryunder the new administration is still underway. W'ith implementation of policy reforms and newinvestments behind original plans, many of the intended development outcomes of the 1999 CAS andthe government's earlier MTPDP are in danger of'not being met by the targeted dates. This includesthe primary objective of poverty reduction (see above), as well as economic growth and investment,employment, and sectoral objectives, for example, regarding health and education services, agrarianreform, or rural electrification (Annex E).

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Box 2-1 Working in Partnership with Others

The Bank has scaled up its partnership and formed strategic alliances with partners in selected areas to enhanceimpact:* With government. Government ownership of the Consultative Group (CG) process was enhanced by holding

the 2000 and 2002 CG meetings in the Philippines, chaired by the government and co-chaired by the Bank.With Bank encouragement, the government also chaired subsequent meetings organized by the Bank with thedonor community, establishing this partnership trend for future CGs and aid coordination events and meetings.

* With other ODA partners. The Bank has intensified aid coordination meetings with other officialdevelopment assistance (ODA) partners and forged several new partnerships such as with the AsianDevelopment Bank (ADB) and Japan on portfolio review, with the International Monetary Fund on a jointFinancial Sector Assessment Program, with ADB on joint programming discussions and the PublicExpenditure, Procurement and Financial Management Review (PEPFMR), and with five donor agencies onanticorruption. The Bank is also leveraging its resources through strategic partnerships on particular programs(e.g., the Agrarian Reform Communities Development Program with financing from more than a dozen ODApartners.)

* With civil society. More than 30 major meetings and workshops took place in FY00 with nongovernmentalorganizations (NGOs) for consultations on the Bank's CAS implementation, projects and sector studies.Partnership with NGOs was also advanced by implementing the Small Grants Program, sponsoring a winningNGO entry at the Development Marketplace involving NGOs in projects and providing grant support to variousNGO-led initiatives (e.g., a microfinance development project in Mindanao).

* With the private sector. A joint World Bank Group effort is being pursued toward common objectives forprivate sector development. The Bank holds regular consultation with private firms and financial institutions onbusiness environment issues. Together with the World Bank Institute and the Institute of Corporate Directors ofthe Philippines, it has developed and delivered training programs and seminars to company directors oncorporate governance.

* With Government, Civil Society, Business Community, and the Media. The Bank sponsored a majorPhilippine Civil Society-Govermnent-Business Conference in early 2000 to promote Partnerships forGovernance and Development. It was attended by more than 400 people from academia, the donor community,the media, business, NGOs, and labor groups, and all three branches of govermnent. Addressed by PresidentJames D. Wolfensohn, the conference helped to position the Bank as a champion of poverty reduction and goodgovernance. A Consortium Agreement was signed among the Bank, Govermnent, Civil Society, and Businessto develop and implement an Out-of-School Youth Development Program, with 19 subprojects now approvedand launched. Through an Asia-Europe Meeting grant and in partnership with the Philippine Center forInvestigative Journalism, journalists and mass communication teachers were given training on investigativejournalism skills to help promote good governance and transparency.

2.4 Over the past three years, the Philippine government largely used Bank services asforeseen in the CAS, but actual levels of resource transfer were much lower than expected (Table2-1). The Philippine portfolio was streamlined, its size reduced by about one third over the past threeyears. Regular, thorough portfolio reviews were undertaken jointly with both government and theother two key ODA partners (the Asian Development Bank [ADB] and Japan). It has also assessedthe monitoring and evaluation arrangements of the portfolio and piloted realignment of these systemsin individual projects in conjunction with the government. A pilot for development of benchmarkingperformance indicators for the rural sector is being implemented under the sponsorship of the Bankand the National Economic and Development Authority. With all these efforts, several portfolioperformance indicators improved relative to the pre-CAS period. However, due to a growing backlogof undisbursed funds (only in part due to savings) and realization of absorptive capacity constraints,the government decided to cancel some partial loan amounts, and constrain new lending. As a result,the number and volume of operations were lower than anticipated.

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2.5 Nonlending activities, including knowledge sharing (e.g., through the Global DistanceLearning Network) and technical assistance for capacity building, have exceededplans, and Bankfunds have been effectively leveraged with trustfunds (Table 2-1). Trust funds play an increasinglyimportant role in knowledge sharing and technical assistance and have covered activities in areassuch as post-conflict assistance for Mindanao, public and corporate governance, financialmanagement and performance measurement and management, out-of-school youth, community-driven development, innovative approaches to agrarian reform, capacity building of rural NGOs,environmental management, urban poverty, and microfinance projects. Among these trust funds, theJapan-funded Policy and Human Resource Development trust fund has continued to finance priorityproject preparation activities. As a response to the EIast Asian financial crisis in 1997, the Asia-Europe Meeting (ASEM) trust fund facility was launched in 1998 to support activities that respondedto mitigating the social impact of the crisis. This facility has been crucial for initiating criticalreforms in the social, financial and corporate sector. Also, the recent launching of the Japan SocialDevelopment Fund (JSDF) grant facility has provided a new avenue for involving NGOs and civilsociety in implementing pro-poor activities that are expected to have the greatest impact on thecountry's poorest and most vulnerable population. But even these "free standing" trust funds(supporting technical assistance and capacity-building activities rather than project preparation) havenot disbursed as quickly as planned, and some balances were cancelled for a variety of reasons,including the earlier administration's lack of commitment to proposed reform measures andinadequate information of some implementing agencies regarding the Bank's policies andprocedures.

Table 2-1 Lending, Nonlending Activities, and Portfolio Performance

Lending _______

FYOO FY01 FYV02 TOTAL___________________ (3 years)

Expected number of operations. 4-5 4-5 4-5 12-15Actual number of operations/current program 3 2 3 8Expected volume (base case) $300-500 million $300-500 million $400-500 million $1.0-1.5 billionActual volume, current program $278 million = $65 million $135 million $478 million

Nonlending activities _FYOO FY01 FY02 TOTAL

(3 years)

Expected number of studies 3-4 3-4 3-4 9-12Actual/programmed number of studies 6 2 4 12Informal papers - 3 6 3 12Grants mobilized for technical assistance and $2.24 million. 4 4 $10 millioncapacity building a _Portfolio indicators

FY00 FY01 FY02 (03/31/02)Number of projects 25 24 25 n.a.Net commitments $1.8 billion $1.4 billion $1.4 billion n.a.Projects at risk 16%(4) 13% (3) 28% (7) n.a.Commitments at risk $617 million $128 million $338 million n.a.

. (33%) (9%) (24%)

Problem projects 4 3 5 n.a.Disbursement ratio 17.3% 11.9% 9.5% n.a.n.a. not applicable.a. Global Environmental Facility, Policy and Human Resources Development Fund, Asia-Europe Meeting, Institutional DevelopmentFund, Japan Social Development Fund.

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2.6 International Finance Corporation (IFC) investments in the Philippines have been on anupward trendfor the pastfiveyears. IFC investment approvals amounted to $126 million in FY01,up from $80 million in FY00. IFC's held portfolio in the Philippines is about $717 million, $393million of it on IFC's own account ($295 million loans and $98 million equity and quasi-equity), and$325 million on participants' account. The portfolio covers 29 projects, especially in the powersector where IFC had earlier supported a number of projects in infrastructure (e.g., transport) and inthe financial sector, including a venture capital fund, leasing services, and trade finance and risk-sharing facilities. In FY02, IFC expects to undertake investments worth between $120 million and$140 million on its own account.

2.7 The Philippines is the largest exposure in Asia for the Multilateral Investment GuaranteeAgency (MIGA), representing about 3 percent of the agency's gross exposure at $130.5 million and 4percent of its net exposure at $121.0 million (as of February 28, 2002). MIGA's current portfolioconsists of four active contracts in the financial and infrastructure sectors. In FY01, MIGA providedguarantees totaling $87 million to the Manila North Tollway Corporation sponsors and lenders. Thisproject involves widening and rehabilitating 82 kilometers of the Manila North Expressway,Southeast Asia's oldest toll road, in collaboration with IFC and ADB. Since January 2000, MIGAhas also been providing technical assistance to the Board of Investment (the lead agency forinvestment promotion), under the Miyazawa initiative. It has also assisted other key national andregional entities (Bases Conversion Development Authority, Subic Bay Metropolitan Authority,Clark Development Corporation, Philippine Export Zone Authority; regional investment promotionentities, and other units of the Department of Trade and Industry) in developing the capacity topromote the Philippines as a location for foreign direct investment and to adopt the techniquesneeded to compete effectively regionally and globally.

B. FINDINGS OF THE QUALITY ASSURANCE GROUP AND THE OPERATIONS EVALUATIONDEPARTMENT

2.8 The 1999 CAS, prepared right after an Operations Evaluation Department CountryAssistance Review, 8 incorporated its recommendations-specifically, sharpened focus on poverty, anew rural strategy and program, more emphasis on the financial sector, inclusion of judicial reform,and enhanced partnership with ODA partners and civil society.

2.9 Since then, trend analysis of quality indicators over the last three fiscal years by theOperations Evaluation Department and the Quality Assurance Group indicates that the quality ofPhilippine "products" has been mostly at par with or better than the Bank's averages (Annex B2),especially regarding quality at entry, Bank supervision performance, and quality of economic andsector work. However, these reviews repeatedly brought out a number of issues, in particular, (i) theneed to assess institutional capacity realistically before project start-up and to avoid complex andoverly ambitious projects and those out of sync with existing laws or institutional structures; (ii) theimportance of quality at entry; (iii) the need for better financial management, procurement, andlogistics capacity and for outcome-focused monitoring and evaluation especially at LGU level; and(iv) the need for better coordination between LGUs and national agencies.

sWorld Bank. Philippines: Country Assistance Review, Report No.17417 Washington: (World Bank, OperationsEvaluation Department, March 2, 1998).

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C. CLIENT AND COUNTRY TEAM SURVEYS

2.10 As planned in the 1999 CAS, the Bank carried out a new client survey in 2001complemented by interviews with a few selected individuals who have been involved in Bank-assisted activities for at least four years. The Bankc has complemented this for the first time by acountry team survey in an effort to uncover any differences in the Bank's and its clients' perceptionsof the Bank's services.

2.11 The client survey was administered to the Bank's broad clientele in the Philippines, includingrepresentatives of government oversight and implementing agencies and nongovernmentalrepresentatives (NGOs, private sector, donor community, and other). Survey results showed thatthese clients have a relatively positive view of their interactions with Bank staff in terms ofreliability, honesty, technical competence, and clarity of communications. The Bank's partnershipwith government in formulating and implementing the assistance strategy was seen as particularlyeffective. In addition, stakeholders reported that the Bank collaborated well with government, civilsociety, and the private sector. However, the survey also identified a few critical areas where theBank was seen as less effective than in other areas: achieving poverty reduction, building capacity atcommunity level, and providing practical recommrrendations through nonlending services. The Bankcould also do more in terms of helping government obtain synergy between private and publicinvestments. Finally, the qualitative indepth interviews show that the Bank is improving in terms ofthe way it communicates with stakeholders and that its decentralization to the field office is viewedquite positively by stakeholders and partners becatuse it has eased access.,

2.12 The country team survey showed that the Bank team's perception was accurate with regard tothe evaluation of some aspects of its support. However, the client survey made the team more awareof some areas of limited effectiveness. These areals are now being addressed forcefully in this CAS.

D. KEY LESSONS EMERGING FOR FUTURE ASSISTANCE

2.13 The Bank draws the following conclusions from the past three years' experience:

* The Bank effectively changed processes and demonstrated that it is a partner of the country, aswell as the government, as its client.

* The Bank helped increase country ownership of the development assistance program (throughthe participatory CAS process, joint prograrrmming exercises, joint ODA portfolio reviews, andcountry chairmanship of the Consultative Group).

* The focus of the Bank's work was relevant and appreciated by the client who continues to seekthe Bank's services.

* Progress is noteworthy in many areas, but achievements in terms of development outcomes fellwell short of the Bank's expectations in many sectors. The Bank was too ambitious and notrealistic enough regarding the difference it can make given other constraints. It also needs tocontinue to improve ways of monitoring and evaluating results and measuring developmentoutcomes.

* The Bank improved several portfolio performance indicators, but at the cost of cancellations,and was overly optimistic regarding the Philippines' absorptive and institutional capacity.

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* The Bank increased its portfolio management efforts substantially, but, in hindsight, it needs togive further attention to implementation issues.

2.14 The Bank sees thefollowing key lessons emergingfor itsfuture activities:

* Reduce expectations for a high volume of new lending for regular investment projects in thenear future and avoid triggering increases in public expenditures beyond a manageable level.

* Reduce project complexity and concentrate on delivery mechanisms that are practical andeffective on the ground.

* Support community-driven poverty reduction programs that give voice to the needs of the poor,understand how development decisions are made in local communities, and put opportunitiesand resources into the hands of the poor.

* Build up management and institutional capacity to carry programs through, focusing more onproject management (by the client), including financial management, procurement, andmonitoring and evaluation.

* Emphasize LGU capacity building and sensitivity to the local election cycle for LGU projects.

* Focus more on the complexity of lending at the LGU level, including expenditure management,development planning and governance, and capacity building of both provincial and municipalLGUs in financial and technical areas.

* Emphasize high quality at entry for all operations, including institutional readiness.

* Strengthen outcome-focused monitoring and evaluation in Bank-supported operations andsupport government efforts to move toward performance-based systems for monitoring andevaluation and benchmarking in central and line agencies, LGUs, and civil society.

* Base the Bank's future support to private sector development on an in-depth assessment ofareas for possible effective support by IBRD, IFC and MIGA.

3. BANK ROLE AND STRATEGIC OBJECTIVES IN THE PHILIPPINES FORFY2003-05

A. THE COUNTRY ASSISTANCE STRATEGY PROCESS

3.1 The process followed in preparing this CAS built on earlier consultations, both duringpreparation and implementation of the 1999 CAS. It included several multistakeholder consultationmeetings on various aspects of the proposed strategy-both sectoral and thematic-to bring out theviews of both government (national and local) and nongovernment participants (private sector, civilsociety, and labor). It also included a retreat between the country team and government on theproposed strategic direction. The draft CAS was reviewed with government and will be publishedafter Board discussion (see Annex G for details on consultation process).

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3.2 The consultations brought out that poor governance, weak implementation capacity, andrelated issues in project implementation were hindering development. On the macroeconomic side,fiscal and financial sector weaknesses were key areas of concern. High costs of doing business,stemming from inadequate infrastructure, high transport costs, and difficult access to microfinancewere affecting private sector development. Capacity building for LGUs, participation of civil societyand local communities, synchronization of services from different levels of government, and need forcloser attention to cross-cutting issues of population management, gender issues, governance, andempowerment of the poor, were some of the key issues identified in consultations on human andurban development. A specific consultation meeting on good and effective governance focused onthe areas of local governance, public sector reforrn, procurement, financial management, and thejudiciary and pointed to the need for'clear, less fragmented rules and regulations, participation ofstakeholders, and improving systems of oversight, monitoring, evaluation, and accountability.

B. BANK STRATEGY

3.3 The Bank's objective for the next three years will be to assist the Philippine government toreestablish a pattern of rapid and sustained poverty reduction. This will require actions both tospeed up growth and to empower the poor to participate more fully in development. To helpachieve more rapid growth, the Bank plans to help the Philippine government ensure that the keybuilding blocks for sustained growth-increased investment and productivity in both the private andpublic sectors-are firmly in place. This involves supporting the government's efforts to (i)strengthen fiscal policy by improving the tax effort and public expenditure management and bycontaining contingent liabilities; (ii) address banking vulnerabilities, and deepen the capital market;(iii) enhance competitiveness through trade and regulatory reforms, especially in agriculture,services, and small and medium enterprise development; (iv) raise productivity by alleviating keyinfrastructure bottlenecks; and (v) improve governance in both the public and corporate sectors.

3.4 To support national efforts to empower the poor to participate more fully in development, theBank's assistance will focus on (a) improving investments in human resources (education and health)and ensuring access by the poor; (b) the efficient provision of other basic services such as shelter,clean water and adequate sanitation, and rural infrastructure; (c) increasing access to productiveassets such as land, technical extension services, and credit; (d) strengthening the organizational andfinancial capacity of the poor so they can act for themselves; and (e) improving programs to protectthe environment and natural resource base so thatl these vital resources can be sustained over time.Strengthening the sustainability of resource management and improvements in governance will beimportant for these two major pillars of the Bank's assistance program.9

3.5 This two-part strategy links directly with the four-part framework of the Philippinegovernment's updated MTPDP-namely, macro economic stability and equitable growth,environmentally sustainable rural development, comprehensive human development, and goodand effective governance (Table 3-1). To facilitate effective partnership with government, thecomponents of this assistance program will hereafter be discussed throughout this CAS in terms ofthese four parts of the MTPDP. Annex B9 provides a CAS program matrix of the Bank's proposedstrategies in each of the four areas. But the fundamental strategy remains one of increased growthand increased participation of stakeholders in development to speed up poverty reduction.

9 See Annex F for alignment of the Bank Group's strategy vith corporate priorities.

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Table 3-1 Linking the Bank's Assistance Strategy with the Medium-Term Philippine Development Plan

MTPDP theme Achieve more rapid sustained growth Empower the poor to Increase their participation indevelopment

I. Macroeconomic * Strengthen fiscal policy by improving * Increase access to productive assets such as land,stability and tax effort and containing contingent technical extension services and creditequitable growth liabilities * Increase assistance to LGUs to empower andbased on free * Deal with banking sector problems and capacitate them to effectively and adequately helpenterprise. deepen capital markets their constituents-urban and rural poor

* Improve the investment climate and communitiesenhance competitiveness, especially inagriculture, services and small andmedium enterprises

* Alleviate infrastructure bottlenecks

2. Environmentally * Enhance agriculture sector * Implement community-based rural development andsustainable rural competitiveness and productivity natural resource management approachesdevelopment with * Support a decentralized, devolved, and * Focus on the poor in development program andsocial equity. deregulated system for providing target poorer regions, especially Mindanao and the

agriculture and natural resource Autonomous Region in Muslim Mindanaomanagement services to ensureaccountability and sustainability ofproject assistance

* Protect the environment and natural * Ensure the participation, benefits, and ownership ofresource base local stakeholders in and management of the

environment and natural resources* Enhance LGU technical implementation * Scale up the Land Administration and Management

capabilities at provincial, municipal and Program and rural credit and expand microcredit tobarangay levels encourage rural investment, especially by the poor

3. Comprehensive * Improve human resources to strengthen * Improve investments in human resources (educationhuman development workplace skills and international and health) and ensure access by the poorthrough access to competitiveness * Provide other basic services efficiently (e.g., shelter,basic social services. water supply, and sanitation) and ensure their

environmental sustainability

4. Good and effective * Improve governance in both the public * Improve governance to strengthen service deliverygovernance and private sectors to help rebuild * Improve local governance through capacity

investor confidence and improve enhancement of local institutionsinvestment efficiency

* Increase confidence in the rule of law * Improve access to justice and confidence in theand in the judiciary in particular, judiciary.through judicial reforms

3.6 The strategy builds on the directions set in the last CAS, taking an integrated approach todevelopment that balances macroeconomic with structural, human, and physical developmentneeds, andfollows the four principles of the Comprehensive Development Framework. First, along-term vision remains the basis for this strategy, building on the government's medium-term planwhich, in turn, describes the actions needed to achieve the country's long-term goals as expressed inits Plan 21 (para. 1.6). The Bank's strategy incorporates a programmatic approach, both throughAdaptable Program Loans in selected subsectors, a series of adjustment loans in support of structural

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change, and a more thematic approach to nonlending services. Second, country ownership is strong,not only within government but also within civil society organizations, which both government andthe Bank have consulted extensively-government as part of its institutionalized broad consultationprocess in the preparation of its plan, and the Bank during both implementation of the 1999 CAS andthe preparation of this one. The Philippine government has increasingly taken more ownership,particularly in the aid coordination process, through chairmanship of the Consultative Group with theBank as co-chairman. Third, strategic partnerships among stakeholders, including civil societyorganizations, the private sector, and donors, have -developed over recent years and are expected togrow stronger under government leadership. (Details on partnerships are described in para. 3.68.)Fourth, the CAS focuses on accountability for results in two ways: it supports strengthening thegovernment's focus on results as a tool for improved governance (paras. 3.47-3.48) and it links theBank's assistance to the government's strategy and relevant targets (including MillenniumDevelopment Goals) where targets are quantified (para. 3.77 and CAS Program Matrix in AnnexB9).

C. BANK'S ASSISTANCE PROGRAM

1. Macroeconomic Stability and Equitable Growth Based on Free Enterprise

3.7 This CAS continues to support the government's policy and institutional reform agendaand investments to promote equitable growth. Several current diagnostic reports point to thefollowing key development challenges in this regard:10

3.8 (a) Macroeconomic stability and soundfiscal management. The Bank's assistance willinclude a stronger focus on several key aspects of public finance and public sector management: (i)increasing tax revenues; (ii) containing contingent liabilities arising from government guarantees inthe context of infrastructure projects, pension obligations and the banking system; (iii) improvingpublic expenditure and financial management; (iv) reducing debt servicing as a share of governmentrevenue to increase fiscal flexibility; (v) civil service reform to professionalize it and improve servicedelivery at both local and national government levels; and (vi) strengthening subnational level budgetplanning and its link with national priorities, procurement and financial management capabilities, andmonitoring. The national government's very limited discretionary spending constrains its ability tofund key social and economic services. The Bank plans to support the government's efforts toaddress these problems with a combination of adjustment lending and nonlending services, includingcapacity building through strategic use of the Institutional Development Fund. In FY03, this capacitybuilding effort will focus first on the Bureau of Internal Revenue and on the implementation ofprocurement reforms and then on broad civil service reform. The IMF has been providing advice andtechnical assistance in areas such as tax policy, monetary policy, and exchange rate management andis expected to continue to do so.

3.9 (b) Financial resiliency. In the banking sector, legal constraints limit Bangko SentralPilipinas' regulatory and enforcement authority in key areas. Ownership of the bulk of banking assetsby a few corporate conglomerates may constrain lending to small and unconnected enterprises, andthe predominance of large interconnected corporations in banking may limit the effectiveness ofregulatory supervision. On the legal side, the Anti-Money Laundering Act was approved inSeptember 2001 and Implementing Rules and Regulations have since been approved. In March 2002,

° Public Expenditure, Procurement and Financial Management Review and the Financial Sector Assessment Program,both in preparation; Philippines Development Policy Review, 2002.

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the Lower House approved the Special Purpose Asset Vehicle (SPAV) act of 2002, so efforts areunderway to facilitate the disposition and reduction of nonperforming loans. In this, the Philippineshas eschewed a centralized public asset management company model, preferring an approach thatauthorizes the creation of SPAVs, which will enjoy certain tax exemptions for a limited period toaddress the nonperforming asset problem of the financial sector and help in the rehabilitation ofdistressed businesses. The Bank's focus will be on assisting the authorities in developing a consensuson the need for further legislative reform that would (i) facilitate rapid intervention in and resolutionof distressed banks; (ii) provide stronger protection to bank regulators from litigation; (iii) promoteownership reforms to stimulate competition; (iv) address weaknesses in the legal enforceability ofcontracts; (v) further develop the effectiveness of consolidated supervision; and (vi) help ensure theeffective implementation of the Anti-Money Laundering Act. Enhanced management of thecontractual savings system to limit contingent liabilities and strengthen the system's viability are alsoof high priority. The IBRD plans a combination of program lending, advisory work, and technicalassistance to help the Philippine government address these issues together with other developmentpartners. To make the banking sector more resilient, IFC would assist in strengthening the capitalbase and operational capacity of financial institutions, in consolidating the banking system andbuilding of specialized institutions to reduce nonperforming loans.

3.10 The government is promoting the passage of capital market bills to accelerate development ofthe domestic capital market. These include the Securitization Act of 2002 providing the regulatoryand tax framework governing the issuance and sale of asset backed securities, the Personal EquityRetirement Account Act of 2002 providing tax incentives for voluntary retirement savings options,and the Revised Investment Company Act, which will provide a more conducive environment to thedevelopment of the Philippine mutual fund industry, while at the same time addressing the concernsabout the adequacy of investor protection. IFC's strategy for the nonbank financial sector focuses on(i) developing the local currency bond market; (ii) expanding the pool of contractual savings formobilization of long-term financing; and (iii) reforming the housing finance and social securitysystem to make them more efficient vehicles for capital market development and domestic long-termsavings mobilization.

3.11 (c) Investment climate and international competitiveness. IBRD and IFC have jointlyprepared a Private Sector Strategy (Annex H) built around three themes:

(i) Support government and the private sector to improve the business environment. Thisincludes assisting the private sector in the development of a national corporate governanceaction program for the corporate, banking, and securities market sectors; capacity upgradingin the judicial sector, especially regarding insolvency law and related commercial issues;eliminating investment impediments in the trade regime, competition laws, and businessregulations at LGU level; and leveling the playing field for small and medium enterprises.

(ii) Support efforts to increase domestic resource mobilization and availability of long-termcredit. This includes support and capacity building to strengthen the framework for financialmarket regulation; support for microfinance institutions; support to expand the role ofnonbank financial and contractual savings institutions; and direct investment support throughuse of new financial instruments (such as asset securitization, mortgage financing, andguarantee instruments).

(iii) Support infrastructure deepening through enhanced private sector participation, includingfinancial and capacity-building support for LGUs. This includes completing the regulatory

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reform agenda especially at LGU level, using concepts like output-based aid and competitivebidding for long-term maintenance contracts and innovative IFC investments.

3.12 The Bank will provide policy analysis and technical assistance in improving the businessclimate, financial market development, and framework for enhancing private participation ininfrastructure. IBRD investment projects will focus on sectoral policy reforms that increase privateinvestments in rural areas and in infrastructure. To enhance competition and growth of small andmedium enterprise, an important priority is the rernoval of hurdles to accessing finance, informationand technology, and skills needed to compete with the large firms dominating the economy. Towardthis end, IFC has been focusing on investing in intermediaries specialized in lending to small andmedium enterprises, on the establishment of ventures to provide small and medium enterprises withquick and affordable access to internet and e-commerce services, and on investing more outside theManila area, especially in poorer regions.

3.13 With multiple national and subnational institutions and organizations, the Board ofInvestment and other key agencies have expressed interest in developing a coordinated approach.This is consistent with the government's strategy as outlined in the MTPDP. MIGA and the ForeignInvestment Advisory Service are prepared to provide assistance to the investment board and otherorganizations in defining and implementing a coordinated strategy for foreign direct investment inthe Philippines, including possible strengthening of the strategic and operational coordinationbetween the various investment promotion agencies, provided that funding is available.

3.14 (d) Infrastructure improvements. IBRD lending in infrastructure would remain highlyselective, focusing on the rural power sector, roads subsector, rural infrastructure such as irrigation,marketing infrastructure, and water and sanitation facilities. IFC's approach is to finance projectswith a high demonstration-effect potential, whose success would help reduce investor perceptions ofrisk in the sector.

(i) The key challenges to address in the power sector are the government's high level ofcontingent liabilities on one side and inadequate rural electrification on the other. The Bankproposes to continue its engagement in the dialogue on power sector restructuring andprivatization of the National Power Corporation, together with other ODA partners, withADB taking the lead in public lending. IBRD lending and technical assistance will focus onthe rural power sector. IFC had been active in financing pioneering power projects underbuild-operate-transfer schemes.

(ii) In the transport sector, the key challenges are persistent bottlenecks and high transport costs,especially for shipping, which inhibit economic growth. Road upgrading and rehabilitationand improved maintenance are urgently needed and will continue to command the largestshare of Bank assistance in the sector. The Bank will focus on national roads (as part of anongoing Adaptable Program Loan). Farm-to-market roads are managed at the LGU level,where other ODA partners are more involved, but small investments are included in Bank-supported rural development projects. The Bank's planned involvement in transport wouldnot extend beyond the roads subsector and analytical work on shipping costs, unlessgovernment accelerates reforms in the other subsectors such as ports and railways. IFC hasrecently been involved in toll roads (Manila Tollways project involving expansion,rehabilitation, and maintenance of the North Luzon Expressway) and airports (construction ofa new passenger terminal at Manila airport).

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(iii) In the water and sanitation sector, IBRD will continue to support LGUs in less urbanizedareas, which are beginning to access loans for water supply investments, with demonstratedwillingness to pay by residents and active private sector responses to bids solicited by LGUs.The focus is on improving water utilities' efficiency and accountability to consumers;deepening private sector participation through new approaches such as output-based aid; andleveraging local resources for private financial flows into the sector. IBRD will continue andpossibly expand its support to improve sewerage and sanitation management in MetropolitanManila. It will also continue the dialogue on corporate restructuring of Local Water UtilitiesAdministration and water sector regulation. IFC's recent involvement in water supply hasincluded advisory assistance to the Metropolitan Waterworks and Sewerage Systemprivatization. IFC is currently looking at a project to finance the Manila Water Company'scapital investment program.

(iv) In view of the Philippines' high urbanization, with growth sectors concentrated around urbanareas, the efficiency of urban services and the quality of urban life will directly determine thecountry's investment climate. The deteriorating quality of the urban environment andservices in major Philippine cities is hurting the economy's competitiveness. The IBRD willsupport the efforts of cities and municipalities to enhance their competitiveness and livabilityby promoting investment in, for example, drainage, solid waste and wastewater treatment,and air quality management to improve the urban environment. It will also promote betterurban governance and municipal entrepreneurship in local economic development bysupporting comprehensive city development strategies.

2. Environmentally Sustainable Rural Development with Social Equity

3.15 Poverty pervades rural areas, remote upland areas, and indigenous populations,exacerbated ty population pressures on the declining natural resource base. Broad-based ruraldevelopment and management of the natural resources, thefoundations of sustainable rurallivelihoods, are core elements of the Bank's assistance to the Philippines. In the 2003-05 CASperiod, the Bank will emphasize the following goals, to stimulate broader growth and enableparticipation in development:

3.16 (a) To put the rural sector on a higher growth path, the declining competitiveness ofPhilippine agriculture must be reversed. Policy and institutional adjustments are needed to createan incentive framework for market-led growth and to stimulate private sector investment inagriculture. These are made all the more urgent as the Philippines adjusts to the phasing-in of tradeliberalization under the General Agreement on Tariffs and Trade and the World Trade Organizationby 2004. The government's traditional focus on rice and corn production has meant that inadequateattention has been given to tapping small farmers' potential to develop diversified andcommercialized production systems. The opportunities from globalization of agricultural markets aretherefore not being captured. The needed stimuli include: reduced protection for rice, corn, andsugar; streamlined institutional and regulatory procedures; inter-island shipping reforms; furtherdevelopment of rural credit and microfinance; provision of market infrastructure including farm-to-market roads; improved effectiveness of agricultural research and extension services fordiversification and higher productivity; and increases in the volume and effectiveness of funding forinvestment in badly needed rural infrastructure. Several ongoing Bank-financed operations and theplanned Diversified Farm Income and Agricultural Modernization project will contribute to thegovernment's ongoing efforts in these areas, as outlined in the Agriculture and FisheriesModernization Act of 1997. The Philippine government emphasizes that reciprocity in trade

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liberalization by developed countries will be equally important for the Philippines' futurecompetitiveness.

3.17 (b) Several planned interventions (the Agrarian Reform Communities DevelopmentProgram [ARCDPJ 2, ARMMSocial Fund, and Kapitbisig Laban sa Kahirapan [K4LAHIIprojects) will build on existing programs that involve community-driven approaches to ruraldevelopment and natural resource management I(e.g., the ongoing national ARCDP, and theSouthern Mindanao Zone for Peace and Economic Development [SZOPAD] Social Fund project).The Bank will also pilot further initiatives in microfinance, in community-based resourcemanagement, and in the Land Administration and Management Program (LAMP), involving titlingof land and security of tenure for poor farmers ancl also ensuring their responsiveness to gender-balance needs. LAMP can be scaled up to a national program after piloting demonstrates replicablemodels and the government establishes the legal and institutional basis. The community-basedprojects should reach the poor-men, women, indigenous peoples, and people in remote villages-soas to involve them in the development process. The participatory process can also help ensuresustainability through community ownership and management and community pressure to raisestandards of public and private services, as well as build the enabling environment for peace inconflict-affected areas.

3.18 (c) At the same time, Bank programs will be designed to better involve LGUs in thedevelopment process and cultivate effective partnerships of national and local governments,community stakeholders, the private sector, NGOs, and the academic community. This is aparticular challenge, as many LGUs, though institutionally still weak, are responsible for much of thenow decentralized rural development process. The Mindanao Rural Development Adaptable ProgramLoan, implemented primarily by provincial and municipal LGUs, emphasizes this approach. Othernational government projects such as the Local Government Finance and Development project alsoaim at strengthening LGUs' capacities in implementation of development projects. To ensuresustainability, new Bank-financed operations will be based on careful analysis of the roles ofdifferent levels of govemment and community organizations in the decentralized developmentprocess.

3.19 (d) Programs will continue to focus on natural resource management, as the decliningresource base-land, forest, watersheds and river basins, and coastal habitats-threatens not just theenvironment but the very welfare of rural people and the sustainability of their livelihoods. Furtheranalytical work is planned on natural resource management issues. In addition to the ongoingCommunity Based Resource Management project and community-based coastal marine biodiversityconservation program in Mindanao, two projects are under preparation: the Laguna de Bay project(FY02 Learning and Innovation Loan) and the River Basin Development project, which will pilotwater and watershed management in selected basins as a step toward protection, conservation, andfurther replication.

3.20 (e) Leveraging the Bank's resources through partnership with government and ODApartners is an attempt to magnify the impact of support. Noteworthy examples are the nationalARCDP involving more than a dozen ODA partners, the Mindanao program below, and the likelyLAMP program. Partnerships with government and ODA partners in lending and nonlendingactivities such as the National Economic Development Authority's rural sector performancebenchmarking program will likely enable a much larger impact than the Bank's resources alonecould achieve.

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3.21 6/ Regional development for particularly impoverished regions is needed, with the primaryfocus at this time on Mindanao (see also paras. 3.42-3.43). Further to the Philippine government'srequest, particular effort will be put here through the Mindanao-dedicated projects and the Mindanaocomponents of a number of other projects. This will be complemented with substantial nonlendingsupport to the Mindanao Task Force, the ARMM govermnent, and improved coordination of thedonor-assisted programs.

3. Comprehensive Human Development through Access to Basic Social Services inEducation, Health, Social Protection, Shelter, Water Supply, and Sanitation

3.22 A large proportion of the Philippine population is still without opportunities for basic humandevelopment. The Bank will support government efforts to improve access for the poor to basicsocial services through ongoing and planned projects. To accomplish this, it will continue its long-standing support to strengthen the delivery of social services in the most needy areas. These "supply-side" interventions will be complemented with pilot "demand-side" measures that would targetpublic funds to needy families to enable them to benefit from social services. In light of governmentagencies' weak implementation record on Bank-financed projects in the social sectors, especiallyproject management and procurement, the Bank will focus on helping government improve theperformance of social sector agencies and public sector providers, building on successful governmentprograms. To improve the efficiency and effectiveness of public expenditures, Bank support aims toconsolidate ongoing improvements in financial management and procurement, initiate reforms inresource allocation, and enhance performance of decentralized and devolved public social services. Itattempts to strengthen accountability by promoting community participation in identifying prioritiesfor social programs and in implementing them. In every aspect of the human development program,Bank support will reflect the gender concerns identified in the earlier Bank work on gender (Box 3-1).

3.23 (a) In the education sector, planned Bank activities will help address deficiencies in thequality of education, fill skill shortages and meet emerging training needs. Project activities will helpongoing efforts to simplify the basic curriculum, increase the textbook-student ratio, and improveteacher performance through better pre- and in-service training. The Bank is also helping theDepartment of Education improve the efficiency and effectiveness of public expenditures throughbetter teacher deployment and management. The main unmet Millennium Development Goals in thearea of education is retention of students in schools. A number of interventions are thus beingimplemented to reduce the high drop-out rates, especially in the first six grades, including expandedpre-school education and a special curriculum for the first eight weeks of Grade 1. Alternatives toformal education for out-of-school youth will also be explored through a possible Learning andInnovation Loan, building on the gains of the government's Nonformal Education Project (1 994-2001) in terms of learning scope, assessment methodologies and accreditation, and equivalencyschemes. IFC is also looking to support projects for private provision of education services.

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Box 3-1 Philippines Gender Profile and Strategy

A Country Gender Profile and Strategy was prepared in 1999. In consultations with government and civil society, the followinggender-related priorities were identified: eliminating violence against women and children, mainstreaming gender in governance,promoting reproductive health, and supporting workers in the informal sector.

Regarding violence against women and children, President Arroyo recently certified two bills as urgent: the Anti-Trafficking Bill,which seeks to institute policies to eliminate the trafficking in persons especially women and minors, and the Domestic ViolenceBill, which defines domestic violence and seeks to protect victims and set penalties for violators. The Department of SocialWelfare and Development provides emergency services and rehabilitative care to women in especially difficult circumstances. AWomen's Help Desk hotline provides counseling and temporary shelter. The Bank, through its Social Expenditure ManagementProject (SEMP), has supported these programs. Today, although the government is in a better position to deal with these issuesthan it was two years ago, violence against women and children nonetheless emerged as a key gender concern across sectorsduring consultations for this Country Assistance Strategy.

The mainstreaming of gender in govemance recently received a boost with the release of two memorandum circulars to guide thedevelopment of agency and local government unit Gender and Development Plans.0 However, reporting on the designated use of5 percent of agency and local goverrnment unit budgets for gender and development activities has been sketchy, and theseactivities are often not grounded on real gender needs. For the National Commission on the Role of Filipino Women, therefore,the challenge is still to provide technical assistance to agencies and local govermment units in the preparation andoperationalization of their gender and development plans.

Regarding reproductive health (including matemal health and nutrition, access to family planning, reproductive tract infections,and sexually transmitted illnesses), the Bank has supported various govemment initiatives in the areas of women's health andintegrated matemal and child health, through its Women's Health and Safe Motherhood project as well as through the UrbanHealth and Nutrition project. It has helped build, renovate and equip health facilities, stock health units with much-needed drugs,and train local health workers. The Philippines' matemal mortality rate remains unacceptably high, however, and access to familyplanning is still lacking or difficult

Under this CAS, the Bank will continue its support for activities to counter violence against women and children through SEMP.It will also seek grant funding for a consortium involving government and nongovernmental organizations that will providesubgrants for studies of this type of violence and projects in identified high-incidence areas across the country. With respect tomainstreaming gender in govemance, the Bank will seek to mobilize funds to strengthen the capacity of the NationalCommission on the Role of Filipino Women to provide technical assistance to agencies and local govemment units by enhancingthe capabilities of its staff, establishing internal mechanisms, and developing a range of technical assistance packages foragencies and local govemment units. The national commission has submitted a project concept to the Bank as a first step towardthe development of a full-blown technical assistance package.

Initial thinking is also underway for a project to support the govermnent's population management program under a follow-onWomen's Health and Safe Motherhood project. The fourth gender-related priority identified-support for workers in the informalsector, remains an important challenge. This area is being covered by the Intemational Labor Organization through its variousprojects in the country.

a/ "Guidelines to Implement Gender Mainstreaming and Institutionalization in the Existing Agency's Programs, Activities, and Projects," DBM-NEDA-National Commission on the Role of Filipino Women (NCRFW) Joint Circular No. 2001-1, August 15,2001; and "Guidelines forIntegrating Gender and Development in the Local Planning and Budgeting System Through the Formulation of GAD Plans," DILG-DBM-NCRFW Joint Memorandum Circular No. 2001-01, December 19,22001.

3.24 (b) In the health sector, the Bank will participate in efforts by the Department of Health toorganize international donor assistance under the- umbrella of its Health Sector Reform Agenda(HSRA). Its reform program will introduce the live components of the HSRA-health insurance,local health systems development, hospital development, public health services, and health regulation(especially for very costly drugs)-in a limited number of convergence sites, with particular attentionto ensuring improved access for the poor. In addition, the Bank will continue support for health andnutrition interventions to enhance physical and mental development of children ages 0 to 6 years.

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3.25 (c) While government struggles to protect and maintain social services on its limited budget,the high population growth rate continues to exacerbate the difficulties by increasing the numbersneeding to be served, undermining hard-won gains in human development. High population growthsubstantially cuts into the income gains from rural and urban economic growth. In addition, highfertility rates constrain possibilities for achieving more significant gains in women's health or theirchildren's health. The Bank plans to provide support to revitalize the Philippine PopulationManagement Program, based on the principle of free choice and full information for couples, and toimplement the government's recently issued Population Policy.

3.26 (d) Social protection of vulnerable groups will continue to be a growth area for Bankassistance. The Bank will continue to help enhance the performance of Community DevelopmentWorkers who help parents obtain integrated early childhood development services (pre-schoolservices, health, nutrition and parent-support services). It also plans to help develop a pilot income-support system for the poorest families conditional on their children's regular school attendance andparticipation in critical social services. It will also help mobilize grant funding to support governmentand NGO programs to reduce violence against women and children.

3.27 (e) A high proportion of the urban poor do not have access to shelter and basic urbanservices. Most do not have titles to the properties they own and often have little means to supporttheir livelihood. The Bank plans to support programs that provide assistance to poor urbancommunities through acquisition of secured titles, financing for shelter improvement, upgrades ofcommunity-driven basic infrastructure (e.g., water supply, sanitation, electricity, and wastecollection), and livelihood support. The Bank's assistance in the water and sanitation sector (para.3.14) will also try to expand services to low-income local government units. In rural areas, the Bankwill support the government's efforts in rural electrification, as well as investments, throughcommunity-based approaches under Bank-financed rural development projects, in village watersupply and sanitation.

3.28 (f) Community-based Social Services. Many cultural, economic, and political barriers preventthe poor from participating in development activities. To better reach the poor, the Bank's plannedprogram emphasizes various investments in human capital (e.g., education and health, improvedparticipatory processes) and investments in social capital (e.g., strong local organizations for agrarianreform beneficiaries, indigenous peoples, service providers that cater to the poor, and local-levelinstitutions. These activities will be carried out, for example, through the Mindanao RuralDevelopment Program and the forthcoming ARMM Social Fund project. The Bank's mostsignificant effort to promote community-participation in development will be through support forcommunity-based development efforts planned and executed from the bottom-up under the newKALAHI project" and in the ongoing Agrarian Reform Communities Development Program, and itsplanned follow-on project.

4. Good and Effective Governance

3.29 The Bank's strategies to promote good and effective governance will focus on: (a) keeping atight 'firewall " against graft and corruption in Bank-financed operations and rigorously pursuingany allegations of wrong-doing; (b) improving citizen's access to information, promoting civilsociety participation in the budget process, and institutionalizing citizen feedback on quality and

" "Kapitbisig Laban sa Kahirapan" "[Linking Arms against Poverty]"-the poverty reduction framework of the newadministration.

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access to government services; (c) strengthening public sector rules and capacity (judicial reform,civil service reform, procurement, financial management, environmental management), such as toenforce procurement and anticorruption legislation; and (d) promoting policy and regulatory reformsto promote competition and good corporate governance. Building on past practice and experience,the Bank will work closely with other ODA partners and local stakeholders to push for theseimprovements in governance.

3.30 (a) Preventing corruption in Bank-financed operations. Key to this will be carefulassessment of the borrower's project-management capacity (planning, monitoring, evaluation,procurement, and financial management) both at the national and LGU-levels, and strict enforcementof the anticorruption provisions of the Bank's procurement and auditing guidelines. The Bank'sstrategy foresees technical assistance and training for implementing-agency staff to strengthen theirmanagement capabilities. One thorough, annual, ex-post review per project will be conducted, withadditional independent procurement audits as needed.

3.31 (b) Civil society participation. Measures to increase the information available to the publicon the nature, extent, causes, remedies, and location of corruption play a crucial role in combatingcorruption. The Bank's assistance will, therefore, include support for promoting efforts to increasetransparency and feedback among beneficiaries of government services; civil society involvement indesign, delivery, and monitoring of development projects; civil society-based monitoring of thegovernment procurement process; and activities to enhance public awareness. In addition to theparticipation of NGOs in bid opening and evaluation in main national agencies and in LGUs, theBank will also engage the participation of various concerned LGU leagues (e.g., League of BarangayCaptains, League of Mayors, League of Governors).

3.32 (c) Strengthening the public sector. Addressing issues of structural reforms in the civilservice, public expenditure management, and revenue mobilization are critical over the CAS period.Bank's support will be a blend of generic across-the-board actions and targeted initiatives forselected institutions or government departments. T he main building blocks for judicial sector reformsand financial management and procurement reforms were put in place under the 1999 CAS, and thisassistance will be continued at a much accelerated pace during this CAS period. Diagnostic analysisundertaken as part of preparation for the proposed Judicial Reform Support Loan identified keyneeds-systems reforms, human resource development, and institutional infrastructure and integritystrengthening-to address concerns about case decongestion, to reduce corruption, and broadenaccess to justice. These problems are being addressed in the Philippines judicial reform program withsupport from development partners, including the Asian Development Bank, Australia, Canada,Japan, the United Nations Development Programme (UNDP), the United States, and the World Bank.

3.33 The Commission on Audit (COA) started, in January 2002, the implementation of a NewGovernment Accounting System in all government entities. The commission is working on thecomputerized version to move toward a government integrated financial management informationsystem. The main agreements with government in the context of the ongoing Country FinancialAccountability Assessment (CFAA)12 are to: (i) establish an inter-agency committee to take charge ofthe comptrollership function; (ii) design an Accounting Policies and Procedures Manual for the newaccounting system; (iii) restructure COA, specifically its audit function, and gradually move towardrisk-based auditing; (iv) introduce peer review of COA; and (v) restructure the Bureau of LocalGovernment Finance to play a focal role in LGU financial management. The initial agreements with

12 A component of the Public Expenditure, Procurement, and Financial Management Review (PEPFMR).

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government in the context of the ongoing Country Procurement Assessment Review (CPAR)'3 are to:(i) promote passage of the Procurement Bill (under discussion in the Senate and Congress) toconsolidate and improve rules and regulations for national agencies and LGUs; (ii) professionalizethe procurement function at national and decentralized levels; and (iii) create a procurement entity tooversee the quality of the procurement function in govermment agencies. An InstitutionalDevelopment Fund grant was mobilized recently to support these procurement reforms.

3.34 (d) Policy and regulatory reforms. These reforms are vital for improving the investmentclimate in the Philippines. IBRD and IFC will support improvement in corporate governance byproviding further policy analysis and technical assistance to heighten public understanding ofcorporate governance programs and promote activities that increase transparency and accountabilityof financial institutions. It will also support the Capital Market Development Council in advocatinglegislative reforms to improve bankruptcy law, strengthen creditors' rights and protect minorityinvestors. Both IBRD and IFC have supported the Institute of Corporate Directors to train directorsin good governance, and a diagnostic study in public and private sector accounting and corporategovernance, to identify areas for improvement. They are now working together to develop a nationalcorporate governance action program to improve governance in the corporate, banking, and securitiesmarket sectors.

5. Cross-Cutting Challenges

3.35 Four challenges cut across the above areas, and the Bank's assistance strategy attempts toaddress them comprehensively. First, its attempt to help LGUs, broadly defined, deliver publicservices more effectively, touches on several aspects of this basic strategy-including fiscalmanagement, delivery of human resource investments, and agricultural services, management ofmunicipalities, cultivation of local conditions friendly to private investment, strengthening of localinfrastructure, and governance improvements. Second, it provides assistance to the conflict-affectedregion of Mindanao, which has great development potential but poor services. To build sustainablepeace and development, the island needs assistance to promote local economic growth and to involvelocal people in these activities. Third, it attempts to ensure environmental sustainability so as torelieve constraints on economic development in rural and urban areas and reduce the threat to socialcohesion posed by unrestricted development. Fourth, it attempts to improve performance monitoringand evaluation to measure progress with regard to both growth and empowerment of the poor at thenational, local, macroeconomic, and sectoral levels.

(1) Dealing Effectively with Local Government Units and Managing Municipal Development

3.36 The Local Government Code of 1991 fundamentally shifted the way resources areadministratively andfinancially managed at the regional, municipal, local, and barangay levels.The code granted substantial financial autonomy and accountability to the LGUs and decentralized tothem functions directly affecting them. A substantial annual transfer of revenues through the InternalRevenue Allotment formula provides LGUs with core funding to support their enhanced functions.The LGUs were also authorized to raise revenue through property and other taxes and assume debt asa means of leveraging their own financial resources to expand their overall investment envelope. Byincreasing LGUs' taxing and spending responsibilities, the code resulted in significant fiscaldecentralization.

" Ibid.

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3.37 Improvements are needed, however, to make decentralization more effective. Few LGUshave stepped up to the opportunities provided by fiscal decentralization-by broadening their localtax base, setting investment priorities and attracting investments, protecting the environment toensure sustainability of development interventions, safeguarding the poor and vulnerable and, morefundamentally, leveraging the powers vested by the Local Government Code. To finance investmentactivities, political leaders rely largely on the substantial Internal Revenue Allotment transfersinstead of raising local taxes. The Internal Revenue Allotment formula itself is biased toward LGUswith large land areas and populations, rather than the low-income LGUs, which encouragesdevelopment around established metropolitan centers.

3.38 LGUs, though the main players in urban and rural areas, are handicapped by limited technicalcapacity. They have the sole mandate to deliver local public services to growing populations, andtheir performance is important to attract private investments. Technical capacity in terms of planning,financial management, and administration is weak at the LGU level. Further, the lack ofcollaboration between neighboring municipalities hampers the promotion and coordination ofenvironmental mitigation and economic activities that benefit an entire region, instead ofjust amunicipality or city administration.

3.39 The Bank's objectivefor the next three years is to strengthen decentralization andpartnership with LGUs through assistance at both local and national levels to improve rural,urban, and metropolitan governance. Many Bank-financed operations have LGUs as theimplementing agencies for the subloans, and the Bank foresees that LGUs will continue to be its keypartners in urban and rural development. The three-year term of local governments requiresparticular attention in project preparation and implementation, including shortening the processes,and necessitates national government enforcement of the LGU commitments when elected officialschange.

3.40 The Bank's assistance at the local level is directed toward promoting better information,broadening community participation at LGU levels, and ensuring transparent and efficientprocurement practices andfinancial management. These activities complement past and ongoinggovernment efforts in some related areas. LGUs must introduce better accountability to residentsand better standards for monitoring performance and adopt sound commercial and financialmanagement practices and reporting principles. T.hese reforms are particularly important if LGUsseek debt financing for capital investments or have to provide guarantees to private financiers, wheretheir creditworthiness will depend heavily on the accuracy, interpretation, and strength of theirfinancial statements. Comprehensive LGU Development Strategy programs (endorsed and approvedby both legislative and executive branches of local governments) and possible follow-up operationswill establish partnership for capacity building with selected LGUs who are committed to bettergovernance. Localizing budget tracking and performance monitoring by civil society and concernedcitizens will help enhance accountability of LGUs to their constituents. Recently a "LGU AssistancePortal" was launched in an attempt to improve the information given to LGUs about Bank-supportedproducts and services.

3.41 At the national level, the Bank will support the national government's efforts to strengthenthe decentralization process. Policy advice would support ongoing efforts to improve the delivery ofbasic public services by enhancing LGUs' capacity in areas such as revenue mobilization, planningand budgeting, personnel management, procurement, financial management, and improvedgovernance arrangements. Planned nonlending work will also provide guidance on approaches tostrengthen inter-LGU collaboration in metropolitan regions and in geographic areas such as river

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basins and watersheds. The Bank will also support national initiatives to publish and benchmarkperformance data so as to improve LGU accountability. Policy measures regarding LGU financecould be addressed in the context of program loans or nonlending assistance.

(2) ProvidingDevelopmentAssistance to Conflict-Affected Areas

3.42 The Bank's assistance to Mindanao is already significant. Of the Bank's 25 ongoingfinancing operations, 18 include components in Mindanao, and 2 of them operate primarily inMindanao. Several trust funds also support development efforts as part of post-conflict assistance. Asocial assessment now underway is expected to generate important information from Mindanaostakeholders on their priority development needs.

3.43 The Bank's proposed strategy has four components. (i) additional lending assistance basedon community-driven approaches working with the LGUs, including new projects as well asreallocation of funding under existing projects toward Mindanao. For instance, the fast-disbursingSZOPAD Social Fund project is to be succeeded by the ARMM Social Fund project targeted to theARMM area; (ii) continued nonlending assistance through post-conflict funding and trust funds formicrofinance, livelihood, and other projects and for elaboration of a Human Development Strategyfor ARMM; (iii) enhance coordination of Mindanao peace and development work among ODApartners. Mobilization of additional resources would be contingent in part on the development of amore detailed investment program for Mindanao based on the framework plan outlined in theMTPDP and sufficiently peaceful conditions to enable development programs to be implemented.Moreover, although institutional responsibilities at the Mindanao level for ODA-assisted programshave been clarified, further clarification is needed at the national level; and (iv) capacity buildingforthe ARMM and technical assistance in the formulation of a comprehensive ARMM DevelopmentFramework Plan, which will identify the activities and public investments required to support peaceand development in the ARMM. The ARMM is one of the poorest regions in the Philippines,suffering from endemic armed conflict and inhabited by people from multiethnic and varied religiousbackgrounds. In addition to the important welfare impact for the communities in that locality, theBank's development-assistance support to Mindanao is expected to have important benefits for lawand order and investor confidence in the Philippines generally, and in Mindanao specifically.

(3) Ensuring Environmental Sustainability

3.44 Unsustainable resource management and environmental quality problems have become acritical constraint to economic development and social cohesion, necessitating a closer linkage ofenvironmental strategies with key economic objectives and poverty reduction efforts. Populationincreases and poor land-use planning have led to the massive depletion of natural resources anddestruction of the environment. Communities in both rural and urban areas are feeling the effects.Widespread depletion of land, aquatic, and biological resources has resulted in the continuing loss ofthe nation's natural capital base, with particularly severe impact on poorer communities that dependheavily on natural resources for their welfare and livelihoods. In urban areas, the deterioration of thequality of air and water has led to serious health and labor-productivity problems. Municipal andhazardous waste, lack of water supply and sanitation facilities, contamination of surface and groundwater, air pollution, and industrial pollution all combine to jeopardize Filipinos' quality of life.Similarly, in rural areas, continuous deforestation, uncontrolled soil erosion, and watershed, riverbasin, and marine degradation pose major threats to overall agricultural productivity, coastal andmarine resources, sustainable supply of surface and ground water, and the overall sustainability ofthe ecosystem.

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3.45 The Bank's assistance program includes thefollowing areas of support to promoteenvironmental sustainability. (i) delivery of safe and reliable drinking water; (ii) affordable anddependable sanitation, drainage, and solid waste management facilities; (iii) an integrated approachto watershed management; (iv) advice regarding pollution charges and fiscal and other incentivemechanisms to improve environmental performance; (v) promotion of nonmotorized transport; and(vi) use of renewable energy in rural electrification. Projects supporting environmental managementinclude the Laguna de Bay Learning and Innovation Loan (FY02), the ongoing Community-BasedResource Management project, Manila Second Sewerage project and possible follow-up, theproposed River Basin Development project, and Global Environment Fund and Montreal Protocolprojects.

3.46 Environmental governance needs improvement at both national and local levels ofgovernment, which are mandated by law to protect and manage the country's natural resources.The lack of awareness and slow action on matters related to poor environmental management and itseffects on health and poverty have aggravated the Philippine's economic problems. Current andplanned technical assistance is designed to strengthen: (i) a decentralized, and LGU-orientedenforcement of environmental laws and standards; (ii) the capacity of national agencies and LGUs toconduct social and environmental assessments; (iii) the environmental performance-monitoring andevaluation system of the Philippine Environmental Impact Statement System; (iv) capacities ofLGUs and technical agencies' field offices to protect and manage watersheds, critical protected areas,and fishing grounds; (v) the environmental units of various agencies such as the Subic BayManagement Authority, Land Bank, the Department of Public Works and Highways; and (vi) civilsociety's participation in advocacy work, promotion of transparent processes of policy formulationand resource allocation, and provision of third-party assessments of key environmental legislationand public and private sector investments.

(4) Improving Performance-Based Monitoring and Evaluation

3.47 A culture and system that emphasikes performance is keyfor the Philippines to reach itspoverty reduction and growth objectives. The administration is committed to improving performancethrough the better matching of priorities, resources and results on the ground and recognizes thecritical role of results-based monitoring and evaluation systems in supporting this goal. Currentinitiatives include (i) improved monitoring of public expenditures, focused on services reaching thepoor; (ii) a phasing in of performance-based budgeting linked to the medium-term expenditureframework; (iii) sectoral efficiency and effectiveness reviews; (iv) performance-indicatorframeworks (both agency and sector); (v) improved quality at entry, monitoring and evaluation, andoversight of foreign-assisted projects; and (vi) performance indicators at the LGU level. Civil societyis also demanding information about government expenditure, public service delivery, and progresstoward national development goals. The Philippines needs to deal with three key sets of issues: theexistence of several fragmented, uncoordinated, and overly ambitious initiatives in performance-based monitoring and evaluation; weak incentive structure and human resource capacity to useperformance data; and existence of pockets of innovation that could serve as models.

3.48 The Bank will support government strategies to build upon current efforts. The CASproposes to support the government's monitoring and evaluation efforts in both lending andnonlending services by focusing on: (i) improving the institutional architecture'and managementcapacity needed to use reliable results information in managing public expenditure and finance at thecentral and local levels; (ii) building capacity to make the Rural Development PerformanceMonitoring Indicator System an operational reality; this initiative could serve as a model to scale up

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in other key sectors; (iii) improving citizen's access to information, promoting civil societyparticipation in the budget process, and monitoring and institutionalizing citizen feedback on publicservices; (iv) assisting the Philippine government in coordinating a strategic approach to results-oriented monitoring and evaluation initiatives: performance budgeting, foreign-assisted projectmonitoring, data dissemination, and capacity building. Tools might include implementationscorecards and a joint website for sharing and monitoring results; (v) improving the outcome focusand usefulness of the monitoring and evaluation in all lending operations and supporting governmentefforts to move toward performance-based monitoring and evaluation systems in national lineagencies and LGUs; and (vi) integrating project-management capacity building with the use ofproject-level monitoring and evaluation information to improve implementation and realization ofoutcomes. The Bank will continue to work closely with other ODA partners that also support thegovernment's efforts to improve its monitoring and evaluation capacity.

D. ASSISTANCE INSTRUMENTS

Portfolio Management

3.49 One of the Bank's greatest continuing challenges is to accelerate project implementationand delivery of development benefits. Key to speeding up results will be mobilizing the governmentrevenues needed to support development programs and strengthen project management in terms ofplanning, procurement, and financial management. Strengthening project management will requirethe following key actions:

* Continue with the regular joint ODA portfolio reviews with ADB, Japan, the World Bank,and the Philippine government and, jointly with National Economic and DevelopmentAuthority, quarterly monitoring of compliance with procurement planning and disbursementtargets.

* Work simultaneously with sector agencies and project-management units to addressimplementation issues systematically at regularly scheduled clinics for country office teams,focused especially on planning, monitoring, evaluation, financial management, procurement,and safeguard policies.

* Apply realistically the "project readiness filter" to ensure project preparedness forimplementation (even at the price of potential slippage), possibly including an "institutionalcapacity filter" in all new projects.

* Assist the Philippine government in developing scorecards and joint websites for sharing andmonitoring results and continue to work with the government to realign project monitoringand evaluation systems in the portfolio, including piloting and subsequent broadbasing ofbenchmarking and other management informnation systems.

* Assist the Philippine government in establishing a real information system at the project,sectoral, and national oversight levels, focusing on the quality and accuracy of information.

* Support the government's ongoing reforms of the procurement process and other capacity-building initiatives in financial management and social and environment assessment.

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3.50 Portfolio management will also be a key instrument to improve long-term implementationcapacity and strengthen governance at both national and local government levels. On the nationalimplementing agency side, the focus will be on improving management in a decentralized system andon more speedy processes. On the local government side, technical and management capacity will bekey to improve implementation and reduce the risk of graft and corruption. With LGUs handlingabout 40 percent of the Bank-financed portfolio, to reduce governance risks the Bank will: (i)evaluate procurement processes systematically and regularly by strengthening the frequency of "ex-post reviews;" (ii) train LGU staff handling Bank funds in project management, procurement, andfinancial management; (iii) evaluate the competency of LGUs involved in Bank projects, developingany necessary action plan for the LGUs, and turning funds over to LGUs only after they comply withthe action plan; and (iv) strengthen the Commission on Audit's powers to audit LGUs.

Lending

3.51 The composition of new Bank lending to the Philippines is expected to shift over the CASperiodL'4 Absorptive capacity at the national level (both fiscal and management) for regularinvestment operations is currently constrained, and there is large unmet demand for basic services aswell as "targeted budget support"-type operations like the SEMP,N5 as well as demand for programloans to support government priorities (see Annex B3 for details on the lending program). New Banklending to LGUs will proceed cautiously in view of their capacity constraints. Over the next threeyears, it will be crupial to develop and strengthen I,GUs' capacity to manage the implementation ofdevelopment projects in line with the responsibilities assigned to them under the LGU code.

3.52 The Bank plans to maintain its programmatic approach to investment lending throughfuture loans under the three ongoing APL prograns (in water, transport, and Mindanao ruralsectors), and through continuation of the "SEMP-approach. " The Bank will evaluate the need andcountry capacity for any additional APLs before proceeding selectively (one-for rural power-iscurrently in the program). New APLs will require strong rationale and policy commitment upfrontfor preparations to move ahead. The Bank plans to expand the "SEMP approach" into the healthsector (Health Sector Reform project) and possibly other areas such as the Diversified Farm Incomeand Agricultural Modernization project, in response to the government's demand for operations thathelp better manage expenditures already made a priority in the national budget.

3.53 Other new project lending will, upon government request, shift more toward community-driven projects, drawing on the Bank's experience with workable delivery mechanisms both in thePhilippines and neighboring countries. This will include a follow-up project to the Agrarian ReformCommunities project (ARCDP) which finances local community initiatives. Preparation is alsounderway for another community-based, poverty-focused intervention (the KALAHI project). Thisproject would improve local governance by empovvering some of the poorest communities to plan,implement, and manage development investment and scale up and improve an existing governmentantipoverty program, called "Comprehensive and Integrated Delivery of Social Services (CIDSS)." Anew social fund project for the Autonomous Region in Muslim Mindanao, the ARMM Social Fundproject, would follow the successful completion (fastest disbursement of all projects) of the ongoing

14 Specific operations and their timing are preliminary, based on CAS consultations with government. The detailedcomposition of the lending program is subject to annual programming discussions with government.15 The FYOO Social Expenditure Management Project ftnances selected budgeted expenditures for social services whilepushing ahead with deep changes in the way goods are procured and financial and expenditure management are carried outin the key departments of Education, Health and Social Welfare and Development.

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SZOPAD Social Fund project in Mindanao which has been disbursing faster than other ongoingprojects.

3.54 Renewed adjustment lending as a strategy for effective assistance to the Philippines isbased on an enhanced commitment by the Philippine authorities to an extensive medium-termprogram of policy and institutional reforms. Planned adjustment operations would address, inparticular, public expenditure and financial management, budget reform, resource mobilization,contingent liabilities, public enterprise reform, civil service reform, corporate governance, theinvestment climate, LGU finance, and financial sector strengthening encompassing banking and thecontractual savings systems. Adjustment lending is envisaged in both the base and high cases, withhigher lending volumes associated with such lending in the high case predicated on a deeper andmore aggressive implementation of reforms in the above areas (Section F below discusses triggersassociated with the various lending scenarios). The Bank is considering a series of carefullysequenced single tranche operations with upfront policy actions. The provision of policy-basedguarantees in lieu of an adjustment loan for the same exposure amount will be considered, if thegovernment so wishes, and if justified by market conditions at that time.

3.55 LGUs, with their responsibilities and resource potential, are key to future lending, but theBank will approach new lending to LGUs with great care. Such lending will require priorassessment and building of institutional and technical capacity, particularly regarding planning,procurement, financial management, and emphasis on accountability through monitoring andperformance review, which in turn require the availability of better information systems. Future LGUprojects should also be catalysts for broader reforms and improvements in the decentralized system.

3.56 Principles of choice for new lending. The composition of the Bank's lending program wasbased on the following principles: (i) impact on the poor, focus on poorer segments of the populationand poor areas; (ii) expressed country and implementing agency priority and commitment, includingpossibly competitive selection from among eligible LGUs; (iii) feasibility of project"implementation" and likelihood of success, including fiscal sustainability and institutional readinessbased on a thorough assessment or proven institutional track record; (iv) community involvement; (v)potential for scaling up (e.g., ARCDP II, LAMP, KALAHI); and (vi) clear division of labor withother ODA partners (see para. 3.66). The planned lending program is a result of the application ofthese principles, responds to the client's priorities as expressed in the MTPDP, and focuses onprojects that have relatively less impact on the government's budget as the government movestoward fiscal consolidation. It excludes areas where government commitment to extensive reform isnot yet apparent (e.g. transport sector other than roads). APLs, Learning and Innovation Loans, andsome other operations attempt to start small but have potential for scaling up to achieve country-wideimpact. The lending program also follows a division-of-labor approach, focusing within each of thebroad chapters of the government's MTPDP only on selected subsectors, e.g., rural electrification inthe power sector or primary education and sectoral management issues in the education sector.

3.57 Choice of loan products. In the context of efforts to implement a prudent debt managementstrategy, the authorities have expressed interest in making more use of the flexibility in the IBRDfinancial products for the proposed new lending operations. The authorities are also interested inpursuing a Master Derivatives Agreement in order to have the option of using the Bank's hedgingproducts on existing IBRD loans. As a necessary condition for the active use of these instruments,the government is also pursuing grant funding to finance the establishment of a risk-managementsystem.

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Nonlending Assistance

3.58 In the past fewyears nonlending services have combined core poverty, policy, andfiduciary analyses,'6 as well as country advisory work and technical assistance on selected keyissues. 17 The assistance has informed the policy debate, helped government design reform programs,and provided a foundation for proposed lending (e.g., Judicial Reform, and the Public FinanceStrengthening Loan, KALAHI project). These Analytical and Advisory Services have been critical inmaintaining the Bank's contribution as a knowledge center.

3.59 Nonlending assistance will remain an integralfeature of the Bank's assistance program. Itis designed to enrich the policy debate, help government design and implement effective reforms,underpin future lending operations and systematically build capacity. The Bank's assistance wouldcontinue to be a blend of core-diagnostic assessments and other advisory work (Annex B4). Corediagnostic analyses will include an in-depth poverty analysis as warranted by the emergence of newdata and strategies, follow-up policy implementation tasks emanating from recent work in thefiduciary, financial sector (the Financial Sector Assessment Program) and public expenditure areas,and periodic Development Policy Reviews.

3.60 The other country advisory work will focus on strategic policy and sectoral issues pertainingto four themes that are critical to the attainment of renewed poverty reduction through sustainedgrowth and broad participation. These are: (a) ensuring the effective delivery ofpublic servicesespecially for the poor (e.g., public resource mobilization, decentralization and strengthening localgovernment capacity, civil service reform, civic engagement in tracking public expenditures,improving public sector governance); (b) strengthening the environment for private sectordevelopment (e.g., urban infrastructure, transport cost study, public enterprise reforms, capital marketdevelopment, improving corporate governance); (c) building human resources (e.g., Mindanaohuman development study, health sector issues); and (d) addressing natural resource, ruraldevelopment and regional concerns (e.g., natural resource management, environmental analysis,environment monitors, Mindanao post conflict). In addition there will be regular economic and socialindicator monitoring, demand-driven policy notes on selected key issues as they arise, andparticipation in East Asian regional studies. Each proposed nonlending task will be evaluated in thecontext of this strategic approach, and will be expected to respond directly either to client demand orto the Bank's corporate priorities and fiduciary responsibilities. Focusing on selected themes in thisway, the Bank anticipates achieving greater complementarity in the use of the Bank's differentnonlending instruments, including a more strategic use of trust funds.

3.61 World Bank Institute activities will continue to complement planned capacity-buildingactivities with further programs in topics such as fiscal and risk management, internationalcompetitiveness, governance and decentralization. These will often be in partnership with localacademic institutions. Global Distance Learning will continue to be part of this and will expand as

16 World Bank. Philippines Poverty Assessment (Washington D.C. May 31, 2001); World Bank. Report on Observanceand Standards of Codes (ROSC) 2001; Public Expenditure Review/Country Financial Accountability Assessment/CountryProcurement Assessment Review 2002 (under preparation); World Bank. Philippines Growth with Equity: The RemainingAgenda-A World Bank Social and Structural Review, (Washington D.C. May 3, 2000); World Bank, PhilippinesDevelopment Policy Review: An Opportunity for Renewed Poverty Reduction (Washington D.C.: February 22, 2002); andthe FSAP-2002 (under preparation).17 For example, governance, judicial reform, pension funds and contractual savings, pro-poor report card, environment,corruption, health, education sector, and an expanded GDLN program (e.g., decentralization, debt management).

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technical capacities allow. An expanding communications technology will be used to increasesharing and learning from analytical and advisory service work.

3.62 The CAS supports the current administration's selectivity in requesting technicalassistance. For project-preparation support, PHRD grants are expected to continue to play the samesupporting role as they have until now, which has been important in developing the lending program.Their selection will be determined by the lending pipeline. The Bank will continue to use the ASEMtrust fund facility to build on the reforms that have been initiated and deepen their impact, especiallyin the social development and governance areas. The thrust in capacity-building activities will besupported by Institutional Development Fund grants, used to build capacity especially within LGUsand in governance, financial management, procurement, tax administration, civil service, andportfolio improvements. Projects that have relatively more need to engage the civil society areexpected to tap into the Japan Social Development Fund facility to increase their outreach andsupplement project work, such as for community-driven projects, an increasingly important part ofthe Bank program.

IFC and MIGA Assistance

3.63 To meet the Philippines' challenges of increasing competitiveness, promotingforeigndirect investment flows, and improving corporate governance so as to attract more privateinvestment, the focus of IFC strategy is to assist the government in: (a) addressing structuralweaknesses in the corporate sector, especially through improved corporate governance with respectto creditors' and minority shareholders' rights; (b) supporting viable projects in infrastructure as wellas in manufacturing and services, and the strengthening of regulatory frameworks necessary forenhancing internal competition in these sectors; (c) promoting growth of small and mediumenterprises; (d) expanding private sector participation to social sectors, such as health and education;(e) strengthening the financial sector by shoring up the capital base and reducing banks'nonperforming loans; and (f) developing the private contractual savings sector and local debt marketsso that infrastructure and other capital intensive projects can begin to tap local currency financing.

3.64 In implementing this strategy, IFC supports, to the extent possible, pioneering or innovativeprojects, with replicable structures, that are likely to have a high demonstration impact. The currentshortage of long-term financing available for private sector projects in the Philippines provides thebasis for IFC's comparative advantage in provision of debt and equity financing for projects. ForFY03, IFC aims to increase its program approvals to around $160 million. IFC is also able to providefocused advisory services to help improve the legal or regulatory framework essential beforeundertaking such projects.

3.65 MIGA will continue to provide demand-based guarantees and possibly more technicalassistance. Its current exposure ($121 million net-para. 2.7) is well below the current country limit($420 million net), giving MIGA significant room for additional guarantees, which could encourageprivate political risk insurers to get involved. It has conducted promotional activities in thePhilippines to publicize its guarantee product, but MIGA's future involvement will ultimately dependon investor interest in investment opportunities in the Philippines. The extent of MIGA' s futuretechnical assistance will depend on the availability of its own funding. This funding would continueto be used to help the Philippines promote itself proactively and energetically as a location forforeign direct investment by strengthening strategic and operational coordination among theinvestment promotion agencies.

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E. MULTISTAKEHOLDER APPROACH, PARTNERSHIP, AND SELECTIVITY

3.66 The Bank will continue its current way of doing business, focusing on the country,including government and nongovernmental stakeholders as its clients. Its selectivity must be seenin the context of its partners' activities in the country, including the private sector, civil societyorganizations, and ODA partners. This requires ifurther outreach, including wider, better, and morepro-active dissemination of information, consistent with the Bank's new public disclosure policy;expansion and/or deepening of relationships with strategic civil society leaders (includingnongovernmental organizations, academia, think tanks, labor groups, and people's or community-based organizations); strengthening media relations through media tours, news conferences, andnews releases to improve transparency and accountability; expanding networks with nontraditionalcontacts through knowledge-sharing activities (Global Distance Learning Network activities, externalwebsite, LGU portal, workshops, and conferences);' 8 and working on enhancing the effectiveness ofthe local Manila Public Information Center and local depository libraries.

3.67 The Bank will also encourage its partners in government to engage civil society in meetingsthat have been traditionally open only to government. NGO representation at Consultative Groupmeetings has been standard practice since 1996. In the April 2001 joint portfolio review, governmentcommitted itself to involve civil society in the results monitoring of old and recently closed ODAprojects and to facilitate civil society's access to information on foreign-funded projects. The latter isin line with the Bank's focus on partnering with civil society in projects, especially in projectmonitoring and evaluation.

3.68 Selectivity and partnerships. The Bank will sustain itsfocus on and deepen its partnershipswith other ODA partners at various levels to help the Philippines attain its development goals.Annex I describes the programs of other ODA paitners in the framework of the MTPDP. At thepolicy level, close collaboration with IMF, ADB, and other ODA partners and agencies will continuein banking, finance, and other sectors where policy issues are crucial to the Philippines' developmentand where common policy matrices can be developed. The Bank has led a small group of ODApartners'9 which developed joint recommendations on anticorruption actions for the government'sconsideration, and the Bank will sustain this partnership. It is also part of a donor group that jointlysupports the government's Action Program for Judicial Reform. At the program level, it will continueto collaborate with ADB on joint portfolio reviews and on programming discussions, and withUNDP, the European Union, and other ODA partiers on strategy and program development. In thecontext of specific projects, co-financing or parallel financing is being used in a few projects (4 ofthe 25) and may increase only slightly (possibly in program lending with Japan) and for the ARMMSocial Fund, but the Bank will pursue new partnerships where opportunities arise and openly discusswith ODA partners issues of division of labor. Finally, on the broader aspect of aid coordination, theBank will continue to support country ownership of the process and support government and Bankco-chairing future Consultative Group meetings.

3.69 There is room for closer and more effective collaboration among ODA partners throughthematic and sectoral working groups.20 These groups already serve as vehicles for ODA partners to

18 The media campaign has spread the Bank's reputation in the Philippines as a knowledge Bank as well as a source offunding.19 ADB, AusAID, the Canadian International Development Agency, UNDP, the U.S. Agency for InternationalDevelopment, and the World Bank.20 Eight such informal thematic groups in the areas of poverty alleviation, Mindanao governance, anticorruption, judicialreform, rural power, health, LGU/decentralization, and agrarian reform, have been in place for several years.

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share information, pursue partnerships in specific projects and activities, and agree on delineation ofroles in certain areas. As chair of the Consultative Group, the Bank will continue to play an activerole in the overall aid coordination process and will work on better defining the roles of theseworking groups within the context of the government's development priorities and targets whileaccelerating the shift to government-led coordination.

F. LENDING PROGRAM: SCENARIOS, ExPoSURE, AND TRIGGERS

3.70 Scenarios. The base-case lending program of about $1.1 billion in FY03-05 will includethree or four investment operations a year (about $770 million total, including APLs) and twoadjustment operations of ($350 million combined). Investment lending would hence average about$220 million a year, well below the $400 million foreseen in the last CAS. The reduction reflectsboth absorptive capacity and fiscal constraints and the need to concentrate on improvingdisbursements. Investment lending will focus on the rural, health, and transport sectors or be cross-sectoral. In addition, three or four selected Learning and Innovation Loans over the next three yearscould test and pilot institutional arrangements, for example, for Community Agrarian Reform, UrbanShelter and Community Development, Microfinance Strengthening, Family Income Support, andAlternative Learning Systems. The high-case scenario (see triggers below), includes up to threeadjustment operations of $250 million each, larger volumes of investment lending and possibly anadditional investment project over the three-year period, based on improved portfolio performanceand absorptive capacity, leading to lending of up to $1.7 billion in FY03-05. In a low-case scenario(see triggers below), the lending program would be restricted to a core set of investment projects,particularly for addressing poverty and regional needs through targeted lending in the rural and socialsectors, and only about half the lending volume of the base case (about $0.5 billion). See Annex B3for details on the lending program.

3.71 IBRD exposure to the Philippines has declined significantly since the mid-1990s, from ahigh of US$5.5 billion (4.5 percent of portfolio) at end-FY95 to US$3.4 billion (2.9 percent of totalportfolio) at end-FYOI, and debt service to the Bank as a proportion of public debt service hasdeclined from 20 percent in 1997 to 12 percent in 2001, and from above 2 percent of exports prior to1996 to 1.5 percent in 2001. Under the base-case scenario, exposure would decline slightly from itsFYO 1 level to 2.7 percent of the total portfolio by end-FY05. With the higher volume of adjustmentlending envisaged in the high-case scenario, Bank exposure would rise slightly to about $3.8 billion(3.1 percent of portfolio). All exposure ratios would remain within the Bank's prudential guidelinesunder both scenarios.

3.72 The triggers for the base-, high-, and low-case assistance programs are summarized inTable 3-2. The base-case is predicated on the assumption that the improvement in economicmanagement initiated by the current government will be sustained and is accompanied by satisfactoryprogress in reversing the trends of falling tax revenue and rising public sector deficits and public debtwitnessed in recent years. Such progress would also be facilitated by a higher average growth ratethan achieved during 1999-2001 and an improving climate for private investment. Specificadjustment operations would support a mix of administrative and legislative measures to strengthenfiscal policy, public sector management, governance, and the financial sector. Higher growth,improved policy environment and more effective government interventions in the social sectorswould be expected to bring down the incidence of poverty relative to its estimated level in 2000.Satisfactory compliance with actions agreed under ongoing Country Portfolio Performance Reviewswould also be expected.

-38 -

Table 3-2 Lending Program Triggers

High Case Base Case Low case

* Tax/GNP ratio to increase by 0.7 * Macroeconomic policy framework * Policy slippage, for example, losspercent per year in 2002-05; acceptable to the Bank of fiscal discipline and financialnational govemment deficit/GNP * Tax/GNP ratio to increase by 0.4 market volatility triggered byratio to decline to target 3.1 percent percent per year in 2002-05; national policy weaknessesin 2002 and by 0.8 percent per year govemment deficit/GNP ratio tothrough 2005 decline by 0.5 percent per year

through 2005

* Agreement on and implementation * Agreement on and implementation of * Nonprovision of the reformof an aggressive program of a sound govemance improvement and foundations needed for adjustmentgovemance and public sector public sector reform agenda assistance and slippage of efforts toreforms including: civil service including: improved financial improve govemancereforms to improve public service management and procurement indelivery; public enterprise reforms public sector agencies, and initiatethat enhance fiscal sustainability civil service reforms to improveand strengthen competition; and public service delivery; reform of thefurther specific actions to raise Bureau of Intemal Revenue as part ofgovemance standards efforts to increase public revenues

and as an example of improvedgovemance; and continuedimprovements in private sectorgovernance

* Agreement on and implementation * Agreement on anld implementation ofof aggressive financial sector financial sector r eforms to reducereforms including legislative banking stress, strengthenreforms to enable rapid intervention consolidated supervision andand resolution of distressed banks regulatory enforcement capacity inand adequate legal protection for banking, and enhance the viability ofbank regulators the contractual savings system

* Improving portfolio * Satisfactory compliance with agreed * Failure to address portfolioperformance/disbursement rate on Country Portfolio Performance problems and deterioratingBank portfolio to increase by 2 Review actions disbursement performancepercent per year in FY03-FY05(for higher investment lending)

Notes: Macroeconomic policy and outcome indicators for the base- and high-cases assume gradually rising GDP growth ratesrelative to the growth rate attained in 2001. To the extent that such higher growth is not attained (e.g., due to serious extemalshocks), quantitative and possibly qualitative targets may need to be re-assessed. Not all the above policy actions would need tobe implemented prior to any adjustment lending; but each individual adjustment operation would require upfront implementationof an agreed subset of measures.

3.73 In moving to the high case with additional adjustment lending, the Bank would expect afaster reduction in the government deficit, aided by a more rapid increase in tax revenues vis-a-visthe base case. In addition, the Bank would need to be assured that reforms of identified priorities inthe context of individual adjustment operations were proceeding at an accelerated pace andimplementation performance on the Bank's project portfolio also was satisfactory. Improvedportfolio performance, particularly regarding disbursements and evidence of a higher absorptivecapacity would be needed to increase investment lending beyond the base case. Faster reforms andbetter portfolio performance are likely to occur sirnultaneously, but if only the preconditions foreither more adjustment lending or higher investment lending are met, the Bank would proceed withonly one or the other.

- 39 -

3.74 In a low-case scenario, commitment to reforms would have waned and the Bank's assistanceprogram would contract to core poverty, human resource, and asset reform-related activities, plus astill active set of nonlending assistance. These triggers would naturally need to be interpreted in thecontext of evolving events as external shocks could also trigger the need for an adjustment to theassistance program. In particular, in the event of a large external shock, followed by appropriatepolicy adjustments supported by IMF lending, the Bank might also respond with a larger volume ofadjustment lending than envisaged in the base case. The precise adjustment and financing needsunder such a "crisis" scenario would have to be formulated in response to the nature of the shock.

G. RISK MANAGEMENT AND COUNTRY PROGRAM MONITORING

3.75 Country Risk and Risk Management. An open economy, large public debt, fiscal risks dueto the government's contingent liabilities, significant banking and corporate stress, and large externalfinancing needs render the Philippine economy vulnerable to both external shocks and policyslippage. On the latter, there is a risk that the administration will face political opposition to some ofthe policy reforms it wants to implement and that the outcome of the 2004 national elections could bedetrimental to the reform program. Risks regarding the conflict in Mindanao and opposition to theadministration's strategy regarding the international war against terrorism may also affect thecountry's economic prospects and the administration's ability to implement difficult reform measures.The strength of the administration's policy actions (e.g., to increase tax revenues, manage contingentliabilities, and implement financial and public sector reforms, and its ability to gain political supportfor those that require congressional approval) will determine the scope of the Bank's interventions.The use of effective triggers would predicate increases in the Bank's exposure on necessary policyactions. Continuous close dialogue with the government and other development partners will alsoallow the Bank to closely monitor emerging problems.

3.76 In addition to the country risks, the Bank's program will also be subject to project risks.These include in particular: (i) the high security risk in Mindanao, which may limit on-the-groundpreparation and supervision of operations; (ii) compliance with safeguard policies (regardingenvironment, resettlement, and indigenous peoples); (iii) compliance with procurement and financialmanagement procedures, particularly at the LGU level in view of capacity constraints; (iv) publicrelations risk with renewed adjustment lending; and (v) reputational risks, in particular regardingpossible allegations of corruption in areas covered by Bank-financed operations. Mitigating theserisks requires intensive supervision, continued regular portfolio reviews, careful assessments beforeproject launch (including procurement and financial management assessment of the entityresponsible for project implementation), strong monitoring and evaluation systems, systematic postreviews of projects, external procurement audit of the portfolio, the more strategic capacity buildingalready outlined, as well as the outreach efforts described above. The Bank will also follow upclosely on and assist in the implementation of agreed recommendations of the integrated PEPFMRexercise, including through interactions on the procurement law and dialogue on restructuring ofspecific agencies. Each project will also improve its risk identification, management strategies, andmonitoring of risk actualization.

3.77 Country Program Monitoring. The CAS relates sector-specific strategic objectives andoutcomes. Where possible,. these have been quantified and target values set. For others, the Bank willwork with government to determine the reliability of baselines and track these during the CASperiod. The CAS will utilize this evaluation feature to focus its sector operations on CAS objectivesand outcomes, monitor government's progress against a set of output-level country performanceindicators, and manage the Bank's own work through self evaluation indices and portfolio targets

- 40 -

(see also Annex B9). The Bank plans to undertake a mid term review of the CAS where the set ofoutcomes, country performance and Bank performance indicators will be reviewed to determineprogress, any needed corrections, and the best way of refining the multitiered evaluation features.The Bank will use the national statistics and specific surveys or data collection instruments for thispurpose. It plans to continue to monitor the effectiveness of the Bank Group's assistance throughconsultations with stakeholders and another client survey in about two years, complemented byfollow-up qualitative interviews with stakeholders.

James. D. WolfensohnPresident

By:Shengman Zhang Peter L. Woicke

Washington D.C.April 30, 2002

Philippines Annex AlKey Economic & Program Indicators - Change from Last CAS Page 1 of I

Forecast in Last CAS Actual Current CAS Forecast

Economy (CY) 1998 1999 2000 2001 1999 2000 2001 2002 2003 2004 2005Growth rates (%)

GDP -0.5 2.5 3.5 4.5 3.4 4.0 3.4 4.0 4.5 5.0 5.0Exports 1/ -5.0 10.5 5.0 6.0 3.6 17.7 -3.2 1.8 4.4 7.2 7.4Imports 1/ -7.4 10.6 7.0 6.7 -2.8 4.0 0.5 2.8 5.3 7.3 8.1

Inflation (%o) 2/ 10.4 8.5 6.0 5.0 8.0 6.7 6.7 6.0 5.5 5.0 5.0

National accounts (% GDP)Current account balance 1.5 0.6 -0.6 -0.5 10.0 12.5 4.6 4.4 3.9 3.5 3.0Gross investment 3/ 20.1 19.3 19.6 18.0 18.4 17.6 18.0 18.0 18.2 18.7 19.4

Public finance (% GDP) 4/Fiscal balance 1.3 1.1 1.6 2.0 -3.8 -4.1 -4.0 -3.3 -2.7 -2.1 -1.6Foreign financing 0.3 2.0 1.6 1.7 2.8 2.0 0.6 2.7 0.6 0.3 -0.7

International reserves 5/ 3.0 2.6 2.9 3.1 4.6 4.2 4.7 4.9 4.9 4.8 4.8(as months of imports)

Oa ~~b b b b b b bProgram (Bank's FY) FYO0 FYOO FYO1 FY02 FYOOc FYO1c FY02 FY03 FY04 FY05 FY06Lending ($ million) 560.0 338.0 469.0 500.0 278.8 66.1 135.0 403.0 320.0 395.0 n.a.Gross disbursements 239.0 300.0 370.0 140.0 202.6 125.9 140.0 345.4 314.3 175.0 n.a.($ million)

1/ GNFS2/ to be consistent with the previous CAS, we use GDP deflator, instead of the CPI3/ includes public, private investments, and changes in stocks4/ for National Government only, excludes the rest of the public sector5/ figures are months of imports of goods and services

a. Estimated yearb. Projected yearc. Actual outcome

Annex A2Page 1 of 2

Philippines at a glance 4/30/02

East Lower-POVERTY and SOCIAL Asia & middle-

Philippines Pacific Income Development dlamond*2000Population, mid-year (millions) 75.6 1,853 2,046 Life expectancyGNI per capita (Atlas method, US$) 1,040 1,060 1,140GNI (Atlas method, US$ billions) 78.8 1,964 2,327

Average annual growth, 1994-00

Populabon (%) 2.1 1.1 1.0 GNILabor force (°) 2.6 1.4 1.3 GNI Gross

per prmaryMost recent estimate (latest year available, 1994-00) capita enrollment

Poverty (% of population below national poverty line) 37Urban population (% of total population) 59 35 42Life expectancy at birth (years) 69 69 69Infant mortality (per 1,000 live births) 31 35 32Child malnutrition (% of children under 5) 30 13 11 Access to improved water sourceAccess to an improved water source (% of population) 87 75 80Illiteracy (% of population age 15+) 5 14 15 PhilGross primary enrollment (% ofschool-age population) 117 119 114 ippies

Male .. 121 116 Lower-middle-income groupFemale .. 121 114

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1980 1990 1999 2000Economic ratios'

GDP (US$ billions) 32.5 44.3 76.2 74.7Gross domestic investment/GDP 29.1 24.2 18.4 17.6Exports of goods and services/GDP 23.6 27.5 51.0 56.3 TradeGrossdomesticsavings/GDP 24.2 18.4 19.2 24.0Gross national savings/GDP .. 19.5 28.0 30.3

Current account balance/GDP -5.9 -5.8 10.0 12.5 Domestic nvsenInterest payments/GDP 1.8 3.5 2.7 3.3 savings InvestmentTotal debtlGDP 53.6 69.0 69.6 72.0 sTotal debt service/exports 26.6 27.0 14.0 12.0Present value of debtGDP .. .. 68.1Present value of debtexports ., .. 111.0

Indebtedness1980-90 1990-00 1999 2000 2000 04

(average annual growth)GDP 1.0 3.3 3.4 4.0 4.2 - PhilippinesGDP per capita -1.2 1.0 1.4 2.1 2.2 Lower-middle-income groupExports of goods and services** 3.5 7.3 3.6 17.7 5.6

STRUCTURE of the ECONOMY1980 1990 1999 2000 Growth of Investment and GDP (%)

(%6 of GDP) 2Agriculture 25.1 21.9 17.1 15.9 20Industry 38.8 34.5 30.6 31.1 10

Manufacturing 25.7 24.8 21.6 22.6 0oServices 36.1 43.6 52.2 52.9 -10 1 ss U go. o

Prvate consumption 66.7 71.5 68.0 63.2 -20General govemment consumption 9.1 10.1 13.1 12.8 GDI0 GDPImports of goods and services 28.5 33.3 51.3 50.2

1980-90 1990-00 1999 2000 Growth of exports and Imports (%)(avenage annual growth)Agriculture 1.0 1.6 6.5 3.3 30Industry -0.9 3.2 0.9 3.9 is

Manufacturing 0.2 3.0 1.6 5.6Services 2.8 4.0 4.0 4.4 95 e 9700

Private consumption 2.2 3.9 0.3 -2.1General govemment consumpton 0.6 3.4 6.7 -1.1 -30Gross domestic investment -2.1 3.1 -2.0 2.3 - Exports -0lmportsImports of goods and services 3.4 7.7 -2.8 4.0

Note: 2000 data are preliminary estimates.

'The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond willbe incomplete.

*Exports of goods and services is in local currency units.

6 Annex A2Page 2 of 2

Philippines

PRICES and GOVERNMENT FINANCE1980 1990 1999 2000 Inflatbon (%)

Domestic pulces(% change)Consumer prces 14.2 6.7 4.3 1_Implicit GDP deflator 14.3 13.0 8.0 6.7

Govemment f1nance(% of GDP, includes current grants) o ,Current revenue 16.8 16.1 15.6 99 9s 97 9s 99 00Current budget balance 0.3 0.3 -0.7 GDP deflator OCPIOverall surplusadeflct. -3.5 -3.8 -4.1

TRADE

(US$ millions) 1980 1990 1999 2000 Export and Import levels (USS mill.)

Total exporls (fob) 8,186 34,210 37,295 40,000n.a.n.a. 30,000

Manufactures 5,706 31.097 33,394Total imports (cif) 12,206 36,276 36,102 20,000

Food 656 1,982 1,256 10 000 is 10111111111Fuel and energy 1,842 3,395 4,524Capital goods 3,122 14,555 15.011 0 -1

94 95 as 97 s9 99 DoExport prce index (1995e100) ..Import prce index (1995-100) .. .. .. .. Exports *ImportsTerms of trade (1995=100) .. .. _.._..

BALANCE of PAYMENTS

(US$ Millions) 1980 1990 1999 2000 Currant account balance to GDP(%IExports of goods and services 7,236 11,430 39,012 41,473 15-Imports of goods and services 9,147 13,967 35,267 37,864Resource balance -1,911 -2,537 3704 3,646 10

Net income -439 -744 4,104 3,786 5-Net current transfers 447 714 481 430

Current account balance -1,903 -2,567 7,647 9,349 97 se so |

Financing iems (net) 2,794 2,474 -2,889 -9,645Changes in net reserves -891 93 -3,941 420 -10 --

Memo:Reserves including gold (USS millons) .. 2,048 14,987 14,910Conversion rate (DEC, locaVUS$) 7.5 24.3 39.1 44.2

EXTERNAL DEBT and RESOURCE FLOWS1980 1990 1999 2000

(USS mlillons) Composition of 2000 debt (USS mill)Total debt outstanding and disbursed 17,417 30,580 53,000 50,100

IBRD 926 3,943 4,040 3,627 A: 3,627IDA 34 101 206 207 G: 5,948 B:207

Total debt service 2,183 3,590 6,400 6,700 D. 3,281IBRD 106 597 641 572IDA 0 2 4 5

Composition of net resource flovwsOfficial grants 59 362 170 E: 12,362Official credftors 367 935 -130 -215 E ;2_36Private creditors 946 109 3,920 2,138Foreign direct investment -106 530 1,427 1,584 F: 24,415 Portfolio equity 0 0 422 45

Wold Bank programCommitments 695 1,008 208 255 A -laRD E -BilateralDisbursements 230 507 164 162 B -IDA D -Other mutilateral F -PrivatePrincipal repayments 33 302 387 352 C -IMF G -Short-termNet flows 197 206 -223 -190Interest payments 73 297 258 225Net transfers 124 -91 -481 -415

Development Economics 4/30102

Annex B2Page 1 of2

PhilippinesSelected Indicators* of Bank Portfolio Performance and Management

Indicator FYI 1999 FY 2000 FY 2001 FY 2002'Portfolio AssessmentNumber of Projects Under Implementation a 27 25 24 25Average Implementation Period (years) b 3.8 3.4 3.7 4.0Percent of Problem Projects by Number a, c 22.2 16.0 12.5 20.0Percent of Problem Projects by Amount 8 ' c 25.2 33.5 9.1 12.1Percent of Projects at Risk by Number d 37.0 16.0 12.5 28.0Percent of Projects at Risk by Amount a d 38.2 33.5 9.1 24.2Disbursement Ratio (%) 0 17.0 17.3 11.9 9.5Portfolio ManagementCPPR during the year (yes/no) Yes Yes Yes YesSupervision Resources (total US$ 000) 1,760 2,024 1,462 902Average Supervision (US$ 000/project) 61.0 67.0 61.0 43.0

Memorandum Item Since FY 80 Last Five FYsProj Eval by OED by Number 119 19Proj Eval by OED by Amt (US$ millions) 7664 1552% of OED Projects Rated U or HU by Number 27.7 26.3% of OED Projects Rated U or HU by Amt 28.5 31.5

a. As shown in the Annual Report on Portfolio Performance (except for current FY).b. Average age of projects in the Bank's country portfolio.c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP).d. As defined under the Portfolio Improvement Program.e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the

beginning of the year: Investment projects only.f. As of April 9, 2002.* All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio,

which includes all active projects as well as projects which exited during the fiscal year.

Annex B2Page 2 of 2

PHILI:PPINESDEVELOPMENT EFFECTIVENESS REPORT

As of March 31,2002SUMMARY OF RATINGS

Ratings

Indicator FV99 FY00 FAY01 FY02as or 6/30/99 as of 6/30/00 as of 6/30/01

Plan Actual

Bank EA7J P PHL B E Bank | EAP |PL Bank | P| PHL

1. Quality at Entry2 (QAG) 86% 100% 100% 89% 88% 100% 94% 82% 100% 90% 90% 100%

2. Quality of Supervision3 (QAG) 82% 85% 75% 92% 96% NR NA NA NA 90% 90% 100%

3. Quality ofESW4 (QAG) 73% 82% 100% 86% 91% 100% 67% NA NR 90% 90% 100%

4. Development Outcome (OED) 72% 86% 100% 76% 81% 75% NA NA 100% 100%

5. Sustainability of Benefits 3,6 (OED) 55% 59% 100% 72% 73% 63% NA NA 100% 100%

6. Bank Supervision Performance' (OED) 73% 81% 100% 87% 88% 92% NA NA 100% 100%

7. Quality of ICR 7 (OED) - - 100% - - 100% - - 100% 100%

8. Development Objectives (PSR) - - 91%9 - 92%9 960/o9 100% 96%1o

NA- not available.NR - not rated because no PHL project/task was included in the sample.

1 In terms of % of projects rated satsfactory or better.2 Sources: (i) QEA-3 and QEA-4 for Bank and EAP; (ii) QAG Assessment Reports for PHL.3 Sources: (i) RSA-3 and RSA-4 for Bank and EAP; (ii) QAG Assessment Reports for PHL. Awaitng RSA-5 results for FY01 rabngs.4 Sources: QESW-2, QESW-3, and QESW4 (1 assessment of CPARs and CFAAs).

Sources: (i) ARDE 2001 for Bank ratings (FY99 and FY00); (ii) OED website for EAP and PHL rabngs. FY01 results for Bank and EAP are expected by Sprng 2002.Rating in terms of projects rated likely or better.Source: OED Evaluabon Summaries.Pertains to DO ratngs of ongoing projects. Source: MMRs.

aProjects with DO rated 'U- as at (i) end-FY99: WHSMP, TEEP, TGRP; (ii) end-FYO0: TEEP, TGRP; (iii) end-FY01: CBRMP'° Of 25 projects, one project (CBRMP) has the DO rated 'unsabsfactory.

Annex B3Page I of 2

PhilippinesBank Group Program Summary

Proposed IBRDIIDA Lending Program for Next Three Fiscal Years

Fiscal USS Strategic Rewards Imple1entation RisksProj ID (HAl) HIIL

year (H/AlL) (L/MIL)

2002 2ND SOCIAL EXPENDITURE MGMT 100.0 M L

LAGUNA DE BAY LIL 5.0 M L

LGU URBAN WATER & SAN APL2 30.0 H M

TOTAL 135.0

. USS(A

High Base LowCase Case Case

2003 SECOND AGRARIAN REFORM COM."/ 50.0 50.0 50.0 H L

KALAHI CDD PROJECT 100.0 100.0 75.0 H M

ARMM SOCIAL FUND 35.0 35.0 35.0 H H

PROGRAM LOAN (PUBLIC FIN. STRENGTHENING) 250.0 200.0 - H L

JUDICIAL REFORM 18.0 18.0 18.0 H M

TOTAL 453.0 403.0 178.0

2004 RURAL POWER I (APL) 25.0 25.0 25.0 M H

POPULATION MGMT/WOMEN'S HEALTH II 30.0 30.0 30.0 H H

HEALTH SECTOR REFORM 40.0 40.0 40.0 M MRIVER BASIN DEVELOPMENT 75.0 75.0 75.0 M MPROGRAM LOAN (PUBLIC SECTOR REFORM 1) 250.0 150.0 - H L

CITIES DEVELOPMENT 100.0 - H H

TOTAL 520.0 320.0 170.0

2005 DIVERSIFIED FARM INCOME/AG MODERNIZATION"/ 100.0 75.0 50.0 M M

NATIONAL ROADS IMPROVEMENT MGT. II (APL) 150.0 100.0 - M L

LAND AMIN. AND MGT. PROJECT 11 30.0 30.0 30.0 H M

MINDANAO RURAL DEV'T PROJECT n (APL) 90.0 90.0 50.0 H M

PROGRAM LOAN (PUBLIC SECTOR REFORM II) 250.0 - - H L

KALAHI CDD II 150.0 100.0 H L

TOTAL 21 770.0 395.0 130.0

TOTAL FOR FY03-05 1,743.0 1,118.0 478.0

o.w. program lending (%) 43.0 31.0 0.0

1/ Stand-by. Indicates project should be ready for possible board presentation in year prior 'to firm lending schedule if other operations slip.

2/ In addition, the Manila Sewerage 11 project (S30-50 million) in FY06 is a standby project for FY05.

Note:1. In addition, LILs could be considered, and are cuffently under discussion, for future years for Coummunity Managed Agmrian Reform, Urban Shelter and Community DevelopmenMicrofinance Steengthening, Family Income Support Project, and Altenative Leaming Systems.

2. This table presents the jointly (Bank and Government) agreed program for the nest three fiscal years on which work is in progress. It will be updated in consultadon with Govenmnenton a three-year rolling basis. Lending amounts are provisional subject to these consultations.

Annex B3 (IFC/MIGA)Page 2 of 2

Philippines - IFC and MIGA Program, FY 1999-2002

1999 2000 2001 2002 (Est)

IFC approvals (US$m) 52.00 80.14 126.00 130.50

Sector (%)CONSTRUCTION & REAL ES 17FINANCE & INSURANCE 0 33 5 38HEALTH CARE 17 1INFORMATION 0 1 8NONMETALLIC MINERAL 19PULP & PAPER 58RETAIL TRADE 10TECHNICAL & PROFESSIONAL SERVICES 21TRANSPORTATION & WAREH 30 76UTILITIES 42 23

Total 100 99 100 100

Investment instrument(%)Loans 69 66 94 72Equity 0 0 1 2Quasi-Equity 31 25 3Other 8 5 23Total 100 99 100 100

MIGA guarantees (US$m) * 83 60 140 131

*MIGA's outstanding gross exposure, as of FY end; FY02 - gross exposure as of February 28,2002.

Annex B4Page 1 of 2

Philippines - Summary of' Nonlending Services

Product CopipL FY Cost (US$000) Audience a Objectiveb(Direct Costs)

Recent completionsCountry Diagnostic ReportsSPR/CDF2000 FY00 205 G, B, D, P PS, PDPoverty Assessment FY01 323 G, B, P, D PS, PDCountry Advisory ReportsRural Power Sector Policy Note FY00 116 G, B PSJudicial Assessment FY00 145 G, B PSRural Development Trends & Strategy FY00 69 G, B, P, D PSCombating Corruption FY00 150 G, B, P, D PS, KG, PDFilipino Report Card FY01 408 G, B, P, D PDAnticorruption Update FY02 80 G, B, P, D PS, PDOther ProductsEnvironment Monitor FYO0 36 G, B, P, D PS, KG, PDPublic Sector Reform Policy Note FY01 13 G, B PSTechnical AssistancePensions and contractual savings reform FYO0 50 G, B KG, PSDebt mgmt, decentralization (thru GDLN) FYO0 N/A G PS

UnderwayCountry Diagnostic ReportsCPAR (integrated in PE, Proc. & Fin. Mgmt. Review) FY02 80 G, B PSCFAA (integrated in PE, Proc. & Fin. Mgmt. Review) FY02 100 G, B PSDevelopment Policy Review 2002 FY02 80 G, D, B, P PS, PDFinancial Sector Assistance Program FY02 150 G. B PSPublic Expenditure, Procurement and Financial FY02 150 G, D, B PS

Management ReviewCountry Advisory ReportsEnvironment Monitor FY02 65 G, B, P, D PS, KGOut of School Youth Report FY02 20 G, D, B PSHealth Sector Policy Notes FY02 60 G, B KG, PSTechnical AssistanceTA for Civic Engagement in Public Expenditure FY02 80 G PSTA for LGU Portal Activity FY02 40 G, P KGTA for City Development Strategies FY02 85 G PSTA for Corporate Governance FY02 33 G PSMindanao Post Conflict Assistance FY02 N/A G, D, B PS

Annex B4Page 2 of 2

Product CompLFY Cost (USsOOO) Audience ' Objective'(Direct Costs)

Planned (preliminary list) 1/

Country Diagnostic Reports

Economic Monitoring FY03, 04, 05 80/year B PSDevelopment Policy Review FY04, 05 200 G, D, B, P PS, PDPER/CFAA/CPAR FY05 150 G, B PSPoverty Assessment FY04 150 G, B, P, D PS, PD

Country Advisory Work and Technical Assistance(a) Ensuring Effective Delivery of Public Services

Decentralization Study FY03 230 G, B, D, P PSCivil Service Reform FY03 TF Funded G, B PSCivic Engagement in Expenditure Tracking F03 72 G PSCapacity Building for Bureau of Internal Revenue FY03, 04 TF Funded G PSTA for Improving Public Sector Governance FY03, 04, 05 50/year G PS

(b) Strengthening Environmentfor Private Sector Development

Selected Public Enterprise Reform FY04 75 G, B PSCapital Markets & Savings Study FY05 120 G, B, D, P PSUrban Infrastructure FY04 120 G, B, D, P PSTransport Cost Review Strengthening FY03 75 G, B KG, PSTA for Financial Sector (FSAP follow up) FY03, 04 75/year G PSTA for Corporate Governance FY03, 04, 05 50/year G PS

(c) Building Human Resources

Human Development Study (ARMM) FY03 75 G, B, D, P PS, KGHealth Sector Issues FY04 75 G, B KG, PSSupport regarding Violence against Women FY04 50 G, B PSGender Coordination FY 03, 04, 05 30/year G, B PS

(d) Addressing Natural Resource, Rural Development, and Regional Concerns

Environment Monitor FY03, 05 50/year G, B, D, P PS, KGCountry Environmental Analysis FY04 50 G, B, D, P PS, KGNatural Resource Management Study FY03 75 G, B.D, P PS, KGRegional Disparities/Inequality Study FY05 120 G, B, D, P PSMindanao Post Conflict Assistance FY03, 04, 05 200/year G, B, D PS

Otlhers

Demand Driven Policy Notes FY03, 04, 05 75/year G PSEast Asia Regional Studies FY04, 05 75/year G, B, D, P PS, PD, KG

a. G=Government, D=Donor, B=Bank, P=Public Dissemination.b. KG=Knowledge Generation, PD-Public Debate, PS=Problem-Solving.

1/ Composition will vary by low, base and high case scenario, be modified in response to evolving circumstances, and be subject to review withgovernment in annual programming discussions.

Annex B5Page I of I

Philippines Social IndicatorsLatest single year Same regionrincome group

East Lower-Asia & middle-

1970.75 1980-5 199399 Pacific Income

POPULATIONTotal population, mid-year (millions) 43.1 54.7 74.3 1,836.6 2,093.0

Growth rate (% annual average for period) 2.8 2.5 2.2 1.2 1.1Urban population (% of population) 35.6 43.0 57.7 34.5 42.9Total fertility rate (births per woman) 5.2 4.5 3.5 2.1 2.1

POVERTY(% of population)National headcount index 1/ .. 52.0 36.8

Urban headcount index .. 42.0 21.5Rural headcount index .. 58.0 50.7

INCOMEGNI per capita (US$) 370 520 1,050 1,010 1,200Consumer price index (1995=100) 10 43 135 136 137Food price index (1995=100) , 45 130

INCOME/CONSUMPTION DISTRIBUTIONGini index .. .. 46.2Lowest quintile (% of income or consumption) 5.0 .. 5.4Highest quintile (% of income or consumption) 56.0 .. 52.3

SOCIAL INDICATORSPublic expenditure

Health (% of GDP) .. .. 1.7 1.7 2.3Education (% of GNI) 2.0 1.4 3.4 2.9 4.8Social security and welfare (% of GDP) .. ..

Net primary school enrollment rate(% of age group)

Total 97 96 101 100 99Male 94 97 .. 100 100Female 99 96 .. 100 99

Access to an Improved water source 2/(% of Population)

Total .. 65 87 75 80Urban .. .. 92 93 94Rural .. .. 80 66 69

Immunization rate(% under 12-months)

Measles .. 49 87 83 87DPT .. 59 87 82 87

Child malnutrition (% under 5 years) 50 33 30 12 9Life expectancy at birth(years)

Total 59 63 69 69 69Male 58 61 67 67 67Female 61 65 71 71 72

MortalityInfant (per 1,000 live births) 3/ 58 46 31 35 32Under 5 (per 1,000 live births) 90 72 41 44 40Adult (15-59)

Male (per 1,000 population) 376 323 193 184 191Female (per 1,000 population) 314 259 146 141 133

Matemal (per 100,000 live births) 4/ .. .. 170Births attended by skilled health staff (%) 46 57 56

Note: 0 or 0.0 means zero or less than half the unit shown. Net enrollment ratios exceeding 100 indicate discrepanciesbetween the estimates of school-age population and reported enrollment data. Latest year for access to Improved watersource data is 2000.

1/ Based on official poverty line.2/ Data available in the Philippines is lower 77% of population.3/ Official govemment data in the Philippines is higher 49 per 1,000 livebirths.4/ Official govemment data in the Philippines is lower: 60 per 100,000 livebirths.2001 World Development Indicators CD-ROM, World Bank

Annex B6Page 1 of 3

Philippines - Key Economic Indicators

Estimate ProjectedIndicator 1998 1999 2000 2001 2002 2003 2004 2005

National accounts (as % of GDP)Gross domestic producta 100 100 100 100 100 100 100 100

Agriculture 17 17 16 15 15 15 14 14Industry 31 31 31 32 31 32 32 32Services 52 52 53 53 54 54 54 55

Total Consumption 86 81 76 81 82 82 81 81Gross domestic fixed investment 21 19 18 18 18 18 18 19

Government investment 3 4 3 3 3 3 3 3Private investment 18 15 14 14 15 15 15 16

Exports (GNFS)b 52 51 56 49 48 47 48 49Imports (GNFS) 59 51 50 47 48 47 48 49

Gross domestic savings 14 19 24 19 18 18 19 19Gross national savingsC 23 28 30 23 22 22 22 22

Memorandum itemsGross domestic product 65 76 75 71 77 84 91 98(US$ billion at current prices)GNP per capita (US$, Atlas method) 1090 1050 1040 1050 ..

Real annual growth rates (%, calculated from 1985 prices)Gross domestic product at market I -0.6 3.4 4.0 3.4 4.0 4.5 5.0 5.0Gross Domestic Income 6.0 6.3 4.6 0.8 2.9 4.5 5.1 5.2

Real annual per capita growth rates (0%, calculated from 1985 prices)Gross domestic product at market r -2.6 1.4 2.1 1.5 2.0 2.5 2.9 2.9Total consumption 4.1 -1.0 -3.8 3.1 1.4 2.2 2.4 2.5Private consumption 5.0 -1.6 -3.9 3.7 1.3 2.2 2.2 2.3

Balance of Payments (US$ billions)Exports (GNFS)b 34.5 39.0 41.5 35.5 37.1 39.7 43.7 48.1

Merchandise FOB 29.5 34.2 37.3 32.2 33.5 35.9 39.5 43.4Imports (GNFS)b 35.0 3-5.3 37.9 34.9 36.8 39.7 43.7 48.4

Merchandise FOB 29.5 29.3 30.4 29.5 31.0 33.5 37.0 41.1

Resource balance -0.5 3.7 3.6 0.7 0.3 0.0 0.0 -0.3Net current transfers 0.4 0.5 0.4 0.4 0.2 0.2 0.2 0.2Current account balance 1.5 7.6 9.3 3.3 3.4 3.3 3.2 3.0

Net private foreign direct investmer 1.8 1.4 1.6 1.7 1.5 1.6 1.6 1.7Long-term loans (net) 2.7 4.7 5.5 -1.7 -1.6 0.0 0.3 1.4

Official 0.0 -0.1 -0.2 1.5 1.4 0.7 0.0 -0.5Private 2.7 4.8 5.7 -3.2 -3.0 -0.7 0.2 1.9

Other capital (net, incl. errors & onmnissi -4.7 -10.0 -16.9 -3.4 -2.3 -3.2 -3.2 -4.1

Change in reservesd -1.4 -3.8 0.4 0.1 -0.9 -1.6 -1.9 -2.0

Memorandum itemsResource balance (% of GDP) -0.8 4.8 4.8 0.9 0.4 0.03 -0.02 -0.4

(Continued)

Annex B6Page 2 of 3

Philippines - Key Economiic Indicators(Continued)

Estimate ProjectedIndicator 1998 1999 2000 2001 2002 2003 2004 2005

Public finance (as % of GDP at market prices)eCurrent revenues 17.4 16.1 15.6 15.5 15.6 15.9 16.3 16.6Current expenditures 15.9 15.8 16.3 16.3 15.8 15.5 15.3 15.5Current account surplus (+) or defic 1.4 0.3 -0.7 -0.8 -0.2 0.4 1.0 1.0Capital expenditure 3.3 4.0 3.4 3.2 3.1 3.1 3.1 2.6Foreign financing 0.5 2.8 2.0 0.6 2.7 0.6 0.3 -0.7

Monetary indicatorsM2/GDP 42.9 45.9 43.2 41.5 41.7 41.7 41.7 41.7Growth of M2 (%) 7.4 19.3 4.5 6.0 10.6 10.2 10.3 10.3Consumer price index (% change) 9.7 6.7 4.3 6.1 6.4 5.9 5.0 5.1GDP deflator (% change) 10.5 8.0 6.7 6.7 6.0 5.5 5.0 5.0

a. GDP at market pricesb. "GNFS" denotes "goods and nonfactor services."c. Includes net unrequited transfers excluding official capilal grants.d. Includes use of IMF resources.e. Central government onlyf. "LCU" denotes "local currency units." An increase in US$/LCU denotes appreciation.

Annex B6Page 3 of 3

Philippines - Selected Indicators TableBase-case (most likely) projection

Estimate Projection1998 1999 2000 2001 2002 2003 2004 2005

Part A: Main Macro AggregatesAnnual growth rates, calculatedfrom constant 1985 price data

GDP (mp) per capita -2.6 1.4 2.1 1.5 2.0 2.5 2.9 2.9Total consumption per capita 4.1 -1.0 -3.8 3.1 1.4 2.2 2.4 2.5

GDP at market prices -0.6 3.4 4.0 3.4 4.0 4.5 5.0 5.0Total consumption 6.3 0.9 -2.0 5.1 3.4 4.3 4.5 4.5

Private consumption 7.1 0.3 -2.1 5.7 3.3 4.2 4.3 4.4Gross domestic investment (GDI) -16.3 -2.0 2.3 4.3 8.2 7.4 8.0 9.1

Gross dom. fixed investment (GDFI) -11.2 -2.3 0.0 -0.6 8.4 7.4 8.0 9.2

Exports (GNFS) -21.0 3.6 17.7 -3.2 1.8 4.4 7.2 7.4Imports (GNFS) -14.7 -2.8 4.0 0.5 2.8 5.3 7.3 8.1

Savings-investment balances, as percentage of GDPGross Domestic investment 20.3 18.4 17.6 18.0 18.0 18.2 18.7 19.4

Foreign savings -2.4 -10.0 -12.5 -4.6 -4.4 -3.9 -3.5 -3.0Gross national savings 22.7 28.5 30.1 22.6 22.4 22.1 22.2 22.4

Govemment savings 1.4 0.3 -0.7 -0.8 -0.2 0.4 1.0 1.0Non government savings 21.3 28.2 30.8 23.4 22.6 21.7 21.2 21.4

Gross domestic savings 13.7 18.9 24.0 19.4 18.4 18.2 18.7 19.0

OtherGDP inflation 10.5 8.0 6.7 6.7 6.0 5.5 5.0 5.0Annual average exchange rate (LCU/US$) 40.9 39.1 44.2 51.0 51.9 52.5 53.7 54.9Money growth 7.4 19.3 4.5 6.0 10.6 10.2 10.3 10.3

Part B: Government Finance IndicatorsPercentage of GDP

Total revenues, of which 17.4 16.1 15.6 15.5 15.6 15.9 16.3 16.6Tax revenues 15.5 14.3 13.8 13.4 13.9 14.3 14.7 15.1

Total expenditures, of which 19.2 19.9 19.7 19.5 18.8 18.6 18.4 18.1Consumption 10.9 10.4 10.1 9.5 9.5 9.6 9.7 9.8

Deficit(-)/Surplus(+) -1.9 -3.8 4.1 -4.0 -3.3 -2.7 -2.1 -1.6

Financing: 1.9 3.8 4.1 4.0 3.3 2.7 2.1 1.6Foreign 0.5 2.8 2.0 0.6 2.7 0.6 0.3 -0.7

OtherTotal Debt/GDPmp 53.3 56.9 62.8 60.4 65.0 62.2 59.2 56.1Total interest payments/Tax revenues 24.2 24.9 30.9 35.7 27.3 26.0 24.2 22.9

Part C: Debt & Liquidity IndicatorsTotal DOD and TDS

DOD (US$ billions) 48.3 53.0 50.1 51.0 48.9 47.5 46.4 45.8DOD/ GDPmp ratio 74.1 69.6 72.0 71.4 63.2 56.3 51.0 46.7TDS (US$ billions) 4.7 6.4 6.7 7.6 7.4 7.0 7.5 6.6TDS/exports(XGS)ratio 11.6 14.0 12.0 17.0 16.8 15.1 14.9 11.9

Total gross reserves (months' imports G&S) 3.4 4.6 4.2 4.7 4.9 4.9 4.8 4.8

Part D: External Financing Plan(USS, millions)

Private investment (net) 2.1 7.7 1.6 2.1 1.7 2.4 2.5 3.4Net Long termn borrowing excl IMF 2.7 4.7 5.5 -1.7 -1.6 0.0 0.3 1.4

Financing Requirements (incl IMF) -0.2 -3.8 -9.8 -3.4 -2.5 -1.7 -1.3 -1.0of which current account deficit -1.5 -7.6 -9.3 -3.3 -3.4 -3.3 -3.2 -3.0

Annex B7Page 1 of 1

Philippines - Key Exposure Indicators

E]stimate ProjectedIndicator 1998 1999 2000 2001 2002 2003 2004 2005

Total debt outstanding and 48.3 53.0 50.1 51.0 48.9 47.5 46.4 45.8disbursed (TDO) (US$b)a

Net disbursements (US$b)a -3.1 3.1 0.4 1.0 -2.2 -1.4 -1.1 -0.6

Total debt service (TDS) 4.7 6.4 6.7 7.6 7.4 7.0 7.5 6.6(US$b)a

Debt and debt service indicators (%)TDO/XGSb 117.9 115.8 105.5 125.7 110.9 101.9 91.6 83.1

TDO/GDP 74.1 69.6 72.0 71.4 63.2 56.3 51.0 46.7TDS/XGS 11.6 14.0 12.0 17.0 16.8 15.1 14.9 11.9Concessional/TDO 23.7 25.3 24.8 27.5 30.9 32.6 32.9 32.1

IBRD exposure indicators (%)IBRD DS/public DS 17.6 13.1 13.1 11.6 11.1 10.0 9.8 10.8Preferred creditor DS/public 30.7 23.6 24.6 22.2 29.3 31.9 28.8 30.6

DS (%)C

IBRD DS/XGS 1.6 1.4 1.2 1.5 1.4 1.3 1.2 1.1IBRD TDO (US$b)d 4.3 4.0 3.6 3.3 3.4 3.3 3.4 3.2

Share of IBRD portfolio (%) 3.6 3.3 3.0 2.7 2.7 2.7 2.7 2.7IDA TDO (US$b)d 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2

IFC (US$b)

Loans 161 186 256 204 n.a. n.a. n.a. n.a.Equity and quasi-equity 36 72 56 68 n.a. n.a. n.a. n.a.

MIGAMIGA guarantees (US$mJ 38 83 60 140 131 n.a. n.a. n.a.

a. inciuaes pUDIIC ana puonicy guaranmeea aeor, pnvare nonguarameea, use or ir creairs ana net snorE-

term capital.b. "XGS" denotes exports of goods and services, including workers' remittances.c. Preferred creditors are defned as IBRD, IDA, the regional multilateral development banks, the IMF, and the

Bank for International Settlements.d. Includes present value of guarantees.e. Includes equity and quasi-equity types of both loan and equity instruments.f. MIGA's outstanding gross exposure, as of FY end; FY02 gross exposure as of February 28, 2002.

Annex B8Page I of2

Philippines

Operations Portfolio (IBRDIIDA and Grants)

As Of Date 04t04t2002

Closed Projects 140

IBRDI1DATotal Disbursed (Active) 536.00

of which has been repaid 20.68Total Disbursed (Closed) 8,055.50

of which has been repaid 5,899.60Total Disbursed (Active + Closed) 8,591.54

of which has been repaid 5,920.31

Total Undisbursed (Active) 821.58Total Undisbursed (Closed) 0.00Total Undisbursed (Active + Closed) 821.58

Active Prolects Difference Between

Last PSR Expected and Actual

Supervision Rating Original Amount In USS Millions Disbursements '

Project ID Project Name Development impementatin FY IBRD IDA GRANT Cancel. Undisb. Orig. RmOblectives Progress Rev'd

P037079 AGRARIAN REFORM COMM S S 1997 50 7 -3.2

P059933 COASTAL MARINE S U 2000 1.2 1.1 1.2

P004595 COMMUNITY BASED RESO U U 1998 50 10 33 27.3

P004403 CONS. OF PRIORITY PR S U 1994 20 2 3 6.9P066069 LAND ADMIN & MANAGEMENT S S 2001 4.8 4.1 0.8

P058842 MINDANAO RURAL DEV S U 2000 27.5 23.7 10.2

P066509 MMURTRIP-BICYCLE NWK S # 2001 1.3 1.2 0.1

P057731 METRO MANILA URBAN TRANSPORT S S 2001 60 57.6 -1.3

P004408 ODS INVESTMENT PROJE S S 1995 15 3.9 3.9

P004565 PH-EARLY CHILD DEV. S S 1998 19 15.2 10.2

P039019 PH-FIRST NATIONAL ROADS IMPROVEMENT S S 2000 150 127.9 37.4

P059491 PH-LGU URBAN WATER & SAN APL2 S S 2002 30 27.9P040981 PH-SECOND SUBIC BAY S S 1997 60 23.8 21 44.9 21

P065113 PH-SOCIAL EXPENDITURE MGMT S S 2000 100 58.6 58.5

P004602 PH-THIRD ELEMENTARY EDUCATION S S 1997 113.4 20.1 72.7 78 29.3P004567 PH-WOMENS HEALTH & SAFE MOTHERHOOD S S 1995 18 4.3 3.1 7.4 3.1

P048588 PHIL-LGU FINANCE AND DEVELOPMENT PROJECT S U 1999 100 40 56.1 21.1

P039022 PHIL-LGU URBAN WATER & SANITATION PROJECT S S 1999 23.3 18 16.3P004611 PHIL-MANILASEWERAGEII S U 1996 57 9 42 51 21.1P004576 PHIL-WATER DISTRICTS DEVELOPMENT PROJECT S S 1998 38.6 32.9 48.4 17.2

P004614 RURAL FINANCEII S S 1996 150 2.6 2.6P057598 RURAL FINANCE III S S 1999 150 108.9 81.4

P051386 SZOPAD SOCIAL FUND S S 1998 10 0.3 0.3

P004571 TRANS GRID REINFORCEMENT S S 1996 250 45.5 80.6 110.8 61.7P004613 WATER RESOURCES DEVELOPMENT S S 1997 58 7.3 28.3 32.6 1.9

Overall result Result 1520 37.6 162 630.8 646.9 155.4

at Intended disbursements to date minus actual disbursements to date as projected at appraisal.

Annex B8Page 2 of 2

P:hilippinesStateiment of IFC's

Held and I)isbursed PortfolioAs of 3/31/2002

(In US Dollars Millions)

Held Disbursed

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic1980/82/85/89/90/94/95 AACT 0.00 2.74 0.00 0.00 0.00 2.74 0.00 0.001996 All Asia Growth 0.00 4.00 0.00 0.00 0.00 4.00 0.00 0.001996 All Asia Manager 0.00 0.04 0.00 0.00 0.00 0.04 0.00 0.001996 AllAsiaVen Mgmt 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.002001 APW Trade 0.00 1.00 0.00 0.00 0.00 1.00 0.00 0.002000 Asian Hospital 7.00 0.00 0.00 0.00 5.00 0.00 0.00 0.001997 Bataan P/E 29.82 0.00 10.00 116.55 29.82 0.00 10.00 116.551998 Drysdale Food 13.46 0.00 0.00 10.00 11.66 0.00 0.00 8.802001 Filinvest 22.00 0.00 0.00 0.00 16.00 0.00 0.00 0.001979/90 General Milling 0.00 1.73 0.00 0.00 0.00 1.73 0.00 0.001998 H&Q PV III 0.00 5.76 0.00 0.00 0.00 5.76 0.00 0.001989 H&QPV-I 0.00 0.61 0.00 0.00 0.00 0.61 0.00 0.001993 H&QPV-II 0.00 1.16 0.00 0.00 0.00 1.16 0.00 0.001970/72/00 Mariwasa 9.50 0.00 3.00 0.00 9.50 0.00 3.00 0.002000 MFl MEP 0.00 0.12 0.00 0.00 0.00 0.12 0.00 0.001993/94 Mindanao Power 0.00 4.26 0.00 0.00 0.00 4.26 0.00 0.002001 MNTC 46.00 0.00 0.00 0.00 0.00 0.00 0.00 0.001993 Pagbilao 30.00 10.00 0.00 3.00 30.00 10.00 0.00 3.002001 PIATCO 50.00 0.00 0.00 50.00 0.00 0.00 0.00 0.001992 Pilipinas Shell 0.00 1.56 0.00 0.00 0.00 1.56 0.00 0.002000 PlantersBank 15.00 0.00 8.71 0.00 15.00 0.00 8.71 0.001998 Pryce Gases 13.00 0.00 0.00 5.00 13.00 0.00 0.00 5.002000 SME.COM 0.00 0.21 0.00 0.00 0.00 0.12 0.00 0.002000 STRADCOM 12.00 0.00 8.00 0.00 0.10 0.00 8.00 0.001995 Sual Power 27.19 17.50 0.00 140.05 27.19 17.50 0.00 140.051992 Union Cement 0.00 5.63 0.00 0.00 0.00 5.63 0.00 0.001999 UPPC 20.00 0.00 10.00 0.00 20.00 0.00 10.00 0.001994 Walden Mgmt 0.00 0.05 0.00 0.00 0.00 0.05 0.00 0.001994 Walden Ventures 0.00 1.59 0.00 0.00 0.00 1.59 0.00 0.00

Total.Portfolio: 294.96 57.96 39.71 324.60 177.26 57.87 39.71 273.40

Ajpprovals Pending CommitmentLoan Equity Quasi Partic

2001 *EI 1.00 0.00 0.00 0.002000 Zsian Hospital 0.00 0.00 0.00 5.002002 Eastwood 25.00 3.00 0.00 0.002000 LTO Project 0.00 0.00 0.00 20.00

Total Pending Commitment: 26.00 3.00 0.00 25.00

Annex B9Page 1 of 25

CAS Program (2003-05) Matrix Based on Medium-Term Philippine Development Plan (MTPDP) 2001-04

1. Macroeconomic Stability and Equitable GrowthAchieve macroeconomic stability and accelerate and sustain growth across sectors, regions and socio-economic groups.

Diagnostic Strategic Objectives & Strategies Country Performance WBG Instruments World Bank Major Related Activities

Country Outcome Indicators Against Strategy Performance Indicators of Other Donors

Indicators U Areas

Recent growthinadequate to generaterapid povertyreduction.

Sound and sustainable Soundfiscal management * Policy and administrative actions to * Sustained expenditures on * Public Finance Satisfactory ADB: Analyses of LGU

fiscal management is and sustained poverty increase revenue mobilization; strategic social investments in Strengthening Loan (PFSL) implementation of PFSL, Finances.

critical for confidence in focused public * Better management of contingent education and basic health and future adjustment SEMP 2 and future IMF: Post-pogram

macto management and expenditures. liabilities and fiscal risks; programs. operations. adjustment loans and of monitoring and TA.

the sustainability of * Declines in the net * Improvements in public, expenditure * Tax/GNP ratio increasing. * SEMP 2 loan, grant assistance. Japan: TA for risk

poverty reducing addition to government management through procurement, * NG deficit/GNP ratio * Public Expenditure, management.

expenditures. liabilities. financial management and budget declining. Procurement and Financial U.S.A.: TA on public

reforms; and Management Review expenditure and resource

* Improving the efficiency, (PEPFMR). mobilization.

effectiveness and equity of public * PEPFMR 11.expenditures. * Periodic Development

Policy Reviews (DPR).* ASEM TF grant supportedtechnical assistance supportingpublic expenditure budgetingand govemance reforms.* GDLN programs on fiscaland debt management.

Govemance deficiencies Improved governance in See section 4 for details.create inefficiency, hurt both the public andthe poor and undermine private sectors.confidence.

1/ Where measurable indicators have not been specified, most will be through ongoing/planned AAA such as PEPFMR, FSAP, etc.

Annex B9Page 2 of 25

Diagnostic Strategic Objectives & Strategies Country Performance WBG Instruments World Bank Major Related ActivitiesCountry Outcome Indicators Against Strategy Performance Indicators of Other Donors

Indicators 1" Areas

Financial sector (banking Financial sector is * Improve bank regulation, supervision * Containment of public * PFSL. * Satisfactory ADB: Non-Bank Financialand non-banking) strengthened and and exit procedures for dealing and funding need for bank * Technical assistance through implementation and Sector Loan andweaknesses create deepened resolving financially troubled resolutions. trust funds, and notes on best dissemination of FSAP. Institutional Capacityuncertainty and militate * Falling NPL ratio. institutions. I Increased ability to solve practice. * Satisfactory Building for PDIC.against efficient resource * Increased financial * Reduce the ratio of non-performing failing institutions. * Financial Sector Assessmen implementation of PFSL IMF: Consultations anduse. sustainability with reduced loans and implement the anti-money * Addressed deficiencies Program and follow-up. and TA. involvement in FSAP.

pending liability on laundering initiative. identified in the Bangko U.S.A.: TA for improvinggovernment. * Increase the availability of financial Sentral ng Pilipinas transparency and* Increase in portfolio services to a greater portion of the assessment. accountability of bankinginvestment. population. ' Examinations including Anti institutions, and addressin* Increase in volume of Money Laundering compliance money laundering issues.trading in secondary bond conducted.markets and increased I Need for additional financialissuance (number and services identified and draftvalue) of corporate bonds. plan prepared.

Deepen the money and securities Deepening of money market as IFC: Deepen and strengthenmarkets to increase sources of long term indicated by increased volum financial system throughinvestment and financring ..inttion building s

introduction ofnew financialmechanisms (e.g.securitization and tradeenhancement facilities).

Implement a comprehensive reform of Increased financial * PFSL.the major retirement income programs sustainability with reduced * Technical assistance through(SSS, GSIS, AFP-RSBS) and pending liability on trust funds.contractual savings institutions to assure government * FSAP.a more adequate, equitable andfinancially viable system.

Increase in portfolio ' Strengthen capital market Passage of the Corporate * Technical assistance through ADB: Non-Bank Financialinvestment, development and the availability of long Recovery Act. trust funds. Sector Loan.Increase in volume of term equity capital. ' Reduction in stamp duties. * FSAP. U.S.A.: TA to the SEC andtrading in secondary bona * Support drafting and implementation * Development of a clearing * Notes on best practices. for financial sectormarkets and increased of the Corporate Recovery Act. and settlement system. regulation and bankrupcyissuance (number and * Establishment of a bond exchange; ' Establishment of a bond issues.value) of corporate bonds. development of rules and regulations for exchange.

asset securitization and trading. * Development of rules andregulations for assetsecuritizabion and trading.

I/ Where measurable indicators have not been specified, most will be through ongoing/planned AAA such as PEPFMR, FSAP, etc.

Annex B9Page 3 of 25

Diagnostic Strategic Objectives & Strategies Country Performance WBG Instruments World Bank Major Related ActivitiesCountry Outcome Indicators Against Strategy Performance Indicators of Other Donors

Indicators " Areas

Infrastructure deficiencies Government and private * Support govemrnment efforts to develop * Full implementation of IRR* Technical assistance through Satisfactory ADB: Support throughlimit growth and sector partnership in and implement frameworks for public- to the Electric Power Industry trust finds. implementation of Bank- lending and policy analysesinfrastructure infrastructure improve private partnership in water, transport Reform Act (EPIRA). * FSAP. financed interventions. in broad infrastructurearrangements expose and are more efficient and power sector development. This * Announcement of guideline * Notes on best practices. sector.government to large fiscal includes a framework for managing relating to issuance of * PEPFMR. U.S.A.: TA for regulatoryrisks. contingent liabilities and issuance of guarantees in PPI projects. * PFSL. framework and competitive

guarantees, and clarifying the NG and procurement (in roads,LGU responsibilities. ports, shipping, aviation,

railways, power, telecom,and M.

Transport Sector: Output based * Introduction of fuel levy to Supervision of ongoing Project performance ADB: Sixth road projectfunding of investment and long-term ensure sustainable National Roads Improvement indicators. and TA for rural roads.performance based maintenance maintenance. Project (NRlMP) I Austria: Bridge programcontracting; procurement and financial * Implementation of Development of NRIMP-II Japan: Various roadmanagement reforms in DPWH to procurement and financial projects.strengthen delivery of infrastructure. management systems.Support policy reforms for PhilippineNationanl Railway, and water transport

In power sector: Power Sector: Restructuring, NPC * Implementation progress * Continued policy analysis Project performance ADB: Power Sector* New entrants of private privatization, and strengthening and results of NPC and dialogue, monitoring of indicators and ratings; Restructuring Programplayers. distribution. privatization. the finances of NPC and its adequacy on donors' Loan and possible loan for* Higher rural * Adequacy of tariff and successor; APL for Rural coordination. rural electrification.electrification ratios. subsidy policy. Power Project, proposed co- Japan: Loan for power

* Improvements in operationa financing with GEF for transmission, geothermaland financial performance of renewable energy component rehabilitation, and TA forelectric cooperatives. * IFC: Support selected hydropower and natural gas

newly privatized National areas.Power Corporation assets, as U.S.A.: TA for powerwell as renewable energy and sector restructuring.energy efficiency projects; andsupport to selected ruralelectric cooperatives.

1/ Where measurable indicators have not been specified, most will be through ongoing/planned AAA such as PEPFMR, FSAP, etc.

Annex B9Page 4 of 25

Diagnostic Strategic Objectives & Strategies Country Performance WBG Instruments World Bank Major Related ActivitiesCountry Outcome Indicators Against Strategy Performance Indicators of Other Donors

Indicators " Areas

In water sector: 2 Water Sector: * More private sector Manila Second Sewerage Project performance ADB: Water supply sector* Improved water and * Assist water utilities to improve participation in water and Project. indicators. loan.sanitation services in all operational efficiency and sanitation sector. Water District Development Meeting APL triggers. Japan: Various projectsurban areas. accountability to consumers. * Increasing private financial Project. Successful implementatio and TA on water supply.

* Deepen private sector participation in resources into water and LGUUWSP APL I and APL2. of TA. Spain: Water project.the sector. sanitation. LGUUWSP APL3.* Consolidate the gains in private TA for drafting the legislationsector participation in operations of to establish a WaterLGU water services. Regulatory Commission* Further private sector participation b (WRC).attracting private financing. TA for establishing a Contrac* Assist Local Water Utilities Administration Unit.Administration reform. PHRD Grant on Local Water

Utilities Administrationreform.

Improved urban Other Urban services: Improve urban Rate of solid waste sanitary Urban Development Sector ADB: Metro Manila Airenvironment (water, air environment by investing in drainage, disposal. Study. Quality Improvementquality measures). wastewater treatment, solid waste and City Development Strategies. Program.

air pollution reduction. Urban Environment Service Sweden: Air Quality Mgt.Delivery and Management Japan: Solid waste mgt.Study. projects.LOGOFIND. U.S.A.: Solid waste mgt.

1/ Where measurable indicators have not been specified, most will be through ongoing/planned AAA such as PEPFMR, FSAP, etc.

2/Relevant MDG targets to which these objectives will contribute: "Halve, by 2015, proportion of people without sustainable access to safe drinking water" and "by 2020, to haveachieved a significant improvement in the lives of slum dwellers."

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Diagnostic Strategic Objectives & Strategies Country Performance WBG Instruments World Bank Major Related ActivitiesCountry Outcome Indicators Against Strategy Performance Indicators of Other Donors

Indicators It Areas

Investment and trade Investor confidence and * Policy and regulatory reforms, in * Lowering of spreads in * Policy advice under Trust ADB: Exportenvironment needs reform willingness to participate particular trade liberalization and international borrowing. Fund arrangements. Competitiveness Projects.to strengthen competition in private sector improves deregulation for agriculture and * Simplified business permit * Alliance with institute of Australia: Support forand competitiveness. (leading to improved service sector activities. approval process at LGU Corporate Directors to deliver training of trainers in

competitiveness in * Inprove corporate govemance. level. corporate govemance training corporate governance.agriculture, industry, and * Improve arrangement for resolving * Securities and Exchange * Possible future policy-base Canada: Businessservices) cases of insolvency quickly. Commission and Philippine lending. Advisory (BAP) Project* Investor Rating/EIU * Privatization of public enterprises and Stocl Exchange guidelines * Report on Standards and and Private Enterprisebusiness environment facilitation of private investment regarding appointment of Codes assessment on corporate Accelerated Resourceratings; infrastructure, corporate directors. govemance insolvency and Linkages (PEARL) Project.* Improved private secto * Land market reform (rural and auditing and accounting. Japan: Various projectsperception of business urban). supporting industries andenvironment; TA for investment* Professionalization in promotion.appointing directors in U.S.A.: TA forGOCCs. privatization and

open/equal access tomarkets and inputs.

Greater competition in Review the cause of high transport costs Policy advice under Trade and ADB: Support throughinter-island shtpping and esp. in shipping. Philippines National Transport Facilitation project ongoing TA.transportation. Railways (PNR) - implementation of for East Asia region. U.S.A.: TA in ports and

concessioning. shippping.

SME Development. * Changes in secured lending Policy advice under Trust Canada: BAP and PEARL* Support diversification of collateral laws to permit floating Fund arrangements. Projects.and secured lending regime. charges. IFC: Microfinance institution Spain: support to SMEs.* Create a level playing field with * Removal of size based fisca in Davao, other investments U.S.A.: TA onregard to trade, competition, tax and and tax incentives. in the Visayas/Mindanao microtinance and creditFDI policies. * Enactment of uniform region. policy improvement.

regulations and standards forall types of microfinanceinstitutions.* Training BSP examiners insupervision and monitoring omicrofinance institutions.

1/ Where measurable indicators have not been specified, most will be through ongoing/planned AAA such as PEPFMR, FSAP, etc.

Annex B9Page 6 of 25

Diagnostic Strategic Objectives & Strategies Country Performance WBG Instruments World Bank Major Related ActivitiesCountry Outcome Indicators Against Strategy Performance Indicators of Other Donors

Indicators 1 Areas

ITservices: -' Support ICT deployment and Development of self- Possible IFC investment Japan: Project and TA in* Renewed investment. technology modernization. regulating mechanisms in E- operations. Assisting telecommunications.* Increase in number of commerce. development of the country's U.S.A.: TA in e-commerceFilipino IT service firms software and technology- and ICT.that qualify for related sector; ongoingintemational certification investment support tosuch as CMM and ISO. cyberpark and technology-

related projects.

Sustained investments in See section 3for detailshuman resources.

I/ Where measurable indicators have not been specified, most will be through ongoing/planned AAA such as PEPFMR, FSAP, etc.

3/ Relevant MDG target: "Incorporation with private sector, make available benefits of new technologies, especially information and communication."

Annex B9Page 7 of 25

2. Accelerating Environmentally Sustainable Rural Development with Social EquityUndertake comprehensive poverty-focused rural development based on productivity improvements, agrarian reform and socially and environmentally sustainable development4'

Diagnostic Strategic Objectives & Strategies Country Performance WBG Instruments World Bank Major Related ActivitiesCountry Outcome Indicators Against Strategy Performance Indicators of Other Donors

Indicators Areas

Pervasive poverty and Increased incomes (farm Refer below ' % increase in income in Refer below Refer below Refer belowlow incomes in rural and non farm) and social selected areas.areas, particularly in wel being in rural areas, * % increase in social wellpoor regions and and improved natural being indicators among fanneamong IPs; and a resource management. (CIDSS survey).declining natural a Participation and benefits toresource base, poverty groups.

* Environmental Indicatorsimproving.

Contributors to Low Market distortionsfor Promote priority policy and market National Food Administration Demand-driven policy Timely completion of ADB: Grains SectorIncomes and Low agriculturalproducts are reforms affecting rural sector incomes restructuring. notes/advice. demand-driven policy Development Program.Agricultural Growth: reduced, transaction costs and market led growth. note(s); effective U.S.A.: TA for grains sector

loweredL and market-led Interisland shipping reforms. Policy dialogue associated coordination with reforms.tLow levels of investor improvements beginning, with preparation of the concerned donors such asconfidence due to high * Reduced levels of Reduced protection coefficients Diversified Farm Income an ADB and USAID; impacttransaction costs and protection for rice, com for rice, corn and sugar. Shift Agricultural Modemization visible in contributing topolicy and market and sugar, stability in from general rice subsidy to Project (DFIAM). policy debate and policydistortions; poor access supplies. more accurately-targeted changes.to markets by producers, Lower transaction costs. subsidy programs for the poor.inefficient markets; ' Increase in investorpoor linkage between confidence in specificproduction and market areas.signals. * Increase in pnvate sector

investments.

4/ Relevant MDG targets to which these objectives contribute: 'Halve, between 1990 and 2015, the proportion of people with income below Si/day."

Annex B9Page 8 of 25

Diagnostic Strategic Objectives & Strategies Country Performance WBG Instruments World Bank Major Related ActivitiesCountry Outcome Indicators Against Strategy Performance Indicators of Other Donors

Indicators Areas

* Create market-based incentives to Successful provision of Policy dialogue and DFIAM. Development of effective U.S.A.: TA for investmentmobilize private sector investments and appropriate market-based Rural Finance 11 & 111. monitoring and facilitationparticipation in rural enterprise incentives (e.g.., streamlined benchmarking system, anddevelopment and diversification of institutional and regulatory qualitative assessment ofincomes and employment procedures, etc.). impacts (IDF Spnopportunities. Incentives for private sector to reports).

invest in grains trading. Assessed impact of PERand DFIAM on budgetprogramming and overallRD/NRM investmnents(spn reports, stakeholderworkshops, GOPfeedback).

* Support provision of rural credit and Successful devlopment of rural Rural Finance H and m. Monitoring of RF HI and ADB: Strengthening Ruralrural finance, including microfinance, credit program (monitored I. Microenterprise Finance.and targeting mechanisms for access t through RF H and m JSDF Grant on Improving Expansion of credit Canada: Promotingfinance by the poor. supervision). Microfinance Access for provisions in volume and Participation in Sustainable

Barangay and Town-Based measured degree to -whicl Enterprise (PPSE) Project.Enterprises. thist is getting to the poor U.S.A.: TA for

(surveys). microfinance facilitationincluding MicroenterpriseAccess to Banking ServicesProject.

* Contribute to budget programming Performance-based, multiyear Ongoing IDF Grant on Development of effectivereforms. budget linked to priorities RD/NRM Monitoring and monitoring and- Increase level of public expenditure spelled out in the MTPDP. Indicator System Project benchmarking system, andon rural sector investments to a level "Harmonized" DA-DAR-DENR managed by NEDA. qualitative assessment ofthat will support stable and sustained budgets. impacts (IDF Spngrowth. Increased budget for planning, PER on RD/NRM. reports).- Appropriately prioritize RD/NRM monitoring and evaluation. Assessed impact of PERpublic expenditures to maximize DFIAM objectives will and DFLAM on budgetimpact. integrate with budget programming and overall

programming. RD/NRM investments.

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Diagnostic Strategic Objectives & Strategies Country Performance WBG Instruments World Bank Major Related ActivitiesCountry Outcome Indicators Against Strategy Performance Indicators of Other Donors

Indicators Areas

Development using CDD approaches are * Aim to develop more pilots. * Successful RD/NRM using * For broadbasing: Agrarian * Project spns, M&E and ADB, Belgium, Japan,Community and used as a common * Broadbase and scale up successfuil these approaches. Reform Communities independent evaluations EC: Support to agrarianDemand Driven approach in the RD/NRM programs. * Development of more pilots. Development Project of progress, impact and reform communities, whichParticipatory sector. Pilot approaches, * Successffil broadbasing. (ARCDP), Land outcomes. is a multi-donor program.Approaches is and broadbase successful (as measured by achievements, Administration & * Stakeholder surveys an Australia: Grantachieving results in pibts. surveys and outcomes). Management Project (LAMP) workshops. confmancing of LAMP.many instances, as an (after LIL pilot) and Ruralequitable way of Fmance.achieving augmented * Implement MRDP regionalwelfare, incomes and approach with LGUs as thenatural resources imnplementor, CBRMP, andmanagement, but needs proposed ARMM Socialbroadbasing for wider fimd, for potential laterimpact. broadbasing.

I Continue introducingfurther pilots.

Decentralization has LGU capabilities to Help strengthen LGU capabilities in Degree to which LGU * National programs such as * Interlinkage with and ADB: LGU Infrastructurebeen enacted, and implement rural managerial, financial and technical capacities develop as measured ARCDP, LAMP to include preferably a direct role by Devevelopment Project.LGUs are effectively developmentprograms areas, using national and regional in effectiveness of LGUs, TA to participating LGUs in LGUs to be aimed for U.S.A.: TA to LGUs forthe implementers of are strengthened programs as mechanisms to help expenditures on rural their areas of activity. during project design. imnproved govemance, env.rural development, yet * enhanced capacity as achieve this. development by LGUs and * Regional projects such as I Increase in LGU mgt., and delivery of basictheir capacity evidenced by stronger NEDA and other benchmarking. MRDP, to focus on LGU capacities for resource services.(manageriaL financial development activities anc Increased collaboration between implementation and capacity allocation andand technical) to increased rural sector DA, DAR, DENR and agencies building; ARMM Social mobilization as theyimplement is often investments, including such as NIA with LGUs. Fund will have a capacity respond to priorityweak, constraining from self-generated funds. building objective. community needs.rural development. * Progressive

institutionalization of aperformance-basedindicator system forRDINRM, andimprovement in suchindicators.

Annex B9Page 1O of25

Diagnostic Strategic Objectives & Strategies Country Performance WBG Instruments World Bank Major Related ActivitiesCountry Outcome Indicators Against Strategy Performance Indicators of Other Donors

Indicators Areas

Serious past Investment in rural Community-based approaches to * LGU and beneficiary Most Bank-financed * Successful ADB: InfrastructureUnderinvestment in infrastructure is infrastructure creation, rehabilitation contributions increase; RD/NRM projects include implementation of Support for AgriculturalRural Infrastructure: enhanced: and maintenance, done and maintained * Poverty targeted and poverty participatory processes and projects (Spn reports, Productivity Project.Farm to Market roads, * higher overall govt. by local communities, working closely impact, finding of ways to target poorer households and independent studies Multidonor: ARCDPirrigation, village water investment in rural with LGUs. ensure sustainabiility of communities: including of poverty program.supply and sanitation, infrastructure. investments (O&M). (measured ARCDP I and 11; impact). Saudi Fund: SZOPADother community * LGUs and beneficiaries by budget figures, poverty MRDP APL I & 2; SZOPAD * Projects serve as base cofinancing.infrastructure. contributing to investment impact surveys, consultant Social Fund; CBRMP; for future scaling up (e.g.,Contributes to low * investment getting to studies). WRDP; ARMM Social Fund ARCDP, SZOPAD).asset base of rural poor villages and * Infrastructure created issector, reduces growth benefiting poor groups AAA on Rural Infra O&M. sustainable (O&M byand contributes to (women, IPs, isolated communitiesrural impoverishment, communities, poorer demonstrated by M&E

regions). and surveys).* investment issustainable includingcommunity operations anmaintenerice (0OV`).

Insecurity of land Provide security of tenure Land Tiding and Land Acquisition Success in the LAMP pilot LAMP LIL is piloting land Success of LAMP, and Australia: Granttenure, particularly for through eventual national Reform: Fast track the (benefits to participants, finding titling approaches. Possible Govt. commitment, cofinancing of LAMP.the poor, inhibits program. implementation of land reform and a grass-roots institutional follow-up LAMP project enabling progressiveinvestment, does not improve land administration and model, including establishment would seek to broadbase. scaling up to a nationalenable land as management systems. of enabling land reform program (Govt. feedback,collateral, and reduces * Secure title to land benefiting the legislation and establishing a Proposed Community project spn reports,Government tax base. poor, and stimulating rural investment dedicated institution) would Managed Agrarian Reform beneficiary surveys,

and access to credit. enable a broadbased national Project (LIL) to pilot a land inbuilt consultant* Broader tax base and land based program. acquisition program. evaluation studies underrevenues. LAMP).* Provision of instruments forlegitimizing communities, IPs andoccupants of public lands to securityand livelihood and resource baseprotection.

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Diagnostic Strategic Objectives & Strategies Country Performance WBG Instruments World Bank Major Related ActivitiesCountry Outcome Indicators Against Strategy Performance Indicators of Other Donors

Indicators Areas

ARCDP needs scaling Scale up Broadbase Agrarian Reform * Faster implementation of ARCDP I and ARCDP 11. Outcome and performance ADB, Belgium, Japan,up. Communities Program (ARCDP). agrarian reform law. The projects are financing the targets under the project, EC: Support to agrarian

* continue the scale-up of the ARCDF .* Budget for land acquisition scale-up, and helping and significant M&E and reform communities, whichincreased. improve the program. independent evaluations is a multi-donor program.* Increase in the number of of income and povertyagrarian reform beneficiaries. impacts.

Uneven rural Resources to and impact Target expenditures and development * realized greater targeting of * Discussions with GOP on Regional poverty impact Consensus on regionaldevelopment in poorer regions are activities. expenditures and achieved priorities, regional focus and note. poverty focus with otherregionally. Need to pay increased: development to poorer regions. expenditures. donors.special attention to * realized greater targeting * niral incomes in these areas * Portfolio has some regionalpoorer regions. of expenditures and increasing. poverty focus under the

achieved development to national programs (e.g.poorer regions. ARCDP, CBRMP), and in* rural incomes in these location of specific projects,areas increasing. such as Mindanao (refer

below).

Special Need for Raise rural incomes and Dedicated Mindanao Development * Mindanao Development * Contribution to GOP's Successful partnership Donor community expectedevelopment of welfare, including of the Strategy under preparation. Strategy successfully prepared Mindanao Development with GOP, ARMM, to contribute significantly,Mindanao and its poor, in post-conflict and attracts donor support Strategy. NGOs and donor especially if MindanaoARMM provinces. Mindanao (refer also to (projects, funds). * Coordination, at GOP's community, and Development Strategy is

Section 3 of matrix), * Rural incomes increasing. request, of donor community implementation of sound and enablesespecially in ARMM * Peace and Development efforts. Mindanao Development inclusivity, and ARMMprovinces. successfully occurs. * SZOPAD Social Fund. Strategy. Social Fund project starts

* MRDP APL. * Stakeholder workshops successfully.* Proposed ARMM Social to continuously assess Many ODA partners haveFund project. progress, shortcomings, related activities through* Continue targeting of impact and outcomes. bilateral or mulit-donorproject activities in * Intensive M&E and programs.Mindanao. outcome assessments

inbuilt into projects.* Mindanao SocialAssessment.

Annex B9Page 12 of25

Diagnostic Strategic Objectives & Strategies Country Performance WBG Instruments World Bank Major Related ActivitiesCountry Outcome Indicators Against Strategy Performance Indicators of Other Donors

Indicators Areas

Partnership Develop such Necessary actors include the Harmonization of approaches Partnerships with * Self-evaluation for all Successful partnershipsApproaches are Needed Partnerships in both stakeholders themselves (farmers, and successful partnerships communities, LGUs, NGOs, projects, strategy dialogue include ARCDP (multi-for successful development of country fisherfolk, communities), LGUs, developing and contributing to civil society, private sector, and advisory work. donor), LAMP (withRD/NRM. and regional strategies National Agencies (DA, DAR, DENR, RD and NRM. govemment agencies and * Degree of Australia), and a major

and in development LBP, DOF, DBM, NEDA, NIA, etc.), ODAs. decentralization and need will be for theprograms. NGOs and academia, and donor participation in Mindanao program (multi-

agencies. development projects. donor). Opportumities exist

also in non-lending work(e.g., water, irrigation,NRM) with ADB and otherODA partners.

Depleted and declining Promote changes in * Examine main constraints and issues * GOP/Bank partnership in National Resource * Completion of NRM ADB: Mindanaonatural resource base. Natural Resources for the NRM sector and formulate a se undertaking the NRM study. Management (NRM) Sector sector review. Community-Based ForestryPopulation pressure, poor Management (NRM) of recommended policies and strategic * Ownership and timely action Study. * Impact on GOP policies, Mgt. Project; Irrigationecosystem management "olzc.es ands.tratc1.'. assistance for the sector. on -. It -u NIzMu sta'egy aU NWY1 Sector Review.and inconsistent policies; * Support sustainable community- recommendations of the NRM programs. Australia: Phil-Australiaintegrated ecosystems based resource management programs sector review. Community Asst. (PACAP)approach is not utilized using an integrated ecosystems * Consistency with Agenda 21 Program.to effectively manage approach, targeted to LGUs and poor goals. UNDP: Various TA oncommunal resources and rural communities. environment and naturalimprove rural poor's * Pilot through Bank-supported resources management.access to, and projects with objective of future U.S.A.: TA for env. andmanagement of such broadbasing. natural resources mgt.,resources; lack of including at LGU level.updated assessment oncritical issues andconstraints in naturalresource management.

5/ Relevant MDG target to which these objectives contribute: "Integrate the principles of sustainable development into country policies and programs and reverse loss of environmental resources."

Annex B9Page 13 of 25

Diagnostic Strategic Objectives & Strategies Country Performance WBG Instruments World Bank Major Related ActivitiesCountry Outcome Indicators Against Strategy Performance Indicators of Other Donors

Indicators Areas

Implementation of Community-based Community-based NRM * Adoption of key Ongoing Projects: In areas targeted by the Japan: Community-BasedNRM requires approachesforNRM. s management: Improve natural recommendations of the NRM Community-Based Resource Bank projects: improved Upland Development.community-based resources management and sector review. Management Project NRM practices by U.S.A.: TA forapproaches environmental protection through an * Adoption of integrated (CBRMP), Water Resources communities, LGUs, and enviromment and natural

integrated ecosystems approach and ecosystems approach and Development Project concerned NGOs; increase resources mgt.using community-based initiatives community-based resource (WRDP), MRDP Coastal in coastal and forestryand LGU empowerment in managing management as core policy for Marine Bio-diversity areas covered byprotected areas, coastal, upland areas, NRM . Conservation Component; community-based mgt;watersheds, etc. * Land-carrying capacity Wetdands Biodiversity improved capacities of

maintained. Project. LGUs on NRM.* Maximum sustainable yieldsmaintained.* Increase in forest cover fromimproved forest protection,natural regeneration,agroforestry and tree farms.

Water requires Initiate Comprehensive Commence management of water on a Proposed Projects: * Successful project Canada: Ecosystem-basedmanagement on a river river basin management river basin basis (pilot through Laguna de Bay LIL. implementation. Watershed Management.basin basis of water. proposed River Basin Management * Improved river basin Component under Phil-

project). River Basin Management management and positive Canada Environmental andProject. trends in environmental Economic Management.Possible NRM sector projec and income indicators. . (PCEEM) Project.

following the NRM sector Japan: Masterplan Studyreview. for Watershed Management.

in Upper Magat andCagayan River.

5/ Relevant MDG target to which these objectives contribute: "Integrate the principles of sustainable development into country policies and programs and reverse loss of environmental resources."

Annex B914 of 25

3. Comprehensive Human Development through Access to Basic Social Services

Promote human development services in education, health, shelter, water and sanitation; Improve socialprotection of the poorest and most vulnerable; Promote sustainedpeace and development in Mindanao

Diagnostic Strategic Objectives & Strategies Country Performance WBG Instruments World Bank Performance Major Related ActivitiesCountry Outcome Indicators Against Strategy Indicators of Other Donors

Indicators Areas

Education: Improvement in the * Simplify curriculum with focus on * Simplified curriculum in Ongoing: Third Elementary * Improved performance of ADB: Non-Formal* Deficiencies in quality quality of student math, languages and science; Increase place in 80% of schools. Education Project (TEEP); TEEP. Education Projectof education across the outcomes and retention in textbooks and instructional materials per * 80% of elementary and Early Childhood * Improved performance o (completed); proposedsystem. the educational system 61 student. secondary teachers trained in Development Project (ECD); pre-school and Grade I Secondary Education* Skill shortage and * Student achievement tes * Improve teacher performance through new curriculum. First and Second Social components of ECD Improvement Project.training needs. scores at elementary and pre/in-service training especially on * At least a 1:2 Expenditure Management Project. Australia: Project on Basic* High drop-out rate. secondary levels increased teaching-learning transactions. textbook:student ratio Projects (SEMPI; SEMP2); * SEMPI completed on Education.* Low budget for from 51.7% in SY`00 to '01 * Prepare children for entry into Grade I nationwide. small grants to support time. Japan: Third Elementaryelementary education to 70% by SY'04-'05 and by (a) expanding attendance at day care * New approach(es) to Program on Out-of-School * SEMP2 effective by FY03 Education Project,relative to need. from 53.4% in SY'00 to '01 centers; and (b) enhancing the quality of providing altemative leaming Children and Youth (OSY). Ql; timely disbursements. Education Facilities

to 70% by SY'04-'05 the 8-week curriculum for entering opportunities for children Planned: Possible * Alternative Leaming Improvement Project,respectively (National Grade I students. under 15 developed and Altenative Leaming Systems Systems Project LIL in Science and MathematicsEducation Statistics). * Develop Altemative Learnig Systems tested; participation in non- LEL; analytical paper on out- FY03 or 04. Education Manpower* 2.3% decrease in (non-formal education) for children 15 formal education of-school youth; education * Education Sector Policy Development Project.elementary drop out rate. years and below. (accreditation equivalency) sector policy notes. Notes prepared.* Incease in saisfacttion * Improve teacher depn!o,_ent and among out-of-schoo! youmwith education services management. increased.among poor (Filipino * Protect budget for basic education in * In event of revenue shortfall,Report Card). event of budget shortfall. reduction in budget

allocations for basic educationless than overall reduction.

e Weak implementation Improvement in Provide TA and training to Department * Teacher redeploymentof education programs performance of DepEd of Education in procurement, financial program implemented.and projects by Programs and Projects: management and resource allocation (withgovernment agencies. * Prices ofpublicly focus on teacher deployment and

procured textbooks management).reduced * Involve principals and Parent Teacher* 20% of new Community Associations in oversight ofconstruction of School Building Program.elementary schoolbuildings completedwithin 90-days.* Procurementjinancialmanagement andresource allocationrocedures in DepEd

more transparent* Correspondencebetween needs andassignments in teacherdeployment.

6/Relevant MDG target to which these objectives will contribute: "Ensure that, by 2015, boys and girls will be able to complete a full course of primary schooling."

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Diagnostic Strategic Objectives & Strategies Country Performance WBG Instruments World Bank Performance Major Related ActivitiesCountry Outcome Indicators Against Strategy Indicators of Other Donors

Indicators Areas

Health: Increase in utilization of * Provide integrated early childhood * HSRA implementation SEMP2; ECD; HSRP; * Accelerated ADB: Co-financier of ECD* Health outcomes behind and satisfaction with the development services. ongoing in 16 convergence analytical work on health implementation of ECD Project; support tocomparators', uneven quality of health care * Implement five components of Health sites (PhilHealth enrollment financing (drug regulation health component. development of local healthacross regions. services, especially among Sector Refomm Agenda (HSRA) in rates increased; number of and pricing, social health * HSRA implementation systems.* Differentials in access, low income households. selected convergence sites: health PhilHealth accredited and insurance policies, etc.). ongoing in 4 Bank-funded U.S.A.: Support to familystandards, quality of 7/ insurance, public health, hospital Sentrong Sigla facilities WBI: Flagship course on convergence sites. planning, PhilHealth,services. * Increase in the utilization development, local health systems and increased; Public hospitals health sector reforms. * TA, HR development development of convergence* High cost of drugs. rate of health services health regulation (esp. drug pricing/ financially viable; drugs and capital improvements zones.* Low health insurance among low income procurement/retailing/distribution). available in public facilities, for BFAD, procurement and UNFPA: Active in familycoverage among poor. households. * Protect budgets for priority public etc.). FM teams delivered. planning and reproductive* Public health spending ' 50% decrease in price of health programs. ' Drug retailing network with * Drug pricing and health.low and uneven across drugs most commonly used socially-oriented prices in PhiHHealth Policy Notes UNICEF: Support toLGUs. by poor. place in 16 HSRA contribute to development women and child health an

* Increase in satisfaction convergence sites. of pro-poor drug and health nutrition.with health services among ' PhilHealth policy package insurance policies. UNAIDS and EC: Supportpoor (Filipino Report more pro-poor (reduced out-of to HIV/AIDS, developmentCard). pocket payments among of community partnerships.* At least 30% of target lower income groups; Japan: Funding for familyIndigents and 10% of increased support level of planning and MCH, HIVtarget Individually Paying services commonly used by and STDs, and TB.Participants enrolled in poor, etc.). Germany: Support toPhilHealth program. ' In event of revenue shortfalL HSRA.

reduction in budgetallocations for health less thanoverall reduction.

'Weak implementation Improvement in ' Provide TA, training and institutional * Shorter timelines for drugof health programs and performance of DOH inputs to Bureau of Food and Drugs and licensing, procurementprojects by government Programs and Projects: to procurement and financial processing and contracting inagencies * Prics ofpublicly management teams in DOH. DOH.

procured drugs reduced* Procurement andfinancial managementprocedures in DOH moreeilident

7/ Relevant MDG targets to which these objectives will contribute: "Reduce by 3/4, between 1990 and 2015, the maternal mortality ratio," "Reduce by 2/3, between 1990 and 2015, the under-5 mortality rate."

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Diagnostic Strategic Objectives & Strategies Country Performance WBG Instruments World Bank Performance Major Related ActivitiesCountry Outcome Indicators Against Strategy Indicators of Other Donors

Indicators Areas

High population growth Reduce population * Support implementation of DOH's Planned: Population Populationrate a binding constraint. growth rate, reduce National Family Planning Policy Management/Women's Management/Women's

fertility rate; increase I Revitalize National Family Planning Health & Safe Motherhood Health & Safe Motherhoodcontraceptive prevalence: Program based on principles of couples' Project 11. Project n approved.Decreased crude birth rate choice and full information.per 1000 popn from 29.5(1998) to 24.6 (2004).Maternal mortality ratesreducedfrom 0.6 per1000 live births(1998) to0.4 per 1000 live births(2004): DOH HealthStatistics.

Social Protection: Increased number of poor * Protect budgets for priority social * In event of revenue shortfall, Ongoing: SEMPI, SEMP2, * ECD Project completed on ADB: Co-financier of ECD* Need for improvements amilies accessing social welfare programs. reduction in budget ECD, Kalahi Project. time; improved quality of Project.

in targeting, scale of welfare services: * Support expansion of integrated early allocations for ECDP, CIDSS, Planned: Family Income Integrated ECD services in Australia: Phil-Australiasocial services. No. of families childhood development services. Kalahi programs less than Support Project (LIL). Region 6. Vulnerable Groups Facility* Opportunity cost (lost participating in CIDSS * Reduce opportunity (economic) cost overall reduction. * Family Income Support and PACAP Program.

income) to family of increased. v of school attendance for poor families * Higher share of LGUs Project LIL in FY03 or 04. UNICEF: Localchildren's attendance in Psychosocial development through family income support offering integrated early Devevelopment Plansschool and participation of children 0-6 years payments conditioned on school childhood development for Children and otherin other social services. fmproved. I attendance and participation in other programs. programs.

Child development index critical social services for children. * Pilot project to test familyscores increased, Grade I income support paymentdrop-out rates decreased in systems ongoing.ECD Project regions.Increase in schoolattendance amongchildren in poorfaniliesin pilot areas of FamilyIncome Support Project

(FISP). v

7/Relevant MDG targets to which these objectives will contribute: "Reduce by 3/4, between 1990 and 2015, the matemal mortality ratio," "Reduce by 2/3, between 1990 and 2015, the under-5 mortality rate."8/Relevant MDG target to which these objectives will contribute: "Halve, between 1990 and 1025, the proportion of people who suffer from hunger."

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Diagnostic Strategic Object5ves & Strategies Country Performance WBG Instruments World Bank Performance MNlajor Related ActivitiesCountry Outcome Indicators Against Strategy Indicators of Other Donors

Indicators Areas

Gender: Reduce levels of violence * Support Govemment and NGO * Mechanism for providing ° Small grants to support c Grants to support Australia: Activities onI Unacceptably high against women and programs to end violence against grants to Government and Govemment and NGO programs on violence participatory monitoring ofincidence of violence children. 9 women and children. NGO programs on violence programs to end violence against women and children. gender projects.against women and 2 Promote reproductive e See Population section above. against women and children in against women and * See Population section Canada: Gender Equalitychildren. health (see population e Strengthen capacity of National place. children. above. Fund for various gender* Poor reproductive health section above). Commission on the Role of Filipino * See Population section * See Population section * Grant and TA to National projects for NGOs, LGUs,of women. * Mainstream gender Women and its partners in assisting above. above. Commission on the Role of and POs, institutional* Lack of responsiveness issues in work of agencies and LGUs in designing and * National Commission on * Possible grant and TA to Filipino Women strengthening for theof govemment programs government agencies implementing Gender and Development the Role of Filipino Women National Commission on the implemented on time. National Commission on theto gender issues. across aal sectors: each programs, projects, and activities. and its partners assisting Role of Filipino Women. Role of Filipino Women.

Govermment agency has a agencies and LGUs in UNFPA: RH interventionswell-developed strategy to designing and implementing for selected provinces.address gender issues. Gender and Development UNIFEM: Evaluation of

programs, projects, and utilization of 5% Genderactivities. and Development budget.* Increased number of UNDP: Gender govemanceagencies and LGUs facility for NGOs andimplementing a gender LGUs; support for genderstrategy. initiatives under Phil.

Govemance Forum.UNICEF: Violence against

women preventionstrategies.

9/ Relevant MDG target to which these objectives will contribute: "Elimninate gender disparity in primary and secondary education preferably by 2005 and to call levels of education no later than 2015."

Annex B9Page 18 of 25

4. Good and Effective GovernancePromote simple, fair, transparent and predictable rules to improve public sector performance, reduce cost of investing in the country andforge new partnerships between government, private sector and civil

society.

Diagnostic Strategic Objectives & Strategies Country Performance WBG Instruments World Bank Major Related ActivitiesCountry Outcome Indicators Against Strategy Performance Indicators of Other Donors

Indicators 10/ AreasWeak governancereduces effectivenessand equity of publicexpenditures andimpedes delivery ofpublic services

* Policy, Planning and Strengthen linkages Improve the design and implementation * Presentation of medium term ASEM TF. Satisfactory ADB: Non-Bank FinancialBudgeting between policy, planning, of the Medium-Term Expenditure expenditure framework PEPFMR. implementation of PFSL Govemance Program and

and budgeting processes Framework (MTEF) by: chapter as part of MTPDP. PEPFMR 11. and Second Adjustment various TA for capacity* National, sectoral, * Linking the MTEF more closely with * Establishment of formal PFSL. Loan. building to LGUs,regional, and LGU the MTPDP. planning coordination Second Adjustment Loan. Satisfactory procurement, PDIC, resultsplanning processes are * Reforming the structure and timetable mechanisms between implementation of IDF monitoring.formally integrated an O of the planning process. NEDA/DBM -nd the sectors C-.ant. Canada; Lc5 Medium-Term * Reforming the Medium-Term Public according to a timetable. Govermment SupportPhilippine Development Investment Program (MTPIP) process to * Reform of the role of the Program.Plan (MTPDP) priorities improve integration with the MTPDP Regional Developmentare reflected in both and recuffent budget. Councils and their relationshiprecurrent and capital * Improving the accuracy of medium with LGUs.budget allocations over the term revenue estimates. * Refom of MTPIP tomedium term. * Mainstreaming and enhancing the strengthen gatekeeper role of

Sector Effectiveness and Efficiency ICC and links to budget.Reviews. * Institutionalization of task* Increasing civil society involvement in force on revenue forecasting.budget formulation, execution and * Published guidehnes for andoversight. tailored capacity building

program on SEERs and sectorprogram costings atdepartmental level.* Increased participation ofthe Development BudgetCoordination Committee inmanagement of MTE.* Regularized coordinationand information sharing withNGOs.

10/ Where measurable indicators have not been specified, most will be through ongoing/planned AAA such as PEPFMR, FSAP, etc.

Annex B9Page 19 of25

Diagnostic Strategic Objectives & Strategies Country Performance WBG Instruments World Bank Major Related ActivitiesCountry Outcome Indicators Against Strategy Performance Indicators of Other Donors

Indicators 10/ Areas* Civil service * Make the civil service Develop and implement a civil service * Enactment and PEPFMR. Satisfactory Canada: Policy, Training

more efficient, reform package. implementation of modem ASEM TF (Civil Service implementation of PFSL. and TA Facility.transparent, results Target corruption-prone institutions with Civil Service Law. Pay and Employment Satisfactory Japan: Training for Localoriented and accountable. special anti-corruption action plans. * Implementation of Modeling). implementation of IDF Planning and Dev't* Reduce corruption, competitive and sustainable Second Adjustment Loan. Grant. Officers.particularly in vulnerable compensation policy and PHRD Grant for Second UNDP: Phil. Govemanceinstitutiorn. greater control over wage bill Adjustment Loan. Forum.

expenditures. IDF Grant for Civil Service U.S.A.: TA for BIR, SEC,* Movement towards a Reform. and Dept. of Justice.sustainable and affordable Govemance and Servicelevel of budgetary Delivery Assessment.employment.* Development oforganizational and individualperformance standards/benchmarks.* Institutionalization ofcorruption assessments andperfofmance on anti-cornuption action plans.

10/ Where measurable indicators have not been specified, most will be through ongoing/planned AAA such as PEPFMR, FSAP, etc.

Annex B9

Page 20 of 25

Diagnostic Strategic Objectives & Strategies Country Performance WBG Instruments World Bank Major Related ActivitiesCountry Outcome Indicators Against Strategy Performance Indicators of Other Donors

____________________ Indicators 101 Areas' Public Procurement A. Centralprocurement Procurement Streamline public ' Law adopting intemational PEPFMR and follow-up. Ratio of disbursement for ADB: Capacity-buildingand Financial performance is improved procurement at the NG, LGU and GOCC procurement standards Support to Procurement WB portfolio reaching for procurement and systemManagement (FM). * Reduction in average levels through adoption and presented and discussed by Policy Board and WB average. Reduction for national accounts.

time taken for implementation of a framework law on Congress. Procurement Service of partial cancellation of UNDP: TA to enhanceprocurement for different public procurement. * Oversight arrangements strengthening. loans. accountability of COA.categories of goods and Establish effective oversight established and active. Regular portfolio reviews. Satisfactory U.S.A.: TA forservices. arrangements for public procurement. * LGU procurement ASEM grant supporting implementation of PFSL. procurement reform and for* Reduction in the number Improve transparency of Priority streamlined and consistent. govemance reforms. sudit practices.of appeals and disputes Development Fund. * New Government IDFs for Procurementover procurement process Increase civil society involvement Accounting System (NGAS) Policy Board andand decisions. through Procurement Watch and similar implemented in all Procurement Service set up,* Reduction in average initiatives. departments. status, and strengthening.time taken to setde Financial Management Streamline flow * Integrated FM capacityprocurement-related of funds to agencies, LGUs and projects. program imnplemented.appeals and disputes, etc.). Implement NGAS and develop an * Creation of the Office of theB An efficient and mtegrated FM capacity building program Controller General.rifendly FMsystem is for National and Local levels. ' Management Informationworking in aU central Management/Monitoring & Evaluation System (MIS) in place.agencaes Develop an effective Monitoring* Increase in number of Information System at all levels andcentral agencies with clean increase speed of implementation.audit reports fromCommission on Audit(COA).

10/ Where measurable indicators have not been specified, most will be through ongoing/planned AAA such as PEPFMR, FSAP, etc.

Annex B9Page 21 of 25

Diagnostic Strategic Objectives & Strategies Country Performance WBG Instruments World Bank Major Related ActivitiesCountry Outcome Indicators Against Strategy Performance Indicators of Other Donors

Indicators 101 Areas* Civic engagement Improve the Civil society feedback and involvement * Drafting and implementation Continued support to NGOs Canada: Local

transparency and in budget formulation, budget execution of Laws and implementing involved in budget, Govemment Supportaccountability with oversight of service delivery, budget rules and regulations (IRRs). procurement and financial Program.which public sector oversight, and public procurement * NGOs represented on management transparency. U.S.A.: Transparent andresources -financial, processes. procurement oversight entity. Accountable Govemancehuman, physical -are * Reactivation of public- Project.allocated and managed private Budget Dialogue* Clients of public sector Group.serves rate the * Institutionalization and usetransparency of the civil of client satisfaction andservants (feedback from Report Card surveys.surveys of households and * Strengthened relationshipenterprises), between public expenditure* Increased involvement o oriented NGOs andcivil society in budget DBM/NEDA.formulation, execution andoversight at national andlocal levels.

Weak governanceundermines publicrevenues* Revenue BIR's ability to collect Develop a comprehensive reform * Increased audit presence by PFSL Satisfactory IMF: TA to BIR.Administration taxes, reduce evasion and program for BIR, covering institutional tax type (e.g. VAT) and Possible grant funding for implementation of PFSL; U.S.A.: TA to strengthen

serve taxpayers with arrangements, administrative procedures, taxpayer group (large BIR Reform. Satisfactory grant BIR management.improved services is computerization, and human resource taxpayers). implementation.improved (at national development. * Full implementation of thelevel) large taxpayers program and* Increase in the tax to establishment of the largeGDP ratio; taxpayers office, with gradual* Reduced level of growth in the number of largeevasion; taxpayers.* Reduced taxpayer * Full computerization of BlR,compliance costs; and including district offices.* Reduced variability of * Development and adoptionannual collections by tax of a comprehensivetype. administrative reform

program, includingcomponents on humanresource rationalization andautonomization.

10/ Where measurable indicators have not been specified, most will be through ongoing/planned AAA such as PEPFMR, FSAP, etc.

Annex B9

Page 22 of 25

Diagnostic Strategic Objectives & Strategies Country Performance WBG Instruments World Bank Major Related ActivitiesCountry Outcome Indicators Against Strategy Performance Indicators of Other Donors

Indicators 50/ Areas* Tax Policy Improve the efficiency Revise excise tax rates. * Specific excise tax rates PFSL Satisfactory IMF: TA and monitoring.

and equity of the tax Review and rationalize tax incentives. restored to their real value as implementation of PFSLsystem of 1997.

* Elimination of narrowlyfocused tax incentives.

Weak local governanceunderminesdecentralization.

Strengthen Improve LGU Establish a high level commission with Greater LGU access to ASEM TF for Completion and Australia: Phil-Australiaintergovermnental transparency and representatives from both public (NG different financing windows, Decentralization. dissemination of Govemance Facility.finance system and fiscal accountability in the and LGU levels) and private sectors to including private fnancing PEPFMR H. PEPFMR and PEPFMR Canada: Localframework for allocation and review IRA law and Local Govemment * Development and Second Adjustment Loan. II. Govemment Supportdecentralization managemnent of own and Code. implementation of Satisfactory Program.

transferred resources. Review and if necessary revise IRA modifications to the system of implementation of PFSL. Japan: Training for local* Increase in number of formula and non-IRA fiscal transfers to intergovemmental funances. planning and developmentLGUs with clean audit achieve better accountability and * Revisions to the 1996 LGU officers.

epots from COA. horizon- equal:adizon. Financing Frarewo-k. 19NDP: Fnhancing nublic* Reduction in number of Revise and implement LGU financing accountability of COA.cases and amount of framework.unliquidatedlunrecoveredlunadjusted advances toLGU officials (the termthey use is 'malversation').Improve the LGUmancingframework soas to enable LGUs toattracd increased privatefnancing.* Reduction in proportionof LGU investmentsfunded from grants.* Increase in proportion ofLGU investments financedfrom private and publicloans.* Increase in number ofLGUs borrowing frompublic and private sources.

10/ Where measurable indicators have not been specified, most will be through ongoing/planned AAA such as PEPFMR, FSAP, etc.

Annex B9Page 23 of 25

Diagnostic Strategic Objectives & Strategies Country Performance WBG Instruments World Bank Major Related ActivitiesCountry Outcome Indicators Against Strategy Performance Indicators of Other Donors

Indicators 101 AreasStrengthen LGU revenue LGU's capacity to Develop a program at the national level * Review of process for PEPFMR II. Completion and ADB: Capacity-building inmobilization capacity administer and collect to support interested LGUs in bolstering updating schedule of assessed LOGOFIND. dissemination of LGU Financing.

revenues from own their revenue mobilization capacity with value of real properties. Second Adjustment Loan. PEPFMR n;sources is strengthened. components on training, IT systems, and * Improved LGU tax mapping Satisfactory* Increase in proportion administrative procedures. capabilities. implementation ofof LGU revenue * Revised DOF circulars on LOGOFIND and follow-collections from own tax exemptions. up of LGU financingsources (e.g. property and framework in otherbusiness taxes, and from projects involving LGUs.fees and licenses)* improve taxpayerservices* Reduction in amounts odelinquent tax paymentsdue.

Improve financing of, Strengthen LGU * Strengthen linkages between policy, * Reduction in LGU personal PEPFMR 11. Completion and ADB: Capacity-building inaccess to, and delivery planning, budgeting and planning and budgeting at the LGU service expenditures as Governance and Service dissemination of LGU Financing, LGUand quality of public implementation capacity, level. percent of total expenditures Delivery Study. PEPFMR 11. Private Infra Devt Facility.services for which LGUs including greater control * Improve NG-LGU coordination and (baseline 2000). ASEM TF on Completion of Australia: Phil-Australiaare responsible over wagebill and inter-LGU collaboration. * Institutionalize framework Decentralization. Govemance and Service Govemance Facility.

employment levels * Improve LGU incentives to control for periodic assessments of Second Adjustment Loan. Delivery Study. Canada: Local* Budget allocations more wage bill size and employment levels, LGU service delivery and Satisfactory Govermment Supportconsistent with LGU and enhance LGU capacity to deal with publication of results. implementation of Program.plans. wagebill and employment issues. LOGOFIND and follow- Japan: Training for local* Greater consistency * Strengthen monitoring and evaluation up of LGU financing planning and developmentbetween LGU plans at arrangements in LGUs and at the NG framework in other officers.different levels. level. projects involving LGUs. U.S.A.: Transparent and

Accountable GovernanceProject.

I0/ Where measurable indicators have not been specified, most will be through ongoing/planned AAA such as PEPFMR, FSAP, etc.

Annex B9Page 24 of 25

Diagnostic Strategic Objectives & Strategies Country Performance WBG Instruments World Bank Major Related ActivitiesCountry Outcome Indicators Against Strategy Performance Indicators of Other Donors

Indicators 101 AreasStrengthen LGU LGU civil service * Selectively support LGUs committed * Develop and initiate PEPFMR 11. PEPFMR II. Australia: Phil-Australiaaccountability and capacity in the area of to better govemance through capacity implementation of a plan for Govemance and Service Implementation of Govemance Facility.institutional capacity transparent and efficient building and capital finance. decompression of LGU Delivery Study. LOGOFIND and Canada: Local(especially LGU civil procurement including * Develop and implement a training and salaries. CPPR. following up of LGU Govemment Supportservice and core for Comprehensive capacity building plan for procurement * More information on Second Adjustment Loan. financing framework in Program.functions such as Development Framework and fnancial management. revenue, expenditure, IDF Grant for Civil Service other projects involving Japan: Training for localbudgeting, procurement related activities and * Implement NGAS and develop an procurement, contracting and Reform. LGUs. planning and developmentand financial financial management integrated FM capacity building program service delivery available to EDF Grant for Improving Decrease in the rate of officers.management) practices is improved for national and local levels. public. Financial Management in rebidding. U.S.A.: Environmental

* Greater number of LGUs * MIS in place at LGU level. * Implementation of training LGUs. Satisfactory results of ex- Govemance Project,with 'clean' COA audit * Promote LGU information publication plan in LGUs with World Selective support through post reviews at the LGU Transparent andreports (baseline 2000 and benchmarking. Bank fmancing. ongoing operations and level. Accountable GovernanceCOA report). LOGOFIND. CDS and other TAs for Project.* Fewer LGUs with LGUs.outstanding recoverableadvances from elected andappointed officials(baseline- COA 2000 auditreport).

* Strengthen Civic Improve transparency Greater civil society involvement in Development and application PEPFMR nI. Involvement of civil Canada: LocalEngagement and Civil and accountability working of LGUs, especially in budget of indicators to indicate Govemance and Service society in budget Govemment SupportSociety Oversight planning and implementation, LGU stafl intensity/number of NGOs and Delivery Study. formulation, execution Program.

recruitment, procurement oversight and local associations involved in CPPR. and oversight, in project U.S.A.: Transparent andcontract implementation, design and budget process, oversight of Second Adjustment Loan. preparation and Accountable Govemanceevaluation of physical investments, and budget execution, merit-based implementation, and in Project.oversight of service delivery. transparent recruitment of oversight of procurement

LGU staff, and in project and contractimplementation and implementation.evaluation.

Weak governanceundermines confidence,increases cost of doingbusiness and reducesinvestment.

10/ Where measurable indicators have not been specified, most will be through ongoing/planned AAA such as PEPFMR, FSAP, etc.

Annex B9Page 25 of 25

Diagnostic Strategic Objectives & Strategies Country Performance WBG Instruments World Bank Major Related Activities

Country Outcome Indicators Against Strategy Performance Indicators of Other Donors

Indicators 10/ Areas* Judicial reform Ensure the effective, Support implementation of the Supreme Reduction in case congestion Judicial Reform Support Satisfactory ADB: TA on Strengthening

transparent and timely Court's comprehensive Action Program and delays. project; PHRD TF support. implementation of the the Independence of theprovision of justice. for Judicial Reform. Judicial Reform Support Judiciary.

Project Australia: Phil-Australia

Govemance Facility.Canada: PPTAF support tothe Supreme Court.UNDP: Activities under thePhil. Governance Program.UNICEF: Support tocomprehensive system onJustice for Children.U.S.A.: Reform of theAdministration of Justicethrough Coalition Advocacproject, Barangay JusticeService System Project

10/ Where measurable indicators have not been specified, most will be through ongoing/planned AAA such as PEPFMR, FSAP, etc.

Annex B10Philippines Page I of I

CAS Summary of Development Priorities

Country Major issueb Country Bank Reconciliation of country andNetwork area performance' priorityc priorityc Bank prionitiesd

Poverty Reduction & EconomicManaaementPoverty reduction Fair Incidence remains high and progress High High

stagnates

Economic policy Good Public debt, low tax revenues High High

Public sector Fair Govemance, decentraliation, civil service High Highreform

Gender Good Violence against women, reproductive Moderate Moderatehealth

Human DevelopmentEducation Good High drop-out rate, education quality poor High High

Health, nutrition & population Fair Financial access for poor, quality of health High Highcare, high population growth

Social protction Fair Coverage of social welfare services, Moderate Moderatepension system, safety net for informalworkers.

Environmentally & SociallySustainable DevelopmentRural development Fair High poverty, low productivity High High

Environment Poor Weak enforcemnent of laws and weak LGU Moderate Moderatecapacity

Social development Good Capacity of local institutions Moderate Moderate

Finance, Private Sector & InfrastructureFinancial sector Fair NPLs; rural credit and weak capital market High High

development

Private sector Good Corporate governance; lack of Moderate Moderatetransparency; high ownershipconcentration

Energy & mining Fair Implementation of power sector Moderate' Moderate'restructuring; privatization of NPC; weakpolicy and regulatory mining environment

Infrastructure Fair Rural Infrastructure; regulatory capacity, Moderate Moderatetransport bottlenecks and costs

a. Use 'excellent," *good," 'fair,' or ^poor.'b. Indicate principal country-specific problems (e.g., for poverty reduction, 'rural poverty;" for educaton, "female secondary completion;' for environment, 'urban air pollution').

c. To Indicate priority, use low,' "moderate,' or 'high.'d. Give explanaton, if prioribes do not agree; for example, another MDB may have the lead on the issue, or there may be ongoing dialogue.

e. Both Country and Bank priorides are high for energy, but are both low for mining; hence the overall rating of 'moderate'.

Annex CPage 1 of 1

WORLD BANK PHILIPPINES-NGO COLLABORATION, BY PROJECT CYCLEFISCAL YEARS 1999 - 2001

Total number of Percentage ofongoing projects ongoinig Projects

(n) that involvedNGOs/POs at Project implementation Project Monitoring and Evaliation IPreparation -.

(%)Projects with Intention Projects with Projects with Projectsvwithof Involving NGOs/POs Acttial Intention of Actualt

(%) Involvement of involvilig Mt

NGOs/POs NGOs/POs e(%) (°) (%)

All 28 24 25 21 33 36 54 62 64 68 75 76 35 38 40 43 41 Z4Projects IInfrastruct 8 8 8 25 37 40 12 25 25 38 62 62 12 12 12 12 25 38ure andUrban ___

Human 5 5 5 20 20 20 100 100 100 100 80 80 100 100 100 100 80 80Develop-ment I__ _ __

Rural 13 9 10 23 44 50 62 88 90 85 100 100 30 33 40 46 44 50Dev./NaturalResource

Mgmt.

Other 2 12 2 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0Projects__- _ - - _ ---

Annex DPage I of I

PHILIPINES: COUNTRY ASSISTANCE STRATEGY FYOO-02CAPACITY BUILDING INITIATIVES* IMPLEMENTED AND/OR MOBILIZED

DURING CAS PERIOD (as of March 31,2002)Interventions** No. of Actual No. of Amounts

Interventions Interventions (USD million)Identified in Implemented/Mobilized

the CAS Imp. From Total Prior From Totalstarted FY00 to FY00Prior to FY00FYOO

SO1: Addressing 7 3 11 14 1.7 1.3 3.0Crisis Effects &PromotingEconomicRecoveryS02: Enhancing 10 4 12 16 29.0 3.5 32.5HumanDevelopment &Social Services forthe PoorS03: Accelerating 11 3 1 1 14 8.6 5.5 14.1EnvironmentallySustainable RuralDevelopmentS04: Promoting 10 3 16 19 3.3 18.6 21.9Sustainable UrbanDevelopment andCombat UrbanPovertyvS05: Developing 0 0 0 0 0 0 0Infrastructure,Particularly in theProvincesS06: Enabling 4 1 5 6 11.2 0.4 11.6Expansion of thePrivate SectorS07: Improving 7 4 15 19 0.7 1.4 2.1Governance andCombatingCorruption** TOTAL 49 18 70 88 54.5 30.8 85.3Of which: Loans 6 9 4 13 51.6 15.5 67.1Trust Funds 19 7 25 32 2.9 15.3 18.2WBI/GDLN/Other 24 2 41 43KS Activities .

* Refers to interventions irivolving training, workshops, semiinars, knowledge sharing and knowledge networking.** Includes interventions provided through loans, rrust finds. WVBi.GDLN WOAher k.noA lIdte Sharing Activities.* Includes portfolio wide intcrventions targeted sr Impro% mig project managemeni capuisia n, compliance with Bank policies and

guidelines.

Annex EPage 1 of 3

Achievements and Sector Objectives during the Previous Country Assistance Strategy Period

CAS objectives Key achievements Major shortfalls

Address Crisis Effects and PromoteEconomic Recovery* Stabilize banking * Strengthened prudential regulations * Increase in nonperforming loan ratio;

persistence of banking vulnerabilities* Make public finance sustainable * Fiscal deficit targets essentially met in * Fiscal targets missed by wide margin

2001 in 1999 and 2000; continued increasein public debt as share of GDP; lackof effective national governmentframework to manage contingentliabilities

* Increase long-term savings * Significant past dialogue and analytical * Lack of concrete actionwork

* Achieve a strong recovery * Reasonable recovery after 1997 crisis * Less growth than expected; noprogress with poverty reduction

Enhance human Development andSocial Servicesfor Poor* Maintain social services * Key social budget expenditures

protected* Increase education quality * Text-book-to-student ratio rising * Little improvement in school

completion rate* Improve management and financing * Some improvements in procurement and * Intra-sectoral public expenditure

of education system financial management allocation still to be addressed* Improve outcomes and performance * Better access to health care, lower . Quality still low, weak financial

of health service system incidence of tuberculosis; cheaper drugs management system, widegeographic differentials

* Improve portfolio performance * Upgraded human development projects * Improvements still fragileAccelerate EnvironmentallySustainable Rural Development* Increase broad-based growth * Positive agricultural growth (3.3 percent * Growth erratic and below target, not

in 2000 and 3.9 percent in 2001) enough to alleviate rural poverty;Comprehensive Agrarian ReformProgram behind target

* Increase public and private * Increase in public funding * Mixed utilization; no pick up inexpenditure in rural areas private investments

* Improve natural resource * Initiated reforms on water resources * Fragmented sectoral, approach tomanagement management at national level and in resources planning and development,

irrigation management lack of subsector coordination on* Indigenous people and local natural resource management

stakeholders engaged in protecting andmanaging centers of biodiversity

* Strengthen institutional capacity * Active devolution of responsibilities, * Capacity and project managementperformance indicator system by still weak, and monitoring andNational Economic Development evaluation deficientAuthority being institutionalized * Local government units (LGUs)

constrained with only partialdevolution of natural resourcemanagement (NRM) functions tothem

* LGU capacity still limited makingBank project implementation difficult

Annex EPage 2 of 3

Achievements and Sector Objectives during th,e Previous Country Assistance Strategy Period(continued)

CAS objectives Key achievements Major shortfalls

Promote Sustainable UrbanDevelopment and Combat UrbanPoverty* Increase urban services for poor * Some LGU water systems coming on * Institutional arrangements between

line, some private sector participation in national and local levels remainwater utilities; pilot city development unclear; slow use of LGU funding;strategies completed limited LGU capacity and private

finance for private participation ininfrastructure projects

* Improve urban environmental * No tangible progress; worseningmanagement environmental quality

Develop infrastructure, particularly inthe provinces* Strengthen National Power * Power sector restructuring bill approved,

Corporation finances; introduce laying foundation for more privatecompetition in energy sector, sector participationpromote private-public partnership

* Increase rural electrification, more * Work just starting * No tangible progress yetefficient rural electric cooperatives

* Better integrated multi-modal * No tangible achievements yettransport system

* Strengthen transport system in Metro * New Metro Rail Transit running * Weak institutional capacity, highlyManila congested traffic

Enable Private Sector Expansion* Promote competition and * Supported Institute of Corporate * No change in competition laws

transparency Directors of Philippines, includingtraining programs on corporategovemance; competed reviews ofstandards and codes relating toCorporate Governance and Accountingand Auditing

* Alleviate constraints on small and * Intemational Finance Corporation (IFC) * Bank loan targeted at privatemedium enterprises trade finance facility; support for a enterprise sector cancelled in 1999

micro-enterprise bank before implementation started* Enhance private-public partnerships * Successful transactions by IFC * Progress hampered by low investor

and promote foreign direct confidence; inflows of foreign directinvestment investment reversed; timely

enforcement of creditors' rightsdelayed by defects in legal andadministrative framework for securedlending; lack of clear rules and time-bound procedures for distressedcompanies

* Develop rural finance * Rural Finance 11 and III projects under * Slow-down of credit applicationsimplementation during 2001

Annex EPage 3 of 3

Achievements and Sector Objectives during the Previous Country Assistance Strategy Period(continued)

CAS objectives Key achievements Major shortfalls

Improve Governance and CombatCorruption• No graft and corruption in Bank- * Allegations rigorously pursued

financed projects* Structural reforms for transparency * Passed anti-money laundering bill; * Budgetary reforms made; anti-money

laumched Judicial Reform Action laundering bill may needProgram strengthening

* Eliminate graft and corruption in * Procurement and financial management * Executive Order issued butspecific institutions reforms initiated in education, health, procurement law not yet passed

and public works departments* Judicial reforms designed and

implementation initiated* Collaborate with partners in official * Collaboration strengthened; joint donor * Implementation of anticorruption

development assistance and with civil recommendation addressed to new programs in most corruption-pronesociety administration; civil society engagement agencies; weak LGU govemance

increased

Annex FPage 1 of3

Alignment with Corporate Priorities

The Bank's corporate priorities are outlined in the Strategic Directions Paperl under twogroups: the Corporate Advocacy Priorities (CAPs) and the Global Public Good Priorities (GPGPs).CAPs are defined as "the critical enablers of poverty reduction that the Bank is particularly well-qualified to champion by sharing knowledge (both research and experience) and building awarenesswith clients, development partners, and other stakeholders. " They build on two key pillars of theStrategic Framework Paper; (i) building the clirnate for investment, jobs and sustainable growth and(ii) empowering poor people to participate in development and investing in them. Regarding the firstpillar, the CAPs advocate that the Bank should play a catalytic role in improving investor confidenceand boosting private sector investment. With reference to the second pillar, the CAPs advocatetreating clients as participants rather than recipients of development aid.

The Philippines CAS proposes to support policy and institutional reforms as outlined in thegovernment's MTPDP to create an environment conducive to investments, led by the private sector.Secondly, by increasing the recipient ownership of the development program through participatoryprocesses, it involves them as participants rather than recipients of development. Table 1 lists theCAPs and their alignment with the CAS.

Table 1: Corporate Advocacy Priorities and their Alignment with the CAS

Corporate Advocacy Priorities I CAS strategyCAP 1: Building the Climate for Investment, Jobs and Sustainable Growth

Investment Climate Poverty Reducing Growth: The CAS supports. Support for urban and rural macroeconomic stability, sound fiscal management, a

development robust financial sector, a favorable investment* Infrastructure services to support environment and infrastructure improvements in the

private sector development roads, water and sanitation and rural power sections.* Regulatory reform and competition Environmentally Sustainable Rural Development with

policy Social Equitv: The CAS aims to accelerate rural. Financial sector reform development by, among other things, supporting

Public Sector Governance policy and institutional reforms to remove market. Rule of Law (incl. Anti-corruption) distortions.. Public administration and civil service Good and Effective Governance: The CAS promotes

reform (incl. Public expenditure better public sector governance support anti-accountability) corruption measures, judicial reform and civil service

* Access to and administration ofjustice reform, procurement and financial management(judicial reform) reform, and policy and regulatory reforms towards

greater competition.

World Bankc Strategic Directions for FY02-04: Impiementing the World Bank's Strategic Framework, March 28,2001.

Annex FPage 2 of 3

Corporate Advocacy Priorities CAS strategyCAP 2: Empowering Poor People to Participate in Development and Investing in Theme

Empowerment, Security and Social Inclusion Comprehensive Human Development: The CAS. Gender mainstreaming; civic supports attention to remaining gender concerns

engagement and participation; including mainstreaming of gender in governance,. Social risk management (incl. Risk civil society participation in strengthening government

mitigation) accountability, addressing deficiencies in educationEducation sector, providing support for women's and child

. Education for All - with emphasis on healthcare, and building the capacity of the poor to actgirls' education for themselves.

. Building human capacity for the Poverty Reducing Growth: The CAS promotes urbanknowledge economy sector development by supporting investments in

Health water and sanitation.* Access to clean water, air and

sanitation by poor people. Maternal and child healthcare

The second group of corporate priorities focuses on the global public goods priorities(GPGPs). These require relatively higher level of international coordination since they involveexternalities and the success of achieving them will depend on the extent to which global programsare implemented at the country level. Table 2 lists the GPGPs and their alignment with the CAS.

Table 2: Global Public Goods Priorities and their Alignment with the CAS

Global Public Goods Priorities CASCommunicable Diseases. HIV/AIDS, tuberculosis, malaria and * Comprehensive Human Development: The CAS

childhood diseases, incl. the relevant link addresses preventable diseases through reformsto education in the health sector and support for critical items

* Vaccines and drug development for major in the health budget. (EU and JICA arecommunicable diseases in developing supporting EHV/AIDS; ADB is co-financingcountries early childhood development project with WB;

UNICEF is supporting women and child health;Japan is financing TB and STD.)

Environmental Concerns* Climate change; water; forests * Poverty Reducing Growth: The CAS supports. Biodiversity, ozone depletion and land investing in drainage, wastewater treatment, solid

degradation waste and air pollution reduction.* Promotion of agricultural research * Environmentally Sustainable Rural Development

with Social Equity: The CAS addresses NRMissues (Japan is financing agriculture research).

Trade and Integration* Market access * Comprehensive Human Development: The CAS• Intellectual property rights and standards focuses on policy and institutional reforms

needed for agricultural competitiveness in viewof WTO agreements.

Annex FPage 3 of 3

Table 2 (contd.): Global Public Goods Priorities and their Alignment with the CAS

Global Public Goods Priorities CASInformation and Knowledge. Redressing the Digital Divide and . Poverty Reducing Growth: The CAS

equipping countries with the capacity to includes PPIAF support to improve accessaccess knowledge of rural communities to

* Understanding development and poverty telecommunications services.reduction I

International Financial Architecture* Development of intemational standards o Poverty Reducing Growth: The CAS* Financial stability (incl. sound public debt supports strengthening and deepening of

management) the financial sector with follow up on* International accounting and legal FSAP recommendations.

framework o Good and Effective Governance: TheCAS promotes reforms in procurement,financial management and in the judicial

_ _ __ _ sector.

Annex GPage 1 of 13

CAS Consultations and Stakeholder Recommendations

The 1999 CAS started the World Bank's (WB) engagement in an extensive consultationprocess at the overall strategic level (October-November 1998)-in addition to consultations forindividual activities. This was never seen as a one-time step, but rather as the start of a continuousfeedback mechanism. Since the last CAS consultations, the World Bank has sought feedback fromcivil society around the country on the final approved CAS (July-August 1999), as well as on itsimplementation progress at midterm (September-November 2000). It held regular end-of-yearfeedback sessions with civil society, as well as regular consultations with ODA partners.

The process followed for the preparation of this CAS has built on the above experience andtaken it one step further: between October and November 2001, the Bank held multistakeholderconsultations for specific aspects of the strategy. These day-long meetings on sectoral and cross-sectoral issues, as well as thematic objectives of the CAS included for the first time both government(national oversight and implementing agencies, as well as local government units, and a fewtechnocrats from Congress), and non-government participants (private sector, civil society, andlabor). The meetings were facilitated by professional facilitators with NGO and academicbackgrounds. The springboard for consultation was the experience in the implementation of the 1999CAS, as well as the issues and priorities identified in the Government's new MTPDP. Separatemeetings were also conducted with ODA partners.

Through these consultations, the World Bank was able to listen to the views of its variousstakeholders-views on the development issues and needs faced by the country in the next threeyears. The meetings also asked for ideas on how the Bank can assist the Government and otherdevelopmental partners in addressing these needs.

Specifically, the meetings tried to (1) review the 1999 CAS and see how it relates to the newMedium Term Philippine Development Plan, determine what worked well and what did not; (2) drawlessons from the past three years of implementation; (3) identify emerging issues as well as crosscutting issues that may be relevant beyond a sector; and (4) identify strategic changes, if necessary.

A team of facilitators and documentors was contracted by the Bank'. At the very start it wasclarified that, although reaching a consensus or agreements on analysis and suggestions was an ideal,total consensus on all points was not aimed for in the consultations. Consensus or converging pointswere to be identified and formulated but it was equally important to surface and document thediverging ideas or issues. A template design was the starting point, with the different sector teamsrevising this to best address both the overall objective of the consultations and specific sector needs.

The concrete output from these consultations is a documentation report that presents both thesynthesis and discussion results of each of the consultations. The summaries of theserecommendations were presented to the staff and the government officials, led by the NationalEconomic and Development Authority and the Department of Finance, who participated in a jointWorld Bank-Government retreat immediately following the consultations.

I The members of the team of facilitators and documentors were hired on individual basis with a principal facilitatorserving as the overall coordinator of the team. All are social development practitioners coming from the civilsociety sector, with a good number of them also based in the academe.

Annex GPage 2 of 13

Since the participants in the consultations for the formulation of the CAS came from variousgroups, the comments, issues, suggestions, and recommendations gathered during these meetings donot necessarily reflect a consensus. A documentation report on all these are posted on the website(www.worldbank.or.ph) and was sent to all the participants. The table below indicates therecommendations gathered from each meeting and how these are reflected in this CAS or, why theyare not reflected.

MULTI-STAKEHOLDERS' RECOMMENDATIONS TO CAS FY03-05

RECOMMENDATIONS WORLD BANK GROUP'S (WBG)RESPONSES

A. Rural Development) Integrate the provision of services for the The ongoing Mindanao Rural Development Project

rural poor under a sustainable development (MRDP) aims to integrate the provision of servicesframework. for the rural poor within the framework of

devolution and empowerment of communities toensure sustainability of poverty alleviationinterventions. The planned KALAHI project willalso pursue this.

) Shape WB programs and projects on rural All Bank-financed RD projects are geared towardsdevelopment (RD) to support the supporting GOP's goals of poverty reduction,Government of the Philippines' (GOP) equity and sustained growth since the majority ofgoals of poverty reduction, equity and the poor are in the rural areas.sustained growth.

) Besides pursuing RD instruments Lending in the rural sector includes Adaptableprioritized earlier, infuse innovation in new Program Loans and Learning and Innovation Loansinstruments to be carried out. (LILs), which are instruments that allow innovative

features. LILs, in particular, provide an opportunityto try out new and untested ideas which can later onbe broadened and deepened.

0 Make social assessment and capacity Social assessment and capacity building are integralbuilding integral parts of every WB and necessary elements of the Bank's program. Forinstrument on RD. example, the design and preparation of MRDP and

the proposed ARMM Social Fund Project are aresult of wide ranging social assessments. In theCommunity-Based Resource Management Project(CBRMP), MRDP, and other RD projects, capacitybuilding through learning-by-doing and formaltraining courses are integral project interventions.

t) Adopt measures related to improving WB The majority of Bank-financed RD and NRMprogram implementation that are directed projects are being implemented with, and through,towards decentralization and increased Local Government Units (LGUs) and communities,partnership/multi- stakeholdership and as well as local NGOs. Hence, implementationlocal community ownership. strategies and modalities are geared towards

enhancing devolution and engaging communitiesand other stakeholders putting them in the drivers'seat for addressing development issues.

Annex GPage 3 of 13

MULTI-STAKEHOLDERS' RECOMMENDATIONS TO CAS FY03-05

RECOMMENDATIONS WORLD BANK GROUP'S (WBG)RESPONSES

f) To improve implementation of WB All Bank-financed RD and NRM projects placeprograms and projects, exact accountability emphasis on disseminating information to promotefrom, and greater coordination among transparency and accountability of all projectstakeholders, undertake public education stakeholders (e.g., local community bill-boards,and information campaign, and set basis for Anti-Corruption Hotline). Systems for monitoringassessment from the very start. and evaluation of performance are agreed with GOP

during project preparation and followed throughduring implementation.

) Include collaborative and impact studies, The WB's program in RD and NRM includes grantanalytical work, credit programs, and resources for economic and sector analysis, strategycapacity building instruments such as formulation and evaluation of critical developmentscholarships and cultural exchange. issues. On credit programs, the Bank-financed

projects under implementation include RuralFinance II and III, as well as grant projects onimproving micro-finance access in selectedMindanao municipalities and on livelihoodassistance for women and Indigenous Peoples (IPs)in the SZOPAD areas.

) Concentrate on the rural poors' access to Eighteen of the on-going projects have componentsnatural resources and focus on Mindanao for Mindanao, including two projects (SZOPADand IPs' concerns. Social Fund and MRDP) that are exclusively for

Mindanao. Pipeline projects also contain emphasison Mindanao. A number of on-going interventionstarget indigenous peoples as beneficiaries (i.e., 30%of micro-finance portfolio for the Japan SocialDevelopment Fund [JSDF] Grant Project on Micro-finance should be provided to IPs, women andMuslims, in the MRDP block grant component, 1/3of community subprojects prioritized for IP andwomen groups.)

* Address the perennial issue of budgetary A public expenditure review and planned non-constraints and revisit classification of lending work would address these issues.LGUs to facilitate their access to resources.

B. Urban Developmentg) Prioritize capacity building and training of LGU capacity building is being addressed in the

LGUs all the way to the barangays. ongoing LOGOFfND project, and the suggestedIncluded in areas for improvement are, areas will be tackled as the implementation of theamong others, policy reform, land use LGU Capacity Building Component of LOGOFINDplanning and enforcement, solid waste accelerates.management. I__

Annex GPage 4 of 13

MULTI-STAKEHOLDERS' REiCOMMENDATIONS TO CAS 03-05

RECOMMENDATIONS WORLD BANK GROUP'S (WBG)RESPONSES

g) Improve accountability of Local Chief Performance monitoring and benchmarking haveExecutives by improving data collection, become standard requirements under projects instrengthening monitoring and evaluation urban water supply and will be followed through(M&E), including Civil Society other future urban sector operations. The Bank willOrganizations (CSOs) in M&E, coordinate with other donors on LGU M&Einstitutionalizing performance monitoring development, and will recommend national policiesacross LGUs, benchmarking, and to improve LGU accountability in the context ofproviding both positive and negative planned analytical work.reinforcements.

) Require participation of communities Bank-financed urban projects are already involvingthrough pre-project consultations, creation communities extensively, particularly in the LGUof consultative bodies and mechanisms; Water and Sanitation projects. The approach will beconduct voters' education for community expanded further to other urban projects, such as theawareness and empowerment; make local planned Cities Development Project, to make themdevelopment councils functional. more community-driven.

) The National Land Use Code should be This will be addressed in a proposed Urban Sectorenacted and operationalized. The Study, though it may not cover the details of theguidelines and standards for creating cities national land use code. This is also an area whereand managing them have to be clearly set. City Development Strategies (CDS) will assist

selected cities on a demand-driven base.Og Disseminate success stories or best The Bank has been working closely with the

practices for replication. League of Cities of the Philippines on CDS andother activities, which facilitate dissemination. Theother important channels are LGU Portal, andCDSEA, websites for communication anddissemination of CDS information.

g) Improve tax collections in both National LGU taxation issues are partially being addressedand Local levels; review the IRA formula, by LOGOFIND, which has a significant LGUimpose idle land tax, creation of secondary resource mobilization component. Other LGUmortgage institution to plow back funds for financing issues, such as IRA formula, will behousing, creation of a Social Housing reviewed under a planned study. Housing finance,Finance Corporation to focus on the including primary and secondary mortgage markets,housing needs of the poor. will be examined as part of capital market

development. Housing for the poor could beaddressed in the proposed Urban Shelter andCommunity Infrastructure LIL.

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MULTI-STAKEHOLDERS' RECOMMENDATIONS TO CAS 03-05

RECOMMENDATIONS WBG'S RESPONSESg) Study and create programs using Most of these would be addressed in the planned

alternative tenure system; expropriate land Urban Shelter and Community Infrastructure LIL.for socialized housing; use foreclosed landfor housing; review and scale up theCommunity Mortgage Program; reviewsubsidy system for housing; provideresources for organizing and socialpreparation work; improve transportationand communication systems.

C. Human Development<D Review government's responses focusing These factors are being taken into consideration in

on how to strengthen LGUs and design of the proposed Health Sector Reformsynchronize the various instruments, Project (HSRP). Shortcomings of LGUs inimprove accessing and networking, adopt implementing the School Building Component offlexible strategies and emphasize the Third Elementary Education Project (TEEP) aresustainability. now receiving close GOP attention.

) Treat capacity-building of LGUs, National HSRP, TEEP and Early Childhood DevelopmentGovernment Agencies and beneficiaries as (ECD) project provide support for LGUs intop priority. implementation of social services. Departments of

education, social welfare and health are receivingsupport in procurement and financial managementunder the Social Expenditure Management Project(SEMP) and SEMP2. A planned HumanDevelopment (HD) sector study for ARMM willreview ways to strengthen the capacity of theARMM government in HD.

) Assist the National Commission for IPs in A study on special needs of IPs in early childhoodtheir formulation of a National IP Plan and development has been carried out under the ECDcome up with more programs that will be Project, and GOP is formulating a strategy toculturally sensitive. Assist in the creation address their special needs. A planned HD sectorof learning centers of the IPs. study for ARMM will address special needs of IPs

in that area.) Assure and sustain civil society SEMPI, SEMP2 and HSRP (will) involve CSOs in

participation particularly in their efforts to project evaluation. PTCAs are involved in TEEPevaluate programs and projects. implementation and local POs are involved in

ECDP implementation.) Support projects in population education Information and Education on reproductive health

and management, e.g., reproductive health and family planning would be the central focus ofconcerns. the proposed Population Management/Women's

Health2 project. Purchase of contraceptives wasexcluded under SEMP2. Grant funding is expectedto be available from USAID for purchase ofcontraceptives.

Annex GPage 6 of 13

MULTI-STAKEHOLDERS' RECOMMENDATIONS TO CAS 03-05

RECOMMENDATIONS WBG'S RESPONSESO Have clear provisions on enforcement and E'CDP, TEEP and HSRP (will) have monitoring and

sanctions in all instruments aside from evaluation components. In addition, the HSRP willclear monitoring and evaluations systems. have an information component covering both theEnsure substantial disclosure of national Health Sector Reform Agenda (HSRA) asinformation regarding all instruments. well as the project itself. All instruments comply

vwith the Bank's disclosure policy.) Support the Health Sector Reform Agenda The HSRP will support HSRA implementation in

particularly reforms in the convergence four convergence sites and will help GOP developsites of public health, hospital system and procedures and guidelines to be able to providethe local health system. technical assistance (TA) and matching grant

support to other convergence sites.< Encourage programs and enhance public- The WB does not have significant activities to

private sector partnerships. promote public-private partnerships in HD, butintends to continue dialogue with GOP. Prioritieswould be public-private partnerships in secondaryschooling and accreditation of private health careproviders and private drug retailers in the nationalhealth insurance scheme. Partnership with IFCcould be explored.

) Provide technical assistance to strengthen SEMP1 and SEMP2 are providing assistance forsystems for resource allocation, procurement, financial management and tracking ofprocurement, tracking and resource resource allocation in departments of education,utilization. social welfare and health. A study on teacher

deployment is being undertaken under SEMP2.D. Governance _Local Governance _-<) Prioritize LGUs in the provision of An IDF grant on strengthening accountability in

technical assistance in the areas of: IT poor LGUs, especially their financial management(hardware, software and training), capacity, is under implementation. A publicenhancement in management knowledge expenditure review focusing on LGUs is plannedand skills, financial management and during the CAS period. Projects such as SEMPI/procurement, monitoring and evaluation. SEMP2 are providing assistance in procurementConduct training needs assessment prior to and financial management in selected governmentany capacity building intervention. Come departments. Recently launched "LGU Assistanceout with user-friendly easily Portal" aims at improving information flow tounderstandable manuals for local LGUs on Bank-supported products and services.executives. Finally, comprehensive LGU development strategy

programs and possible follow-up operations arebeing proposed to assist LGUs committed to bettergovernance.

Annex GPage 7 of 13

MULTI-STAKEHOLDERS' RECOMMENDATIONS TO CAS 03-05

RECOMMENDATIONS WBG'S RESPONSES0 Set-up citizen's group for monitoring and TA is ongoing and proposed to build capacity

evaluation. Put mechanisms in place to within CSOs to monitor and evaluate governmentensure genuine and meaningful activities (e.g., support to Procurement Watch).participation of citizens in locaf The WB will also continue to support thegovernance, from planning of projects to institutionalization of Report Card Survey amongimplementation. beneficiaries of government services.

g) Clarify roles to facilitate inter- A proposed study will revisit the Local Governmentgovernmental coordination; reengineer the Code, including the IRA formula, and provideDepartment of the Interior and Local guidance on strengthening inter-LGU collaboration.Government. A follow-up program loan is likely to address issues

of civil service reform.t) Give more emphasis to internal controls Program loans will address the issues related to

and set up performance indicators and LGU finance. The WB will also supportaccountability measures. benchmarking to improve LGU accountability.

Public SectorO9 Focus reforms on the most corrupt agencies Technical assistance is being mobilized (IDF grant)

including the Bureau of Internal Revenues to support reforms in the BIR. A proposed program(BIR). Clean these agencies to set an loan will also focus on BIR reforms.example.

) Come up with a competence index for This is not being addressed directly by the WB.public officials, instead of using trust andintegrity alone. Involve CSOs inmonitoring of officials. Intensify electorateeducation to include use of competenceindex, criteria for selection of agovernment officials and report card for theincumbents.

<) Conduct capability-building interventions WB is proposing TA and training activities to stafffor barangay officials, particularly on of implementing agencies to build theirfinancial management and administration. procurement and financial management capacities.

These are being included in project design asrequired.

1) Make available to the public government The Country Procurement Assessment Reviewrecords and publish in web site full (CPAR) working group (WB and GOP) isdisclosure of assets and liabilities of public discussing creating a procurement oversightofficials. Also include data on government committee which would monitor quality of GOPperformance, procurement processes and procurement functions. The WB is alreadycontracts. Create a database to be shared supporting Procurement Watch, a civil-societyby several groups. based organization, to monitor public procurement.

Q Emphasize national and sectoral priorities The public expenditure reviews, undertaken both atrather than the project level, i.e., the public national and local government level, will provideand the implementors should be made to guidance on how best to achieve this.see the bigger picture.

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MULTI-STAKEHOLDERS' RECOMMENDATIONS TO CAS 03-05

RECOMMENDATIONS WBG'S RESPONSES) Institutionalize coordinating mechanisms to The institutionalization of the Report Card Survey

facilitate cooperation among government being supported by the WB will facilitate closeragencies and other sectors. Engage CSO collaboration between government agencies. Civilin government planning, monitoring and society involvement in design, delivery andevaluation. monitoring of development projects will be

strengthened by supporting them with capacitybuilding and technical assistance.

<) Introduce Civil Service Reforms including The proposed program loans would address civilthe conduct of regular lifestyle checks of service reform issues. A capacity building grantpublic officials, developing clear will also be mobilized to improve the capacity ofperformance indicators, improving the government in designing and implementing civilincentive system (reward system, public service reforms and streamlining bureaucracy.recognition), reviewing RA 6676 (last in,first out policy on reorganization), developcustomer-service orientation, andaggressively pursue streamlining or right-sizing of the bureaucracy.

<) Limit appointing powers of the President to This is not part of the WB's assistance program.cabinet secretary and undersecretary levelsonly.Judiciary

I) Provide continuous legal training of court The implementation of the action program forpersonnel and judges in order to improve judicial reforms which has been embraced by thethe quality of performance and increase the supreme court will be supported by the judicialdrive for reforms; streamline judicial reform project that is under preparation andsystems and procedures; and establish pro- concurrent assistance from a number of bilateralpoor and user-friendly systems. donors as well as ADB and UNDP.

g) Establish a clear and transparent judicial An NGO (Bantay Katarungan) is alreadyappointment process, especially for women contributing information to the judicial appointmentmagistrates. process.

G) Involve justice institutions in national The judicial reform project under preparation willprocesses; install effective judicial address the performance management system.performance management system; andenhance operating budgets.

® Reform formative education to inculcate Information dissemination and mobilizing publicgenuine sense of democracy; design a legal understanding and support is one of the pillars ofliteracy program for the general public. the supreme court's action program for judicial

reform which will be supported by the Bankfinanced judicial reform project under preparation.

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MULTI-STAKEHOLDERS' RECOMMENDATIONS TO CAS 03-05

RECOMMENDATIONS WBG'S RESPONSESProject and Financial Management

1 On leadership and transparency: The ongoing Public Expenditure, Procurement andgovernment leaders should improve their Financial Management Review (PEPFMR) willdecision-making processes; establish provide guidance regarding reforms in financialcomprehensive disclosure requirements as management, including auditing and accounting.part of the operations and financialreporting system; improve public access togovernment records and transactions.Review role of oversight committees, In the context of civil service reform, the PEPFMRstrengthen and where necessary, rationalize will provide advice on the strengthening of the roleroles and responsibilities. of oversight agencies; based on this, the proposed

second program loan might support this initiative.O Enforce consistently laws, rules and Several projects will include improving

regulations. Improve accountability accountability and transparency in financialsystems and mechanisms. management as an important component (e.g.,

SEMP 2, NRIMP 2). An IDF capacity buildinggrant is supporting improving accountability in poorLGUs.

) Streamline and simplify audit and reporting The Commission on Audit (COA) is taking the leadprocesses. in improving the internal and external audit

mechanisms. The PEPFMR will also provideguidance on how the streamlining andsimplification of such processes is achievable.

Enhance capacity through IT hardware and SEMP 2 will finance IT improvements in thesoftware. Include training to optimize these departments of education and health. This project istools. currently under preparation.Procurement

) In terms of procedural reforms: integrate The PEPFMR will provide advice on procurement-requirements of different funding agencies related reforms. This would also be addressed in thefor consistency and standardization; two proposed program loans.simplify processes and procedures;suppliers/ contractors and the public shouldbe provided with the procedural guidelinesthat are simple and easily understood; thereshould be clear benchmarks andspecifications; reduce the number orrequired signatures; increase transparencyby making information available to thepublic; improve communication betweenrecipients and procuring entities; maximizetechnology in the procurement of goodsand services; simplify the payment process.

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MULTI-STAKEHOLDERS' RECOMMENDATIONS TO CAS 03-05

RECOMMENDATIONS WBG'S RESPONSES) Capacity-building is an important Procurement reforms will be supported through

intervention. Training should be done on projects (for instance SEMP 2) and staff ofthe procurement cycle and project design; implementing agencies will be provided withGOP should recognize procurement as an training and technical assistance to build theirimportant function that requires the procurement capacity.appropriate skills and professional staff;regular refresher course should be providedgiven that procurement policies andprocedures as well as people managing theprocess, change regularly; come up with anaccreditation process for procurementofficers, Bidding and AccreditationCommittee members and the secretariatand technical staff. _

g) Reinforce/reward good performance; Should be addressed by GOP directly, in context ofpenalize those involved in graft and civil service reform.corruption; use performance evaluationschemes with effect on promotions,improvement in pay scale for thoseinvolved in this function. _-

E. Macroeconomy *_) Rural infrastructure and human capital See the responses above for (A) rural development

investment are important for growth. and (C) human development.<i Look more into the micro (supply side) Analysis is currently underway regarding transport

responses and not just demand to generate costs in the Philippines which may constrain supplygrowth, including privatization, agriculture side response. Trade reforms, in particular fortrade reforms, reforms in the social sectors agricultural commodities are part of the WB'sand improved productivity. macroeconomic dialogue with government.Review/change/repeal laws and policiesthat hamper productivity. Expand rural-based and not just traditional agriculture-based income sources. Consider regional,industry and sectoral distribution and thequality of growth. _-

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MULTI-STAKEHOLDERS' RECOMMENDATIONS TO CAS 03-05

RECOMMENDATIONS WBG'S RESPONSES0! Look at policy and procedural reforms for Detailed follow-up on implementation is a key

both lending and non-lending programs. It element of our CAS, with regard to bothis effective to support not just policy but implementation of projects and of policies. Thealso implementation and their consistency. WB is ready to provide technical assistance in thisImprove service delivery of agencies regards where needed. Also, communication aboutincluding coordination among them. the WB's programs and policies is a key element ofImprove communication about the Bank's the Bank's outreach strategy, including both in-policies and programs. Review Bank's own country events, publications, media relations andpolicies, processes and requirements, availability of information on the Bank's externalparticularly criteria for project selection. web site.Exact accountability and impose the rule oflaw.

1 Improve fiscal management in two areas: Lending support to improve fiscal discipline will berevenue policy and fiscal risk matters. provided through the proposed program loan andGOP plans and programs should have clear advisory and technical assistance through thebudgetary sources and fiscal management PEPFMR, a follow-up study and grants. Futureplans, with reconciliation of seemingly analytical and advisory work will pay particularconflicting policies. GOP should move attention to fiscal management at the localaway from foreign loans to reduce debt government level and will review the feasibility ofburden. Review tax system and IRA. the current IRA. The capacity building efforts will

initially focus on BIR through mobilization of anInstitutional Development Fund (IDF) grant. TheIMF has also been providing advice and technicalassistance on tax policy.

g) Undertake policy reforms in the financial The WB will continue to work with the IMF andsectors and capital markets; SEC reforms use a combination of program lending, advisoryto ensure fair competition; corporate work and technical assistance to addressgovernance reforms. Explain proposed weaknesses in the financial sector. IFC will alsoinstruments and solutions such as the assist in strengthening the banking system andAMCs and securitization to the public. promoting capital market development.Strengthening the regulatory system(Banking Act and the Central Bank Act).

) The WB should continue to blend project The WIB's assistance will include all these elementslending and non-lending program (i.e., best during the CAS period, depending on the needs ofpractices, knowledge-sharing, distance the government. It will use a blend of programlearning, studies and researches. etc.). lending (for policy reforms), project lending, andInformation and communication advisory services. Advisory services will includetechnology is an element to improve analytical and diagnostic studies, including bestefficiency of service delivery. LGUs and practices and knowledge sharing. Some of thesesocial preparation are key elements in will also have LGU focus.project design to ensure project success.WB's intellectual capital must beharnessed, not just its financial capital.

Annex GPage 12 of 13

MULTI-STAKEHOLDERS' RECOMMENDATIONS TO CAS FY03-05

RECOMMENDATIONS WBG'S RESPONSESF. Private Sector*^) The Bank Group should concentrate on: IFC is talking to several players interested in setting

support to asset management companies up a Special Purpose Asset Vehicle (SPAV) and(AMCs), expansion of micro-finance, would be pleased to work with a Company that hassharing of its knowledge-wealth, undertake a viable proposal. It would like to leverage on theinformation dissemination on best experience of its micro finance investment inpractices, assistance in urban development Mindanao, once the results of the first investmentconcerns (titling system, security of tenure are clear. IFC is also looking to finance the Landof informal settlers), and the establishment Registration Authority project that would helpof a local infrastructure fund. improve the land titling system. It is also working

on providing local currency financing to clients inthe Philippines.

) Address the following constraints faced by The WB is ready to assist the GOP in helpingthe private sector in supporting LGUs: improve LGU capacity, both within the context ofLGUs limited capacity, lack of LGU projects, and through grant assistance. Upcomingaccountability and transparency, the short analytical work will focus particularly on issues ofterm of the Local Chief Executive (LCE), financial management at the local level. However,the incompatible accounting system being the short term of the LCE cannot be addressed byused by government, and the lack of a the WB.clearing and settlement system.

0) Recommendations to address the above See above.constraints were: the LGUs to make use ofavailable funds window before accessingprivate sector funds, classifying LGUsaccording to capacity and identifying thetype of assistance needed by each cluster,reviewing the official policy against LGUdeposits in private banks including thebond pooling system and strengthening thelocal government guarantee system. .

<) Population management was raised as a One of the proposed WB-financed projects wouldkey concern. It was suggested that LGUs address population management issues (Populationshould address this issue with help from the Management/ Women's Health 2).Department of Health, private sector andcivil society organizations.

Annex GPage 13 of 13

MULTI-STAKEHOLDERS RECOMMENDATIONS TO CAS 03-05

RECOMMENDATIONS WBG'S RESPONSESO The meeting suggested the following Approving IRRs soon after legislation is passed is

regulatory priorities to improve investor key to assuring actual implementation of policyconfidence: the formulation of the reforms. The WB is ready to provide assistance toImplementing Rules and Regulation (IRR) government as requested. Tax reform would beto already passed legislations and ensuring addressed in the context of the planned programstrict compliance and implementation of loans.these; specific tax reforms (documentarystamp tax, capital gains tax, excise tax,VAT, taxes for self-employed) and arationalization of the complicated tax rulesand regulations, with greater transparencyto improve compliance.

Consultations on Private Sector and Macroeconomy had different methodologies, hence, the formats were quitedifferent from the rest. Recommendations often refer to government rather than the Bank Group's program.

Annex HPage 1 of 28

Philippines: Private Sectcr Development Strategy

I. Introduction

Philippines absorbed the negative impact of the Asian financial crisis better than most othercountries in the region. But it has not returned to pre-crisis GDP growth levels and over thepast 30 years growth has lagged behind most Asian neighbors. The incidence of poverty inPhilippines remains relatively high at about 34°'o. To reduce poverty Philippines has to growfaster. The private sector would have to play a major role since it dominates the economy.

However, despite a relatively open and liberal investment environment the private sectorengine has never been consistently strong. Growth has been a start-stop process. Periods ofboom have been followed by episodes of bust. Periodic political and economic turbulencehas shortened investment horizons causing under investment. Increasing private investment isthe key to building a strong competitive private sector. This would require, first andforemost, reducing concerns about law and order problems and perceptions about politicalinstability breaking the chain of reforms. Then policy must focus on (a) improving thebusiness environment; (b) expanding supply of long-term risk and loan capital; (c)strengthening infrastructure by attracting private investment and management expertise tocomplement government resources and increase their effectiveness. Finally, speedyimplementation of reforms would enhance credibility with investors.

This report identifies issues in private sector development. The focus is on development ofthe non-financial private sector. Part II presents an overview of the private sector and reviewsdevelopments since the last CAS. Part III identifies key issues. Part IV proposes a PrivateSector Development (PSD) strategy and role of the Bank Group.

II. Overview of the PhiLippines Private Sector

Structure

* The Philippine economy is a predominantly private economy. Private sector consumptionand investment drive the economy accounting for about 63% and 10-12% of GDPrespectively. In the agriculture sector the chief products are rice, corn, coconut,pineapple and sugar. In the minerals sector, the country is rich in copper, cobalt, nickel,silver, and iron and gold. Food processing, textiles, clothing, wood, forest products, andhome appliances dominate the industry sector, with fast-growing aquaculture,microcircuit, garments and furniture sectors. Retail trade, financial services andtelecommunications are important service sub-sectors. Private sector involvement ininfrastructure sectors increased during the 90s.

* Industry and Services sectors dominate the economy. In 2000, services, industry andagriculture accounted for 53%, 31% and 16% of GDP respectively. Between 1990 and2000 the services sector has been the fastest growing sector (average annual growth rateof 4%). Manufacturing dominates industrial sector output. In terrns of employment,agriculture accounts for about 40% of employment, services for about 36% and industry24%.

Annex HPage 2 of 28

* Unemployment and underemployment is high. Of the estimated 32.6 million persons inthe labor force (public as well as private) as of July 2001, about 29.2mn people wereemployed giving an unemployment rate of about 10.1% (unemployment is estimated tohave gone up since then). In addition 17.7% of the labor force is estimated to beunderemployed. There are about lmn overseas Filipino workers. With annualremittances in excess of US$6bn (2000), these overseas workers make a majorcontribution in supporting balance of payments and domestic consumption.

m Micro and small enterprises account for 99% of registered private firms. According tothe annual survey of establishments, the total number of registered establishments inoperation at end- 2000 was estimated to be about 820,960. Micro enterprises accountedfor 91 % of registered establishments; and small establishments accounted for about 8%of registered establishments. Medium-sized firms accounted for 0.4% of registeredestablishments. The remaining 2,984 were large establishments employing more than 200workers. In the agriculture sector there are an estimated 4.6mn farm holdings with anaverage size of about 2.1 hectares. Disparity in agricultural land ownership is substantial.Most manufacturing establishments are located in one of the 54 (mostly privatelymanaged) special economic zones and industrial estates.

* Ownership in listed companies is highly concentrated. The Philippines has 231 publiclylisted companies. The degree of ownership concentration is second only to Indonesia inthe region. The top 15 families account for 55% of ownership in listed companies.According to a 1997 survey, 757 of the 1,000 largest corporations (ranked by sales) werePhilippine-owned and 216 of these belonged to only 39 corporate groups. The total salesof these 216 group-owned companies accounted for 51 percent of the total sales of thelargest Philippine-owned corporations. The study also found that in 1997, among publiclylisted non-financial companies, one dominant shareholder controlled on average 41percent of the equity, while the top 5 shareholders had majority control in three out ofevery four listed company. Some product markets such as tobacco, beverages and cementhave high concentration ratios. Geographically, the National Capital Region aroundManila -accounts for a large part of the corporate private sector and industrial sector.

* Export production and export markets are concentrated Exports grew rapidly in the 90sand manufactured exports account for 80% of total exports. But relative to other EastAsian economies the export base is narrow with a high dependency on electronics exportsthat account for nearly 60% of total exports. In terms of destination, U.S.A. and Japan arethe largest markets accounting for more than 50% of total exports. Philippines share inregional exports is lower in comparison to Thailand and Malaysia. Domestic value addedin electronics exports increased from about 10% in the early 90s to about 30% by 1998but now appears to have reached a plateau. In recent years, IT services have grownrapidly. Exports increased from US$125million in 1995 to around US$700million by2000.

a While it is difficult to assess the truefinancial situation of the corporate sector it appearsnot to be highly leveraged. Filipino companies are not as leveraged in comparison toother East Asian countries. However, because accounting standards and disclosurerequirements are not up to international practices the relatively lower leverage may needto be interpreted with caution. In terms of external sources of financing, the corporatesector relies mainly on commercial banks. Loans are typically on short-term basis withmaturities not exceeding 90 days. The corporate bond market is almost non-existent

Annex HPage 3 of 28

because of high costs of trading. Private sector's external debt accounts for about 34% oftotal external debt.

Foreignfirms are an important part o,the private sector. As at end 1995 about 14,800foreign affiliates were located in the economy, a number considerably higher than that inIndonesia and Thailand.

Financial Sector

* Relative to Thailand, Malaysia, and Indonesia, the Philippines financial system issmaller. At the apex is BSP, the central bank responsible for monetary policy and banksupervision. The banking system consists of Commercial Banks (Expanded CommercialBanks and Non-Expanded Commercial Banks); Thrift Banks (Savings Banks, PrivateDevelopment Banks, Stock Savings and Loan Associations); Specialized GovernmentBanks; and Rural Banks. As of June 2001, there were 45 universal and commercial banks,1 5 thrift banks and 785 rural and cooperative banks. The Philippine Deposit InsuranceCorporation administers a deposit insurance program. Deposit insurance covers up toPesos 100,000 per depositor. In addition, there are a number of other financial institutionsregulated mainly by the Securities and Exchange Commission. These include registeredinvestment companies (26), and registered investment houses (48). The micro financesector is growing rapidly. There are over 300 credit-granting non-governmentorganizations. Two of the largest non-government financial institutions have experienceda rapid growth in number of clients. Cooperatives and rural banks are also expandingtheir micro-finance operations. Ownership of financial institutions is mainly in privatedomestic hands. Majority or controlling interests in the commercial banks typicallyresides with business families. The government owns three specialized developmentbanks.

* Commercial banks dominate the financial system. As of June-2001 expanded commercialbanks, ordinary commercial banks, thrift banks and rural and cooperative banksaccounted for 71%, 20%, 7% and 2% of assets of the banking system respectively.Foreign banks account for about 15% of the assets of the banking system. In recent yearsforeign banks have been involved in mergers in the banking system.

* Despite rapid growth in the mid-90s the equities market is small. As-of 30 August 2001,the Philippine Stock Exchange had 231 listed companies. The top 15 stocks account for67% of trading volumes and 71% of total market capitalization. The Market's averagedaily trading volumes have shrunk to less than US$10mn in comparison to US$20-30million in Indonesia and US$120-130million in Thailand.

Annex HPage 4 of 28

Infrastructure Sector

Philippines infrastructure development is behind its middle-income neighbors. (Table 1)

Table 1: Philippine Infrastructure Performance

Philippines Indonesia Malaysia Thailand Korea Middle_____ __________ ____ _____ ____ _____ ____ In co m e

Per capita power consumption 451 320 2554 1345 4497 1367(kwh) _ _ _ _ _ __ _ _ _ _

Trans & Distrbn losses (lo) 16 12 7 9 7 11Access to power 65 39 92 87 97(%households)Urban water access ( YOpop) 92 91 95 89 97 93Rural water access (% pop) 80 65 94 77 71 68Paved Roads (% 95-99) 20 46 76 97 75 48Telephone mainlines per I 000 39 27 203 86 438 121Cellular Subscribers per IO00 36 1 1 137 39 500 55

Source: World Development Indicators, 2000

Government agencies are responsible for sector development with independent (and oftenmultiple) regulatory bodies responsible for entry, price and service regulations. Operators area mix of public and private entities and local governments (Table 2).

Table 2: Institutional Structure in Infrastructure

Sector Institutional StructureTransport Sector Development: Department of Transport and Communication, Infrastructure Committee

of NEDA.Regulation: Separate agencies for each mode. Toll Roads are under the Toll Regulatory Board;local govemments.Delivery: Rail is state-owned except for light rail. Several private toll roads. Other roadsmanaged by Department of Public Works and Highway and local governments. Passenger andcargo traffic and inter-island shipping is largely private. Ports are a mixture of public andprivate under the overall jurisdiction of the Philippines Port Authority. Aviation is in privatehands.

Telecommunication Sector Development: Department of Transport & CommunicationsRegulation: National Telecommunications Commission.Delivery: Private operators. Competitive market structures in most segments and low barriersto entry.

Water Sector Development: National Water Resources BoardRegulation: National Water Resources Board, Local Water Utilities Administration, MWSSregulatory office for Manila;Delivery: Autonomous Public Sector Water Districts, Private systems under design, build andlease schemes. Water delivery in Metro Manila through private concessions supported by IFC.

Power Sector Development: Department of EnergyRegulation: Energy Regulatory Commission Delivery: (a) generation: State owned NationalPower Corporation (NPC)+ Independent power produccrs; (b) transmission: NPC; (c)distribution: local government utilities; investor owned utilities and electric cooperatives. Morethan 40 generation projects with private sector participation. The Electric Power IndustryReform Act provides the framework for privatization of NPC and creation of a competitivepower market.

The track record in attracting private sector investments.in infrastructure has beenimpressive. Among developing countries Philippines was a pioneer and innovator in theuse of Build-Operate-Transfer (BOT). A BOT law was passed in 1990 and amended in1994. Over the past decade, the government in partnership with the private sector has

Annex HPage 5 of 28

implemented about 111 infrastructure projects, with an estimated total capital cost ofUS$26 billion. IFC has been an advisor and financier in some of these projects. Privatesector participation is the highest in the power and telecom sectors followed by roads andwater.

Trade & Investment Regime

Trade and tariff reform programs launched in the early 90s have lowered and simplifiedtariffs but agriculture sector is relatively more protected Tariffs have come down. Theaverage most favored nation rate in Philippines in 1999 was 9.98% compared to 13.5% inIndonesia, 9.45% in Malaysia, and 16.97% in Thailand. The weighted average effectiveprotection rate (EPR) declined from 24.8% in 1995 to 14.4% in 2000. The decline in theEPR is most pronounced in the manufacturing sector. The latest Tariff Commissionestimates of EPRs are as follows: 14.1% in 2001, 12.62% in 2002, 11.77% in 2003, and10.76% in 2004. In 2004, a uniform tariff of 5% will apply. But exceptions in agricultureand food processing make the EPR in these sectors 20.08% and 21.50% respectively. Mostprice controls have been eliminated.

* The foreign investment regime isfairly liberal. In most sectors 100% foreign ownership ispermissible. However Philippines maintains two negative lists that restrict or limit foreigninvestments in certain sectors/activities such as services, ownership of land, retail trade.While foreign ownership of land is restricted firms can lease land for up to 75 years. Theinvestment regime guarantees freedom fiom expropriation without nationalization, and theright to remit profits, dividends, capital gains and sale proceeds from investments.

Recent DeveloDments

The private sector has been unable to sustain a growth momentum and business andconsumer confidence has been volatile. With the exception of the services sector growth hasbeen volatile (Figure 1). Turbulent domestic political and economic events and adverseweather conditions contributed to volatility. High oil prices and slowdown in global ITdemand further exacerbated domestic problems. Private business and consumer confidencehas also been volatile as measured by the monthly confidence surveys conducted by theBusiness World and Audit and Surveys Worldwide.

Annex HPage 6 of 28

Figure 1: Uneven Growth: Quarterly Sectoral GDP Growth (y-o-y, %)

15

10

-1 --,-Construction-15 U- Agnculture

15 \ -- Manufacturing|

-20 ~-0-Services _

Source: BSP

A slow-down in export growth has muted private sector growth. The fortunes andperformance of the private manufacturing sector depend significantly on export performance.Because Philippines is highly dependent on electronics exports, it has been severely affectedby the global slow-down in the information technology sector. In the first half of 2001, on ayear-on-year basis export growth turned negative because of a significant decline inelectronics exports. (Figure 2).

Figure 2: Steep decline in export growth (%, y-o-y)

25-20-

10S 5-

-5 -1997-- 1998-199 1999- 20000t(Jan-10-15

Growth in private fixed investment has been muted. Fixed capital formation has not pickedup (Figure 3). Fixed investment in the manufacturing sector has been subdued because ofunutilized capacity; average capacity utilization in the manufacturing has fluctuated between70-75%. Growth in private construction - an important component of fixed capital - hasbeen hampered because of soft commercial property markets. Rental rates have beendeclining and vacancy rates have been increasing.

Annex HPage 7 of 28

Figure 3: Fixed Capital Formation, Annual Change, %,1985 prices

Is _ _ _ _ _ _ _ _ _ _ _ ___ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

I. -S

J I' N U OI(OI X J

Source: NEDA

Net realizedforeign investmentflows have been volatile. Once again, turbulent domesticpolitical and economic conditions resulted in Philippines not being able to maintain a steadygrowth in new investment flows (Figure 4). A stock market scandal in early 2000 severelyundermined investor confidence.

Figure 4: Fluctuating Foreign Investment (Net Flows, US$mn)

1~~ 7- 1 I w ,,$ A a z I

| | | _ *~~~~~0Portfolio lI .D, 9 X OFDI

Source: BSP

Andforeign as well as domestic direct investments approved by promotion agencies hasbeen declining. Approved private investment projects have remained below pre-crisis levels(Table 3). Both domestic as well as foreign investment approval requests registered with themain investment promotion agencies have been declining. Initially uncertain political andeconomic conditions made the private sector hesitate in committing new investments. Globaleconomic downturn resulted in maintaining the decline in the approved value of investmentin 2001. Translating approved investments into actual investments also continues to be achallenge.

Annex HPage 8 of 28

Table 3: Private investment approvals have declined

Total approved investments Of which foreign(bn Pesos) (bn Pesos)

1998 375.1 172.51999 283.3 106.72000 207.0 80.42001 (QI+Q2) 57.9 17.0

Source: National Statistical Coordination Board. (Covers investments approved by Board ofInvestments, Philippine Economic Zone Authority, Subic Bay Metropolitan Authority and ClarkDevelopment Corporation.)

Corporate financial performance has improved. Net profits in the corporate sector show anupward trend and the number of loss making companies did not materially increase (Table 4).Systemic risk appears to have been reduced -at the end of 2000, only 13.5% of totalcorporate sector liabilities were on the books of the 100 largest loss-makers versus 20% at theend of 1999. However, sustaining profit performance and strengthening balance sheets willbe a challenge because of the slowing economy and weak exports.

Table 4: Corporate Performance, 1997-2000

1997 1998 1999 2000# of companies 4,535 4,705 4,578 2,910% loss making 24.3 24.1 21.6 22.0Net Profit (Peso bn) 68.9 122.9 99.1 127.9Return on equity 5.7 7.7 6.7 7.1Debt-Equity ratio 1.7 1.3 1.5 1.4Memo ItemTotal external debt of private 12.5 12.0 13.2 14.1sector (USSbn)Source: World Bank and BSP

There is evidence of corporate restructuring. Despite important bottlenecks and limitationsin the corporate restructuring regime, firmns appear to be restructuring their operations. Afunds flow analysis of 3,344 corporates for the balance sheet year 1999 also indicatesrestructuring that went beyond mere rescheduling of loans. Corporates financed losses andreduced borrowings by liquidating long-term investments and other assets (Table 5). Data onworker retrenchment also suggest an active process of restructuring. However, restructuringin the corporate sector has been at the expense of banks. Companies surrendered assets tobanks in return for reduction in loan obligations. The market value of surrendered assets(classified in bank balance sheets as ROPOA --- Real and Other Properties Owned orAcquired) is considerably below the face value of loans.

Annex HPage 9 of 28

Table 5: 1999 Flow of Funds for 3,344 Corporates

L__ _ _ _ _ Peso BillionsSOURCES OF FUNDSFrom operations 156.9From investment activities

Decrease in current assets 94.5Decrease in long term investments 285.7Decrease in other assets 333.8

Totalfrom investment activities 714.0Fromfinancing activities 0.0

Total Sources of Funds 870.9APPLICATION OF FUNDS

Increase in Cash 44.6Decrease in current liabilities 66.7Decrease in long term liabilities 427.6Decrease in shareholder funds 323.0Others 9.0

Total uses of funds 870.9

While the Philippines banking system did not suffer as severely from the East Asianfinancial crisis it did not materially improve its performance and NPLs have risen. Table 6summarizes the performance of the financial system. Banks have been focusing onconsolidation by reducing lending, increasing loss provisioning and improving liquidity.There has been an increase in mergers between banks, often involving foreign banks,reflecting the need for better economies of scale. Between 1998 and 2000 there were I Imerger transactions in the banking system. While BSP reported capital adequacy ratios forthe banking system remain substantially above the minimum Basle standard of 8%, the truecapital adequacy picture may be far poorer if the value of acquired assets are properlyaccounted for. The system may be becoming more vulnerable. Asset quality has worsenedbecause NPLs and restructured loans have gone up. At the same time profitability, measuredas return-on-average-asset ratio has declined to less than 1%.

Table 6: Philippine Banking System -Key Performance Indicators

1999 2000 2001 (June)Growth Rates (% year-on-year) _Total Assets 6.7 9.5 9.8Loans (net) 0.3 2.1 3.8Operating Income -8.9 -8.7 3.7Ratios

Loans/Dcposit 36.1 80.9 74.7NPL Ratio 12.7 14.9 16.6NPL Coverage Ratio 45.4 43.7 44.8Capital Adequacy 17.5 16.2 16.7Return on Assets 0.4 0.4 0.4Retum on Equity 2.9 2.7 3.2

Source: BSP

The Philippine capital market is yet tofully regain lost ground but in recent monthsinvestor interest has picked up. Recently, S&P upgraded outlook to "stable"from negative.The PSE composite index has declined from a high of 2621 reached in July 1999. TheMarket's average daily trading volumes has shrunk and market depth has not increased. Thetop 10% and 25% of publicly listed companies accounted for 88.6% and 95.9% of marketcapitalization, and 81% and 96% of trading volume, respectively, at year end 2000. Activity

Annex HPage 10 of 28

in the IPO market has also been low. The net new number of publicly listed companies grewby an average of only five companies per year over the last five years. A corporate debtmarket has also not emerged because of high documentary tax costs of transactions. Theseweaknesses led to three international financial firms closing their securities and brokerageoperations in Philippines. However, investors have viewed positively the government'sreform and its determination to tackle law and order problems, including terrorism. The PSEcomposite index has regained some of the lost ground.

Re2ulatorv and Policy Develovments

Significant policy and regulatory developments in the power, banking and corporate sectorsinclude:

Power sector reform. The most significant development was the passage of the long delayedpower reform bill in June 2001 sends a strong signal to the market. The Electric PowerIndustry Reform Act (EPIRA) which shall provide a framework for the restructuring of theelectric power industry, including the privatization of the assets of the National PowerCorporation (NPC), the transition to a desired competitive structure, and the definition of theresponsibilities of the various government agencies and private entities. Key features of thereform include: (i) separation of generation & transmission functions of NPC; (ii)competition in generation & supply sectors; (iii) regulated transmission and distributionsectors; (iv) unbundled power rates for transparency and basis for consumer choice; (v) openaccess in transmission & distribution wires; and (vi) retail competition.

Anti-money laundering legislation. Philippines was identified by the Financial Action TaskForce (FATF) as one of the 15 countries that was non-cooperative in the fight against moneylaundering. In response, Philippines passed an Anti-Money Laundering Law just ahead ofthe September 30, 2001 deadline imposed by FATF. Documentary requirements for foreignexchange transactions have been tightened. These actions resulted in the FATF deciding forthe time being not to apply counter-measures to the Philippines. However, as of February 1,2002 Philippines remains on the list of non-cooperative countries pending action by theGovernment of Philippines to address the deficiencies in the Act identified by the FATF.

A new General Banking Law. This law was enacted in May 2000. It is a major improvementover the 1949 law and an important step in addressing structural weaknesses in the financialsystem. The new law lays the basis for a major overhaul of the regulatory and supervisoryframework. The law also eases restrictions on foreign ownership of local banks (foreignownership has been raised to 40% of voting stock and after seven years up to 100%). Thesupervisory powers of the central bank have been enhanced and made more explicit andprudential regulations are more closely aligned with BIS standards.

A frameworkfor encouraging micro-finance institutions. The Monetary Board, the policy-making body of BSP, has partially lifted the general moratorium on the licensing of newthrift and rural banks to allow the entry of micro-finance-oriented banks on a selective basis.Consequently, Micro Enterprise Bank (MEB), an IFC investee bank for micro-finance wasable to receive its lending license in 2001. Micro finance loans extended by rural banks andcooperative rural banks will be eligible for rediscounting with BSP. This is to encourage ruralbanks and cooperative rural banks to support micro finance activities by providing themadditional liquidity to fund their lending operations.

Annex HPage 11 of 28

A new Securities Regulation Code. The nevw code is intended to increase corporatetransparency, afford better protection of investors interests, and strengthen regulation. Underthe law, the Securities and Exchange Commission (SEC) is to be reorganized to function asan effective market regulator. Implementing regulations have also been issued. Both the codeand the implementing regulations adopt many of the practices recommended by InternationalOrganization of Securities and Credit Organizations. As mandated by the SEC thePhilippines Stock Exchange was transforned into a stock corporation owned by 184stockholder members. The new structure provides for easier entry by new securities firms andfacilitates greater transparency.

A number of laws liberalizing the economy and opening it to greater competition wereenacted. The Retail Trade Liberalization Act opens the retail sector to foreign equityinvestment. The E-commerce law provides a legal basis for electronic transactions. The lawalso requires the government to move within two years towards implementing an electronicsystem for issuance of permits and granting of business approvals. The RegionalHeadquarters law grants additional incentives to multinational corporations to establishregional headquarters in the Philippines.

The government implemented measures to reduce the cost of transacting business withGovernment agencies. Examples include the modernization of customs procedures includinga comprehensive electronic interface for submission, examination and clearance. This hasmaterially reduced customs processing time. The government used the BOT law to support apublic-private partnership that has shortened processing time for driver's licenses and carregistration to 1-2 hours. This project has been financed by IFC. A computerization projectwithin the judicial system is being implemented to ensure efficient and speedy resolution ofcourt cases. The Supreme Court along with the Bar is also working on measures to reduce thebacklog of pending cases. Government statistics indicate that the backlog is declining.

III. Key Issues

Short-term growth prospectsfor the private sector are subdued. Growth prospects in theprivate sector during the next twelve to eighteen months will remain subdued. While privatedomestic consumption is expected to remain steady, domestic investment is not expected topick up. The simultaneous and a broad-based slow down in the industrial economies andconcerns about emerging market risks will affect exports, foreign direct and portfolioinvestment flows. High dependency of IT sector exports may mean that the export sector isunlikely to emerge as a growth engine at least till beginning of 2003. The ability of thegovernment to stimulate growth through increased public spending is also limited given theneed to contain deficits. And because of creeping NPL problems, the financial system will becautious in increasing credit to the private sector. As a result in the short-term a rapidramping up of growth appears unlikely.

But prospectsfor implementinggrowth-inducing reforms aregood. Underlying thesubdued short-term prospects is a strong positive -the restoration of political stability, areform minded government and social consensus for reforms. The policy framework has,over the years, become more conducive. T here is good understanding about the maindevelopment bottlenecks. S&Ps recent upgrade of country outlook to "stable" from negativeis contributing in reviving portfolio investments. The Government is aiming for an averagegrowth of over 5% per annum over 2001--2005. Consistent implementation of policy and

Annex HPage 12 of 28

regulatory reforms and sustained action to make the business environment more conducivecould contribute in realizing this goal.

Philippines must improve its competitive position. Boxes I and 2 provide externalperceptions regarding Philippine country risk and competitive standing. Philippines issomewhere in the middle. But this may not be enough because Philippines is caught in acompetitive pincer. Countries such as Vietnam and Cambodia pose a threat in low-cost goodsand services markets. Thailand and Malaysia have a better infrastructure and head start inFDI in a wide range of export assembly industries. China poses a competitive threat in allsectors especially after WTO entry. And India offers stiff competition in IT services sectorsand, increasingly, with deepening reforms will pose a threat in manufactures also. Further,the large domestic markets of China and India exert a strong gravitational pull and enablethem to attract foreign direct investments despite policy and regulatory deficiencies. Chinaand India also offer an abundant supply of technically qualified manpower. Investors areincreasingly reluctant to spread themselves thin across many markets. At the same time manymore developing economies are reforming and aggressively chasing investments,technologies and markets. Private sector growth will depend on Philippines developing apositioning that is attractive to investors - a very open and stable investment environmentand high quality infrastructure. The recent upgrading in Philippines country risk outlook is apositive development.

Annex HPage 13 of 28

Box 1: Foreign Investor Perception of Philippine

Economist Intelligence Unit Business Environment Rankings. The Economist Intelligence Unit has developed aglobal business rankings model, which seeks to measure and forecast the quality or attractiveness of the businessenvironment and its key components. The model uses quantitative data, business surveys and expert assessments. Itreflects the main criteria used by companies in formulating their global business strategies and investment-locationdecisions. The overall scores (on a I to 10 scale) and rankings are based on the scores for 70 indicators, grouped intoten different categories of the business environment. The higher the score better the environment.

Country 2002-2006 IBusiness Environment Qualitative AssessmentSingapore 8.52 -Very GoodThailand 6.96 -_ _ _ __Good

Malaysia 6.79 GoodPhilippines 6.38 ModerateChina 6.16 ModerateIndia 6.34 Moderate

Institutional Investor Country Credit Ratings

Institutional Investor Country Credit Ratings

gao 0900

70 0

500 ________Q -0-~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~PHIL

40 0

n 300 * _ _ _

200

100

00 , i , ,

90O 9°> c°> §oO 4S lz9 9c7 99 g ,°,°,° °°

Annex HPage 14 of 28

Box 2: Philippine competitive position is weak

The most cited measure of competitiveness is the annual Competitiveness Ranking issued by the World EconomicForum. Philippines is viewed as less competitive than most of its important Asian competitors.

WEF Rankings. (Represents a best estimate of an economy's effective utilization of its current stock of resources.)

Current Competitiveness Growth Competitiveness2001 2000 2001 2000

Malaysia 37 30 30 24Thailand 38 40 33 30Indonesia 55 47 64 43Philippines 54 46 48 36China 47 44 39 40India 36 37 57 48(Current Competitiveness Rank: Measure's an economy's effective utilization of current stock of resources)

(Growth Competitiveness Rank: Measures an economy's underlying prospects for growth over the coming five years)

Source: WEF

Philippines must increase fixed investment. Growth of fixed investment has been muchlower than other economies in East Asia. Between 1986 and 1997, the average investment toGDP ratio in Philippines was around 21% substantially lower than those in Thailand (36%),Indonesia (34%/6), and Malaysia (35%). Foreign direct investment also played a lesser role infixed capital formation (Figure 5). Four factors would appear to be central for increasingfixed investments: quality of business environment, quality of infrastructure, availability oflong-term loan and risk capital, and skilled labor.

Figure 5: Role of FDI in Fixed Capital Formation

201

MYS

THA_ _____ In 1 0

1272

PHIL

0 5 10 15 20 25

Annual Average, as % of gross fixed capital formation

Source: United Nations Center for Transnational Corporation

Low fixed investment rate has not been sufficiently offset by high productivity growth;productivity growth has been negative. While the exact estimates of productivityperformance vary among studies, all point towards poor productivity perfornance and itslack of contribution to economic growth. One study estimated that Total Factor Productivity

Annex HPage 15 of 28

(TFP) in Philippines was -2.2% in 1981-:1989 and -0.6% in 1990-981. Another studysuggests that Philippines has been lagging behind in its productivity performance withrespect to other East Asian countries (Table 7). Improving productivity is fundamentalbecause Philippines will not be able to mimic the process of high capital accumulation thatenabled other East Asian economies to grow rapidly during the 80s and early 90s.

Table 7: Annual Growth Rate of Total Factor Productivity (%)

Period Philippines Malaysia Indonesia Thailand1960-94 -0.4 0.9 0.8 1.81984-94 -0.9 1.4 0.9 3.3Source: Collins and Bosworth, 1997

To improve private investment and prod uctivity the volume and quality of domesticresource mobilization needs to be increased. This means increasing access to domesticlong-term debt financing, equity capital and "patient" risk capital. Domestic savings inPhilippines are much lower than other East Asian countries and this constraints a rapidincrease in investment. The problem of low-level of domestic resources is furthercompounded by the very short-term nature of savings. This inhibits long-term lending byfinancial institutions. Long-term contractual savings play a limited role in a commercialbank dominated financial system. The corporate debt markets are underdevelopedaccounting for less than 10% of capital market debt instruments. Risk capital by way ofequity issuance is also limited and the total amounts raised have been small relative to thesize of the private sector. Institutions providing "patient" risk capital - "angel" capital andventure capital - have not emerged.

But increasing investment volumes and long-term resources will require strengtheningaccounting and auditing systems and corporate governance. The Bank Group and IMFhave jointly prepared two Reports on Standards and Codes (ROSC) - ROSC Report onAccounting and Auditing and ROSC Report on Corporate Governance. The ROSCassessments have revealed weaknesses in financial reporting due to poor audit, ineffectiveoversight over the auditing industry, conflicts of interest, related party transactions, weakinstitutions and poor corporate government practices. These weaknesses have diminished theeffectiveness of market mechanisms for corporate control and undermined investorconfidence. They are a leading cause for the underdeveloped state of the capital market.

Growth needs to be more broad-based and diversified. This issue needs to be tackled at anumber of levels. The Philippines private sector is very bi-modal. A large number of smalland micro enterprises coexist with relatively few modern corporations. A sophisticated sub-contracting manufacturing sector is yet to emerge. SME access to finance, technology andmarkets needs to be improved. This will require addressing issues relating to enforcement ofloans, expanding forms of acceptable collateral and supporting micro finance institutions.Removing biases with regard to incentives and foreign direct investment regulations wouldfacilitate technology and market development.

Exports need to be diversified and the relative dependency on IT sector needs to bereduced. Agriculture and mining sectors offer good export potential. With the exception of

' Paderanga, Cayetano W. (2000). Productivity Growth and Industrial Structure in the Pacific region: ThePhilippines. Japan: Pacific Economic Cooperation Council.

Annex HPage 16 of 28

a few crops such as fresh mango and banana and rubber, export growth of crops was lowerbetween 1990-98 than during the 80s. The agriculture sector has shifted from being a netearner of foreign exchange to a net importer. Mineral exports; which have potential togenerate more than $1 billion in export earnings and $ 400 million in tax revenues, havelanguished. Resolving obstacles to 100% foreign ownership of mines and putting in placeclear environmental standards, safeguard and monitoring procedures could mobilize theinvestments required to fully tap the economic potential of the mining sector.

PFivate entrepreneurship and investment also needs to be more widely dispersed. WhileNational Capitol Region will continue to be the growth pole, increasing private sector activityin backward regions is essential. This will require improving infrastructure, strengtheningsupply chain, increasing rural access to credit and improving the local business environment.Modifying the current system of zone-based incentives that tend to distort location decisionswould facilitate dispersion of industries. Improving service delivery at the LGU level wouldalso be necessary.

Engineering rapid growth will require improving productivity in agriculture and growth ofnon-farm activities. Despite accounting for only 20% of GDP the agriculture sector accountsfor 40% of employment. And, a significant percentage of agriculture employment is seasonal.The agriculture sector has been growing at only about 2% for the past 20 years and output perworker in agriculture is about one-sixth of output per worker in industry and about half ofservices sector. Growth in yield of many crops fell in the 90s. A number of factors areresponsible for these outcomes.

* Distortions in land markets and uncertainty of the land reform with process lowerincentives for long-term investments in land improvements and tree crops, erodecollateral value of land and limit free transfer of land.

* Access to credit is limited. Share of agriculture loans in total loans from the formalprivate financial system is less than 10%. Most households rely on short-term highcost informal sources of finance.

* The share of productivity supporting public investments in total public expenditure inthe agriculture sector has not risen beyond 30-40%.

* Non-farm activities have not grown rapidly in rural areas because of poor ruralinfrastructure and farm to market supply chains. Philippines is an archipelago.Lowering logistics costs is critical to integrating the rural economy. The need for abetter rural road network linking farms to collection and marketing points is essential.

* Investment in and management of extension technologies, R&D has not kept pacewith farmer needs or cropping patterns.

Private firms require a better-trained technicalforce. Student achievement in math andscience in Philippines is lower that its neighbors and lower than the international average.This affects the capability of the average worker to absorb new technologies and processes.Government and the private sector need to work together to improve technical skills of theexisting work force.

Annex HPage 17 of 28

Corporate restructuring framework is weak. The present restructuring framework does notfacilitate maximization of the value of a firm's assets; is unable to strike the right balancebetween liquidation and reorganization and between creditors and debtors, and provide fortimely, efficient and impartial resolution of insolvencies. A new restructuring framework isbeing introduced under the proposed Corporate Recovery Act. However, as analyzed later onin this report the new framework while improving on the existing framework still has someimportant deficiencies. While the proposed law seems much closer to best practices than theinterim rules, there remain a number of important outstanding issues that should be addressedprior to enactment (Box 3).

Box 3: Outstanding Issues Under the Proposed Corporate Recovery Act

- Many concepts incorporated in the proposed law are not commercial in nature but tend to be litigious and couldreduce the likelihood of speedy outcome.- Unlike the old insolvency law, there is no formal hearing on the petition. There is also no requirement that thedebtor be given the right to examine the creditor on the affidavit supporting the petition.- Under the law creditors may submit to the court their comments on the merits of a proposed rehabilitation plan but itis the trial court judge who decides whether to try to rehabilitate or to liquidate a distressed company. Under theCommonwealth model, creditors take this decision based on meetings and discussions amongst themselves. It would beimportant to give creditors greater say in the final decision to liquidate or rehabilitate.-Though the proposed law imposes a number of requirements on a debtor, there are no defined consequences if thedebtor does not or will not fulfill these requirements.- Although the law requires that a conservator be appointed, there is no obligation for the conservator to report to thecreditors or the Court.- The law does not provide, as is in the case of other jurisdictions, that levies be charged, based on varyingpercentages of assets, to defray the court costs-The proposed law provides that adjournments can be sought and provided, even for inadequate reasons. Delayscaused by such adjournments could cause the death of a distressed company.- There is no provision for a "cram" down plan and the circumstances under which it could be used.- A number of sections of the proposed law require that the conservator expend finds. However, there is norequirement that the debtor advance funds for these purposes.-There is ambiguity over the establishment of classes of creditors. There is no requirement concerning classificationof sub-classes of secured creditors based on varying security interests. It is inequitable to lump together the claims ofsecured creditors into the same class if their security interests are totally different.Source: World Bank, Preliminary ROSC Analysis of Insolvency Systems

IV. The PSD Strategy

The proposed PSD strategy addresses the key issues. It is built around three themes: (i)supporting the government and the private sector to improve the business environment; (ii)supporting efforts to increase domestic mobilization of long-term funds; and (iii)supporting infrastructure deepening through enhanced private sector participation.

The proposed strategy responds to constraints identified in the private sector. In November2001, the IFC and World Bank (WB) held consultation meetings with the Philippines privatesector focused on Enabling Expansion of the Private Sector. The discussions included (i)reviewing the new MTPDP and the previous CAS, determining what worked well and whatdid not; (ii) drawing lessons form the past three years of implementation; (iii) identifyingemerging and strategic issues and (iv) implementation actions under this CAS . Earlier onduring the summer of 2000, the World Bank Group had commissioned a study to survey thedomestic private sector's perception of the business environment. These consultationsaffirmed the key issues discussed in section II and identified the following areas of concernto the private sector: (i) business environment issues relating to policy and political

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uncertainty, taxes and uncertain regulations; corruption; speed and consistency ofjudicialdecisions; (ii) lack of access to long-term investment capital and absence of local funds forprivate infrastructure investments; (iii) poor quality of public infrastructure and need toimprove LGU service delivery; (iv) need for framework and regulations relating tosecuritization and Asset Management Companies including reform of documentary stamptax; and (iv) need for speedier announcement of implementing rules and regulations.

The proposed strategy supports the government's policy and institutional reform agendaand private sector development priorities. The Medium-Term Philippine Development Plan(MTPDP) 2001-2004 envisages the private sector playing a leading role. The MTPDPcommits the government to a program of legislative, policy, regulatory and institutionalmeasures to improve the investment and operating environment. The main elements of thegovernment's support for private sector development are given in Box 4. The Bank Group isalready involved in the areas identified by the govemment as well as the private sector. Theproposed strategy will focuses on completing and deepening existing engagements.

Box 4: Medium-Term Philippine Development Plan, 2001-2004 -Private Sector DevelopmentPriorities

* Maintainfiscal stability* Rationalizefiscal incentives* Privatize government corporations.* Strengthen the financial system, address NPL problems and deepen capital markets* Generate employment by improving the investment environment at the LGU level, supporting SMEs and micro

finance institutions and supporting construction of low cost housing. Enhance competitiveness by liberalizing, deregulating and facilitating trade and investments and

Investing in skills development in partnership with industry under a system of enterprise-based training* Improve infrastructure by relaxing restrictions on shipping, promoting connectivity and convergence in

telecommunications sector, attracting private investments under regulatory frameworks that promotes competitionand cost recovery, enacting the Water Resources Management Act and strengthening capacity at the LGU level

* Modernize agriculture by effective implementation of land reforms, fast tracking implementation of theAgriculture and Fisheries Modemization Act, reducing tariffs on agricultural inputs, upgrading generation ofmarket information, modernizing farm to market supply chains and promoting private investment in agribusiness

* Improve governance by improving service delivery using ICT in govemment, strengthening local governmentcapacity, implementing procurement reforms

* Suipport growth of the tourism and ICT sectors.

Source: MTPDP, 2001-2004

The Bank Group will implement the proposed strategy through lending and non-lendinginstruments. The Bank will provide policy advice and technical assistance and will facilitateknowledge sharing for strengthening regulatory and implementation capacity. With regard tolending, the Bank will incorporate elements of the proposed PSD strategy in the adjustment,APL, and investment operations proposed under the FY03-05 CAS. These lendingoperations will support policy and institutional reforms that improve the environment forprivate investments as well as finance public infrastructure and services required by theprivate sector. The focus will be on the financial, water, transport, power and rural sectors.An important goal will be to improve the business environment at the LGU level.

IFC's approach is to support pioneering or innovative projects. The current shortage of longterm financing available for private sector projects in the Philippines provides the basis forIFC's comparative advantage in provision of debt and equity financing. IFC's priorities in thePhilippines include achieving a deepening and diversification of the financial system,

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supporting viable projects in infrastructure and promotion of private investment in health,education, software and technology relatedi sectors. IFC's investments in the Philippines havebeen on an upward trend over the past few years. During FYOI, investment approvalsamounted to $126 million, up from $85 million in FY00. The Philippines is currently amongthe Corporation's top ten exposures worldwmide, with a portfolio of over $750 million for 29projects, $416 million of which is on IFC's own account. During FY02, IFC expects toundertake investments worth $120-140 million on its own account. It is aiming to increase itsprogram approvals to around $160 million in FY03. MIGA will remain available to provideguarantees to facilitate new private sector investment in FY03. In particular, the agencyexpects to underwrite two additional transportation projects next fiscal year. Also, MIGA isbeing approached for coverage of projects involved in the power privatization process.

The remaining paragraphs discuss the PSD agenda under each of the three themes and theproposed strategy of the Bank Group to support the implementation of the agenda.

Strenethen the Business Environment

The private sector needs a stable business environment because it expands access to capitalat lower cost. Private investors want to see specific and concrete measures. The litmus testfor investors is implementation. Therefore, the strategy proposes the following actions.

Ensure that implementing regulations and setting up of monitoring, enforcement andregulatory mechanisms quickly back new laws. A comment often voiced in Philippines isthat while policies and laws are passed, the implementing regulations take a long time to beannounced. Investors have viewed positively the relatively short lag between the enactmentof the Electric Power Industry Act and the announcement of implementing regulations. TheMTPDP has an ambitious legislative agencla. The government could consider preparing draftimplementing rules and regulations concurrent with the draft legislation. Markets also needmore convincing that the rules of business are indeed changing. The litmus test would be amore effective enforcement of rules already on the books such as those dealing with integrityof regulatory, accounting and auditing practices and compliance with disclosurerequirements.

Announce a time-bound implementation program to address the business environmentconcerns of the domestic private sector. A business environment survey conducted by theWorld Bank Group identified the specific concerns and priorities of the domestic privatesector. Corruption, poor infrastructure, inefficient judicial enforcement, poor infrastructurewere identified as some of the important concerns. The govemment could work with theprivate sector to systematically tackle the constraints identified through the BusinessEnvironment Survey.

Strengthen the business environment at the local level. Progress has been made in addressingbusiness environment issues at the national government level. However, day-to-day hurdlesto businesses operations are affected by local rules and regulations. The government couldconsider working with the local private sector in systematically identifying and resolvingbottlenecks at the local government level. Benchmarking and broadcasting LGU serviceperformance could be an important part of exerting performance pressure.

Strengthen. and implement vigorously the accounting, auditing and corporate governancestandards and regulations. Philippines should first and foremost adopt accounting and

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disclosure standards consistent with best international practices. Then it must focus onimproving enforcement of laws and regulations related to compliance, including imposingsanctions on accountants, directors and managers who violate the law or their professionalduties. Then it must strengthen institutions responsible for ensuring accountability - theSecurities and Exchange Commission, the Stock Exchange and the Institute of Accountants.Finally, the government must support and promote institutions that protect shareholder rightsand support shareholder activism. These measures would significantly enhance investorconfidence and attract foreign partners. The ROSCs on Auditing and Accounting andCorporate Governance provide a detailed road map and action agenda.

Complete the policy reform agenda. Philippines must differentiate itself with respect to itsneighbors. Sticking to or even accelerating the tariff reform agenda could send a verypowerful signal. To offset some of the advantages that competitors enjoy, a bold decision tofully deregulate the services sector could be important. Fully opening the mining sector toforeign investment and putting in adequate environmental and local community safeguardsalso needs to be part of the policy agenda. Philippines has drafted a competition policy law.A speedy announcement of a competition policy framework and competition law could beimportant in signaling the government's intention to create a level playing field.

The Bank Group will support efforts to strengthen the business environment throughcapacity building, knowledge sharing andfocused technical assistance.

Corporate Governance: The Bank Group is assisting the private sector in the development ofa national corporate governance action program, aimed at improving governance in thecorporate, banking and securities market sectors. The Bank and IFC have supported theInstitute of Corporate Directors, set up in Manila to train directors in good corporategovernance, and are also, supporting a diagnostic study in public and private sectoraccounting and corporate governance to identify areas for improvement. The Bank Groupwill assist BSP and the Department of Finance to improve corporate governance amongbanks and government owned corporations. Finally, the Bank Group will collaborate with theInstitute of Directors in the development of a public information program advocatingimproved corporate governance.

Accounting and Auditing. The Bank Group in collaboration with ADB will provide technicalassistance and policy advise for strengthening of enforcement capacity and adoption ofinternational best practices and standards. In particular, the Bank Group will assist the SEC,BSP, PSE and the Board of Accountancy to enhance their surveillance and enforcementcapabilities. Support will also be provided for improving the system of licensing andcertification of accountants and auditors. The Philippine Institute of Chartered ProfessionalAccountants will be assisted in adopting and promoting international accounting and auditingstandards and improve the quality of professional education. Program loans will be used asvehicles to assist the Government implement the key policy recommendations and regulatorygaps identified in the ROSC on Accounting and Auditing.

Capacity upgrading in the judicial system. The Bank Group will support a comprehensiveprogram to build judicial capacity. Bank technical assistance will focus on training, judicialinspection, and greater transparency and predictability in court and case management.Support will also be provided to further strengthen drafting capabilities in government,training of judges in insolvency law and related commercial issues. The Bank will also

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provide assistance for strengthening, diversifying and expediting the system for perfectingand enforcing security interests.

Eliminating investment impediments. The B3ank Group will assist the government to improvethe investment environment at the LGU level. Assistance will be provided for benchmarkingLGU performance and for identifying specific bottlenecks in the operation of businessregulations. The Bank Group will work with the government to reduce investmentimpediments. For example, the Bank Group will provide advisory services to strengthen theregulatory framework relating to mining sector development. The Bank Group will also assistthe Government to rationalize and streamliie investment promotion activities. MIGA hasprovided capacity building assistance to the staff of the many investment promotion entitiesin Philippines. MIGA will work to achieve greater strategic and operational coordinationbetween these agencies. Finally, the Bank will assist the Government to maintain progress inreforming the trade regime and introducing an effective competition policy regime andcompetition policy law.

Improve domestic mobilization of long-term resources.

From the standpoint of the non-financial private sector there are two important creditaccess issues: (a) limited availability of domestic long-term resources; and (b) limitedaccess to private credit in rural areas.

Stepping up fixed asset investment requires long-term resources. And for prudential reasonsthere has to be a balance between long-termi debt and equity capital. Developing an activedebt and equity market would require as necessary conditions effective bankruptcy regime,transparent disclosure and clear accounting standards. Financial transparency breedsconfidence, and confidence enhances efficient credit and equity flows. The necessaryconditions for a long-term debt market would include (a) independence and authority ofregulators for corporate debt and equity markets that is at the same level as is accorded toBSP for the banking industry; (b) an early approval of the proposed Securities Act byCongress; (c) an effective debt resolution framework under the proposed Corporate RecoveryAct and (d) a credit rating system.Give high priority to implementing proposals that have been preparedfor developing thecorporate bond market. Philippines is aware of the need to address these deficiencies. Themonitoring and surveillance capabilities of the monetary authorities have been strengthened.In the long run this will enhance confidence of international lenders in extending medium-term loans to the financial system. Since the mid 90s, the government, professionalassociations, bilateral and multilateral agencies have been examining options for developinga robust capital market especially the debt rnarket. Under the Market Reforms Projectinitiated in 2000, BSP, the Bankers Association of Philippines, the Investment HouseAssociation of the Philippines, and the Trust Officers Association of the Philippines havedeveloped proposals regarding a "Fixed Income Securities" exchange. The government onits part is considering revising the Investment Company Act, enacting a law for securitizationand eliminating document stamp tax on primary issue of securities and its trading insecondary markets. Completing these initiatives should be given high priority in order tocreate an effective regulatory and supervisory framework for the bond market,intermediaries, institutional investors and other market participants.

Increase the supply of debt securities by establishing the framework and regulationsgoverning asset securitization. The volume of ROPOA assets, proposed privatization

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program, agricultural commodities, housing construction, receivables etc. are sufficient tosupport an active asset securitization market. Distressed bank assets in particular wouldbenefit from securitization and transfer to Asset Management companies. This wouldfacilitate the process of establishing Asset Management companies that is gatheringmomentum in Philippines. The basic task is to create a policy framework for (i) bank assetsecuritization, (ii) use of Special Purpose Asset Vehicles, (iii) pricing and valuationarrangements, (iv) taxation, (v) land ownership by foreign investors and (vi) a system forperfecting the asset transfer arrangements.

Establish a coherent restructuring and insolvencyframework by ensuring that therestructuringframework proposed under the Corporate Recovery Act removes most of theuncertainties and delays. The proposed Corporate Recovery Act is a comprehensiveapproach to addressing corporate financial distress. It allows the long-overdue reform ofinsolvency laws and provides for the remedy of rehabilitation for distressed companies.However, as discussed in the previous section there are some deficiencies in the proposedAct. A quick enactment of an effective act that expedites corporate restructuring andbankruptcy would enable banks and private sector firms to commence the process ofunfreezing assets and restructuring balance sheets.

Increase the ease of using inventories and accounts receivables as collateral. In Philippinesthe three principal types of collateral forms are real estate mortgage, chattel mortgage andpledge. In all cases the option for extra-judicial foreclosure is available. Inventories andreceivables are important and most common assets of a producer. But using these ascollateral under existing instruments is cumbersome and expensive. The concept of a floatingcharge does not exist. Developing the legal basis for floating charges could expand securedlending to a broader set of firms especially small and medium enterprises.

Maintain and deepen the program of introducing micro-finance concepts and institutions forexpanding delivery of credit to small and micro enterprises in rural and urban areas.Government has taken a decision to consolidate and wind down its directed credit programs.The National Credit Council has emphasized the importance of distinguishing betweentargeting social and infrastructure services to the poorest of the poor and delivering credit tosmall entrepreneurs. There is an ongoing debate in Philippines regarding the best approachesto promoting and regulating micro-finance institutions. Currently, the share of micro-financeinstitutions in total deposits and loans is small. They do not pose a systemic risk to thefinancial system. Focus needs to be on capacity building in rural banks, dissemination ofmicro-finance management concepts, strengthening of information systems and training ofbank regulators and supervisors in monitoring and evaluating micro-finance activities.

The Bank Group will support efforts to increase availability of long-term resourcesthrough policy advice, capacity building, support to private financial institutions and directinvestment support to private enterprises.

Policy support and capacity building. On the policy front the Bank Group will assist thegovernment to strengthen the framework for financial market regulation. The Bank Groupwill continue to provide support to BSP in the area of bank supervision and regulation.Technical assistance will also be provided to support the establishment of the regulatoryframework for corporate bonds and asset securitization. Support will also be provided forstrengthening the payment and settlement infrastructure in capital markets. These efforts willdirectly contribute in supporting the proposed "Fixed Income Exchange". To support

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corporate restructuring the government, BS'P, SEC and other agencies will be assisted inimplementing the proposed Corporate Recovery Act and developing legislation relating toprivate asset management companies. The B3ank Group will support staff training inregulatory agencies.

Stupportfor micro finance institutions. The Bank Group will provide assistance to BSP intraining bank examiners in supervision of micro finance institutions. It will also support therestructuring and transformation of rural finance institutions into micro finance institutions.Specific micro finance institutions will be supported in building capacity and applying bestpractices. Under its community and rural development projects the Bank Group will channelpart of its financial assistance through comrnunity based micro finance institutions. IFC hasestablished a micro finance institution in Davao to provide small entrepreneurs access toappropriate financing, and is considering other investments in the area.

Direct Investment Support. Through community development, rural and agriculturedevelopment projects the International Banlc for Reconstruction & Development willcontribute in increasing long-term investments in farm to market infrastructure, formodernizing the tree crop sector, for improving access to irrigation systems and forincreasing the effectiveness of extension and technology support systems in the agriculturesector.

IFC will take the lead in directly increasing the supply of long-term resources. IFC's strategyfor the financial sector focuses on promoting a deepening and diversification of the financialsystem through:

* introduction of new financial instruments and mechanisms (e.g. securitization,forfeiting, factoring, venture capital, and trade finance and risk-sharing facilities);

* strengthening banking and non-banking financial institutions, by helping upgradetheir standards of governance and technologies (via electronic banking andcommerce);

* assisting in the consolidation of the banking system, i.e. through mergers andrestructuring;

* helping in the restructuring of NPL portfolios, by supporting the establishment of aprivate asset management company;

* helping to set up specialized institutions, e.g. a secondary mortgage institution forprovision of housing finance, or an investment fund for developing micro financeinstitutions.

* For the technology sector IFC strategy is to support development of technology parkssoftware companies and e-commerce institutions IFC has already made a number ofinvestments in these areas (Filinvest Alabang Inc., Eastwood, ).

* In the health and education sectors, IFC had earlier invested in Asian Hospital and,more recently, approved an investment in the Asian Eye Institute, a comprehensiveeye-care ambulatory center in Manila. IFC is also looking to support projects forprivate provision of education services.

MIGA will catalyze long-term financing in projects by providing political risk insurance.MIGA has sufficient guarantee capacity to support additional political risk insurance forprojects in the Philippines. On an annual basis, MIGA conducts promotional activity inPhilippines in order to publicize the use of its guarantee products as well as meet withpotential investors.

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Supporting SME Development. The Bank Group will provide advise on creating a more levelplaying field for the SME sector. Assistance for SME development will be provided by: (i)supporting reforms in the secured lending regime so as to diversify sources of collateral andexpedite the process and procedures relating to creation and enforcement of security interests;(ii) supporting policy changes in the trade, competition policy, FDI, fiscal and tax regimes soas to create a more level playing field for SMEs; (iii) developing and supporting private-public initiatives aimed at delivering enterprise level technical assistance to SMEs. In thearea of micro finance, the Bank will assist micro finance institutions to expand outreachthrough support for development of a regulatory framework, skills deepening anddevelopment of information systems.

IFC has also been actively engaged in support of SMEs, having earlier supported a thrift bank(Planters) focused on the SME sector, and more recently having approved an investment in acredit line for SMEs engaged in exports and an investment in an SME export servicescompany. In support of the Government's objective of promoting regional development, anddevelopment of small and micro enterprises, IFC's priorities include the objective ofinvesting more outside of the Manila region, and in particular in the Visayas and Mindanaoarea. Since 1998, IFC's Board has approved investments of more than $50 million forprojects in these two areas.

Improve the Infrastructure.

From the private sector standpoint there are two issues: (i) how can infrastructure servicesbe made more adequate, efficient, reliable and affordable and (b) how can private sectorinvolvement in the infrastructure be increased in the provision of both financing anddelivery of services? The strategy needs to be framed in the following context:

* Philippines infrastructure requirements are estimated ranging from US$36 billion toUS$45 billion for the next 10 years, about an average of 7 percent of its annual GDP.From a fiscal standpoint the government does not have resources to finance theinfrastructure backlog even if measures currently proposed to increase revenuecollection efforts are fully realized.

* The government is already saddled with substantial contingent liabilities arising fromearlier commitments under private infrastructure projects. This reduces its capacityand flexibility to offer credit enhancements to support private financing andmanagement of infrastructure.

* Infrastructure problems are most acute in rural areas. Purely privately managed andfinanced projects in this infrastructure may emerge only slowly because commercialviability, at least initially will be tenuous.

* At the same time local governments willingness and ability to invest in essentialinfrastructure at the local level is constrained by short-term political horizons, limitedfinancial independence and limited capacity. These problems have biased localgovernment investments away from essential infrastructure towards commercialactivities.

Implement the recommendations made in the Country Framework Report on PrivateInfrastructure. The infrastructure strategy for Philippines has been extensively analyzed inthe Country Framework Report on Private Infrastructure (CFR) prepared by the World Bankunder funding from the Public-Private Infrastructure Facility (PPIAF). The CFR has been

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discussed with investors. The CFR put forvward a three point strategy: (a) reducingdependence on National Government finance through a number of financial reforms; (b)strengthening institutional and legal elements by rationalizing institutions and processes; and(c) deepening reforms in the individual infrastructure subsectors. Table 8 summarizes themain pending issues in each of the infrastructure sectors. Implementing this strategy wouldrequire a careful unbundling of construction, management and financing functions betweenthe private and public sector. To encourage private sector involvement arms-lengthregulatory agencies with institutional capacity to deal with issues of access, pricing andquality need to be established. A clearer and more transparent competitive bidding process isalso required. Finally, a framework for fostering partnerships with the private sector andlocal communities would minimize subsidies, target them better and make governmentmoney go further.

Table 8: Required Sector Reforms

Sector Required Sector Reforms

Power Effective enforcement of the Implementation Rules and Regulations (IRR) of the EPIRA.Privatization of NPC. Efficient management of IPP contracts. There is also a need to: (i) strengthenthe Energy Regulatory Commission; (ii) restructure the National Electrification Administration; (iii)rationalize franchise areas and open up unserved areas to qualified new entrants; (iv) address thepoor financial and managerial performance of selected electric cooperatives, and to encouragegreater private sector participation in the operations and financing of this sector; (v) rationalize tariffand subsidy policy for rural electrification (government study ongoing); and (vi) follow through onprivatization plan for NPC-SPUG operations.

Water Water sector faces substantial service deficits. Reform of the water sector should involve theredirection of two PPI policies. First, there should be a shifting of emphasis from BOTs to theprivatization of existing assets. Although BOT projects being pursued outside of Metro Manila willenhance supply capacity, they fail to address fundamental problems associated with those watersystems, namely: (i) inadequate investment; (ii) inefficient operations; and (iii) maintenance andmanagement of the distribution system, and billings and collection deficiencies. Privatization ofexisting assets addresses these issues while removing the gap between bulk and retail tariffs.Secondly, the government should move towards transparent and solicited bidding of water assets asalready too many unsolicited bids are tying up the sector and posing severe constraints in the furtherdevelopment of water infrastructure. In addition there is a need for institutional reforms byreassessing the role of LWUA and other agencies in the sector. In the long run, it is best to separateregulatory, policy and operational functions of govemment agencies (e.g. LWUA, NWRB, MWSSand SBMA) and to establish an independent national utility regulator.

(i) Greater attention to maintenance to cope with large maintenance backlog, as stipulated in theTransport MTPDP (efforts underway); (ii) develop policy framework for PPI in regional airports and ports;

(iii) enhance LGUs capacity to manage PPI, contracting and tendering process; (iv) improvecoordination between greenfield and privatization projects; and (v) separate regulatory, policy andoperational functions of PPA, ATO and DPWH.

Telecoms (i) standardize interconnection agreements; (ii) implement framework for frequency spectrumauctions and allow greater flexibility with regard to the allocation of frequency; (iii) establishinstitutional framework to manage issues relating to exercise of monopoly powers by incumbents;and (iv) strengthen provision of telephony services in rural areas.

A frameworkfor reducing dependence on national governmentfinancial resources needs tobe developed. The PPI movement in the Philippines was highly successful in addressing theimmediate problems of the infrastructure sectors - particularly power. However, thegovernment assumed heavy contingent liabilities estimated at around $18 billion. Moreover,the Government's budget does not include any provisions for covering expected claims on

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these contingent liabilities, giving rise to the possibility of significant adverse consequenceson the Government's finances if these liabilities are called in the near-to-medium term. TheEPIRA provides for government to assume up to P200billion (between US$2.5 to 3.75billion) of NPC's obligations (stranded debts and IPP contract costs) as part of the move to amarket-oriented sector structure. Measure that the govemment could consider include: (i)moving toward more privatization of service level function so as to minimize the need forguarantees for demand risks; and (ii) improve the current framework for the issuance ofsovereign guarantees, by better defining the basis and rationale for credit enhancements andonce extended, pricing and managing the attendant risks appropriately.

Infrastructure management at the Local Government level needs to be made more effective.The existing framework does little to foster development of infrastructure in the poorer andmore remote parts of the country. Very few local governments have either the financial ormanagement capacity to design, construct, operate or contract out infrastructure. Four areasshould be targeted for supporting infrastructure investment.

* Modify the LGUfinancingframework. Consider revising the formula on blocktransfers by making a greater relative allocation these smaller and poorer towns. Thisrealignment in the block transfers would also force the larger cities to rely more ontheir own internal sources of revenue from property and business taxes.

* Privatize or concession out local government owned commercial enterprises andactivities. LGUs tend to invest their scarce capital in business enterprises, where thereis strong investment interest from the private sector.

* Develop the financial marketfinancing option for the larger LGUs with morediversified revenue base. The current LGU finance market is extremely limited.Presently only DBP and Land Bank and to some extent the Municipal DevelopmentFund provide financing to local governments. These are all government entities. It isestimated that about 150 LGUs could tap the private financing market. A start couldbe made by working with credit rating agencies and financial markets to identify thepre-conditions for LGU access to financial markets.

* Increase performance pressures on LGUs. Benchmarking performance indicators foreach LGU could tighten governance and accountability. Making the comparativeresults available to the public, community groups and local businesses couldsignificantly increase performance pressures.

Focuts on making government infrastructure spending go further through better targeting andthrough involvement of the private sector. Many basic services cannot be adequately fundedfrom user-fees alone. For some services, externalities mean that user fees alone cannot fundan efficient level of service. For other services, full cost-covering user fees raise affordabilityissues for the poorest members of society. These services will remain dependent on publicfinancing. But the responsibility of delivering these services could go beyond the publicsector and could be contracted out to the private sector on a competitive basis. This wouldreduce the fixed cost of government, provide the private sector with business opportunitieswhile lowering delivery costs because of competitive bidding. Options that could be pursuedare:

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* Use "output-based aid" (OBA). OBA involves delegating delivery for serviceprovision to the private sector and NGOs under contracts that tie public payments tothe services or outputs actually delivered. Contracts are structured such that paymentsare made when services are delivered or when certain pre-determinedperformance/quantitative targets are met. The public payments complement user fees,and are sourced from budget revenues, loans from international lending agencies, orother forms of donor assistance. OBA schemes can take a wide variety of forms andcan be used in a variety of settings. OBA can be used to subsidize connections. Animmediate example could of application of OBA is in making telephony servicesmore accessible in rural areas. In Philippines rural areas remain largely excludedfrom access to basic communication services. Some form of government subsidywould be required, especially for initial investments and operating expenses. But bymaking private firms bid for delivery of these subsidized services costs could belowered as has been the experience in Peru.

* Involve the private sector in improving efficiency in maintenance and management ofinfrastructure. In situations of budget constraint, routine maintenance is the first tosuffer. Operational efficiency also tends to be lower. In Philippines numerous studieshave identified poor road maintenance as the most serious problem. Philippines couldconsider greater private sector involvement as many countries in Latin America havedone successfully

The Bank Group will support efforts to improve the infrastructure through policy adviceand capacity building in the area of infrastructure regulations, financing publicinfrastructure, and through financial support to private infrastructure operators undervarious contracting arrangements.

Supportfor completing the regulatory reform agenda. The Bank Group will first andforemost focus on rationalizing the regulatory framework and improving the functioning ofregulatory agencies along lines recommended in the "Country Framework Report on PrivateInfrastructure" prepared by the Bank Group. The Bank Group will: (i) support strengtheningof institutional capacity at the central and LGU level to identify, promote, negotiate andregulate PPI projects in the water and power sectors; (ii) provide policy advice and technicalassistance with regard to clarifying the roles and responsibilities of national and localgovernment agencies; (iii) assist central and local governments to review the revenue sharingand financing framework with a view to enhancing the capacity of LGUs to increase accessto private commercial financing; (iv) assist national government for establishing a frameworkfor the sound management of contingent liabilities and issuance of sovereign and other typesof guarantees for PPI projects; and (v) streamline project preparation.

Supportfor increasing private sector involvement. In view of the resource and capacityconstraints faced by the Government, the Bank Group will give special attention to involvingthe private sector through arrangements going beyond BOT contracts. The Bank will workwith the government in using concepts such as Output Based Aid, auctioning of subsidies,competitive bidding for long-term maintenance contracts etc. to increase private sectorinvolvement in managing and financing infrastructure in areas where purely commercial andprivately owned operations may not be feasible. In this regard the Bank Group will givepriority to assisting the government reduce the Digital Divide. The Bank Group, with supportfrom PPIAF, has recently submitted to the Government a report recommending options foraccelerating access to telecommunication services in rural areas. The Bank Group will work

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with government in implementing the recommendations. Bank will also assist thegovernment in piloting OBA schemes for decentralized electrification in rural areas, in waterdelivery, and delivery of telephone services in rural areas.

In order to increase access to capital markets for water, power, road and urban infrastructureprojects, the Bank will support design and implementation of pre-investment funds,establishment and operation of local infrastructure funds and measures to develop municipalinfrastructure bond markets. In view of the reduced risk tolerance of private infrastructuredevelopers and reduced availability of private risk insurance worldwide the Bank will alsoexplore the use of Bank's guarantee instruments to enhance market access to commercialdebt.

IFC has been active in infrastructure investments sector over the past decade, commencingwith the financing of path breaking privately financed BOT power projects in the early 1990s(the Hopewell Pagbilao, Navotas, and Sual power plants), and of the Light Rail Transitproject. More recently it provided advisory assistance to the Metropolitan Waterworks andSewerage System privatization and is considering financing the Manila Water Company'scapital investment program. It has also financed toll roads (North Luzon Expressway, forwhich MIGA also issued $87 million in guarantees) and construction of a new passengerterminal at Manila airport. IFC's medium term priority would be to support innovative powerprojects, e.g. co-generation/alternative fuels without government support, and environmentalventures, such as the Efficient Lighting Initiative and grid-connected photovoltaic solarprojects. IFC is also looking to support private investments in electricity distribution,contingent on the introduction of satisfactory regulatory arrangements.

Annex IPage 1 of 6

PHILIPPINES

PROGRAMS OF OTHER ODA PARTNERSIN THE CONTEXT OF THE MEDIUM-TERM PHILIPPINE DEVELOPMENT PLAN

1. The following provides an overview of other ODA partners' major activities in thePhilippines, organized according to the four major parts of the Medium-Termn PhilippineDevelopment Plan (MTPDP). Since the CAS is closely aligned with the MTPDP, the ODAactivities were mapped according to the MTPDP themes/parts. The information was based oninputs from the various ODA partners under a mapping exercise undertaken by the World BankOffice Manila from November 2001 to January 2002, to which most ODA partners in the Philippinescontributed data. The purpose of the exercise vas to obtain an overview of the broad distribution ofODA activities to point to areas where several ODA partners work towards the same overallobjectives based on government's expressed priorities and where strong collaboration among them isthus desirable. It also points to those areas where the role of the Bank Group needs to be delineatedagainst that of other ODA partners.

2. In terms of lending volume to the Philippines, the Bank ranks third after Japan and ADBamong all the ODA partners. Overall, Japan provides the largest portion of ODA to thePhilippines, accounting for more than half of total amount of ODA. Together, Japan, ADB andWorld Bank provide about 95 percent of all ODA to the Philippines, which totaled over $13billion in outstanding commitments as of December 2001. Other ODA partners provide assistance ata smaller scale, mostly in the form of grants to the national government, local government, and/or toNGOs. Moreover, the World Bank also administers grant funds on behalf of Japan (PHRD, JSDF)and EU (ASEM).' It should be noted that some ODA partners may have activities in some of thesectors below, but were unable to participate in the mapping exercise or are relatively less activethan many other ODA partners, and were thus, not necessarily mentioned in the write-up.

I. Macroeconomic Stability and Equitable Growth Based on Free Enterprise

3. Part I of the MTPDP outlines six major strategies to address the overall objective of broad-based growth: macroeconomic stability; productive employment; competitiveness of industry andservices; information and technology; tourism; and infrastructure development. A review of the datacollected from the ODA partners indicate that ADB, Japan, USA and the World Bank are the majorODA partners with activities that directly support macroeconomic stability through policy-basedprojects and policy advice in various sectors. ADB's program loans are in the grains, power andenvironment sectors, while USA provides technical assistance in areas such as public expenditure,resource mobilization, financial sector regulation and bankruptcy issues.. In the case of Japan, itprovides policy advise through its Individual E,xpert Dispatch, where experts are sent to look at areassuch as risk management. World Bank provides policy advice regularly through annual countryeconomic analyses, and currently on specific areas such as public expenditure, procurement andfinancial management. For the IMF, its engagement in this sub-theme is in terms of its ongoing

'PHRD: Policy and Human Resources Development FundJSDF: Japan Social Development FundASEM: Asia-Europe Meeting Fund

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policy dialogue in the framework of post-program monitoring and annual Article IV consultations.Together with the World Bank, the IMF is also conducting a financial sector assessment for thecountry.

4. In terms of other sub-themes covering employment, competitiveness, information technology& communications (ITC) and tourism, there are relatively fewer ODA partners directly involved.This is in part due to the large role of the private sector in areas such as ITC and tourism. On ITC,Japan provides technical assistance and project funding in telecommunications, while the USAprovides technical assistance in e-commerce. Employment and competitiveness are addressed moreindirectly through ODA programs that support growth through investments, support to SMEs, creditpolicy reforms and technical assistance to enhance competitiveness.

5. Under the broad theme of accelerating infrastructure, multiple ODA partners are involved,some with relatively large projects, particularly Japan, ADB and World Bank. ODA activities inthis area include major infrastructure works such as flood control, airport development, highways,and power projects, as well as smaller urban and rural infrastructure projects and water supplyprojects. Complementary activities include policy advice and TA for supporting public-privatepartnerships. The MTPDP notes the role of private sector participation as an important element,particularly in public-private partnership in infrastructure development. USA is particularly active inpromoting private sector participation in infrastructure at the local government levels, and providestechnical assistance to enhance the regulatory framework and competitive procurements in variousinfrastructure sub-sectors. Other ODA partners with activities in the infrastructure sector includeAustralia, Austria, Belgium, Spain, and Sweden. The Bank's investment have been focused on theroads sub-sector, rural electrification and water supply in smaller municipalities. In the water sub-sector, the Bank has a continuing dialogue on water sector regulation and corporate restructuring ofthe Local Water utilities Administration, and through the IFC, may finance the capital investmentprogram of the Manila Water Company, one of the two private water supply enterprises operating inMetro Manila.

6. Under the infrastructure sector, the sub-sectors which the Bank is not nor plans to beinvolved in include aviation, ports, waterways, shipping, telecommunications, and railways, whichother ODA partners (ADB, Japan) are already heavily supporting. In the energy sector, the Bank islimiting its assistance to rural power transmission/distribution as agreed with the ADB (which willcover power generation), and to renewable energy in coordination with other ODA partners.

II. Agriculture and Fisheries Modernization with Social Equity

7. The MTPDP recognizes that majority of poor Filipinos still reside in the rural areas anddepend on farming and fishing as their main source of livelihood. Hence, Part II of the MTPDPoutlines the country's plans for rural development through agriculture and fisheries modernization,as well as by advancing social equity through land reform, and promoting sustainable managementof natural resources.

8. As most of the ODA partners programs are aimed at alleviating poverty, and many of thepoor reside in the rural areas, substantive investments are channeled to the rural areas. Mostprograms and projects focus on community-based approaches for the management of upland, coastaland forestry resources as well as support irrigation works and give comprehensive assistance to

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agrarian reform including the development of farmer organizations, enhancement of ruralinfrastructure, provision of credit and rural micro-enterprise finance. Environment and naturalresources management activities are also well-supported by many ODA partners, which includesupport to strengthen the institutional framework at the Local Government Units' level to implementand monitor natural resources and environmental management. Complementary activities to all theseactivities are capacity-building initiatives, and studies, policy advice and technical assistance in areasrelated to development of the sector.

9. Specifically, on agriculture and fisheries; ODA partners with major activities include theADB, Australia, EU, France, Germany, Japan, Spain, USA and World Bank. Central to thestrategy of advancing social equity is the agrarian reform program of the Government, whichnumerous ODA partners are supporting through various programs. Among the ODA partners withmajor activities supporting agrarian reform are the, ADB, Australia, Belgium, EU, , Japan, Spain,and World Bank. On natural resources management, including environment programs in the greenand blue sub-sectors, active ODA partners include ADB, Belgium, Canada, Germany, Japan,Sweden, UNDP, USA and World Bank. WB assistance in the agriculture sector is being targetedprimarily at the local government and community levels, consistent with the strategy of empoweringthe LGUs and poor communities, as well as small-scale producers, to improve their access toproductive assets and services. Areas where the Bank will not be involved in, include agriculturalresearch and animal production.

III. Comprehensive Human Development and Protecting the Vulnerable

10. Part III of the MTPDP covers the sub-themes of: education and training; health care; accessto shelter; protecting vulnerable groups; balanced regional development; and peace and developmentin Mindanao (as a special chapter). Of these areas, shelter has the least number of ODA programs,while education, health, vulnerable groups, and Mindanao have a proliferation of ODA activities.Major activities across the various sectors include support to: basic and secondary education,including teacher training and provision of school buildings and support facilities; formal and non-formal education; integrated community health services; nutrition; family planning and reproductivehealth; protection of social sector expenditures in the budget; as well as policy reforms directed atimproving access to and quality of basic education, improving education sector financing andenhancing the skills of the labor force. There are also special activities directed at marginalizedwomen, children, rural and urban poor, indigenous peoples, victims of disasters, and HIV/AIDSprograms. Parallel to these activities are measures designed to improve poverty targeting and actionplans to reduce poverty and income inequalities. Active ODA partners in this broad area includeADB, , Australia, Canada,, EU, Germany, Japan, Finland, the UN agencies, USA, and WorldBank.

11. In the education sector, the Bank's assistance is targeted at primary education; IFC isplanning to support projects for private provision of education services. In the health sector, the Bankwill support components under the Department of Health's Health Sector Reform Agenda, and willcontinue to support health and nutrition interventions in children ages 0-6 years. Populationmanagement/women's health is an area where government demand for ODA has recently beenindicated, and to which the Bank is responding. For the health and education sectors, the Bank isprotecting expenditures in the budget through budget support-type projects. Social protection ofvulnerable groups is a growth area for Bank assistance, and initial activities will be targeted atprograms to end violence against women and children. In all these areas, the Bank works closely

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with other ODA partners through working groups or discussion groups, as there are many involved inthe sector.

12. In the area of pursuing a balanced regional development within the country, ADB, Canada,,Japan, UNDP, USA, and World Bank have activities which have been identified in support of thattheme. These include various types of programs (infrastructure, micro-enterprise, planning andtraining activities, etc.) that are directed at specific regions/areas and are intended to strengthen thoseregions to balance the development of the country nationwide. The Bank's support in this area isthrough the Cities Development Program as well as LOGOFIND projects which address urbandevelopment throughout the country through TA and infrastructure support.

13. As a special area of concern highlighted in the MTPDP and in response to Government'scall, almost all multilateral and bilateral donors are extensively and intensively involved insupporting peace and development of Mindanao, not only through their own programs butthrough multi-donor programs as well. Assistance is in the form of targeted programs for the wholeof Mindanao or specific areas in Mindanao, as well as other multi-province/region programs thatinclude Mindanao in their coverage. The range of programs include almost all types ofinterventions-from large to small-scale infrastructure, from National Government- to LGU- orcommunity-based assistance, from livelihood to institution-building activities, and from post-conflictto peace and development interventions. Given the numerous ODA programs for Mindanao,President Gloria Macapagal-Arroyo has specifically requested the Bank to coordinate donorassistance to Mindanao. Therefore, aside from being an active player through our large program inMindanao (50 percent of Bank portfolio is targeted at, or include Mindanao in its coverage), theBank will take a leadership role in coordinating ODA for Mindanao in partnership with theGovernment and other ODA partners.

IV. Good Governance and the Rule of Law

14. The overarching goal of the Arroyo Administration is to "Winning the War Against Poverty."Accordingly, the MTPDP devotes the fourth part to the Government's plans to: good governance;peace & order, law enforcement and administration ofjustice; and harnessing governance throughinternational collective action. In the broad area of governance, ODA activities include policy-related activities to help the Government address regulatory and institutional issues confronting thenon-bank financial sector; capacity-building and strengthening accountability at the national andlocal governments; support for dialogues and partnerships on governance with NGOs; supportingcorporate governance; and enhancing portfolio management and results monitoring. ODA partnersactive in this theme include, ADB, Australia, Canada, Japan, UNDP, USA, and World Bank. Onanti-corruption work, in particular, the Bank is leading a small group of ODA partners (ADB,Australia, Canada, UNDP, USA) who are actively supporting anti-corruption programs. This sub-group of ODA partners has prepared a joint working paper on recommendations for the Governmentto consider in addressing corruption, which has been presented to Government. The Bank willcontinue to play this leadership role to pursue the actions from the joint working paper.

15. Since the last CAS, more ODA partners have become active in the area of improving theadministration ofjustice, possibly due to the pro-activity of the Supreme Court in implementingjudicial reforms under the leadership of the current Chief Justice. Under the umbrella of agovernment action program for judicial reform, assistance is provided by several ODA partners tostrengthen the judiciary, advocacy support for judicial reforms, support to the barangay justice

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system, and specific justice programs for children. ODA partners with activities in this area includeADB, Australia, Canada, Japan, UNDP, UN][CEF, USA, and World Bank. In the field of lawenforcement, Japan is active through its experts dispatched in forensic sciences.

16. The following matrix indicates the ODA partners who provide support in each theme of theMTPDP. Overall, it will be noted that there are certain sectors where there is a proliferation of ODAactivities while in other there may be less. This could be explained by the large financingrequirements in one sector relative to others, on one hand, and the availability of private sector andgovernment financing on the other hand.

Ensuring Sustained

Growth with Equity andMacroeconomic Stability _Promoting Full, Decent &

X X Productive Employment

…- - - - ~~~~~~~~~~~~~~EnhancingX _ X _ X X _ _ X X X X . Co mpetitiveness of

~~~~~~X ~~~~~~~~~~Industry & Services -

Building on the Country's O

X X X X X , Strengths in Information & OCommunications

Technology

Putting the Philippines on > -

the International TourismMap

AcceleratingX~ X~ X ~ X X X XX ., Infrastructure Dev't

Modernizing Agriculture

X X X X X X X X X X X . & Fisheries

Advancing Social Equity r

_ ~ X X _ X X _ _ X X _ X _ X _ _ X _ _ X X _ . through Land Reform >

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ e Promoting Sustainable S X

x x x x x ~Management and useor "c 0XX X~ X ~ X X X _ X X _ X _ X _ _ X _ _ X X _ . Natural Resources 'TO

Investing in Education and ZTraining

Enhancing Health Care

Expanding Access to _x x ~~~~~~~Shelter

_ _ _ _ _ _ _ _Protecting Vulnerable 0X X X X X X X X Groups O

Pursuing BalancedX X X X X X . Regional Development

Securing Peace & Dev't in N t

x X X X X X X X X X X Mindanao >

W__inning the Battle Against tx~~~~~~x~~~~~~ ~~~~~~ ~~Poverty thohGoX X X X X >< _ _ X _ _ X _ oethrough Good i0^

Governance

Improving Peace & Order, '

x X x ~~ ~~~x x Law Enforcement and (Administration of Justice -

Harnessing Governance ,-_ _ _ _ X _ _ _ _ _ _ _ _ _ X _ _ _ _ _ ;f through International b

Collective Action 1

PHILIPPINES

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