Document of The World Bank Public Disclosure Authorized FOR OFFICIAL USE ONLY
Report No: 38004-PH
INTERNATIONAL BANKFOR RECONSTRUCTIONAND DEVELOPMENT
PROGRAMDOCUMENT Public Disclosure Authorized FOR A PROPOSED
FIRSTDEVELOPMENT POLICY LOAN
INTHE AMOUNT OF US$250 MILLION
TO
THE REPUBLIC OF THE PHILIPPINES Public Disclosure Authorized
NOVEMBER16,2006
Poverty Reduction and Economic Management Unit East Asia and Pacific Region Public Disclosure Authorized This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. REPUBLIC OF THE PHILIPPINES - GOVERNMENTFISCAL YEAR January 1 - December 31
CURRENCY EQUIVALENTS (Exchange Rate as of November 15,2006) US Dollar Philippine Peso US$l.oo PHP50.09
Vice President (Acting): Jeffrey Gutman Country Director: Joachim von Amsberg Sector Director: Homi Kharas Lead Economist: Sanjay Dhar Task Team Leader: Vera Songwe
The Philippines Development Policy Loan is being prepared by a World Bank team managed by Vera Songwe (EASPR) and consisting of Karl Kendrick Chua, Sameer Goyal, hindGupta, Yasuhiko Matsuda, Thang-Long Ton, Hiroshi Tsubota (EASPR) Ben Eijbergen (EASTR), Selina Wai Sheung Shum, Michel Kerf (EASEG), Eric Groom (IEF), Andrew Parker, Carol Figueroa-Geron (EASRD), Loraine Hawkins, Lynnette Perez (EASHD), Mary Judd, Josef Tuyor (EASSD), Joseph Reyes, Rajiv Sondhi, Cecilia Vales (EAPCO), Yolanda J. Azarcon, Nerrisa Esguerra, Leonora Gonzales, Susan Hume (EACPF), Abby Sanglay (Consultant), and is supervised by Sanjay Dhar (EASPR). Doris Chung, Gloria Elmore, and Necitas Garcia provided administrative support.
The team worked jointly with an ADB team led by Kelly Bird and a JBIC team led by Floro Adviento.
Vinay Bhargava (Director, EXTIA), Ulrich Lachler (Lead Economist, LCSPE) and James Gordon (Philippines Mission Chief, IMF) are peer reviewers for the operation. The team worked under the overall guidance of Homi Kharas, Chief Economist and Sector Director (EASPR) and Joachim von Amsberg, Country Director (EACPF). ACRONYMS AND ABBREVIATIONS
AAA Analytical and Advisory Activities ERC Energy Regulatory Commission ABC Approved Budget Ceiling FDI Foreign Direct Investment ADB Asian Development Bank FE Forward Estimates AGRAM Automatic Generation Rate Adjustment FIES Family Income and Expenditure Survey Mechanism FMIS Financial Management and Information BIR Bureau of Internal Revenue Systems BIS International Banking Standards GAD Gender and Development BLGF Bureau of Local Government Finance GAA General Appropriations Act BOC Bureau of Customs GDP Gross Domestic Product BOT Build-Operate-Transfer GEPS Government e-Procurement System BP Bank Policies GFIs Government Financial Institutions BSP Bangko Sentral ng Filipinas GFMIS Government Financial Management CAS Country Assistance Strategy Information System CBMS Community-BasedMonitoring System GNI Gross National Income CG Consultative Group GNP Gross National Product CMIS Case Management and Information GOCCs Government Owned and Controlled System Corporations COA Commission on Audit GOP Government of the Philippines CPAR Country Procurement Assessment GPPB Government Procurement Policy Board Report G&S Goods and Service CPI Consumer Price Index GSIS Government Service Insurance System CPSD Consolidated Public Sector Deficit HRMIS Human Resource Management CPUE Catch Per Unit Effort Information System csc Civil Service Commission IBRD International Bank for Reconstruction csos Civil Society Organizations and Development DA Department of Agriculture ICB International Competitive Bidding DA Dedicated Account ICT Information and Communication DAR Department of Agrarian Reform Technology DBCC Development Budget Coordinating IDA International Development Association Committee IDRs Integrity Development Reviews DBM Department of Budget and Management IFRS International Financial Reporting DECDG Development Economics Data Group System DENR Department of Environment and Natural IGCA Incremental Generation Cost Resources Adjustment DepEd Department of Education IGFMIS Integrated Government Financial DOF Department of Finance Management and Information System DOH Department of Health IMCs Investment Management Contracts DOTC Department of Transportation and IMF International Monetary Fund Communications IPS Indigenous Peoples DOTS Directly Observed Treatment Short- IPP Independent Power Producers Course IPRA Indigeneous People’s Rights Act DPL Development Policy Lending IRA International Revenue Allotment DSWD Department of Social Welfare and JBIC Japan Bank for International Development Cooperation DSCR Debt Service Coverage Ratio KALAHI Kapitbisig Laban sa Kahirapan EA Environmental Assessment KALAHI- Kapitbisig Laban sa Kahirapan EAP East Asia and the Pacific CIDSS Comprehensive and Integrated Delivery EC European Commission of Social Services Project EFA Education For All LGU Local Government Unit EIS Environmental Impact Statement LGFPMS Local Government Financial EPIRA Electric Power Industry Reform Act Performance Monitoring System EMBI Emerging Market Bond Index LGPMS Local Government Performance ENR Environment and Natural Resources Monitoring System ENRMP Environment and Natural Resources MDGs Millennium Development Goals Management Program MIGA Multilateral Investment Guarantee ENRM Environment and Natural Resources Agency Management MFOs Major Final Outputs E-NGAS Electronic-New Government MOU Memorandum of Understanding Accounting System MRDP2 Mindanao Rural Development MTEF Medium-Term Expenditure Framework RIPS Revenue Integrity Protection Service MTP Medium-Term Prospects RVAT Reformed Value-Added Tax MTPIP Medium Term Public Investment Plan SARO Special Allotment Release Orders MTPD Medium term Philippines Development SEA-K Self-Employment Assistance Kaunlaran MTPDP Medium-Term Philippine Development SBM School-Based Management Plan SEMP2 Second Social Expenditure Management MWSS Metropolitan Waterworks and Sewage Project System SPV Special Purpose Vehicle NACPA National Anti-Corruption Program SSL Salary StandardizationLaw NAMFREL National Movement for Free Elections NCA Notice of Cash Allocation NCIP National Commission for Indigenous Peoples NEA National Electrification Authority NEDA National Economic and Development Authority NFPS Non-FinancialPublic Sector NG National Government NGAS New Government Accounting System NGA Non-GovernmentAccounting NGOs Non-Government Organizations NPA Non-PerformingAssets NPC National Power Corporation NPL Non-Performing Loans NRIMP2 National Program Support Projects for National Roads NRM National Resource Management ODA Official Development Assistance OMB Ombudsman OPIF Organizational Performance Indicator Framework OP Operating Policy PAGC Presidential Anti-Graft Commission PD Presidential Decree PDF Philippine Development Forum PEFA Public Expenditure Financial Assessment PER Public Expenditure Review PEM Philippines Environment Monitor . PEPFMR Philippines Public Expenditure, Procurement, and Financial Management Report PFM Public Financial Management Phil GEPS Philippine Government Electronic Procurement System PPAs Programs, Projects, Activities PPP Public Private Partnership PSALM Power Sector Assets and Liabilities Management Corporation PREM Poverty Reduction and Economic Management PTCA Parents-Teachers-Cornunity Associations PWD People With Disabilities RA Republic Act RATE Run-After-Tax-Evaders RATS Run-After-The-Smugglers RDO Revenue District Office RFP Request for Proposal PHILIPPINES .FIRST DEVELOPMENTPOLICY LOAN
TABLEOF CONTENTS
I. Introduction ...... 3 I1. Country Context ...... 4 A . A Stronger Economic Context ...... 4 B . A Major Turnaround in Fiscal Performance...... 7 C . Political Context ...... -10 D. A Challenging Institutional and Social Environment ...... 11 E. Macroeconomic Outlook and Debt Sustainability ...... -13 I11. The Government’s Reform Agenda ...... 14 IV. Bank Support to the Government’s Program ...... 31 A . Links to the CAS ...... 31 B. Relationship to Other Bank Operations ...... 32 C . Collaboration with the IMF and Other Development Partners ...... 32 D. Lessons Learned ...... 33 V . The Proposed Operation ...... 34 A . Objectives and Design ...... 34 B . Policy Actions supported by the DPL ...... 35 Table 5: Summary Table of Prior Actions for DPL Iand Triggers for DPL I1 ...... 40 VI. Operational and Implementation Issues ...... 44 A . Poverty and Social Impact Analysis ...... 44 B . Environmental Aspects ...... 49 C . Fiduciary Assessment ...... 50 D. Loan Administration ...... 53 E. The Engagement Process, Implementation and Monitoring ...... 54 F. Risks and Risk Mitigation ...... 55 Annex 1: Letter of Development Policy ...... 58 Annex 11: Policy Matrix ...... 66 Annex 111: Summary of the CAS ...... 71 Annex IV: Environmental and Social Aspects ...... 73 Annex V: lh4F Public Information Notice ...... 76 AnnexVI: Tables ...... 80 MAP IBRD 33466 ...... 85
THE REPUBLIC OF THE PHILIPPINES FIRST DEVELOPMENT POLICY LOAN
~~ Loan and Program Summary Borrower: The Republic of the Philippines Implementing Department of Finance Agency Amount: US$250 million (Single Tranche)
Terms: IBRD - Repayable in 20 years including eight-year grace, at the standard interest rate for LIBOR-based fixed-spread loans in US Dollars.
~ Commitment Fee: 0.75% per annum on undisbursed balances; reduced to 0.25% in FY07 Description: The proposed First Development Policy Loan would be the first in what is expected to be a series of single-tranche DPLs. The first operation (DPL1) supports the Government’s significant achievements in reducing public sector deficits and debt through tax reform and power tariff adjustments, and seeks to bolster this performance by: strengthening tax administration; improving budget execution and fiduciary performance; and strengthening the finances of the power sector.
In addition, DPLl lays the groundwork for deeper reforms in the areas of fiscal consolidation, governance and the fiduciary environment, the investment climate and social policy, with the objective of supporting specific reforms in these areas in the context of subsequent DPLs. Benefits: The benefits derived from the proposed series of DPLs include: Sustained progress towards fiscal sustainability and public debt reduction Improved revenue collection, in particular through better management and administration of the VAT Better expenditure control and more effective delivery of government programs and services in reaching intended targets Higher investment led by the private sector, facilitated by strategic increases in public investment, to enable robust growth on a sustained basis Better social outcomes: improved and more efficient and effective delivery of public services, and better targeting of vulnerable groups Greater civil society involvement in the monitoring and evaluation of public programs. Increased transparency and accountability of public finances, simplified administrative procedures, and steps towards curbing corruption as part of a broader effort to build good governance.
1 Risks: The proposed operation may be adversely affected by:
0 External risks - Deterioration in the external environment would render the objectives of the program more difficult to attain
0 Reform slippage - Adjustment fatigue and the perception of inadequate benefits from the enactment of reforms could undermine support for further adjustment Fiducialy risks - Fiduciary shortfalls could limit the attainment of intended development outcomes
0 Political risks - Political opposition to the government could slow reform momentum The policy achievements and the reform program are nonetheless judged to be robust, and adequate to mitigate the above risks. Disbursement: The loan will be disbursed upon declaration of effectiveness. Proiect ID number: P10 1762
2 PHILIPPINES FIRST DEVELOPMENT POLICY LOAN (DPL1)
I. Introduction
1. The pro osed $250 million First Development Policy Loan (DPL1) would b the Bank’s first policy-based budget support operation to the Philippines since the 1998 Banking System Reform Loan. The proposed operation would be the first in what is envisaged to be a series of single tranche DPLs in support of the government’s credible efforts to reduce the public sector deficit and debt, strengthen the investment climate, and improve service delivery through increased and more effective government spending. Assuming adequate reform progress, subsequent loans are envisaged to. follow an annual schedule.
2. The resumption of policy-based lending to the Philippines has been made possible by substantial fiscal adjustment in the past two years that has reduced concerns about a fiscal crisis and outlined a credible path towards fiscal sustainability. Fiscal balances had deteriorated significantly following the Asian crisis. By 2003: tax revenues had fallen by 4% percent of GDP from their 1997 peak; the public sector deficit exceeded 5 percent of GDP; and public debt was rising unsustainably, exceeding GDP by 2003. In August 2004, shortly after reassuming office for the current term, President Macapagal-Arroyo announced that the Philippines was in the midst of a fiscal crisis and urged Congress to enact a series of tax measures, the most important of which was reform of the VAT to broaden the base by limiting exemptions and raise the rate. After much debate, full implementation of the VAT reform was completed in two stages by February 2006. While Congress was debating the VAT reform (and other tax measures), power generation tariffs were substantially increased in December 2004/early 2005, and expenditure restraint was tightly maintained.
3. The results of these actions, which had been singled out by the Bank (and Fund) in its documents and dialogue, have been highly successful thus far. The consolidated public sector deficit (CPSD) was reduced by 3 percent of GDP in 2005, debtIGDP is declining, tax revenue was up by 24 percent through September 2006, and the National Government deficit, the single largest component of the CPSD, fell to less than half its 2005 level through September. The extent of fiscal adjustment enacted over the past two years is thus well beyond the minimum criteria needed for development policy lending as laid out in the Bank’s April 2005 CAS. Growth of 5-6 percent has also been maintained during this period, exports and FDI have increased sharply in 2006, inflation is declining, financial markets have strengthened and borrowing spreads have fallen.
4. The proposed loan would logically follow from the policy dialogue with Government during the 8-year hiatus in policy based-lending. Several CAS documents during this period linked the resumption of policy-based lending directly and foremost to fiscal reforms. The current CAS explicitly signals the willingness of the Bank to resume policy-based lending under fiscal adjustment criteria-deficit reduction and improved tax effort-that have been fully achieved. The Government has reiterated its commitment to pursue its medium-term fiscal consolidation objectives in the last two annual meetings of the Philippines Development Forum (which evolved from the Consultative Group). In this context, the Bank (and other major official lenders) indicated willingness to support the Philippines with policy-based lending under the scenario that has materialized.
3 5. Notwithstanding these accomplishments, public debt remains high (87 percent of GDP in 2005), investment appears too low to sustain more rapid growth, government spending on infrastructure and human development is also low, and leakages from public spending have undermined the intended impact of such spending. Firms consider macroeconomic instability, corruption, and poor infrastructure as significant impediments to increasing investment. The proposed DPL series contains components to address each of these concerns.
6. The proposed DPL series supports government efforts to build a longer track record of fiscal adjustment and reduce public debt to 60 percent by 2010, which would assuage investor concerns about instability. Strengthening tax administration and power sector finances are essential to this objective. In this context, the Government’s commitment to a multi-year fiscal consolidation program with the Bank and other international development partners-this DPL is being prepared jointly with the Asian Development Bank (ADB) and the Japan Bank for International Cooperation (JB1C)-would boost the program’s credibility amongst private investors and creditors, particularly since recent history has included a number of adjustment efforts that could not be sustained.
7. The DPL series also supports complementary measures needed to secure the fiscal consolidation effort. This includes the Government’s efforts to deliver services more effectively, in particular, through deepening implementation of procurement and financial management reforms thereby enhancing predictability in budget formulation, and transparency in its execution.
8. Finally, the DPL series would support the Government’s efforts to increase public investment in infrastructure and social services financed from the proceeds of improved tax policy and administration; and to encourage greater private investment through an enhanced policy framework for public-private partnerships and the streamlining of procedures. The resulting higher investment and growth would bolster tax revenue and in turn help to achieve the Government’s fiscal consolidation objectives. 11. Country Context
A. A Stronger Economic Context
9. Fiscal adjustment in recent years has benefited the Philippine economy and financial markets. Economic growth since 2004 has been robust even in the face of higher oil prices-and well above its historical trend of 3.8 percent over the previous 40 years. In 2004, GDP growth reached 6.2 percent, its highest level in 15 years. Growth slowed to 5 percent in 2005 reflecting an agricultural slowdown and terms-of-trade deterioration (due to higher oil prices and weakness in electronics export prices), but picked up to 5.6 percent in the first half of 2006, amidst a recovery of agriculture and exports. Strong growth of remittance flows has boosted consumption and also appears to have reduced the volatility of consumption. Some 8% million Filipino workers, about a quarter of the domestic labor force and a tenth of the population, work abroad. Rapid growth of remittances and transfers from overseas workers, amounting to about 14 percent of GDP in 2005, has converted large trade deficits into modest current account surpluses, and raised average GNP growth to above 6 percent since 2004. Higher growth in recent years has been primarily driven by the service sector including back office activities such as business process outsourcing, although since 2005, manufacturing growth has also risen at a pace of nearly 6 percent.
10. Higher imported energy prices, and the major adjustment in power generation tariffs in late 2004, raised inflation to 8% percent in 2004. Since then inflation has been on a gradually declining 4 path, with the 12-month CPI declining to 5.4 percent as of October 2006, below the path targeted by BSP. The monetary program anticipates a deceleration to 4 percent by end-2007.
Table 1: Selected Economic Indicators 2000 2001 2002 2003 2004 2005
Growth, inflation and unemployment (percent) Gross national product 7.1 2.3 4.2 5.9 6.7 5.6 Gross domestic product 6.0 1.8 4.4 4.9 6.2 5.0 Inflation (period average); 2000 base year 4.0 6.8 3.0 3.5 6.0 7.6 Inflation (end period); 2000 base year 6.5 4.5 2.5 3.9 8.6 6.6 Unemployment/l 10.1 9.8 10.2 10.2 10.9 7.4 Savings and investment (percent of GDP) Gross national savings 18.2 16.5 17.2 17.2 18.7 17.5 Gross domestic investment 21.2 19.0 17.7 16.8 16.8 15.1 Public sector (percent of GDP) National government balance -4.0 -4.0 -5.3 -4.6 -3.8 -2.7 Total revenue 15.3 15.5 14.3 14.5 14.4 14.7 Tax revenue 13.7 13.5 12.5 12.4 12.3 12.6 Total spending 19.3 19.6 19.6 19.1 18.3 17.4 Consolidated public sector balance -4.6 -4.8 -5.6 -5.2 -4.8 -1.8 Nonfinancial public sector debt 88.1 87.4 93.7 100.8 95.4 86.8 National government debt 64.6 65.7 71 .O 77.7 78.5 71.8 Money and credit (year-end percent change) M3 4.6 6.8 9.5 3.3 9.2 9.0 Credit to the private sector 8.1 -3.0 1.2 1.8 4.6 -1.5 Balance of payments Merchandise exports (percent change) 9.1 -16.2 9.9 2.7 9.8 3.7 Merchandise imports (percent change) 7.7 -13.3 6.3 3.1 8.0 7.4 Current account balance (percent of GDP) -2.9 -2.5 -0.5 0.4 1.9 2.4 International reserves Gross official reserves (billions of dollars) 15.1 15.7 16.4 17.1 16.2 18.5 Change in reserves (billions of dollars) -0.5 -0.2 0.8 0.1 -0.3 2.4 Gross official reserves (months of imports) 4.2 4.6 4.7 4.2 3.7 3.9 External debt Total (billions of dollars)/2 51.2 51.9 53.6 57.4 54.8 54.2 Total (percent of GDP)/2 67.5 72.9 69.8 72.1 63.3 55.1 Debt service ratio (G&S and income)/2 13.0 15.7 17.1 16.9 13.8 13.3 Exchange rate (peso/dollar, period average) 44.2 51 .O 51.6 54.2 56.0 55.1 Real effective exchange rate (2000 = 1O@ ' 100.0 95.6 96.2 89.1 86.2 92.3 Memorandum items Nominal 2005 GDP: USD 98.4 billion 2005 population: 84.4 million Source: GOP, World Bank, IMF
11 Beginning 2005, revised definition of unemployment in use. Under old definition, 2005 unemployment was 10.3 percent. 2/ Reported by BSP
11. The pace of formal employment has increased in parallel to the stronger economic activity in the most recent period, but overall employment growth is heavily influenced by developments in the less formal parts of the labor force, in particular, agriculture. For example, the number of wage and salary workers increased by about 1.2 million (7.5 percent) in the year ending July 2006, with the service sector accounting for the majority of the increase. Over the same period, however, overall employment growth was more modest and unemployment increased from 7.7 percent to 8 5 percent reflecting the growth of new entrants into the labor force and the fact that wage and salary workers account for less than half of the labor force.
12. Markets have rewarded the adjustment effort. Until the tightening of global liquidity conditions led to a correction in May-June 2006, financial markets in the Philippines displayed an extended period of improvement, reflected in reduced spreads for global bond issues, falling interest rates for local currency government borrowing, a strengthening currency, and a buoyant stock market which reached a 7-year high in mid-May. Bond spreads have fallen significantly in the past two years, reflecting both the liquidity in emerging market spreads and improving Philippine spreads vis-&vis the EMBI. For example, in early 2005, the spread paid on a long-term bond issue was 505 basis points, versus 333 basis points on a $2.2 billion issue in January 2006, and 246/262 basis points for a $750 million issue in July 2006 (maturing in 2016 and 2031). In common with other emerging markets, these positive trends were reversed during mid-May to early July, but financial markets have since stabilized and in fact have been relatively quick to regain lost ground in comparison to other emerging markets. For example, the Philippine peso has traded at five-year highs against the US dollar in recent weeks. FDI and portfolio flows grew rapidly in 2005-06 but these flows remain small in relation to the economy.' Ample domestic liquidity has pushed short- term Treasury rates below inflation; the benchmark 91-day T-bill rate had fallen to below 5 percent as of November 2006.
13. The strong performance of remittances and exports has helped to insulate the current account from higher imported oil prices, and raised gross reserves to $22.3 billion as of October 2006, up $3.8 billion from end-2005. Foreign currency borrowing from the capital markets by the public sector in 2006 is estimated at $4 billion. This figure is projected to decline somewhat, given the Government's intention to rely to a larger extent on borrowing in local currency and from official sources.
14. Domestic investment has been on a declining path, falling to about 15 percent of GDP. Private investment has yet to respond to the higher growth rates of recent years, and has not been helped by the political instability and uncertainties of recent years. Despite ample liquidity, banks have remained cautious in their lending to the private sector, preferring to finance the government in local as well as foreign currency, and government securities now comprise about a third of the banks' portfolio. Private sector credit as a share of GDP fell by some 40 percent between 2000 and 2005. Public investment, estimated at only 2.3 percent of GDP in 2004-05, has been limited by fiscal constraints, and deficiencies in infrastructure appear to be a major drawback to increased private investment. Continued robust economic growth is expected to raise capacity utilization and private investment demand, aided by higher public investment in the medium term, although if the sectoral shift to services continues, robust economic growth may be compatible with somewhat lower investment rates than implied by historical data, as the service sector is less investment- intensive vis-&vis manufacturing.
15. Considerable progress has been made in recent years to address banking sector vulnerabilities but credit to the private sector has continued to decline in real terms. The regulatory framework for the effective conduct of banking supervision has been strengthened, and efforts to strengthen corporate governance, risk management, and capital adequacy in commercial banks have
' Net FDI inflow reached $1.36 billion through August 2006. Net portfolio investment was $1.8 billion through October 2006. 6 also progressed. Regulations are now in closer alignment with international standards and regulatory policies are more responsive to the growing sophistication and globalization of the banking industry. While asset quality is still below regional and world standards, significant progress in asset resolution has been achieved. Capital adequacy is much above the minimum norms under BIS. In addition to reducing bad loans and non-performing assets from their balance sheets in response to regulatory pressures and changes (Table 2), large domestic banks have focused on strengthening their capital base by raising tier-2 bonds in recent years. BSP has encouraged such capital-raising by issuing guidelines relating to issuance of Hybrid Capital Instruments.
16. Improvements in asset quality are due to implementation of an initiative to facilitate restructuring of non-performing loans and assets. The enactment of the Special Purpose Vehicle (SPV) Act in 2002 was an important catalyst in reducing banking sector vulnerabilities via the take out of NPLs and NPAs from commercial bank balance sheets. After a slow start, by end 2005, about P97 billion worth of NPAs were sold through transactions under the SPV Act, reducing by about 19% the stock of NPAs in the banking system. In early 2006, the SPV Act was extended by a period of another two years. BSP estimates that this would facilitate resolution of additional NPLsNPAs with face value of about PlOO billion.
Table 2: Banking Sector Indicators, 2002-2005
2002 2003 2004 2005 Liquidity Liquid Assets to Deposits 47.7 47.9 53.2 53 Asset Quality NPL Ratio (excl interbank loans) 16.6 16.1 14.4 10.3 NPA Ratio 26.5 26.1 24.7 20 NPL Coverage Ratio 50.2 51.5 58 73.8 NPA Coverage Ratio 30.1 30.9 33.2 39.2 Profitability (%) Net Interest Margin 3.8 3.7 4.2 4.6 Cost to Income Ratio 71.4 68.9 69.8 67.3 Return on Assets 0.8 1.1 0.9 1.1 Return on Equity 5.8 8.5 7.1 8.7 Capital Adequacy Total Capital Accounts to Total Assets 13.4 13.1 12.6 12 Capital Adequacy Ratio (solo basis) 15.5 16 17.4 16.7 Capital Adequacy Ratio (consolidated basis) 16.9 17.4 18.4 17.6 Source: Bangko Sentral ng Pilipinas
B. A Major Turnaround in Fiscal Performance
17. Fiscal Deterioration (1997-2003). Following the East Asian crisis, the Philippines witnessed a sharp deterioration of fiscal variables. Between 1997 and 2002, the National Government (NG) account moved from approximate balance to a deficit of 5.3 percent of GDP, due to a plunge in tax revenues from 17 percent of GDP to 12.5 percent, and a growing interest burden that reflected both increasing debt and higher risk premia. The fall in tax revenue, which continued through 2004, was the result of weak corporate and banking profitability in the aftermath of the
7 crisis, some built-in weaknesses in tax policy, reductions in import tariffs, as well as deterioration in administrative performance of the major revenue collection agencies. The deficits of Government Owned and Controlled Corporations (GOCCs) also widened significantly, rising from near balance in 1999 to 1.8 percent of GDP in 2004, driven largely by the escalating deficits of the National Power Corporation (NPC). By 2003, non-financial public sector debt exceeded GDP and global borrowing spreads had risen above 500 basis points. The fiscal deterioration was paralleled by governance concerns that in turn contributed to considerable political instability through much of the present decade.
18. As a result of the build-up of deficits and debt, the Philippines entered a period of fiscal instability between 2002 and 2004 that could have deteriorated into crisis. During this period, the government was able to avert a full blown fiscal crisis through expenditure restraint: primary expenditure during this period was cut by two percent of GDP reflecting cuts across the major categories of spending-civil service salaries, for example, were not increased from 2001 to 2004 despite rising prices, spending on education and health also declined in real terms, and public investment was cut further.
19. Fiscal Turnaround since late 2004. In August 2004, shortly after President Macapagal- Arroyo reassumed office for the current term, she announced that the state was on the brink of a fiscal crisis and urged Congress to pass a series of tax measures as an important element in addressing the critical situation. These included: an increase in the excise tax on cigarettes, tobacco, and alcohol; a comprehensive tax reform package which included broadening VAT coverage by the removal of exemptions for petroleum products, power, and medical and legal services, authority for the president to increase the VAT rate from 10 percent to 12 percent upon satisfaction of certain criteria, an increase in the corporate income tax from 32 percent to 35 percent (reverting to 30 percent in 2009); and lateral attrition for revenue agencies (to improve incentives for tax administrators). In parallel, power generation tariffs were raised by about 30 percent in late 2004/early 2005, and import duties on oil products were raised from 3 to 5 percent (subsequently reversed to mitigate the impact of the VAT reform on fuel prices). In addition, the Department of Finance (DOF) intensified programs to identify and prosecute tax evaders and smugglers and a revenue integrity protection service that charged cormpt collectors in the revenue agencies was promulgated. A 30 percent average increase in excise taxes was enacted in December 2004, and, after considerable debate and delay, the crucial VAT reform was enacted in two steps (November 2005 for the removal of exemptions and February 2006 for the increase in rates). Throughout this period, and subsequently, tight controls on government spending continued to be maintained.
20. The consolidated public sector deficit (CPSD) was reduced by 3 percent of GDP in 2005, primarily the result of power tariff adjustments and expenditure restraint. Furthermore, the implementation of the VAT reform coupled with other policy and administrative measures have begun to yield clear benefits: for the first time since 1997, the tax effort increased in 2005; and tax revenue increased by 24 percent through September 2006, setting the stage for a more significant improvement in tax effort in 2006, of about 1 percent of GDP. This has opened the way for a more sustainable fiscal adjustment path: in which an improving tax effort allows a recovery in primary expenditure and a declining public debt burden. The CPSD was reduced to 1.8 percent of GDP in 2005 implying a primary public sector surplus of 4.4 percent. Non-financial public sector debt declined from 101 percent of GDP in 2003 to 87 percent in 2005 and is projected to decline to 60 percent by 2010, even assuming a somewhat less ambitious path of declining deficits and improving tax effort (Table 3) than targeted by the government. 8 Figure 1: Fiscal Adjustment has Improved- Market Indicators Improving Deficit Towards a Sustainable Debt Path
NG and CPS deficit (%of GDP) NG and NFPS debt (%of GDP) 110 1 ;;; ;;; -4
-5 -6 , 1 1 2000 2001 2002 2003 2004 2005 2006 I 2000 2001 2002 2003 2004 2005 2006 /P /P +Consolidated non-f inancial public sector debt +CFS deficit +NG deficit +National government debt Source: DOF 1 Source: DOF With Improving Tax Collection And Expenditure Restraint
~~ Revenue and Tax Efforts NG Expenditure
10.0 - 8.0 -
---_---)----)----I----. 4.06.01 11*010.0 2.0- ----+ 2000 2001 2002 2003 2004 2005 2006 0.0 I * 2000 2001 2002 2003 2004 2005 2006 /P /P +Revenue -m- Tax revenue --e Capital -m- Interest -A- Primary Source: DOF Source: DOF, World Bank estimates
Result in Reduced Bond Spreads Strengthening Peso & Equity Prices
Bond spreads Market Indicators 700 600 500 2800 T 35.0 ti 400 .- 2300 40.0 300 - 45.0 200 1800 B 50.0 zCL 100 % 1300 0 55.0 8 I 2000 2001 2002 2003 2004 2005 2006 800 , I I i i i 160.0 2000 2002 2004 2006 +Philippines -e- Thailand 1-B- Stock index +Exchange rate 1 Source: Workl Bank Source: Bangko Sentral ng Pilipinas
9 21. The government is on track to reduce the national government deficit significantly in 2006. Through September 2006, the deficit fell to P50 billion, less than half the deficit through September 2005, and well below the 2006 target of P125 billion (2.1 percent of GDP). The lower deficit this year reflects the strong tax performance as well as non-enactment of the 2006 budget due to a deadlock between the President and Senate over the 2006 budget, which has constrained spending below target. Spending restraint in recent years appears also linked to procurement reforms, which, by improving transparency have reduced the cost of key spending items such as school textbooks. Spending in the last quarter is expected to increase with the recent passage of a P47 billion supplemental budget to the reenacted 2005 budget, but the deficit for the year is expected to remain well below its 2.1 percent of GDP target, resulting also in a CPSD somewhat below 2 percent of GDP in 2006.
22. A major factor contributing to the CPSD adjustment in 2005 was the improvement in the financial position of the National Power Corporation, the result of power tariff adjustments in late 2004/early 2005, improvements in operational efficiency, and the transfer of P200 billion of NPC debt to the national government. The NPC deficit declined from 1.5 percent of GDP in 2004 to 0.4 percent in 2005, reducing the overall GOCC deficit to 0.4 percent of GDP (Annex VI, Table 2). The financial condition of the NPC however remains weak, reflecting the legacy of undercapitalization and excessive borrowings as well as huge take-or-pay financial obligations to independent power producers (IPPs). Implementation of the power reform program, including privatization of NPC’s power generation operations and TRANSCO’s transmission operations as well as introduction of a universal charge to cover both stranded debt and stranded IPP contract costs will be needed to place the finances of NPC and its holding company, the Power Sector Assets and Liabilities Management Corporation (PSALM), on a sounder footing.
C. Political Context
23. The political environment since 2000 has been challenging and plagued with scandals and allegations that have constrained the Government’s ability to undertake strong reforms. President Estrada, elected in 1998, faced escalating allegations of corruption until he was removed from office in January 2001 following growing public demonstrations and cabinet defections. Estrada’s Vice President Macapagal-Arroyo replaced him as President, but was initially unable to present a comprehensive fiscal adjustment package, constrained in part by acute political divisions. Estrada remained a popular figure amongst large segments of Filipino society, and his arrest and trial for plunder further divided the nation.
24. President Arroyo’s electoral victory of May 2004 enhanced the administration’s ability to propose wide-ranging fiscal reforms, although political divisions delayed implementation of the central elements of the tax policy reforms for more than a year after they were first proposed in August 2004. Accusations against the President of corruption and attempts to rig the 2004 elections led to the resignation of several important cabinet members, the withdrawal of support from key leaders in the Senate and the administration coalition, and an impeachment attempt that was launched in July 2005.
25. The political tension has waned since late 2005, although a second (also unsuccessful) impeachment attempt in 2006 indicates remaining political divisions. Notwithstanding such constraints, an impressive series of legislative and policy initiatives has been implemented over the
10 past two years to reverse the fiscal deterioration and bring credibility to the Government’s professed goal of balancing the budget.
D. A Challenging Institutional and Social Environment
26. Concerns about weak governance and corruption in the Philippines are long-standing. Following the end of the Marcos era in 1986, the return to democratic government and major market-oriented reforms (trade liberalization, deregulation, privatization) brought about improvements in perceived corruption. But the events leading to the impeachment of former President Estrada reversed this trend. The current government declared combating corruption one of its top priorities and announced several initiatives. These have included reforms to procurement and financial management, judicial reform, a concerted effort to reduce tax evasion, and the passage of the Anti-Money Laundering Law. The investigative capacities of the Office of the Ombudsman have been strengthened, which has led to suspension or dismissal of a number of high-ranking government officials.
27. In spite of these measures and some visible successes, the general perception about the level of corruption remains mixed. Transparency International’s corruption perception index indicates a stagnant trend since the beginning of the present decade (Figure 2). A 2005 Social Weather Station (SWS) Survey on corruption in the public sector from 2000 to 2005 reported a decrease in bribe- related activities on respondents availing local government permits or licenses from 55% to 36%, national government permits or licenses from 42% to 28%, and payment of income taxes from 52% to 30%. For the same period, the Philippines’ standing deteriorated across five of six of the World Bank’s governance indicators, although there was improvement in five of six of these indicators for the most recent period, between 2004 and 2005.2
Figure 2: Corruption Perception Index Score
Least 4 .1 Corrupt 3
2
1 Most Corrupt 0 ‘80- ‘88- 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 ‘85 ‘92 Source: Transparency lnternationa
28. Weaknesses in governance continue to extend across government interaction with the private sector-ranging from tax evasion, collusion in procurement, inflating of contracts, and
The World Bank’s governance indicators are: Voice and Accountability; Political Stabilitymo Violence; Government Effectiveness; Regulatory Quality; Rule of Law; Control of Corruption. Between 2000 and 2005, each indicator deteriorated with the exception of Control of Corruption. Between 2004 and 2005, each indicator improved with the exception of Voice and Accountability. 11 leakages in service delivery programs, Persistent implementation of ongoing governance reforms, ranging from public expenditure management reform to enforcement of anti-corruption laws will need to be pursued with diligence for more visible impact.
29. Poverty incidence in the Philippines remains high but is estimated to have declined more rapidly in recent years. The Government's Family Income Expenditure Survey (FIES), conducted every three years, estimated that poverty incidence had declined from 33% in 2000 to 30% in 2003.3 Its relatively high incidence, and slower decline relative to other East Asian countries, reflects modest per capita growth in the Philippines over the past 25 years, and problems in the effectiveness and targeting of government programs intended to benefit the poor. High income and asset inequality and prolonged conflict in parts of the country have also limited economic opportunities and the benefits of growth to the poor. An expenditure Gini coefficient of 0.42 is estimated for 2003. GDP growth averaging about 5% percent during 2003-06 and rapid increases in remittances during this period are expected to show a more rapid decline in poverty incidence in the 2006 FIES. Bank estimates of Philippine poverty using a consumption threshold of $2 per day, estimate poverty incidence to have declined from 47.2% in 2000 to 41.9% in 2005, which (comparing 2005 estimates) is less than in Indonesia (44.4%) or Vietnam (49.1%), but higher than in Thailand (22.8%) or China (28.6%). Using a threshold of $1 per day, poverty incidence is estimated to have declined from 13.5 percent in 2000 to 10.8 percent in 2005
30. Progress on meeting MDG targets has been mixed. The Philippines is on track to meet the MDG target for reducing extreme poverty. However, there is a risk the country will not meet the education-related MDG of universal primary education by 2015. There is a low probability of achieving the MDG and Education for All (EFA targets) for elementary and high school cohort survival, and a medium probability of achieving the target for increasing elementary participation. Elementary participation rates have fallen from 96.95 in 1999/00 to 88.4 in 2003/04. High school participation rates have risen since 2001/02 from 57.55 to 59.88 in 2003/04. Because of poor transition rates between the two levels of education, comparatively few children (38% in 2003) make it through to the end of high school. The persistent under-performance of the Philippines education system in important skill areas for economic development is illustrated by comparative data on achievement: in 2003: Philippines ranked 23rd of 25 countries in the Grade 4 mathematics and science tests in the Trends in International Mathematics and Science Studies test. The impact of the adverse fiscal position on the sector has been exacerbated by rapid population growth: real government spending per student fell by an average of 3 percent per annum from 2000-2004. Weak, over-centralized governance and inequality in resource allocation have contributed to poor school performance, especially for the rural poor, and are reflected in marked inequality in school achievement. Functional literacy rates varied from 95% to 63% in 2003 across the 17 regions in 2003.
31. The Philippines is also at some risk of not meeting the MDG targets for reducing child malnutrition, reducing maternal mortality and increasing the prevalence of couples practicing responsible parenthood, though it is on track to achieve the targets for reducing child mortality, controlling communicable diseases, and increasing access to water. There is a medium probability that Philippines will not achieve the MDG target for reducing its high rate of maternal mortality (180 deaths per 100,000 live births in 1998), and weak data collection undermines the ability to
Based on a per capita income threshold in 2003 of P33.7 per day, calibrated by region.
12 monitor progress on this MDG. Low health service quality and problems of financial and physical access for the poor lie behind this poor performance. Health care costs and loss of earnings due to ill-health are a leading cause of chronic poverty in the Philippines. Public spending on health (US$14 per capita per year, for national, local government and social health insurance spending combined) and total spending (US$33 per capita per year, and 3.1% of GDP) on health in the Philippines are low for a country at its level of economic development, and have remained static for the past eight years. (The comparable figures for lower middle income country on average are $33.94 for public expenditure on health, and $81.60 or 5.6% of GDP for total expenditure.) Access to health services and health outcome indicators also show a pattern of inequality. Under-five child mortality for the poorest 20% of households is 2.7 times higher than for the richest 20%.
E. Macroeconomic Outlook and Debt Sustainability
32. Macroeconomic prospects have clearly improved given the extent and nature of the fiscal adjustment of the past two years, starting with tight control over spending and adjustment of power tariffs, and followed in 2006 by the realization of substantially higher tax revenue stemming from the implementation of the VAT reform. The turnaround in fiscal policy has already paid dividends in terms of stronger financial market indicators and reduced spreads for borrowing in the global capital markets (to about 200 basis points in the secondary debt market over the 10 year US Treasury bond). Yet while public debt has been placed on a declining path, its level remains high, borrowing requirements are also high, including the requirements for external commercial borrowing, and investment has yet to recover from its declining path. The Philippines will therefore have to maintain the confidence of investors by building a longer track record of fiscal prudence, even as the government strives to improve infrastructure and service delivery quality and enhance support for its reform program internally.
33. In 2006, stronger growth in agriculture and exports is expected to raise GDP growth to about 5% percent, aided by the continued robust growth of remittances-aided private consumption. Lower spending by the national government thus far in 2006 has been countered by an estimated increase in spending by the GOCCs, including for investment. In 2007, with agricultural growth assumed to return to its average pace of recent years (from over 5 percent growth in the first half of 2006) and export growth also slowing in line with global trends, the pace of growth would be at least maintained by somewhat higher government spending and the start of an assumed recovery in private in~estment.~
34. The key assumption underlying the Bank’s medium-term projections is that the reforms initiated in 2004-06 to return to a path of fiscal sustainability will be sustained, with revenue enhancement becoming the driving force for further deficit reduction. Beginning in 2007, the higher tax effort would permit non-interest public sector spending to increase as a share of GDP, even as both the national government and consolidated public sector accounts move towards balance in the medium term. The CPSD path outlined in Table 3 implies the maintenance of a primary surplus averaging slightly over 4 percent of GDP through 2010. In this scenario, public debt would fall to 60 percent of GDP by 2010 and public sector interest payments would decline from 6.4 percent of GDP in 2005 to about 4 percent by 2010. The fiscal space afforded by higher
Recent surveys suggest increased optimism among private companies and investors; e.g., a recent survey by the Philippines Chamber of Commerce indicated that more than half its membership intended to expand their business in 2006. 13 revenues and lower interest payments would permit increases in public sector spending, including for investment. With easing investor concerns about fiscal sustainability derived from a falling public debt ratio, private investment shares would begin to increase, helping to boost average GDP growth to average about 6 percent during 2007-10.
Table 3: Medium-Term Macroeconomic Framework
2004 2005 2006 2007 2008 2009 2010
GDP growth (percent change) 6.2 5.0 5.5 5.7 5.9 6.2 6.4 CPI inflation (average, %) 6.0 7.6 6.7 5.0 4.2 3.5 3.5
(Percent of GDP) Gross domestic investment 16.8 15.1 15.2 15.8 16.6 17.5 18.2 Gross national savings 18.7 17.4 17.6 17.6 18.0 18.5 19.2 Tax revenue 1/ 12.3 13.0 14.2 14.7 15.1 15.5 15.8 National Government balance -3.8 -2.7 -1.8 -1.1 -0.5 -0.2 0.0 Consolidated public sector balance -4.8 -1.8 -1.8 -1.4 -0.9 -0.5 -0.2 Non-financial public sector debt 95 87 80 74 69 65 60 Current account balance 1.9 2.4 2.4 1.8 1.4 1.0 1.0
Source: GOP, IMF, World Bank
11 Beginning 2005, tax revenue includes non-cash collections equivalent to 0.4% of GDP in 2005.
35. This framework is slightly more conservative than the government’s own medium-term targets, particularly with respect to the tax effort, deficit reduction and economic growth. As a result, government projections also assume a somewhat faster public debt reduction path. 111. The Government’s Reform Agenda
36. Shortly after the second Arroyo Administration took office, it issued the government’s 2004- 20 10 Medium-Term Philippine Development Plan (MTPDP). The overarching objective of the government’s policy agenda, as articulated in the MTPDP and a number of subsequent statements: is to create jobs and reduce poverty at a faster rate than has been possible in the past. This is to be attained through higher economic growth led by the private sector and more effective government service delivery. To promote higher private investment and growth, fiscal policy would be fundamentally adjusted to substantially reduce public debt and assuage investor concerns about fiscal sustainability. Reducing infrastructure bottlenecks and promoting private investment through improvements in the investment climate and more effective public private partnerships are also considered vital elements of the strategy to increase private investment. More effective delivery of government services is to be achieved by reducing inefficiencies and corruption and by allocating more resources to those programs that are demonstrated to be effective in improving human development or reducing poverty. The thrust of the anti-corruption program would focus on strengthening financial management and fiduciary oversight and reducing tax evasion.
See, for instance: the Millennium Development Goals Report; government presentations at the Philippines Development Forum (PDF) in March and August, 2006; the State of the Nation Address (SONA) in July 2006, and the President’s budget message (submitted to Congress alongside the proposed FY 2007 budget) in September 2006. 14 (i) Fiscal Consolidation
37. To restore fiscal sustainability, the MTPDP proposed to balance the budget and reduce the CPSD to one percent of GDP by 2010. Following the larger than targeted fiscal adjustment in 2005, the targeted date for balancing both the NG budget and the CPSD was brought forward to 2008. Balancing the public sector deficit is to be achieved through tax reform and administrative improvements, expenditure restraint, and improving the performance of the GOCCs, most notably in the power sector. As deficits and debt are reduced, interest payments would also decline in real terms and constitute a falling proportion of budgetary outlays, creating the space for more productive government spending.
38. The government’s emerging fiscal program assumes tax revenue increases from 13 percent of GDP in 2005 to 16.2 percent in 2010. Major legislative measures that have already been implemented in support of this objective include increases in excise taxes, the reform of the VAT, and the institutionalization of an attrition system to strengthen incentives of tax collectors. To augment these measures, the government is considering a reform of its investment incentive regime to reduce losses to revenue while preserving the country’s export competitiveness and attractiveness as an investment destination. Legislation to rationalize and consolidate fiscal incentives is under discussion in Congress. The proposed legislation is an important step in reigning in tax preferences, tax holidays and other fiscal incentives. The proposed changes would make incentives more sector and investor neutral and performance-based. The bill also aims to consolidate and tighten jurisdiction and oversight over granting and administration of incentives. Sustaining the revenue effort will also require periodic adjustments in user fees and charges to ensure adequate cost- recovery and efficient utilization of resources.
39. The government recognizes that further improvements in tax administration that focus on intensified collection efficiency through concerted actions to reduce tax evasion by corporations and individuals and to improve governance in the BIR and BOC will be needed to continue to raise the tax effort as targeted. Anti-corruption efforts have focused especially on these agencies because of the high incidence of alleged corruption in them, and the importance of improving revenue performance. The BIR and the BOC have instituted special programs to pursue tax evaders, and have introduced a series of institutional reforms to improve the integrity of their management.
40. Following significant restructuring and privatization in the late 1980s and 1990s, a core group of GOCCs remain under public sector control. The government is considering options to design more appropriate accountability mechanisms to strengthen GOCC performance, for example, through explicit performance contracts with each GOCC, though information constraints inhibit rapid progress in this area.
41. In the power sector, the initiation of a universal charge for the recovery of stranded costs and stranded debt of the NPC, and accelerating privatization of generation capacity and the sale of the transmission company are high on the government agenda and integral to fulfilling the intent of the Electric Power Industry Reform Act (EPIRA) (Section V contains a fuller discussion of the power sector reform agenda).
42. The government recognizes that pursuing its objective of balancing the budget must be accompanied by protecting vital expenditures from further cuts while enhancing budget processes to improve spending effectiveness. Primary spending is thus targeted to rise in the 2007 proposed
15 budget by about 12 percent in nominal terms over programmed 2006 primary spending; and in the context of this increase, spending on social services is targeted to rise (from 27 percent of the budget in 2005 to over 29 percent in 2007), and capital outlays are slated to grow (from below 7 percent of the budget in 2005 to nearly 10 percent in 2007). This shift is to be facilitated by the VAT reform, which took explicit account of the need to raise spending in priority areas, targeting 30 percent of its net yield to finance higher spending on social services and infrastructure (to rise to 50 percent by 20 10).
43. Upon continued reduction of the public debt ratio, the government intends to articulate its debt management strategy which implicitly has been following the objectives of lengthening the maturity structure of both domestic and foreign debt, tilting new borrowing towards local currency and official financing instruments, although commercial borrowing in global capital markets will remain an important source of finance in the medium term. Establishing an integrated debt and risk management unit that can monitor and analyze all aspects of public sector debt and contingent liability management is an important objective of the strategy.
Improving the Tax Effort
44. By 2004, the tax/GDP ratio had fallen to 12.3 percent from 17 percent in 1997. The President declared a fiscal crisis and laid out a set of measures to address the situation. Through a combination of recently implemented tax policy measures and ongoing improvements in tax administration, the tax effort increased by 0.3 percent of GDP in 2005, and is expected by government to increase by about 1.5 percent of GDP in 2006, to be followed by further increases in subsequent years.
45. The centerpiece of the 2004-05 tax policy reform was the passage of the reformed value- added tax (RVAT) law. Its main elements were the removal of many prevailing exemptions from the VAT in November 2005, of which oil and power, legal and medical services are the biggest components, and an increase in the VAT rate from 10 to 12 percent effective from February 2006. Mitigating measures to protect the poor eliminated excises on kerosene and reduced excises on diesel (Section VI).
46. An increase in corporate income tax rate from 32 percent to 35 percent, effective from 2006, was also enacted in conjunction with the RVAT, while the “Sin Tax” law, raising excise taxes on cigarettes, tobacco and alcohol by an average of 30 percent, was passed in late 2004 and effective from 2005. As previously indicated, the results through August 2006 have been very encouraging. The following figures decompose the growth of tax revenue in the first half of 2006 across tax categories.
16 Figure 3: Growth in BIR VAT Collection through July 2006
Value-Added Taxes j 20000 1 (Millions of Pesos)
15000 10000
5000 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Source BIR
Figure 4: Growth in Total BIR Collections through July 2006
First Seven Months YOY Growth
Personal income Corporate income Percentage VAT Excise BIR
-10.0 30.0 70.0 I Percentage 1 Source: BIR
Tax Administration
47. The government recognizes that improvements in tax administration will be needed on an ongoing basis to reach its medium-term objective of increasing the tax/GDP ratio to 16.2 percent by 2010 from 13 percent in 2005. To that end, a high level tax reform administration group has been appointed to oversee the reform agenda; task forces have been formed and have convened to discuss reform strategy and priorities, resulting in a work plan which coordinates all BIR and stakeholder efforts. The BIR’s reform group intends to focus on the following areas in 2007:
Increase the number of corporate, business and individual taxpayers in the Registry. BIR estimates significant under-registration in each of these categories, and aims to increase the registration effort as a priority for strengthening collections.
Increase the quality of audits and collections by cleaning up the Taxpayer Registry. The taxpayer register is corrupted with registrations of businesses that have long ceased to operate and people who have died or left the country. Some taxpayers have also obtained
17 multiple registrations, either fraudulently or in error. Gaining access to accurate and complete data is thus also a priority for the BIR, for both collections and taxpayer auditing.
Improve auditing through risk-based selection of cases and enhanced enforcement. No national audit plan for 2005 was issued from BIR headquarters, without which the BIR cannot ensure that major compliance risks are being addressed. Audit coverage will therefore be increased, and the selection of audit cases carried out based on risk principles, necessary to identify which refund claims should be audited and in what depth.
Increase the amount of arrears collected by 1.5 billion pesos per year. Because of Shortcomings in the BIR’s processing of returns has increased the number of stop filers, and the arrears inventory. BIR intends to identify, process, and pursue in a systematic way those taxpayers that have not filed returns or have not paid taxes.
Expand the RATE program. The Run After Tax Evaders (RATE) program has had a number of successes in identifying and prosecuting well-known figures in the Philippines, and publicizing these successes has had a positive impact on BIR’s image. The program will thus be expanded and the number of cases tripled.
48. The Bureau of Customs also intends to carry out preparatory activities for the implementation of more systematic reform, preceded by establishing a similar Reform Group to prepare a detailed reform work plan.
(ii) Strengthening Public Sector Governance
49. The government’s program to improve governance and reduce corruption, as articulated in the MTPDP and at the Philippine Development Forum, focuses on measures to improve the management of public resources, improve accountability and oversight, and fight corruption. Specifically, the reform agenda includes the following categories: (a) improvement in public expenditure management; (b) strengthening of performance management, improving service delivery, and civil service reform; (c) implementation of the procurement reform; and (d) anti- corruption enforcement and corruption prevention.
Public Expenditure Management Reform
50. The government has launched a set of reforms to strengthen its public expenditure management and to contain corruption. The primary reform consists of the introduction of a medium-term framework in budgeting in order to align budget allocations more explicitly to the government’s own policy priorities and to increase transparency. So far the reform agenda has focused mainly on strengthening budget formulation, although specific progress in budget execution has also been registered, such as in the use of an electronic accounting system (eNGAS).
51. Within public expenditure management reform, the government has made important progress since last year when the 2007 budget proposal was prepared with strong emphasis on clarifying policy priorities within a medium-term expenditure framework (MTEF). The Department of Budget and Management (DBM) prepared departmental forward estimates of the costs of the existing set of policies and programs in order to calculate “allocable” budgetary resources-that portion of the budget which is still available after funding the government’s ongoing commitments.
18 52. To improve the alignment of policies with resource allocations for the 2007 budget, DBM submitted a paper on budget strategy to seek the President’s guidance on how to allocate the “allocable” budget in line with the Government’s overall policy priorities. As a result, the Government’s 2007 budget proposal includes spending increases in priority areas such as infrastructure, basic education, national health insurance (PhilHealth), and civil service reform. In parallel to the DBM-led efforts at developing policy-based budget formulation, the Departments of Education (DepEd) and Health (DOH) each prepared a medium-term sectoral spending plan on the basis of their respective medium-term sectoral strategies.
53. In future iterations of the MTEF process, government intends to continue refining the existing sectoral spending plans, particularly for DepEd and DOH, and encourage other departments, such as Agriculture and Public Works and Highways to develop similar plans. The number of line departments with sectoral strategies and medium-term spending plans is expected to increase over time as the government gradually expands its capacity for sectoral expenditure planning. Continuation of these annual exercises is expected to lead to better allocation of budgetary resources, including an increase in the share of discretionary items: maintenance, operations and other expenditures (MOOE) and capital spending. To facilitate this process in the infrastructure agencies, the government intends to develop formal guidelines for the preparation and appraisal of infrastructure projects to be reviewed by the NEDA Infrastructure Committee and Investment Coordination Committee. The guidelines will incorporate improved methodologies for assessing project feasibility and costing parameters.
54. A major priority is to improve transparency and thus reduce the scope for undue discretion in budget execution. To this end, the government has begun posting budget releases for priority projects and internal revenue allotments of Local Government Units on the DBM website. Over the medium term, detailed data on obligations and cash disbursements by project and by expense class will be disclosed ex post on DOH and DPWH websites on a quarterly basis for central office and regional offices with e-NGAS. As presented during the PDF, the government intends to increase the number of departments involved in enhanced disclosure of budget data by 2010.
55. These disclosure measures are all basic information that a well-functioning budget and financial management system should be capable of producing on a regular basis. The financial management system in the Philippines still lacks the capacity to produce such information on a systematic basis, and thus the government’s initial steps are relatively modest. A related action is the plan to improve the user-friendliness of budget documents. The current format is adequate for the purpose of budget appropriation, but is not sufficiently clear and easily understandable to outside observers such as civil society groups intent on monitoring the government budget. For the 2007 budget proposal, the government attached a companion volume on performance indicators for 20 national government departments (see the discussion on OPIF below), which report proposed budget allocations by departmental Major Final Outputs (MFOs). The government’s intention is to restructure the format of some of the departments to one that is more user-friendly, such as that which is based on the MFOs. Once this is done and the government starts reporting on budget execution by MFOs, the transparency in the sense of user-friendliness is expected to improve substantially.
56. As an additional step to support and consolidate the incipient budget transparency measures in the medium term, a government integrated financial management information system (GJFMIS) is expected to obviate the need for specific disclosures as all data from budget transactions should
19 become available on-line automatically; the design and implementation plan for this system will be developed in 2007 and it will be fully operational in selected national government agencies by 2009. Initial progress has been made in the use of electronic financial management systems in budget releases, accounting, and procurement; the eNGAS accounting module has been installed in 82 NGAs, 47 LGUs and 8 GOCCs. On the procurement front, Phase 1 of a computerized procurement system, PhilGEPS, has been launched featuring a Bid Board, Suppliers’ Registry and Price Catalogue to automate procurement.
57. The objectives of public expenditure reform can best be evaluated in the context of reform efforts in specific agencies. Over the past three years, DepEd, DOH and the Department of Social Welfare and Development (DSWD) have been pilot agencies for reforms directed at improving management of public expenditure, spanning financial management, procurement reform, performance-oriented budgeting, and medium-term fiscal planning. These agencies have plans to extend the breadth and depth of these reforms over the next three to five years.
58. Both the DepEd and the DOH have developed medium-term sector reform and development strategies and have produced medium-term sectoral expenditure plans aligned with their strategies for the next five years. Additionally, both sectors are working to align development support around their medium term reform plans and fiscal plans, in nascent sector wide approaches. DepEd’s Basic Education Sector Reform Agenda has the objective of improving quality and equity in learning outcomes in basic education, in pursuit of Education for All targets. Full implementation of the plan will require sustained increases in national government spending on education, combined with improved resource allocation and resource mobilization from LGUs. The health sector reform strategy of the DOH and Philippines Health Insurance Corporation (PHIC) is directed at improving access to essential health care for the poor and intensifying efforts to achieve priority public health goals, including reduction in maternal mortality and better control of tuberculosis, malaria and HIVIAIDs. This strategy requires sustained national government commitment to financing of the PHIC indigent program and the PHIC contributions of government employees, together with sustained increases in expenditure and more effective expenditure by LGUs and the PHIC social health insurance program.
59. Additionally, both DepEd and DOH have focused effort on improved budget formulation processes to achieve sectoral objectives. Already, in the past two years, the three social sectors departments have been to develop an organizational performance indicator framework (OPIF), mapped to the program structure of the departmental budgets, for monitoring progress in producing major outputs and achieving results. Over time, the plan is to use this and other performance information as a basis for strategic budget allocation decisions within a multi-year framework.
60. To track progress in the area of public expenditure management performance, including the extent to which the system enables achievement of fiscal discipline, strategic allocation of resources and efficient service delivery, the Government is undertaking a Public Expenditure and Financial Accountability (PEFA) assessment with the support of the World Bank and AusAid to guide the PFM reform strategy and focus. The PEFA assessment will provide the government with information on critical areas where progress is required to improve accountability.
20 Performance Management and Public Sector Delivery
61. Measures to improve budget allocations are accompanied by an initiative to clarify government agencies’ core missions. Twenty agencies have already finalized their agency logframe to identify their Major Final Outputs (MFOs) and related performance indicators. These have now been published as companion to the 2007 budget proposal submitted to Congress. DBM plans to expand the coverage of the OPIF exercises to other national government agencies (NGAs) by the 2008 budget preparation cycle, eventually covering about 75 percent of NGAs by 2009.
62. The DSWD, DepEd and DOH have been pilot agencies for the use of output and performance indicators in the budget process, and for initiatives to link organizational performance indicators to a performance framework for its managers. The articulation of a social welfare and protection reform strategy and development of medium-term fiscal planning is, however, at an earlier stage in the DSWD and related social and food assistance programs. But DSWD plans to conduct a review of social assistance programs, and draw on this to review resource allocation and develop a sectoral MTEF in the time frame for preparation of the 2008 budget. DSWD also plans to develop policies and implementation plans for improving the methods for identifying the poor and targeting social programs effectively to poor families, in coordination with other social sectors agencies.
63. Civil Service Reform and Rationalization. In 2004, government issued the Executive Order No. 366 to initiate an ambitious program of government rationalization. Under this program, each executive agency is mandated to carry out a detailed review of their core functions, organizational structure and staffing needs. Progress has been slow, however, and as of August 2006, only a few agencies have had their rationalization plans approved by DBM, a required step for the implementation of the plan.
64. The rationalization program was intended to be accompanied by a revision to the existing salary and compensation scheme and job classification. One of the oft-repeated complaints about the incentive environment of the public sector in the Philippines is that its pay policy fails to motivate senior technical staff. To address this problem, the government has prepared a new compensation structure with a decompressed wage structure and a new job classification scheme, as a basis for the new Salary Standardization Law (SSL3). If approved as proposed, the SSL would make working in the public sector more attractive, and could have a beneficial effect of reducing attrition of experienced senior technical staff. The government recognizes that for this reform to have stronger effects on performance of government agencies, other complementary reforms such as the pending proposal to rationalize staffing and the organizational structure of the NGAs wil be needed. Likewise, the government, through the Civil Service Commission, has been developing a new Human Resource Management Information System (HRMIS) in order to establish better control over the level and the distribution of public sector staff. This system has been completed and is ready for roll out to the regions.
Procurement Reform
65. The most visible progress thus far has been in the area of procurement reform. The passage of the landmark 2003 procurement law (Republic Act 9184) mandated all government agencies, including GOCCs and LGUs to post procurement opportunities in the government’s electronic procurement system (PhilGEPS) thereby increasing transparency and creating a single source of
21 public procurement opportunities. In specific sectoral instances, civil society groups have organized themselves to monitor and scrutinize procurement and delivery of procured goods, such as for medicines and textbooks.
66. In its effort to ensure transparency, accountability and efficiency in the procurement and delivery of textbooks, the DepEd organized the Textbook Count as a program involving the participation of Civil Society Organizations (CSOs) in the complete procurement cycle for textbooks from bid opening to final deliveries. CSOs such as the G-Watch, NAMFREL, Parents- Teachers-Community Associations (PTCA), Boy Scouts were involved in the actual delivery, inspection, and acceptance of textbooks. DepEd also has a system of joint monitoring of school buildings: inspection reports are co-signed by DepEd, DPWH, development partners, and CSOs. The progress they have made in complying with the more transparent, competitive requirements of the new law has been recognized in benchmarking exercises, corruption perception surveys and in reviews by development agencies. In DepEd, improvement in the textbook: pupil ratio to 1:1.2 in core subjects, improvement in physical quality, and significant cost savings (over 50 percent reduction in costs) were realized through increased competition.
67. NAMFREL has been involved in monitoring medicine procurement in the DOH for over a year. In the last year, DOH has undertaken a diagnostic study of vulnerability to corruption in the pharmaceutical supply chain, jointly with the WHO. It has recently entered into an agreement with Procurement Watch to implement a corruption measurement methodology called the “Differential Efficiency Expenditure Management Tool”, which benchmarks expenditure on certain items and will be piloted at a DOHhospital.
68. Full implementation of the Act would significantly enhance the ability of both oversight bodies and civil society groups to monitor the probity in government procurement processes in particular through the disclosure of pertinent information in PhilGEP and the compliance of agencies with RA requirements. Consistent with this, the Technical Support Office of the GPPB will produce quarterly compliance reports, and government will develop an on-line monitoring system accessible to the general public. At the sectoral level, departments are expected to pursue sector-specific efforts to tighten their procurement processes, such as regular DOHmonitoring of its CHD and hospital procurement. Public disclosure would be made by DOHof prices paid for drugs, disaggregated by procurement unit and by source of finance in 2007; a progressive roll-out to DOH hospitals would be complete by 2010.
69. Through these measures to enhance transparency and implement other related provisions of RA9184, the ongoing procurement reform is expected to reduce opportunities and incentives for corruption and augment the government’s ability to deliver public services and goods. The related provisions include: simplification of pre-qualification procedures and strengthening of post- qualification process, to circumscribe the discretion of officials on bids and awards; protection for procurement officials from unjust legal suits arising from the performance of their duties; and the imposition of criminal and liabilities for those found guilty of collusion and other anomalies.
Anti-corruption
70. To tackle weaknesses in governance and corruption, the MTPDP laid out a multi-pronged agenda: (i)punitive measures that include effective enforcement of anti-corruption laws; (ii) preventive measures that include the strengthening of anti-corruption laws, strengthening of
22 financial accountability and improvements to integrity systems; (iii)zero tolerance for corruption; and (iv) implementation of reforms that improve transparency, accountability and participation in the governance processes. These objectives are to be pursued in conjunction with minimizing waste in the use of government resources, improving accountability for results, cutting red tape, and fiduciary reforms to reduce corruption in government programs.
7 1. Anti-corruption (enforcement): Good governance reform with emphasis on transparent management of public resources would have beneficial effects on curbing corruption, as well as on improving government performance overall. Given the perception of widespread corruption in the Philippines, however, the government has launched specific initiatives to control corruption. The government’s anti-corruption enforcement actions have focused on life-style checks, strengthening the Ombudsman’s Office, prosecuting tax evaders and smugglers, and strengthening anti-corruption in the BIR and BOC.
72. Through the efforts of the Office of the President-Transparency Group, Department of Finance and members of the Inter-Agency Anti-Graft Coordinating Council (VLAGCC)~, the government began in 2003 the aggressive scrutiny of the lifestyle of government officials to gather evidence of graft and corruption. The lifestyle check is an investigative instrument to check whether the lifestyle of suspected government officials is commensurate to their income. Lifestyle checks and anti-graft units were formed in six agencies: Departments of Finance, Agrarian Reform, Health, Public Works and Highways, Environment and Natural Resources, and Education. The Office of the President and Office of the Ombudsman will primarily conduct the lifestyle checks, with OP focusing on the officials and personnel of BIR and BOC (RIPS), while the OMB will concentrate on all other government officials with salary grade 26 and higher. 43 RIPS cases have been filed thus far.
73. The Office of the Ombudsman has been strengthened to investigate and prosecute corruption cases in the Corruption Court (Sandiganbayan). The Office saw an increase in budget and the number of field investigators and prosecutors, and a corresponding improvement in its conviction rate (from 24 percent in 2004 to 33 percent in 2005).7 The Office has collaborated with the Commission on Audit (COA) and the Civil Service Commission (CSC) to ensure efficient coordination of anti-corruption actions by these agencies in areas related to financial management (COA) and personnel management (CSC). COA, for its part, has issued guidelines to clarify and tighten rules regarding management of cash advances and other expenditures that may be considered unnecessary or excessive.
74. As the Arroyo administration prioritized fiscal reforms, the DOF, BIR and BOC have developed complementary anti-corruption initiatives to go after tax evaders (Run After Tax Evaders, RATE) and smugglers (Run After The Smugglers, RATS). RATE, for example, seeks to investigate criminal violations of the National Internal Revenue Code of 1997 and prosecute criminal cases that will generate the maximum deterrent effect, enhance voluntary compliance, and
The IAAGCC is composed of anti-graft bodies such as the Office of the Ombudsman, PAGC, Commission on Audit, Civil Service Commission, Department of Justice, and the National Bureau of Investigation. The Lifestyle Check Coalition, involving other line agencies, nongovernment organizations and civil society groups such as CBCP-NASSA, TAN, PGEA, NACPU, NYC, etc. was later organized. ’ These achievements notwithstanding, both the Office of the Ombudsman itself and some external observers point out that resource insufficiency limits its ability to expand its operations and bring about more visible and significant impacts on reducing corruption in the public sector. 23 promote public confidence in the tax system. At the onset, RATE targeted prominent individuals and corporations to send the message that the government is serious in reducing tax leakages. RATS was initiated by the Bureau of Customs in May 2005, although the achievements so far have been more limited. 65 RATE cases and 16 RATS cases, including against prominent public figures, have been filed under these programs, although many have been reversed by the Department of Justice on the ground of insufficient evidence. To improve the preparation and handling of these cases, the DOJ and the BIR have created a joint task force; further training is planned for the three programs and for the Office of the Ombudsman.
75. The government’s anti-corruption efforts also prioritized the BIR and the BOC because of the high incidence of corruption involving these agencies, and the importance of improving revenue performance in the Philippines. The BR and the BOC have instituted special programs introduced a series of institutional reforms to improve the integrity of their management.
76. Anti-corruption (prevention): The government’s anti-corruption strategy does not rest solely on investigation and prosecution of corrupt officials. Government bodies responsible for ensuring public sector probity have developed programs to reduce NGA vulnerability to corruption. The programs include the Integrity Development Reviews (IDRs), in-depth institutional diagnostic of specific government agencies to assess the degree to which they have adequate rules and procedures to prevent corruption and identify points of vulnerabilities specific to each agency. The IDR process is led by the Office of the Ombudsman, and five agencies (BOC, BIR, LTO, DPWH, and LTO) have already completed their IDRs. The Government expects to complete 11 more IDRs within about a year, and start implementing IDR recommendations in the first five agencies. The transparency of all probity programs will be facilitated by assuring public access; COA is already publishing its audit reports on its website.
(iii) Improving the Investment Climate and Infrastructure
77. The Government’s strategy for strengthening infrastructure rests on two pillars: (i) increasing public investment in infrastructure financed from the proceeds of improved tax policy and administration, i.e., within the proscribed fiscal envelope; and (ii)encouraging greater private investment by streamlining procedures, rationalizing investment incentives, strengthening the framework for public-private partnerships, and strengthening the banking system and the capital market. In her 2006 SONA address, the President highlighted the need for a global competitiveness strategy that would keep labor and electricity costs competitive, modernize infrastructure at least cost; mobilize, upgrade and disseminate knowledge and technologies, and reduce red tape to cut business costs.
78. The core of the strategy is to generate higher investment in infrastructure. At a PDF presentation in August 2006, NEDA indicated that the Government is targeting total infrastructure investment of P1.7 trillion during 2006-10, representing a substantial increase in real terms relative to the previous four year period.
79. In this context, high priority infrastructure projects have been identified. The line agencies are focusing their efforts on a few high priority projects and the main stakeholders within the administration plan to join forces to ensure high quality preparation of those projects. NEDA as the planning agency of the Government is completing the process of identifying 10 high-impact, well- prepared and implementation-ready projects.
24 80. Public-private partnerships (PPP) in infrastructure are being strengthened at the policy and transaction levels. While the Philippines was a pioneer in infrastructure PPPs, flaws in design, bidding and financing caused these to languish and have added to the government's contingent liabilities. The government is now aiming for a paradigm shift. Over half the projects in the pipeline are slated to have a private finance and private participation component compared to only 4 percent of committed or ongoing projects. Further, at least 22% of financing is targeted from private financiers. Under the aegis of the PDF the government is working with the private sector and development partners in modifying BOT laws to clarify the concessions, public guarantee and public subsidy policy framework with regard to the infrastructure sector. These reforms are aimed at assuaging concerns of private operators and financiers about policy risks and the ability of the government to deliver on its commitments while simultaneously keeping contingent liabilities manageable. The development of a few successful model public-private projects, with appropriate risk mitigation features combined with transparent and competitive award processes, would send a very positive signal to the private infrastructure community and could substantially increase the interest of private investors in infrastructure projects in the Philippines.
8 1. The government has implemented measures aimed at strengthening the PPP framework. The Implementing Rules and Regulations of the BOT Law have been revised. One substantial change in the BOT IRR is that project approval has been streamlined. Previously, a project had to undergo two approval stages, which was a major source of delay: in both stages-project approval and draft contract approval-depending on the amount, approval would have to be sought from the ICC or NEDA Board. There is now only a single pass to expedite project approval. Also, in the new BOT IRR, the "contract re-opener" clause was removed thus eliminating a major source of delay in implementation. Over the medium term, the government is developing a clear policy framework with procedures and institutional jurisdiction relating to use of government credit enhancementdfinancial participation in public-private infrastructure projects. Government support in the form of subsidies or guarantees would only be made available to competitively bid projects.
82. Public investment in transport is being increased and private participation promoted. The transport sector accounts for 52% of targeted investment during 2006-2010. This decision will compensate for past chronic under-investment-expenditures on the road networks fell to a low in 2001 and were inadequate to maintain the existing network. The government has since increased funds allocated to road maintenance due to rising contributions from road users in a Special Road Fund. But these are still only about one third of the estimated needs, and plans for achieving full cost recovery have been lagging. Private sector investment has declined in recent years due to an uncertain investment climate, a poor legal environment, and numerous land acquisition problems. The government is taking measures to make the road sector more hospitable for private investment. For example, it is increasingly contracting out road maintenance to the private sector, whereby their shares would grow from 50% in 2005, to 70% in 2007 and 100% by the end of 2009. By doing this the road construction industry would become more financially viable and the market would become less dependent on the market dominance of a few suppliers, thereby promoting competition and the delivery of better quality.
* Inadequate transport infrastructure, especially roads, is perceived as a serious constraint to investment and growth. Roads and inter-island shipping account for almost all freight and passenger traffic. High levels of congestion, the poor condition of the road network, inadequate connectivity, and the lack of a sustainable road safety strategy reduce the efficiency of the road network. Intercity freight rates, for example, are more than 50% higher than in Thailand or Vietnam. 25 83. Improving the quality of infrastructure construction by developing the Constructor’s Peformance Evaluation System (CPES) is also an important objective. The current quality of infrastructure construction is a shared concern in the Philippines, and CPES is a system of grading the performance of a constructor for a specific kind of infrastructure project, using a standard criteria. The CPES guidelines are being developed further by an inter-agency group led by the Construction Authority of the Philippines (CIAP), and with the approval of the NEDA Infrastructure Committee (INFRACOM)
84. Digital Infrastructure is being strengthened. The IT enabled services sector is an unfolding success story. The sector has witnessed rapid growth with employment and exports increasing from 70,000 and about $0.5 billion in 2003 to 240,000 and $2.5 billion by mid 2006. To maintain momentum, the government has accelerated and rationalized the progressive development of a digital infrastructure to interconnect at affordable cost the entire country, with the private sector playing a major role in this effort. Under the Digital Connectivity Plan, all cities and provincial capitals attained access to the internet by 2005; lst, 2nd, 3rd Class Municipalities (about 30% of total municipalities) by 2007; and all 1,501 municipalities by 2010. The government has also launched the Philippine Cyber Services Corridor, an ICT belt stretching over 600 miles from Baguio City to Zamboanga to provide a variety of cyber services at par with global standards.
85. Investment Incentives are being rationalized to attract higher private investment. To increase the level of private investments the government has embarked on a substantive overhaul of the fiscal incentives regime. Besides lowering the fiscal burden of investment incentives the policy goals is to create a level playing field and attract investments from a broad spectrum of entrepreneurs and investors into all sectors of the economy. The process of granting, administration, monitoring and evaluation of incentives under the present system is being reviewed with a view to making it less complex and more transparent. The review process is also examining issues of multiple jurisdictions and embedding of incentives in sector specific laws leads that could bias incentives in favor of specific sectorshnvestors. Various line ministries are currently collaborating to arrive at a unified position on rationalization of investment incentives. Once this exercise is completed the government plans to work with the Congress in enactment of a new fiscal incentives regime that would reign in special incentives and make incentives more sector and investor neutral and performance-based.
86. Red Tape is being reduced. To encourage entry of new business players and entrepreneurs the government has initiated measures to lower costs of doing business by cutting red tape associated with securing government approvals. In 2005 the government issued an executive order directing government agencies, including government-owned and controlled corporations to further simplify rules and regulations and reduce reportorial requirements. An Anti-Red Tape Bill is currently under deliberation in Congress. The bill imposes time limits on approval of transactions and automatically grants extensions if no action is taken by the government agency. To facilitate this process the President also signed in July 2006 an EO establishing an anti-red tape task force. The government has also started using better bidding processes in public sector procurement to shorten the number of day’s necessary for contracting to 45 for infrastructure and 26 for supplies.
Financial Sector Reform
87. Regulatory policies are more responsive to the growing sophistication and globalization of the banking industry. The incentives for and the ability of banks to dispose and deal with non-
26 performing assets were improved through the implementation of the Special Purpose Vehicle Act which enabled a 19 percent reduction in the stock of non-performing assets. Better governance and disclosure has been pursued via mandatory application of the International Financial Reporting System (IFRS). The establishment of the Fixed Income Exchange has laid the foundations for a vibrant domestic debt market. In the short term, BSP will continue to issue supervisory guidance to banks for further reducing non-performing loans and fully migrating to risk-based capital adequacy framework under the Basle I1standardized approach with regard to credit and operational risks.
88. The medium-term strategy is to establish a strong and diversified financial system that lends more to the private sector, is able to provide greater amounts of long-term loans for private sector and infrastructure sector investments, and provides better access to financial services to all economic groups. The medium-term goal in the banking sector is to increase the share of loans to the private sector from the present share of 35 percent. In the capital markets, the medium-term goal is to increase the share of corporate debt issuances in total domestic debt issuances from the present share of about 5 percent. With regard to access to financial services, the medium-term goal is to increase credit flows to the urban and rural poor via microfinance and to also lower the transaction costs of overseas remittances. It is expected that: the share of non-performing loans in the banking system would be at low single digit levels (as a share of total loans) ; the coverage ratio for non-performing assets would have been raised significantly from the present low level of 40 percent, and the risk-based capital adequacy ratio would remain significantly higher than minimum requirements. It is expected that the reduction in financial system vulnerability would be accompanied, and driven, by better management of credit risk.
89. Anti-Money Laundering Measures have been tightened. The Anti-Money Laundering law criminalized money laundering and provided measures to be taken by the financial institutions and supervisory authorities to combat money laundering. These measures include making customer identification and record-keeping mandatory and introduction of a suspicious transaction reporting system. The Secretariat of the Anti-Money Laundering Council (AMLC), which functions as a financial intelligence unit, is tasked with facilitating detection and investigation of money- laundering offenses, information sharing between domestic and foreign authorities and guiding anti- money laundering measures taken by supervisory authorities. In February 2005, the Philippines was removed from the FATF’s Non-Cooperative Countries and Territories (NCCT) list. Recent FATF reports have indicated that Philippines is making progress towards improving implementation of the AML Act.
(iv) Improving Delivery of Social Services
90. The government’s social inclusion objectives include: (i) improving the access to and quality of social services; and (ii) poverty monitoring and targeting. With respect to the first objective, the Philippines is at risk of not meeting some key MDG targets. The constrained fiscal conditions and the relatively high rate of population growth have resulted in declining key indicators such as school completion rates. The Government has initiated reform strategies for basic education and health, directed at achieving the first of the above objectives.
91. The Government is committed to improving quality and access to basic education, reversing recent declines in performance. The proposed 2007 budget allocates substantial real increases to the DepED, compared to 2005, to increase provision for the public school system, increase the allocations for teacher recruitment, textbooks, school buildings and repair and maintenance of
27 schools, so as to widen coverage and improve quality, Alongside this increase, the Government is committed to improve further the management of operations of the public school system, and strengthen partnerships with LGUs, communities and the private sector. Over the medium term, the Department of Education will improve the quality of basic education, school completion and achievement rates.
92. In the health sector, the Government has adopted a sector reform strategy and implementation plans to increase equity, sustainability and quality in the health system, particularly in health services that are critical for the poor and critical for the achievement of the health-related MDGs (such as women’s and child services, and intensified disease control programs for tuberculosis, malaria, HIV/AIDS and other preventable illnesses). The proposed 2007 budget allocates real increases in resources for subsidies for the health insurance contributions to expand enrolment of poor families under the National Health Insurance Program (NHP),and for a program to widen the access of the poor to low-cost medicines through the Botika ng Barangay. The Department of Health, in collaboration with the Philippines Health Insurance Corporation and selected LGUs, will work to make increases in PhilHealth enrolment sustainable, and take measures to reduce exclusion of some poor and leakage to non-poor of the PhilHealth indigent program.
93. The Government is implementing these strategies through two sector program operations: the National Program Support for Basic Education Project and the National Sector Support for Health Reform Project. The implementation of these strategies will result in improving outcomes in the medium to longer term. By 2010, the Government expects to see improvement in results indictors, including improved elementary and secondary school cohort survival, childhood immunization rates, and tuberculosis case detection and cure. Successful implementation will require sustained real increases in public expenditure on health and education, accompanied by continued progress in strengthening governance and management of expenditure in the social sectors.
94. Although the Government’s policy agenda for social welfare and protection is at an earlier stage of development, DSWD plans to develop a social welfare and protection reform strategy, and a medium-term expenditure framework for social welfare, protection and development. The Government is encouraging LGUs to put in place building blocks for planning and monitoring local poverty reduction strategies, and for improving the targeting of services and programs for the poor. The Social Inclusion component of the reform program targets key building blocks for improvement in social protection and welfare services. DSWD plans to undertake a review of social expenditure for a range of social assistance programs, including cash and in-kind transfer programs, and plans to undertake impact assessment of some of its major anti-poverty programs, including the Self- Employment Assistance Kaunlaran (SEA-K) and the poverty-targeted KALAHI-CIDSS community-driven development program.
95. With respect to the goal of improving poverty monitoring and poverty targeting, the available data for local planning, monitoring and targeting pro-poor programs is limited, and national poverty statistics are not sufficiently disaggregated or timely. To address this gap, community-base poverty mapping is being utilized by over 10 percent of LGUs, and more are gearing up for implementation. There is broad agreement among national government agencies to standardize this methodology.
28 96. Government has adopted a range of policy issuances to promote adoptions by LGUs of a standardized community-based poverty monitoring system (CBMS), for local pro-poor planning, poverty profiling and monitoring, and program targeting. Local poverty mapping and monitoring is an important complement to the national poverty statistics, which are able to provide poverty measures disaggregated only to provincial level (or municipal level in the case of a small number of indicators). The National Anti-Poverty Commission, the Department of Interior and Local Government, the Social Development Committee of NEDA, and the National Statistical Coordination Board have endorsed a standardized and harmonized set of local poverty monitoring indicators and survey instruments for local poverty monitoring. A range of projects of national Government agencies, development partners and NGOs are supporting LGUs to implement CBMS. During the next three years, the government plans to support the scaling up of CBMS by LGUs. Additionally, the GOP will continue to carry out capacity building activities to promote a better understanding and use of the tool, and better understanding and use of national poverty statistics. The Government anticipates that about half of LGUs will be using local poverty mapping in 2009 for local planning, monitoring and for improving poverty targeting of geographically targeted programs and expenditures.
Summary of the Broader Development Agenda
97. The foregoing describes the specific areas of the government’s program to be supported by the proposed DPL series. Table 4 below outlines the broader objectives of the government’s development agenda as presented to the Philippines Development Forum (PDF) in August 2006. The PDF evolved from the Consultative Group, and is the primary mechanism of the government for facilitating policy dialogue amongst external stakeholders of the country’s development agenda.
Table 4: Philippine Development Forum Action Plan (! immary of Government Presentations during PDF wrap-up session) Sector / Cluster Proposed action plan Economic and Improve tax effort by 1.4 percent of GDP in 2006 Fiscal Reforms Achieve a deficit of not more than P125 billion or 2.1 percent of GDP for 2006 Achieve balance budget by 2008 for NG and budget surplus for CPSD by 2008 Sustain improvements in tax administration Accelerate reforms in the power sector Passage of the following revenue bills: consolidated fiscal incentives, simplified net income tax by end 2006 Adopt plans for better GOCC oversight
Governance and Governance Anti- Revive multi-year budgeting system for 2007 budget (medium-term fiscal and corruption expenditure planning in 2007) Develop integrated government financial management and information system Completion of the government e-procurement system (GEPS) and compliance monitoring Complete the rationalization program and review and revise the compensation scheme Passage of the fiscal responsibility bill Anti-corruption Develop performance indicators and monitoring mechanisms to objectively
29 measure results of anti-corruption reforms Develop comprehensive communication plans to inform public on gains and benefits of anti-corruption initiatives Promote accountability and sustain capacity building through active participation of CSOs/NGOs/local institutions Mainstream and operationalize the National Anti-Corruption Plan of Action (NACPA) process
Infrastructure 0 Upgrade transport, tourism, and digital infrastructure Enhance communication strategy on government infrastructure programs Enhance preparation, financing and credit in projects Increase infrastructure to GDP spending from 2.2 percent to 4-5 percent Develop and adopt clear guidelines for infrastructure project financing
Investment 0 Coordinate with national line departments for a unified position on rationalization Climate of fiscal incentives Secure passage of rationalization of fiscal incentives bill Pursue energy independence and competitive power rates
~ SMEs Develop communication plan to inform LGUs on best practices and benefits of formalization of informal businesses Millennium Advocate for a stronger national population management policyflegislation and Development program Goals and Adopt a multi-year budgeting framework starting 2007 for the social sector Social Progress Secure additional revenues from fiscal reforms and savings from debt servicing to benefit social programs Scale up community-based monitoring system (CBMS) Strengthen coordination and harmonization of sector-wide approaches and adoption of harmonized gender and development (GAD) guidelines Address human resource development and management challenges across social sectors in a concerted manner
Rural Harmonize programs of DA, DAR, and DENR Development Harmonize national government initiatives with LGUs Promotion of income diversification or income-enhancing activities
Mindanao Increase social mobilization activities Develop multi-year funding for projects in Mindanao Design a workable disarmament/decomrnissioningprogram with donor community support and LGU involvement Conduct of environmental mapping especially in conflict areas Increase support to basic services, peace building effort, social protection and institutional strengthening
Adopt and implement common framework for LGU financing; strengthen BLGF Decentralization Develop strategy to harmonize capacity building programs in LGUs in the areas of and Local financial management, expenditure allocation, revenue generation, investment Government program and project development Implement mechanisms for enhancing information sharing among stakeholders Support full implementation, supervision and enhancement of local government 30 performance monitoring system (LGPMS) and local government financial performance monitoring system (LGFPMS) Implement agreements or action plans for further devolution in agriculture, environment , and natural resources. Review and revise the Local Government Code of 1991 and IRA formula
IV. Bank Support to the Government’s Program
A. Links to the CAS
98. The Bank Group CAS for 2006-08, discussed at the Board in May 2005, seeks to help the government improve public institutions and services and thus help the country achieve higher and sustained growth coupled with greater social inclusion. Within this objective, the Bank aims to support recognized and replicable successes in delivering public services. It also identifies two important levers for pursuing these goals: fiscal consolidation and improved governance. The strategy applies key lessons that have emerged from the Bank’s past engagement and from stakeholder consultations: the need for less complex and more achievable reforms and closer alignment between Bank Group support and national budget priorities. This implies a shift away from financing discrete projects toward more programmatic engagement with selected key agencies and sectors, as well as development policy lending if warranted by fiscal adjustment and progress in implementing the Government’s reform agenda. The CAS program also aims to assist the government through advocacy, technical assistance and AAA to develop and implement programs aimed at increasing fiscal revenues. (See Annex 111 for further discussion of CAS objectives.)
99. The CAS identified weak fiscal performance as the single most important short-term obstacle to more rapid development in the Philippines. It therefore lays out criteria for development policy lending squarely focused on the extent of fiscal adjustment. Given the acute concerns at the time regarding fiscal sustainability and the low and declining tax effort, entry into the CAS high case, which was anticipated to include DPLs, would be triggered by a CPSD reduction of 2 percent of GDP relative to 2004, compatible with a CPSD reduction of 3 percent of GDP during 2005-07. A significant portion of such adjustment would have to originate from increases in the ratio of tax revenue to GDP. An ‘enhanced base case,’ which also could include DPLs (but with lower lending volumes) was framed in the same terms, but with a CPSD reduction of 1-1.25 percent of GDP, compatible with a 2 percent of GDP reduction during 2005-07.
100. Based on these triggers, the Philippines is now well ahead of the threshold defined for the enhanced base-case and eligible for development policy lending: the reduction of the CPSD in 2005 has already exceeded the relevant CAS trigger, and the decline in the NG deficit thus far in 2006 is consistent with a further drop in the CPSD this year. Available data indicate that the tax effort in 2006 will be about 1.5 percent of GDP higher than in 2004. In addition, significant adjustment of power tariffs has raised revenue from this source in 2005 by about 1 percent of GDP relative to 2004, in the process considerably improving the financial position of the power sector relative to 2004.
101. IBRD exposure in the Philippines has been decreasing as a result of negative net disbursements from the Bank over the last 11 years: TBRD exposure thus declined from a peak of $5.5 billion in FY95 to $2.9 billion at end FY06. The last eight years in particular saw fewer loans and no policy-based lending as the Bank’s lending program adapted to the country’s deteriorating 31 fiscal situation. Reflecting somewhat higher recent and projected investment lending commitments, annual disbursements from investment lending are projected to average $200 million over the next three years. But with principal repayments to IBRD averaging about $390 million during the same period, net disbursements would remain negative and exposure would continue to decline in the absence of policy-based lending. IBRD exposure satisfies current Bank guidelines, given also the Philippines heavy reliance on borrowing from global capital markets in recent years. An increase in financing from official sources to support the government’s reform program (with co-financing from development partners) would raise the share of such debt to about 30 percent of total debt outstanding during this period, in the process, lowering the average interest cost of public external debt. Total external debt is projected to fall from the present 60 percent of GDP to about 40 percent in 2009.
B. Relationship to Other Bank Operations
102. The proposed DPL would reinforce the objectives of a number of ongoing and planned Bank operations. In FY06, the Bank supported government efforts to strengthen the quality of social service delivery through approval of the National Program Support for Basic Education and the National Sector Support for Health Projects. The ADB, bilateral partners and UN agencies are coordinating their support for these reform strategies as part of steps towards development of Sector Wide Approaches. The Government and Bank are in discussion over a possible loan to support the Government’s efforts to strengthen tax administration in the BIR. This follows the provision of technical assistance to the BIR in coordination with other development partners.
103. The DPL draws heavily from the Bank’s analytical and advisory work. In particular, it relies on the joint IMF-WB report: Critical Priorities in Tax and Customs Administration Reforms, and on formal reports by the Bank such as From Short-Term Growth to Sustained Development (Development Policy Review); Meeting Infrastructure Challenges: Towards a Better Investment Climate; Public Expenditure, Procurement, and Financial Management Report; Philippines Environment Monitor. A new Public Expenditure Review (PER) and Country Procurement Assessment Report (CPAR) are under preparation, and, in this context, the Government is undertaking a PEFA assessment with the support of the World Bank and AusAid (para. 60). Finally, as indicated in paras. 168-169, the Bank, often in coordination with other development partners, is involved in a number of other initiatives to assist the Government in its efforts to strengthen public financial management and governance that would be reinforced by this operation.
C. Collaboration with the IMF and Other Development Partners
104. The Bank and Fund have collaborated closely in areas of common interest, and views on macroeconomic and structural policy priorities are closely aligned between the two institutions. In December 2005, a Bank-Fund mission provided advice to the DOF, BIR and BOC on strengthening tax administration, and collaboration on this topic has continued since then, in coordination also with the ADB and USAID.
105. Since the expiration of the last IMF Stand-by Program in December 2000, the Government has maintained a post-program monitoring (PPM) arrangement with the IMF, even after its obligations to the Fund dropped below 100 percent of quota, though this arrangement is expected to expire in 2007. The recent IMF mission (July-August, 2006) found fiscal and monetary polices to 32 be compatible with the Government’s macroeconomic framework. Its report was discussed at the IMF Board in October, and the Public Information Note from this Board meeting is attached in Annex V.
106. The Asian Development Bank (ADB) and the Japan Bank for International Cooperation (JBIC) intend to proceed with parallel DPL operations, and have participated in the discussions with the Bank and Philippine authorities regarding the policy reforms to be supported by the DPL. The DPL complements concurrent ADB and JBIC energy and infrastructure loans by supporting high level policy issues in these sectors. The World Bank team has worked closely with the ADB in the preparation of its energy sector policy loan, and with the JBIC in the preparation of its infrastructure policy loan. ADB is also considering a policy loan for capital market development. Other development partners such as Australia have expressed interest in joining the DPL, possibly through grant support for the implementation of the government’s reforms discussed in the context of this DPL.
D. Lessons Learned
107. The proposed DPL would be the first policy-based budget support operation in eight years. Key lessons from past operations include:
Support for a track record of achievements. Past reform programs have often been overly ambitious and lacked consistent implementation over time. Given this experience, this DPL has not been processed earlier and is proposed only at this time, two years after reform commitments were made and were followed by a track record of consistent implementation. The proposed DPLl is thus squarely focused on support for, and fully justified by, reforms achieved to date rather than commitments for future reforms. The latter will be supported by the next loans in this DPL series,
The importance of consensus building. Bank staff and development partners have been involved in a lengthy process of consensus building on the reform program with key government officials. Concerned officials have taken the lead in an iterative process of proposing reforms, taking into account comments from different departments (oversight and line agencies) and external partners, and then re-developing internal consensus. This process has allowed for stronger ownership of the reforms within the affected government departments than was typical for previous Bank adjustment lending.
Focus on actions that can be implemented by the executive branch. Past emphasis on enactment of legislation by Congress has been avoided. This improves the prospects for implementation, given the independence of the legislature in the Philippines. Moreover, legislative constraints are not the principle constraint to reform implementation, as much can be accomplished within the prevailing legislative framework, reflecting enactment of major legislative reforms in recent years across many of the areas of focus of the DPL series.
Preference for single tranche operations. Avoiding a multi-tranche loan is better suited to the Philippine political environment, and to preserve the strong dialogue between the Government and Bank across a range of development issues. While a notional annual cycle of DPL2 and DPL3 is envisaged, the quality of implementation of the overall reform 33 program, rather than financing considerations, will primarily guide the timing of subsequent DPLs. This process is facilitated since the Philippines has ready access to internal and global capital markets to meet its financing requirements.
V. The Proposed Operation
A. Objectives and Design
108. By the end of 2009, the outcomes expected from reforms supported under the series of DPLs would include:
Stronger growth and a more sustainable public sector financial position characterized by: a. Consolidated public sector deficit reduced to 0.5 percent of GDP from nearly 5 percent in 2004. b. Non-financial public sector debt reduced to 65 percent of GDP, from 95 percent in 2004. c. Tax effort increased to 15% percent of GDP, from 13 percent in 2005. d. Discretionary public spending increased to at least 6 percent of GDP from 4.1 percent in 2005. Transparency and efficiency promoted in key areas of expenditure management: in particular, financial management and procurement as measured by timely availability of budget execution and public contract process data. Perception of corruption reduced between 2006 and 2009 as seen in an improving trend of governance indicators, such as the World Bank Governance Indicators. Investment increased to about 17.5 percent of GDP from 15.1 percent in 2005. Satisfactory implementation of the Government’s program of improved service delivery in the social sectors, which includes targets of a. An increase of elementary cohort survival to 71 percent from 63.5 percent 2003-04 and high school cohort survival to 69 percent from 63 percent in 2003-04. b. An increase in coverage rate of fully immunized children to 87 percent from 80 percent in 2005.
109. In support of these outcomes the proposed DPL series would:
(i) First and foremost, support the Government’s commendable effofts to reduce public sector deficits and debt, and ensure these efforts are sustained and deepened in the medium term to reduce the Philippines’ vulnerability to shocks;
(ii) Support reforms that improve governance, the investment climate and social policy, which, coupled with sustained fiscal adjustment, would provide the basis for stronger private-led growth and a faster reduction in poverty than witnessed in the past.
110. DPLl supports the impressive recent adjustment to fiscal policy. Actions taken in the past two years had been singled out in previous Bank documents and dialogue with the government over an extended period as the key steps to overcoming the weaknesses in the Philippines policy environment. DPLl would thus support the government’s continuing efforts to strengthen public
34 finances by improving tax policy, tax administration, the financial position of the power sector, and progress with implementation of procurement reform.
111. A possible DPL2 would continue to support government efforts to improve tax administration, sustain improvements in overall fiscal balances, and public sector governance, for which the enabling environment would have been created in DPL1. Tax administration improvements, such as the introduction of clear performance management contracts and integrity enforcement, would strengthen confidence in the state’s ability to collect taxes more equitably and increase tax revenues. Governance reforms supported by DPL2 would include improving the quality and efficiency of public expenditure, enhancing transparency, and enhancing performance management and accountability for results. In addition, DPL2 would support specific efforts to strengthen the investment climate and infrastructure.
112. In addition to continuing support for implementing the above objectives, DPL3 could include support for more specific reforms in the social sectors aimed at enhancing service delivery and strengthening the investment climate and private sector-led growth. Triggers for DPL3 and possible further operations will be developed and extracted from the medium-term reform program (Annex 11) and presented in the DPL2 documentation.
113. The design of this DPL program takes into account the nature of the reform program and government capacity to implement it. To secure recent fiscal gains and bolster credibility of the government program, the prior actions for DPLl and the triggers for proceeding with DPL2 are framed primarily in terms of fiscal policy and administration. To the extent a wider reform agenda is supported through the DPL series, its rationale is to reinforce the core fiscal objective: by making public expenditures, particularly for social service delivery more effective; by enhancing the climate for investment and growth, which in turn would help to sustain the recovery in tax effort; and by generating wider public support for the reform program.
114. The Bank’s assessment, corroborated by the PDF, is that more direct and coordinated involvement by the development partners through advice and implementation assistance to the Philippine Government would improve the prospect that its reform program will be implemented as envisaged. A series of DPLs, coordinated (at this stage) with the ADB and JBIC, and disbursed on the basis of adequate progress on the reform path, provides an appropriate means for increasing the likelihood of sustainable progress along such a path.
B. Policy Actions supported by the DPL
115. The Government’s Letter of Development Policy (Annex I)and Policy Matrix (Annex 11) describe its medium-term reform agenda in the areas to be supported by the World Bank, ADB and JBIC in the context of the proposed DPL series, and reflect discussions between government officials and staff from the World Bank, ADB and JBIC. From this set of proposed reforms, Table 5 below lists the prior actions that have been selected as the basis for support provided through DPLl and the proposed triggers for proceeding with DPL2. This section describes the context in which these prior actions and proposed triggers have been framed.
35 (i)Macroeconomic and Fiscal Stability
Fiscal Consolidation
116. A central objective of the DPL series is to reduce the public debt burden to 65 percent of GDP by 2009 (and to 60 percent by the end of the decade) in order to reduce the interest burden, allow for increased primary spending in priority areas, and assuage investor concerns about fiscal sustainability.’ Reaching this objective would represent a major turnaround from the early years of this decade when public debt was rising rapidly, exceeding GDP by 2003, and generating intensifying concern about fiscal sustainability. Deficit reduction in the past two years has helped to lower the public debt burden, improving investor sentiment, and strengthening private capital inflows and financial market indicators in 2005-06, and the strong tax effort in 2006 has bolstered the prospect that the fiscal consolidation can be sustained.
117. As a prior action for DPL1, the CPSD was reduced from 4.8 percent of GDP in 2004 to 1.8 percent in 2005, primarily through expenditure restraint and power tariff adjustments, and secondarily through a 0.3 percent improvement in the tax effort. The NG deficiffGDP ratio was reduced from 3.8 percent in 2004 to 2.7 percent in 2005, and, based on data through September 2006, is on track to be reduced well below its 2.1 percent target for 2006: the NG deficit through September 2006 was P50.4 billion, less than half the deficit through September 2005, and versus a target of P125 billion for the full year 2006. The primary tools for deficit reduction in 2006 have been an increase in tax revenue (by 24 percent through September), primarily as a result of the implementation of the VAT reforms, accompanied by continued expenditure restraint within the NG budget. The reduction in the NG deficit thus far in 2006 is expected to be countered by an increase in the power sector deficit, and a reduction in the combined surplus of other agencies (social security institutions, government financial institutions, BSP and local governments), leaving the CPSD largely unchanged in 2006.
118. As a trigger for DPL 11, the CPSD/GDP ratio would be maintained at about 2 percent of GDP in 2006 and would be on track to be reduced to 1.4 percent in 2007. For 2007, the primary means of reducing the CPSD is a further strengthening of the tax effort, which, coupled with a lower interest/GDP ratio, would permit the NG deficit to decline even as primary spending is increased.
Tax Effort
119. The tax policy reforms implemented in 2005 and 2006 coupled with a sustained effort to improve tax administration are critical to the success of the fiscal and macroeconomic reform agenda. Accordingly, the prior actions for DPLl have been selected as:
VAT coverage broadened in November 2005; by removing exemptions on petroleum products, electric power and legal and medical services;
As indicated previously, the DPL targets are derived from the macroeconomic framework presented in Table 3 and are slightly more conservative than the government’s most recent fiscal targets. To the extent the government is able to attain its own more ambitious fiscal targets, this would be encouraged in the context of the DPL dialogue, and the macro framework underlying the DPL would be progressively adjusted. 36 0 The increase in the VAT rate from 10 percent to 12 percent effective from February 2006;
0 The establishment of a high level tax reform administration group in 2006 to oversee administration and the reform agenda; task forces have been formed and have convened to discuss reform strategy and priorities, resulting in a work plan which coordinates all BIR and stakeholder efforts; and
0 The significant response in terms of tax collection through September 200&up 24 percent from 2005, following a 0.3 percent of GDP increase in 2005.
120. The first two reforms above represent the core of the landmark RVAT legislation. The third recognizes the efforts that are being made to strengthen tax administration in Bk. The final prior action is in recognition of the first significant improvement in tax effort since the Asian crisis that has raised hopes for a sustained recovery in tax revenue and corresponding improvement of fiscal prospects. As a trigger for DPL2, the government has committed to increase the tax effort by 0.5 percent of GDP in 2007 mainly due to improved tax administration, further positive repercussions from the VAT reform, and improving excise tax performance. This follows a substantial increase in the 2006 tax effort, estimated at about 1 percent of GDP. If DPL2 is approved before the end of CY2007, this trigger would be evaluated on the basis of the most recently available data for 2007, and the vigor with which BIR efforts to improve tax administration have been pursued. On the administration front, a further trigger for DLP2 would be that the clean up and expansion of the large corporations and businesses in the BIR registration database is underway to improve the equity of the system and increase revenues.
GOCC Finances
121. Even as the national government deficit is being reduced, pressure of higher deficits originating from the GOCCs could arise, inter alia, on account of the difficulty in maintaining power tariffs (in real terms) after their substantial adjustment in 2004/05, and from possible pressures on GOCCs and GFIs to increase public investment in infrastructure. Hence in the context of fiscal consolidation, the dialogue under the program of DPLs is expected to focus increasingly on strengthening the financial performance of GOCCs, in particular the Power Sector Assets and Liabilities Management Corporation (PSALM), the holding company of NPC and Transco, and by far the single largest GOCC in the country." l1
122. Power sector reform. The Electric Power Industry Reform Act (EPIRA), enacted in 2003, provides a sound framework for the power sector structure, privatization, market arrangements and administration of stranded costs and stranded debt. But its implementation requires coordinated actions with a carefully planned timetable. While implementation has lagged behind the schedule envisaged under EPIRA, a significant milestone was reached in June 2006 with commencement of , the commercial operation of the Wholesale Electricity Spot Market (WESM), and adoption of a
The high cost structure of Philippine electricity provision has led to a perennial trade-off between fiscal and competitiveness concerns: despite charging amongst the highest power tariffs in East Asia, the power sector has traditionally generated significant deficits. 'I To the extent the government is able to strengthen the reform agenda in other GOCCs or other institutions that would contribute to bolstering public finances, these would be incorporated into the DPL series. 37 range of important associated risk mitigation measures. This follows substantial NPC tariff increases which were implemented carefully to minimize adverse effects on the poor through the use of subsidized “lifeline rates” (Section VI).
123. These steps have helped to demonstrate the commitment to reform, and will need to be bolstered by implementing the pending measures under the government’s remaining reform agenda. In particular, there are four interrelated, priority areas that require that will need to be addressed:’* (i)strengthening and sustaining the power sector’s financial viability; (ii)reducing risks and ensuring a smooth transition to competitive energy markets; (iii)enhancing efficiency and private sector investment in the sector; and (iv) ensuring security of supply.
124. Consolidated PSALM finances. In late 2004 and 2005, NPC’s effective average generation tariff was increased by about 30 percent, contributing to a reduction of NPC’s deficit by 1.1 percent of GDP. This adjustment is recognized as a prior action for DPL1. In addition, P200 billion of NPC’s debt was assumed by the national government at end-2004. As a result, consolidated PSALM’S deficit was reduced sharply to 0.2 percent of GDP in 2005 and the overall GOCC deficit fell to 0.4 percent of GDP (from 1.8 percent in 2004). However, NPC remains insolvent with a negative net worth and a significant debt overhang. PSALM’S current projection is to reach break-even (debt service coverage ratio (DSCR) to reach one time) by 2009. This will require timely and adequate remedial actions, without which the recent financial turnaround of Consolidated PSALM may not be sustained, undermining the objective of balancing the CPSD.
125. The authorities are developing a detailed action plan to restore and sustain the financial viability of Consolidated PSALM, including the following measures: (i)continued improvements in operational efficiency and in prioritization of pre-privatization capital expenditures by NPC and Transco; (ii)ERC publication of draft guidelines, for public consultation, for the filing of Universal Charge (UC) for stranded IPP contract cost and stranded debt, respectively; and implementation of the above UC by PSALM; (iii)appointment of the IPP Administrators (IPPAs); . this is an important step as it strengthens WESM by increasing the trading expertise available, and reduces the market and financial risks for NPC and PSALM from trading. Performance-based contracting of PSALM IPPs and NPC power generation to private expert traders would provide a legitimate proof that market revenues have been maximized, thus facilitating the approval and implementation of the UC; (v) mitigation of perceived risks by investors to achieve successful privatization and use of the resulting privatization proceeds to reduce borrowings; (vi) liability management, including refinancing debt on more favorable terms and hedge currency and fuel price exposure as appropriate; (vii) government reimbursement to NPCPSALM for non-power cost of multipurpose projects; and (viii) government commitment to undertaking appropriate budgetary assistance, as necessary, to help Consolidated PSALM achieve annual DSCR of at least one time starting end of CY 2009. Recent improvement in fiscal consolidation opens up opportunity for further debt relief for Consolidated PSALM to help restore the financial viability of the Corporation.
126. As a prior action, for DPL1:
ERC published-for public consultation-guidelines for universal charge (UC) for stranded costs and stranded debt respectively l2 Power sector reforms are being coordinated between ADB and the Bank. ADB is preparing a Program Loan for the sector scheduled for 2006. 38 127. As a trigger for DPL2:
Universal charges for stranded debt and cost would be filed by PSALM
(ii)Governance and Anti-corruption
Public Expenditure Management and Transparency
128. By 2009 it is expected that a more robust set of institutional mechanisms will be in place to enhance government accountability to the public for its fiscal management and service delivery. Improved expenditure prioritization and control should increase efficiency and transparency in expenditure execution and public service delivery. Reforms of public expenditure management encompass the entire budget cycle from budget formulation to execution to ex-post reporting. The emphasis is on establishing better mechanisms for expenditure prioritization, transparency and better predictability in the budget process to facilitate execution by line departments as well as external monitoring by civil society groups.
129. Aligning policy priorities and funding requires improved fiscal discipline, to account for the costs of existing and new policies based on realistic and reliable forward revenue forecasts and more accurate aggregate resource constraints. As a DPL I1 trigger, the 2008 Government budget proposal will be underpinned by an MTEF, drawing from a refined budget strategy paper and forward estimates developed with the Departments. The budget strategy paper would be underpinned by an analysis of critical expenditure management issues in priority sectors. In addition, to facilitate preparation of sector strategies and make the presentation of the budget document more aligned with core functions, DOH, DepEd, DPWH and DA will submit 2008 budget proposals to DBM based on a new budget as a DPL I1trigger.
130. To simplify the budget execution process, increase its transparency, and facilitate line agencies’ ability to utilize released funding efficiently and responsibly, as DPL I1 triggers, government will ensure that:
Detailed data on allotment and quarterly cash releases by agency for central offices of DOH, DPWH, DepEd and DA are disclosed ex post on DBM website on a quarterly basis.
0 Details on payments to contractors for central offices and 4 pilot regions of DOH, DPWH, DepED and DA disclosed ex post on DBM website on a quarterly basis
This would result in greater transparency of budget execution, not only to civil society but also toward the spending departments and agencies.
39 '0a .- m .-c 2 3
E0 cE -m 5: F s2 E ca
0-4 a U a Procurement reform
131. To improve the transparency of the Government procurement process and control corruption, the number of bid opportunities and awards posted on PhilGEPS increased from 3,128 in 2004 to 8,919 in 2005 to 8,987 in 2006 (through Sept). At the same time, the award amounts posted increased from P4.45b (2004) to P15.0b (2005) to P21.2b (2006 through Sept). These are prior actions for DPL I.
132. A trigger for DPL I1 will be that all publicly bid opportunities and bid awards of central offices of GPPB member departments plus DA (altogether 12 departments) will be posted on PhilGEPS in compliance with RA9184.
(iii) Investment Climate and Infrastructure
133. All surveys of private firms, investors and financiers identify three main constraints to private investment: macro-fiscal instability, inadequate infrastructure and regulatory uncertainty. As discussed in preceding sections, considerable progress has been made in reducing fiscal vulnerability. An emerging focus is thus on generating and allocating additional revenue towards investment in infrastructure and reducing regulatory uncertainty. Given the backlog of public infrastructure investment, private participation in infrastructure would be necessary and this will require a credible PPI framework. Properly structuring such participation would help to demonstrate to private investors the soundness of the investment climate across sectors. Hence the focus in this (and subsequent) operations on enhancing the investment climate through the following areas.
134. Increasing private sector participation in infrastructure projects by reducing risks and uncertainty and by use of carefully chosen pilot transactions. The DPL would support government efforts to enhance PPI projects by reducing risks and uncertainty and by use of carefully chosen pilot transactions. The Government would complete the task of revising the BOT law such that policies relating to the award of concessions, issuance of public guarantees and provision of public subsidies are transparent and improve confidence in private operators and financiers with regard to government commitments. This would be demonstrated in practice with the design and implementation of pilot public-private infrastructure projects. A few successful transactions would send a very positive signal to the private infrastructure community and could substantially increase the interest of private investors and enable NEDA to realize its target of attracting at least 22% of the total infrastructure financing from the private sector. The programming, planning and supervision of these models could be overseen by a unit in one of the oversight agencies, who could develop the policy and program for PPP projects and could become the incubator for a pipeline of projects.
135. As a trigger for DPL2:
List of priority investment projects submitted by NEDA Infrastructure Committee to DBM in time for inclusion in the 2008 budget.
41 Enhancing Regulatory Certainty in the Power Sector
136. The Energy Regulatory Commission (ERC), perceived in the past as delaying tariff increases, is now moving towards greater regulatory predictability. The ERC’s recent review of the transmission wheeling rates provides an example of the progress that has been made. In the lead-up to the review, the ERC published the Transmission Wheeling Rate Guidelines (TWRG) which provided a comprehensive statement of the ERC’s intended approach to the regulation of the Transco. The TWRG were prepared with the assistance of consultants with international experience and are in line with or better than comparable documents in regulatory systems in many developed countries. Furthermore, the ERC has demonstrated its capacity to implement the TWRG through its determination of transmission wheeling rates for the period from 2006 - 2010.
137. Ensuring a smooth transition to a competitive power market. The introduction of wholesale market competition and retail contestability for at least part of the retail market are key elements in the power sector reforms.
As a prior action for DPL 1:
Electricity Market: Commercial operation of the Wholesale Electricity Spot Market (WESM) commenced in Luzon in June 2006.
138. Market opening was preceded by a series of measures and transitional arrangements to mitigate market risks and to ensure that WESM-a critical part of the overall reform package-has a smooth start-up. Together with past regulatory measures to phase-out cross-subsidies in distribution and transmission tariffs and increases to regulated NPC power rates over the last 2 years, the commencement of WESM and associated measures shows a reactivated and more realistic move towards the implementation of the EPIRA. These are important steps toward a sustainable market capable of attracting private investment and toward strengthening the financial health of the sector.
139. However, competitive electricity markets are, by their nature, volatile and teething problems and price instability are common in their early stages. Hence, it is not surprising that the early months of WESM’s operation were characterized initially by low prices and then high prices that has created concern about possible market manipulation or abuse of market power. The test for the government will be to ensure that there is a measured, considered response that maintains investor confidence. This is a technically complex task. Technical assistance will advise the government on the implementation of timely and appropriate responses. In particular, international experience suggests that fine tuning of market rules and pricing methodologies will be necessary, but the important price signals provided by a competitive market should not be lost or suppressed.
140. The variability in prices in the early months of WESM’s operation has also highlighted the market and politicalheputational risks for PSALM and the government, while PSALM continues to be the dominant market participant through the trading of power bought under the IPP contracts. In this context, the transfer of the public sector role in generation to the private sector through privatization of NPC’s generation assets and appointment of IPP administrators by PSALM to manage the trading of energy generated by NPC-IPPs is critical. The early appointment of the IPPAs will be an important means of managing the risks noted above and enhancing the credibility of the market. It will allay some fears of excessive market power and provide private investors
42 confidence that the bidding will be fair and driven by commercial incentives. It will enable transitional arrangements in line with effective competition as expected once privatization is completed, therefore increasing the competitiveness and credibility of WESM, and enhancing the environment for investment in new generation and private sector participation. Additionally, it would allow establishing in each trader’s contract performance incentives promoting prudent trading. Together, these measures will encourage more efficient decisions in the production and use of electricity and investment in new capacity. While these steps are aimed at improving the investment climate, the problem of ensuring sufficient capacity is one of the most difficult in electricity reform and further work on this is needed in the Philippines. Specific actions would include measures and incentives to promote a sufficient level of contracting and a clear timetable for introducing contestability at the retail level.
141. As a trigger for DPL2:
PSALM and NPC will have engaged a trading advisor to advise on trading strategies and the appointment of the IPP administrators, including risk sharing and performance incentives.
(iv) Social Inclusion
142. The focus of social sectors reforms supported by the DPL in 2006-2007 will be on continued improvement in the management of public expenditure, public procurement and transparency. These are seen as important foundations for ensuring that the planned increase in expenditure in the social sectors is focused on results, and that the impact of existing expenditure is increased. Accordingly, the governance component of the DPL includes actions and triggers for the Departments of Education and Health, including preparing the ground for increased availability of resources as a result of fiscal consolidation. Future DPLs are envisaged to encompass more specific sectoral dimensions of the Government’s program for improving the quality of and access to essential social services, and for developing a social protection framework to enhance and complement the impact of economic growth on poverty reduction.
43 VI. Operational and Implementation Issues
A. Poverty and Social Impact Analysis
143. Introduction. In assessing the poverty and social impacts of recent adjustment measures, several factors need to be considered. First, not undertaking a fiscal adjustment would have been irresponsible as it would have increased the risk of a full-fledged economic crisis in which the poor would have suffered disproportionately. As fiscal pressures built, the government initially responded with expenditure restraint and efforts to improve tax administration-given legitimate concerns about leakages from public spending programs and the foregone revenue from uncollected taxes. But ultimately, the government concluded that adjustments in tax policy and power generation tariffs would also be needed, and that adjustments to the VAT would need to be part of the reform package if a significant impact on tax revenue was to be realized. This conclusion is fully consistent with the advice of the Bank for a period of several years. The fiscal reforms undertaken thus far are essential for reversing the compression of public expenditures for basic public services. Even with untargeted public services, the poor would still receive a much larger share of benefits from such spending than their own contribution through taxation. Moreover, the substantial fiscal adjustment of the past two years has already played a role in easing investor concerns about fiscal sustainability. Private capital inflows have increased and financial market indicators have improved. Growth has thus been maintained at robust levels, employment has increased, and poverty is estimated to have declined at a faster pace than prior to 2004. Such an environment provides the appropriate framework for pursuing the government’s medium-term reform agenda.
144. Even though the net positive impact of the fiscal reforms supported by the DPL is apparent, this PSIA section nevertheless assesses the separate impact of the VAT reform and power tariff adjustments on low income groups. In doing so, it is important to recognize the counterfactual of higher poverty incidence without enactment of the government’s adjustment program for the reasons outlined above.
145. On VAT and equity. If applied uniformly to all goods without exemption, a VAT may be regressive in theory; but discriminate application of the VAT can soften its impact on the poor and make the tax less regressive. Empirical analysis of household surveys in the Philippines suggests that the VAT is mildly regressive in the sense that the effective VAT rate (the actual VAT paid as a percent of total expenditures) of the poor is slightly higher than that of the rich. A National Tax Research Center (NTRC) study using the FlES 2000 indicates that the effective VAT rate of the poorest 50 percent of families was 5.2 percent while that of the richest 50 percent was 4.1 percent. The richest three percent of families had an effective VAT rate of 3.7 percent.
44 146. But the VAT turns out to be marginally progressive if one examines its burden across expenditure classes. The same FIES 2000 (and later also the FIES 2003”), indicated that 39 percent of VAT revenue was collected from the richest 10 percent of families while only 17 percent of VAT revenue was collected from the poorest 50 percent of families. Table 6 summarizes VAT paid by expenditure percentiles.
Table 6: VAT Paid by Expenditure Percentile
Percentile Share of Percentile Share total spending in total spending liable to VAT VAT due Poorest 1Yo 0.1 44.2 0.1 1-10% 1.9 45.9 1.4 10-25% 5.2 48.4 4.1 25450% 13.2 53.0 11.5 50-75% 22.1 58.4 21.2 75.90% 22.3 61.9 22.7 90-99% 25.0 63.8 26.3 Richest 1YO 10.1 75.8 12.6 Source: de Dios et. AI. (2005), Fletcher (2005)
147. Country level evidence moreover indicates that income taxes may de facto be more regressive than indirect taxes when tax administration is poor: if the government cannot effectively collect income tax from the millions in the labor force, focusing its collection effort on a few thousand establishments that would collect indirect taxes on its behalf can be both more effective and more equitable.
148. There is ample evidence in the Philippines that the individual income tax suffers from rampant evasion and avoidance from self-employed individuals. This is indicated in Bureau of Internal Revenue data by the disproportionate collection of income tax from employed individuals; and from Department of Finance estimates that the tax gap (the difference between collected taxes and the potential tax base) of self-employed individuals is about 70 percent versus only 7 percent for employed individuals. The NTRC estimates that almost P30 billion in taxes from the self- employed and professionals were not collected on an annual basis in the last six years.
149. On expanded coverage and the increase in VAT rate. The VAT reform takes explicit account of distributional concerns, to the extent that mitigating measures and discriminate application of the law substantially limit its negative impact on the consumption basket of the poor. Extension of the VAT to petroleum products was accompanied by eliminating excises on kerosene and reducing excises on diesel to alleviate the impact of the measure on lower income groups. At the same time, certain excise, franchise and common carrier taxes (CCT) were repealed in favor of the RVAT to mitigate the effects of rising prices especially on the poor. Table 7 provides the mitigating measures and the estimated impact on gross VAT revenue. In 2006, the government estimates that P24 billion or 0.4 percent of GDP will be foregone to soften the impact of RVAT on l3At that time of computation, the final versions of the 2003 FIES was not available. The data set used here was the preliminary and restricted-access version. 45 the poor. Moreover, extending the VAT to professional services such as law and medicine was designed to counter the income tax evasion by upper income self-employed groups. Distributional concerns are also addressed by targeting 30 percent of incremental revenue to finance higher spending on social services and infrastructure; this proportion is targeted to increase steadily to 50 percent by 2010.
Table 7: Mitigating Measures (% of GDP)
2005 2006 1. Reduction of excise tax on kerosene, diesel and LPG 0.13 0.22 2. Repeal of franchise tax on power distribution 0.03 0.05 3. Repeal of CCT on domestic transport 0.00 0.00 4. Repeal of CCT on international transport of passengers 0.00 0.01 5. Increase in marginal threshold (Le. housing rental, purchase) 0.02 0.1 1 6. Increase presumptive input tax for agro products 0.00 0.00 TOTAL 0.18 0.39 Source: Department of Finance
150. The reformed VAT law was generally designed to protect the poor to the extent possible. As with earlier implementation (Le. 1988, 1997), the RVAT still exempts all unprocessed food (Le. food purchased from the wet market), as well as purchases from stores with gross income below P1.5 million (i.e. sari-sari stores and ambulant sellers) from which the poor source almost all their food requirements. The two percentage point increase in the VAT rate is thus estimated to have a relatively small impact on the food prices consumed by the poor (about 0.6% on basic food items). The average increase of prices of all goods consumed by the poor is estimated at 2.3%.
Table 8: Effect of RVAT on Basic Food Items of Bottom 50 Percent
Food item Price/kl Price/kl after % Increase Weight Weighted Percent before RVAT RVAT in Price Increase in Price Rice 20.76 20.77 0.05% 50% 0.03% Corn 10.60 10.30 0.03% 5 yo 0.00% Bangus 83.03 83.05 0.04% 0% 0.00% Tilapia 67.93 68.04 0.02% 10% 0.00% Cabbage 24.03 24.01 0.00% 10% 0.00% Eggplant 43.37 43.40 0.05% 0% 0.00% Chicken 97.33 97.41 0.09% 5% 0.00% Pork 141.67 141.94 0.19% 5% 0.01 % Other food items 4.00% 15% 0.60% Average increase for Door Ion% 0.64% Source: World Bank estimates
151. Overall, the RVAT is estimated to have a minimal effect on the consumption pattern of the lowest 50 percent of the population. Table 9 provides estimates of the expected percentage increase in prices of basic commodity groups due to the RVAT. The weighted average increase in all items
46 for this group is 2.3 percent, versus 2.7 percent for all income groups and above 3 percent for the richer half of the population.
Table 9: Effect of RVAT on Basic Consumption of Bottom 50 Percent
Commodity Weight Percent Weighted percent group increase due increase due to VAT to VAT All Items 100.0% 0.0% 2.3% Food, Beverage & Tobacco 65.0% 0.6% 0.4% Clothing 3.5% 5.0% 0.2% Housing & repairs 10.0% 5.0% 0.5% Fuel, light & water 5.7% 6.6% 0.4% Services 8.7% 5.0% 0.4% Miscellaneous items 7.2% 5.0% 0.4% Source: World Bank estimates
152. As a mitigating measure on fuel prices, the government reduced excise tax rates on various petroleum products, with diesel oil garnering the largest reduction (Tablelo). As a result, the poor were estimated to face a 6 % percent increase in the cost of fuel consumption (including liquefied petroleum gas and kerosene used in cooking and heating), which is lower than what the upper 50 percent faced. The continued escalation of oil prices since the implementation of the RVAT (reflecting global price trends) has, however, added to commuting fares and fuel cost. Since November 2005, pump prices of diesel, which powers most public utility transportation, have increased by about 15 percent. Kerosene and liquefied petroleum gas have followed suit. The government has responded by reducing tariff rates on oil and postponing plans to increase the rates on metro rail transits (MRT).
Table 10: Effect of RVAT on Pump Prices
~ Price Price per liter per liter before Mitigating with Percent Petroleum Product VAT Measures RVAT increase Unleaded 34.07 0.85 37.21 9.21 % Premium 35.55 0.40 39.37 10.74% Diesel 32.45 2.13 33.96 4.65% Kerosene 33.01 1.10 35.74 8.27% Liquefied petroleum gas by cylinder 461.50 8.03 507.89 1O.O5% Average increase for poor 6.45% Source: Department of Energy
47 153. On the increase in power tariffs. Electricity prices in the Philippines have traditionally been amongst the highest in the region to the detriment of competitiveness, reflecting, inter alia, the high cost structure of power production. However, tariffs had been allowed to decline significantly for a number of years, lowering their value in real terms, with adverse effects on the financial position of the National Power Corporation. The major adjustment in power tariffs in late 2004/early 2005 was thus an unavoidable element of the overall fiscal package. But for those households consuming less than 200 kWh per month, there has been no increase in electricity charges (Table 1l), although to the extent that poor households share electricity meters resulting in consumption exceeding the lifeline, they too could have borne an increase.
Table 11 : Adjustments to Electricity Prices Based on Consumption
Peso increase Electricity (monthly) per kwh Residential Below 200 kwh O.OO/kwh Between 200 and 999 kwh 0.73lkwh Above 999 kwh 0.85lkwh Commercial 0.85Ikwh Average increase for poor O.OO/kwh Source: Department of Energy
154. To protect the poor, power utilities in the Philippines use a lifeline scheme that targets its benefits to consumers below a threshold amount. Those who consume above the threshold do not get a discount for their first consumption block. The two major power utilities subsidize up to 200 kWh of consumption per month, which is well above the estimated subsistence level of electricity consumption. Moreover, the Philippine’s use of percentage discounts as opposed to fixed amount discounts preserves the benefits when electricity tariffs are changed thereby making available to the poor the same relative amount of benefits. These two features allow the Philippines to better target the poor and provide discounts of up to 63 percent to low-end users. As a result, international comparisons of electricity lifeline schemes have rated the Philippines very favorably.
155. Public consultation and information dissemination on the RVAT. The need for VAT reform had been extensively debated before the President declared a state of fiscal crisis in August 2004 and called Congress to enact a series of tax measures of which VAT reform was an essential element. During the debates inside and outside Congress between August 2004 and May 2005, when the VAT reforms were passed by Congress, an assortment of VAT impact studies from universities, think tanks, the NTRC, the Department of Finance, the congressional planning offices and other institutions served to inform legislators and business leaders on the necessity of VAT reform. The DOF allotted P15 million to disseminate information on the objectives of the reform amongst the general public, especially to the poor. A VAT reform website was set up and regular advertisement in television, newspapers and radios was also pursued. The BIR set up a hotline in every revenue region and in some revenue districts to accept VAT queries. Road shows were conducted in four major provincial cities in September 2005; and press conferences and meetings
48 with various business groups were also held clarify the objectives of VAT reforms and to alleviate public concerns. B. Environmental Aspects
156. No major direct negative environmental impacts from the reforms supported by this operation are expected. In particular, the adjustment of energy prices is estimated to have had a beneficial impact on energy conservation. Possible specific, minor, or indirect impacts are described below. More broadly, this section indicates that the Philippines maintains a good environmental management framework, but that implementation is often weak and requires strengthening to effectively deal with economy-wide changes.
157. Potential Impact on Environment, Forestry and Natural Resource Some of the areas covered by the DPL may have environmental and social impacts-positive as well as negative, although some of these impacts may not be immediate. Examples of policies that could have impacts worth considering include: (i)the broadening of VAT coverage by eliminating exemptions such as on petroleum products; (ii)protection of the poor by eliminating excise tax on kerosene and reducing excise tax on diesel; (iii)increasing power generation tariffs by about 30 percent in late 2004/early 2005; and (iv) the agenda of sustained growth and expansion through simplification of the investment framework.
Assessment of the Country’s Capacity to Address Impacts on the Environmental, Forestry and Natural Resources as well as Social Aspects
158. Environmental. The Philippines has comprehensive laws and regulations that govern the utilization, protection and management of forests and natural resources and control of air and water pollution. Poor implementation, however, is shown by the existing levels of pollution and continued degradation of the natural resource base. The Department of Environment and Natural Resources (DENR) is facing significant implementation challenges: its mandate has increased over the years, without a commensurate increase in resources; while its priorities and senior management have changed frequently. The DENR needs to review its present mandates and assess staff and budget to prioritize those mandates that it can deliver. The DENR also needs to improve coordination with other government agencies, LGUs and the private sector to improve ENR law enforcement, management and monitoring.
159. Social. The Philippines has a very comprehensive system for the protection of the rights of its indigenous peoples. l4 Among the rights being granted are territorial domain, self-determination including the right to practice their customary laws, cultural integrity and property, and consent over development interventions in their community. The agency responsible for IPRA implementation is the National Commission for Indigenous Peoples (NCIP) which has field offices in 12 regions and 46 provinces. However, the implementation of the social policies needs to be improved and funding for the required activities needs to be increased. The institutional capacity for implementing and monitoring the social safeguard aspects also needs to be strengthened. While the country has made progress in this area, gaps in the country’s policy on involuntary resettlement and land acquisition-such as exclusion of certain groups of affected people who may have legitimate claims, fair compensation on land and property, assistance for restoration of livelihood,
l4Indigenous Peoples Rights Act (IPRA) of 1997. 49 lack of disclosure on resettlement plans-need to be filled to further improve the government’s record on social issues.
Gaps to be Addressed
160. In order to improve the Philippines capacity to manage possible indirect impacts of economic reforms on the environment, the Bank seeks to strengthen the country’s capacity to implement its EM framework. In its CAS, therefore, the Bank identified a National Program Support for Environment and Natural Resources Management (NPS-ENRM), a budget support operation for the DENR due to be delivered to the Board in FY08 (standby for FY07). The NPS- ENRM is aimed at addressing the weaknesses in the country’s ENR sector by supporting the DENR implement its core mandates, including strengthening its capacity to enforce ENR laws and regulations, implement an integrated ecosystem management approach and strengthen its planning and budgeting process to minimize the disconnect between what is planned and what is actually implemented.
C. Fiduciary Assessment
161. An assessment of the country’s financial management systems was conducted to better understand fiduciary risks and determine appropriate fiduciary arrangements for the purposes of this operation. This assessment has relied upon diagnostic work done in recent years, viz., the Philippines Public Expenditure, Procurement, and Financial Management Report 2003 (PEPFMR), as well as the ongoing CPAR and PER and recent reports by other development partners (e.g. AusAID, EU, and UNDP). The findings from these analytical reports are summarized below. Recent discussions with the government on the ongoing financial management reforms have also been taken into consideration. Based on this assessment the fiduciary arrangements proposed for this operation are considered acceptable.
162. As discussed earlier (Sections I11 and V.B(ii)), the government is committed to improving public financial management, and some progress in modernizing accountability systems has been made. The main advances so far relate to improving credibility and predictability of the government budget and some improvements in government accounting. Revenue forecasting has improved and revenue collections have exceeded targets in the last eighteen months. The improvement in credibility on the expenditure side comes from DBM’s current efforts to link the budget to medium-term development plans and performance indicators.
163. Government is considering the development and implementation of an integrated financial management information system. The timeliness of budget execution data, especially of month-on- month allotment vs. obligations vs. expenditure data, is being addressed by the implementation of the e-budget system. To date, it has been implemented in the Central Offices, and it will be implemented in the Regional and Provincial offices in 2007. In the meantime the cash flow system is executed via the release of appropriations followed by the release of the Notice of Cash Allocation (NCA) on a month-to-month basis as at the time of PEPFMR.
164. The manual Government Accounting system (NGAS) has been rolled out to the approximately 5,000 reporting agencies in the country spanning all levels of government (national and local), helping to bring about some standardization in accounting practices. This accounting system, which was developed by the Commission on Audit and is mandated for use by COA, is now
50 being computerized. The electronic version of the NGAS (eNGAS) has been successfully piloted in several agencies. There is a well thought out roll-out plan for the other agencies, which will be covered in phases. Areas remaining to be addressed include: improving the compatibility of the budget accounting framework with that of COA; linking the information on approved budgets prepared by different agencies, to facilitate meaningful and regular comparisons of financial reports with budgets; improving management documents on the use of funds during budget implementation; increasing the use of financial audit reports in the formulation of the budget; and improving basic accounting controls such as bank reconciliations and management of advances in government agencies.
165. COA prescribes accounting standards for Government accounting and produces financial statements in a consolidated manner for all levels of Government, which creates a risk to its independence. This risk arises because COA is mandated under the Philippine Constitution to audit the financial statements of all government agencies. COA's audit reports and audited financial statements are published on their website. COA has recently adopted a risk based audit approach, and its systems are being upgraded to provide more information on the timeliness of completed audits and on how well audit findings are followed up.
166. The last CPAR undertaken in 2004 shows that there has been distinct progress in the area of public procurement, as mandated by the procurement law and the issuance of the implementing rules. An empowered Government Procurement Policy Board (GPPB) has been established and is now overseeing implementation to make sure that the transparency, efficiency, economy and accountability principles of the law are carried out. Bids and Awards Committees and supporting procurement organizations in each agency are functioning, a protest mechanism has been defined, electronic procurement is being developed and expanded, and posting of invitation and awards in the website is mandated. Standard bidding documents were issued for mandatory use and the Generic Procurement Manuals to guide the agencies were recently approved and being rolled out. Both of these documents were harmonized with development partners and are now being used for World Bank assisted projects. Some major remaining challenges to the effective implementation of the procurement law include: (a) monitoring the procurement performance of implementing agencies and local government units, (b) strengthening capacity, and (c) measuring the impact of the reforms in terms of adding value for money and reducing graft and corruption in the public procurement system. A repeat CPAR is currently under way.
167. With respect to internal audit, a Presidential order issued in 2003 required that this function be established in all agencies. This task is being overseen by the Presidential Anti Graft Commission (PAGC). A few agencies have already set up this function, and technical assistance is being provided to assist others to develop appropriate audit methodologies. The Government has also made some progress on anti-corruption. A National Anti-Corruption Program of Action has been completed with inputs from a range of stakeholders, and action taken in some key areas, such as strengthening the Office of the Ombudsman, the establishment of anti-graft units in a number of agencies and life style checks on civil servants. However, the impact of these measures on the perception of the overall governance environment appears to have been only modest thus far.
168. On the anti corruption front, the Government-Development Partners Working Group on Governance and Anti-Corruption has provided a forum for discussion and coordination of the many ongoing activities. The group is focuses particularly on the government's anti-corruption agenda, and development of broad indicators of progress. A governance sub-group focusing on budget and
51 public expenditure reforms, civil service rationalization and support to the Supreme Court and the Office of the Ombudsman. There are also a number of agency-specific partnerships with the Office of the Ombudsman, Supreme Court, Commission on Audit, and the Presidential Anti Graft Commission.
169. Efforts to strengthen anti-corruption programs supported by Bank operations include:
e Institutionalization of internal audit functions in all government agencies to take the lead in monitoring and enforcing anti-corruption programs of the government. e Strengthening the anti-corruption efforts of the Office of the Ombudsman through the recruitment and training of field investigators and strengthening systems for case tracking e Lifestyle checks using the Statement of Assets, Liabilities and Net Worth filed by government officials, and increased targeting of tax evaders. e Supporting the Judicial Reform Agenda led by the Supreme Court, including mobile courts and information systems for case management and public service delivery. e Strengthening controls in the revenue raising agencies, Bureau of Internal Revenue and Bureau of Customs. e Training and workshops on corporate governance and continuing support for research and capacity building through the Hills Governance Center at the Asian Institute of Management.
170. In recognition of the remaining governance challenges, the Bank’s overall program is squarely focused on supporting the government’s efforts to improve the overall environment with a three pronged approach: at the project level, the country fiduciary level and the country policy level. Various development partners are likewise supporting Government’s efforts to address related issues.
171. At the project level the Bank is working with sector agencies to provide sector specific technical assistance and oversight. For expenditures directly financed by the World Bank, a strengthened system of fiduciary controls of procurement, financial management and disbursement procedures is in place, overseen by field staff in Manila and reviewed by managers in Washington. Where government implementation capacity is limited, consultants are being used for supervision or technical audit of completed works. For small local projects, community monitoring teams have proved very successful in ensuring and building capacity for quality and accountability.
172. At the country fiduciary level, the Bank is facilitating the move towards increased use of country systems by building capacity within government for fiduciary controls at international standards and methodology levels. The Bank has worked with government over some years to strengthen public systems for procurement, financial management and audit, and to help harmonize procedures used by various government agencies and development partners. This has greatly reduced the complexity of procedures and improved capacity for audit oversight and identification of non-compliant practices. As these systems mature, the Bank has been able to use them as a primary tool for fiduciary control and monitoring of some aspects of Bank-financed expenditures, usually supported by additional project-specific controls.
52 173. At the country policy level, the Bank's Country Assistance Strategy for the Philippines places a strong emphasis on supporting systemic changes in key institutions, both at the national and local level. This involves supporting well-articulated reform plans, and working through country systems to ensure sustained improvements in capacity and effectiveness of selected "islands of good governance". This will be achieved largely through financing eligible expenditures of these agencies which support the reform efforts, and builds upon the earlier efforts to strengthen government systems for procurement, accounting, audit, and budget execution. The Social Expenditure Management Projects, for example, have financed school building, books, medicines and social services procured and accounted using improved government systems. The DPL is contributing to this part of the Bank's governance strategy through its ability to support systemic broad based policy commitments on issues such as transparency in budget preparation and execution, accountability in the procurement process and improved administration and reduced corruption in the areas of tax administration for example. In these areas in particular the government has made clear commitments to hasten the implementation agenda and the Bank through the DPL and other supporting operations is providing tangible support to the government.
174. In addition, the ongoing Public Expenditure Review will apply the PEFA (Public Expenditure Financial Assessment) framework for standardized assessments of PFM, to develop a benchmarking tool for assessing reform in the public sector. The PEFA indicators were developed to support integrated and harmonized approaches to assessment and reform in the field of public expenditure, procurement and financial accountability.
175. Foreign Exchange Control Environment in the Central Bank. The IMF has not carried out a Safeguards Assessment of the central bank (Bangko Sentral ng Pilipinas). Loan proceeds will be deposited in a Designated Bank Account in the central bank established for the purposes of this operation, since the Bank does not have adequate understanding of the foreign exchange control environment in the central bank.
D. Loan Administration
176. Borrower and Credit Amount. The borrower is the Republic of Philippines and this operation is a single-tranche loan of US$ 250 million that would be made available upon loan effectiveness, as all policy actions supported by the loan would have been completed prior to Board presentation.
177. Disbursement Arrangements and Use of Funds. The loan amount will be disbursed into a Designated Bank Account (DA) in US Dollars at the central bank (Bangko Sentral ng Pilipinas) that forms part of the Philippines' official foreign exchange reserves. The Bank will retain the right to seek an independent audit of the DA by an auditor acceptable to the Bank, to seek reassurance on the accuracy of the information relating to transactions from this account that was provided by the Borrower, and that funds in this account were not used for items on the negative list. After disbursement of the loan, the Borrower would ensure that the equivalent Peso amount of this loan amount is promptly accounted for (in Philippine Pesos) in the Borrower's budget system in the General Fund, and thereby be available to finance budget expenditures. The Borrower would provide to the Bank a written confirmation within 30 days of disbursement of the loan that this accounting has been completed, with supporting details.
53 178. Disbursements of the loan will not be linked to any specific purchases and no procurement requirements have to be satisfied, except that the Borrower is required to comply with the standard negative list of excluded items that may not be financed with Bank loan proceeds. Prior to disbursement, the Borrower would provide to the Bank a copy of written instructions issued to the Bangko Sentral ng Pilipinas for conversion of the foreign exchange amount of the loan into local currency and that an equivalent amount be credited to an account of the Government available to finance budgeted expenditures. The Bank will also retain the right to seek an independent audit of the designated bank account, by an auditor acceptable to the Bank, to seek reassurance on information relating to transactions from this account.
E. The Engagement Process, Implementation and Monitoring
179. The DPL framework is based on the CAS, which drew on various dialogue and feedback mechanisms, including a client survey and a series of formal and informal meetings with key opinion leaders from the private sector, civil society, and government officials from oversight and implementing agencies. The preparation of the DPL program has been extensively participatory. One major mechanism for facilitating substantive policy dialogue on the country’s development agenda among stakeholders is the Philippines Development Forum (PDF), which evolved from the Consultative Group. The PDF also serves as a process for developing consensus and generating commitments among different stakeholders toward critical actionable items of the government’s reform agenda. The action plans proposed in the second PDF meeting in March 2006 became a basis for the preparation of the DPL.
180. Apart from continued participation in the PDF, the Bank conducted a number of meetings with government officials, former government officials and public servants, non-government and advocacy organizations, academe and private sector groups, yielding valuable inputs for the design of DPL. Through these, as well as its regular outreach and dialogue activities, the Bank Group consistently engaged critical stakeholders on key DPL issues such as governance and anti- corruption.
18 1. Monitoring and Evaluation. The DOF will be responsible for coordinating implementation of the proposed operation, with close cooperation with DBM, NEDA, impacted line ministries, and civil society representatives. The last column of the government’s policy matrix (Annex II)includes the key results expected from implementation of the program.
182. Country capacity for monitoring will be strengthened through the ongoing public expenditure management improvements explicitly mentioned in the reform. In particular, DBM plans to expand the coverage of the OPIF exercises to other national government agencies (NGAs) by the 2008 budget preparation cycle, eventually covering about 75 percent of NGAs by 2009. To complement the OPIF, the NEDA Infrastructure Committee will adopt a project monitoring framework and guidelines for improved supervision and evaluation in infrastructure departments which will be introduced in DPWH in 2008 and rolled out to other infrastructure agencies by 2010.
183. Bank staff will continuously monitor implementation of the reforms specified in the program matrix of the proposed and subsequent DPLs. Monitoring will focus on the indicators specified in the policy matrix. Agreements already exist between the government and civil society in a number of areas to monitor public sector compliance with laws and implementing rules and
54 regulations. Further participation of civil society stakeholders in monitoring DPL reform implementation is under discussion.
184. A status report on the first DPL will be presented in the documentation for the second, and so on throughout the series. An implementation completion report will be issued within six months following the closing date of DPLl.
F. Risks and Risk Mitigation
185. Notwithstanding significant accomplishments to date, particularly with respect to fiscal adjustment, the achievement of the Government’s medium-term objectives is subject to a number of risks. These include: (i)external risks; (ii)risk of reform slippage; (iii)fiduciary risks; and (iv) political risks. These risks, discussed below, are considered acceptable in the context of the proposed mitigation effort. In judging overall risk, market signals also need to be incorporated-in particular, the significant reduction in borrowing costs and spreads over the past two years, which in part reflects market perceptions of the reduced risk of lending to the Philippines.
(i) External Risks
186. The Philippines is an open economy that is increasingly integrated with global and regional trade and financial flows. In recent years the economy has benefited from booming Chinese and recovering Japanese demand, and ample global liquidity that has brought down borrowing costs for all emerging markets. Should any of these patterns change, triggered, for example, by a prolonged slowdown in US demand or greater volatility amongst the major currencies, growth could slow relative to the assumed macroeconomic framework and render major objectives of the reform program more difficult to attain. Slower external growth would adversely impact both exports and remittances, which in turn could adversely impact private capital flows. Susceptibility to shifts in investor sentiment is heightened by significant gross external financing requirements estimated at about 12 percent of GDP during 2007-08.
187. At the same time, the integrated economy and experience with past episodes of volatility have instilled a greater sense of discipline in the nation’s financial managers that has fostered more responsible financial policies in recent years. In particular, the recent fiscal adjustment has improved the ability to cope with external shocks relative to the pre-2005 period.
(ii) Risk of Reform Slippage
188. Recent fiscal adjustment and the accompanying higher economic growth have led to faster employment creation and an estimated reduction in poverty. Nonetheless, there is a risk that adjustment fatigue, exacerbated by several years of cuts in government expenditure, could undermine support for further adjustment. Leakages from government programs exacerbate this risk by diminishing the value of services provided and support for the reform effort. Also, if more tangible improvements in infrastructure and service delivery are not forthcoming, support for recent tax policy and administrative measures may wane, undermining the tax effort and hence the underlying macroeconomic framework.
189. These risks are mitigated by the fact that there is a broad acceptance of the need for fiscal consolidation. Moreover, primary government expenditure is targeted to increase beginning in 55 2007, and improving the quality of public infrastructure through higher public investment is now receiving increased prominence in official statements.
190. It is, however, possible that given the prominent focus on balancing the national government budget, public investment would increasingly be channeled via GOCCs and government financial institutions (GFIs), where investments are less subject to legislative scrutiny, more susceptible to the accumulation of contingent liabilities, and more difficult to monitor in the short run. The DPL anticipates this possibility by focusing on the consolidated public sector accounts (which incorporate both GOCCs and GFIs) in addition to the national government budget. Nevertheless, sustained vigilance in monitoring the consolidated public sector accounts with the help of the government will be required.
191. An expanded program of AAA work, undertaken jointly with Government and other donors, mitigates policy risks. This work, which includes an ongoing public expenditure review, and technical assistance and a proposed TA loan aimed at strengthening tax administration, will aim to highlight the underlying analytics for the DPL program and ensure they are well articulated. The monitoring framework for the DPL provides an opportunity for these results to be shared transparently with donors and civil society groups, and for any issues or slippages to be brought to the attention of senior policymakers in a timely fashion. If the implementation of reforms is impaired, or outcome indicators prove to be unsatisfactory, the program for future years would need to be readjusted.
(iii) Fiduciary Risks
192. As evident from the above fiduciary assessment (Section VI.C), while much progress has been made, further significant improvements to fiduciary controls and transparency are essential, and corruption in government remains an issue of major public concern. In this context, corruption scandals could undermine public support for the government’s reform agenda.
193. To mitigate this risk, continued progress on implementing the Government’s program to improve governance and reduce corruption (as described in Section I11 (ii)and Section V.B (ii))will be essential. These reforms form an integral element of the proposed DPL series, a key objective of which is to promote deeper governance-strengthening budgetary reforms. The Bank has consulted with civil society stakeholders with an interest in enhancing transparency and reducing corruption, and has included civil society representatives as part of the DPL monitoring mechanism.
(iv) Political Risks
194. Reform progress is vulnerable because of significant opposition to the Administration: over the past 18 months, there have been two failed attempts to impeach the President (in mid-2005 and mid-2006) and a declaration by the President of a state of national emergency (for a week in February 2006) in response to heightened tensions. In addition, management changes at senior levels in government have slowed the resolution of some policy issues. Nonetheless, the Administration has proven itself to be resilient, and its resolve to push forward the reform program has not wavered.
195. The reform program itself is non-partisan, and has broad private sector as well as public sector support; on the fiscal front, the constituency for fiscal reform is wide, vocal and influential. 56 A change in government would thus be unlikely to result in a reversal of the direction of the fiscal program. The broad based nature of the consultations leading up to the DPL and the inclusion of clear governance, transparency, and service delivery objectives gives this DPL popular appeal due to the visible direct benefits to the population. In combination with bank instruments such as investment lending and AAA work, the DPL provides a visible framework for policy continuity in a volatile political environment.
57 Annex 1: Letter of Development Policy
16 November 2006
Mr. Paul Wolfowitz President The World Bank Washington, D.C.-USA
Dear Mr. Wolfowitz:
This Letter of Development Policy highlights the Philippine Government’s commitment to achieve global competitiveness through a policy of prudent economic management and investment in infrastructure and social services.
Over the past two years, we have undertaken major reforms that have reduced our public sector deficit and improved the prospects for robust growth in the medium term. In the process, we believe we have met the World Bank’s CAS criteria for accessing development policy lending. In the attached Policy Matrix, we have identified key reform initiatives under our medium-term reform program, which we propose be supported by a series of development policy loans. We thus request financial assistance from the World Bank through a First Development Policy Loan (DPL1) to support the first phase of these key reform initiatives that we have implemented. This loan will support the Government’s efforts to maintain momentum in implementing our medium- term reform program.
We trust that this loan will be approved as soon as possible.
Macroeconomic Performance
Driven by growth in the agriculture, exports and finance sectors, the domestic economy sustained its strong growth in the midst of adverse internal and external factors such as rising global oil and commodity prices. For the second quarter of 2006, gross domestic product (GDP) grew by 5.5% in real terms compared to last year’s 5.4%. On the other hand, gross national product rose by 6.6% compared to 5.8% last year, as net factor income from abroad, which is driven primarily by higher levels of remittances from Oms,grew by 18.3%.
Government has been able to effectively manage inflationary pressures, maintaining the country’s inflation at single-digit figures. Despite volatile oil prices, increases in wages, electricity and transport fares, inflation averaged 6.6% as of October, well below the official inflation forecast of 6.9% to 7.0% for 2006. Interest rates are also on a stable path with bellwether 91-day T-Bill rate figure as of September 2006 easing at 58 5.4% due to ample liquidity in the financial market. This low interest rate regime makes credit and loans more affordable and supports economic growth.
The Republic’s balance of payments recorded a surplus of US$2.6 billion for the first nine months of 2006, equivalent to 3.2% of the country’s GDP compared to the US$2.7 billion surplus posted in the same period a year ago. The favorable BOP position was driven by the strong current account buoyed by robust inflows of overseas Filipino workers (Oms)remittances and services exports.
Net foreign direct investments are also on an upsurge recording US$1.1 billion, a 133.9% growth for the first seven months of 2006 compared to $481 million for the corresponding period in 2005. Investors remained upbeat on the country’s investment climate following an improved fiscal position arising from lower than programmed deficit, strong macroeconomic fundamentals and better-than-expected second quarter performance of corporations. New growth industries such as mining, logistics, health and wellness and medical tourism, and information technology-enabled services have emerged.
The local currency is also strengthening against the US dollar as the peso continued to appreciate to (Peso) 49.84 per US dollar as of end-October 2006, compared to (Peso)53.09 per US dollar on December 29, 2005 and (Peso)56.27 per US dollar on December 29,2004.
The Medium-Term Program of the Government
The Medium-Term Philippine Development Plan (MTPDP) of the government focuses on five core-areas: economic growth and job creation; energy; social justice and basic needs; education and youth opportunity; and anti-corruption and good governance. This Development Policy Letter shall be focusing on economic growth, energy, health and education, and anti-corruption and good governance.
Economic Growth
Addressinn the fiscal situation. When the MTPDP was crafted in 2004, the rising fiscal deficit emerged as a key macroeconomic concern for the country. During that time, the consolidated public sector deficit (CPSD) as of end-2003 was at 5.7% of GDP while NG deficit was at 4.6% of GDP. Huge deficits were recorded by the GOCCs led by NPC, LRTA and NFA, and this large deficit pushed the public sector debt to reached 117.6% of GDP as of end-2003. Economic growth slowed down to 4.9% in the first half of 2003. Unemployment was at 11.4% (based on old definition) as the number of jobs generated could not adequately absorb the influx of labor entrants.
Recognizing that resolving the fiscal problem is primary and essential to achieve sustained and accelerated pace of growth, government set-off to implement a fiscal consolidation program aimed towards strengthening public sector revenues through legislative and administrative reform measures. Ten revenue measures were identified by the DOF of which seven has been accomplished so far. This include: increasing power generation tariffs; raising sin taxes; broadening the VAT base; reducing excises on 59 petroleum products; changing VAT refund procedures; raising the VAT rate from 10 to 12%; and implementing the Lateral Attrition Law. The three measures that are still pending but are being addressed are: rationalization of fiscal incentives; simplified net income tax for the self-employed; and passage of the Fiscal Responsibility Bill.
With the vigorous implementation of the VAT and revenue enhancing measures, the revenues increased by almost 20 percent through September 2006. At the same time, the government was able to rein in the fiscal deficit to P50.4 billion for the first nine months of 2006, way below the target ceiling of P122 billion. For the first time in 10 years, the national government posted a surplus for four months this year.
Apparently, these reform efforts are starting to pay off better than expected. Although the MTPDP aimed for a balanced budget by 2010, balancing it by 2008 has become achievable. It is also projected that the CPSD can be turned around into a surplus starting 2008. With the deficit numbers on a decline for the last three years, it is now apparent that a “virtuous cycle” of lower borrowing, reduction in debt service and allow more resources for productive expenditures like infrastructure and social services. Government realized savings in interest payments of P17.6 billion as of the end of September 2006.
Zm~rovin~tax effort. The passage of three key fiscal reform measures significantly improved revenue generation. The increase in excise tax on tobacco and liquor or RA 9334, which was signed into law in December 2004, is expected to generate P15 billion in additional revenues. The Attrition Act of 2005, which provides for a system of rewards and punishment for BIR and BOC personnel to ensure more efficiency in tax collections, is expected to generate P5 to 10 billion in additional revenues. The Restructuring of the Value Added Tax (RVAT) System, which was approved into law in May 2005, expanded the sales tax base to include the electricity, fuel and transport sectors and other previously exempt industries and increased the VAT rate from 10 percent to 12 percent this year. In 2006, 70% of the RVAT proceeds would be used to reduce the budget deficit while the balance of 30% would be used for social services and infrastructure.
Efforts are also being made to plug the leakages in tax collection. The DOF and its agencies, the BOC and the BIR, developed anti-corruption measures such as the Revenue Integrity Protection Service (RIPS), Run After Tax Evaders (RATE) and Run After The Smugglers (RATS) to secure the tax revenues. As proof of their success, RIPS, RATE and RATS - have entered the lexicon of good governance. As of September 2006, 65 tax evasion cases have been filed under the RATE program while 16 criminal cases have been filed under the RATS program. Investigations conducted under the RIPS, on the other hand, resulted in the filing of cases against 43 officials and employees: BIR - 20, BOC - 20 and BLGF -3. Of these, 5 were already dismissed from service and 9 suspended as of this period.
With improved tax administration and a more efficient taxation system, meeting the goal of increasing tax revenues from 15.3% of GDP in 2007 to 16.6% of GDP by 2010 is achievable.
60 Zmvrovina Comvetitiveness. As the outlook on the fiscal side is improving, government is also setting off policies that address the root causes of declining competitiveness. In the President’s State of the Nation Address on July 2006 she outlined five main strategies to improve competitiveness: (1) making food plentiful and affordable to keep labor costs globally competitive; (2) reducing the cost of electricity to make factories regionally competitive; (3) modernizing infrastructure to effectively transport people and goods; (4) mobilizing, upgrading and disseminating knowledge and technologies to enhance productivity; and (5) reducing bureaucracy in all agencies to lower transaction costs.
Given the above, the over-arching strategy is to expand investment in transportation infrastructure significantly. Being an archipelagic economy, a good transport network will open up new economic opportunities, reduce transportation and transaction costs of business, and increase access to social services. But building these infrastructure projects is enormous and would require huge public sector spending and a wider support from the private sector. In the 2007 budget, government is proposing a combined budget of P91.1 billion for the two infrastructure agencies DPWH and DOTC, this is an increase of 18.9% from their budget of P76.6 billion in 2006. Efforts are also being made by government to create an enabling environment for private sector to invest in infrastructure. This entails, among others, revising the Implementing Rules and Regulations (IRR) of the BOT Law, and developing a clear policy framework, procedures and institutional jurisdiction relating to use of GOP enhancementdfinancial participation in PPP projects.
Improvements in the road systems, especially in the Luzon Urban Beltway where two-thirds of the country’s production emanates, underpin the competitiveness of economic activity in the country. Efforts are being undertaken to improve road maintenance as proven by government setting aside some P7.9 billion for research on construction materials and for the preventive maintenance. This is a significant increase from last year’s budget since the target for this year would be 1,756 kilometers of roads, significantly higher than the 525 kms. in 2005. Some P37.4 billion is also allocated to fund road and bridge construction, nearly double the P17.8 billion spent in 2005.
Government is also investing in the construction of new and upgrading of existing airports in the country, the gateways to tourism destinations. About P8.3 billion will be set aside for the construction, repair and rehabilitation of airports and air navigational facilities. Among the projects identified by the administration include: New Communications and Navigation Surveillance/Air Traffic Management Systems and Development Project (P159 million), Selected Airports (P2.8 billion), Laguindingan Airport (P946.3 million) and New Iloilo Airport Development Project (P2.7 billion). The development of new airports in Negros Occidental, Iloilo and Bohol, as well as improvements in the airports in Naga, Guiuan and Siargao, will boost tourism in the country.
Supporting Export and Investment Growth. The export sector continued to show strength as it recorded a growth of 16.8% which topped the 10% export growth target for 2006. Investments in BOUPEZA - approved infrastructure/industrial service facilities 61 recorded an impressive 885% growth from last year while employment in BOWEZA - approved investments likewise grew by 43% during the first half.
Under the Philippine Export Development Plan, 2005-2007, the Philippines will pursue a market-driven strategy that will link its supply-capacity to high impact markets and develop niches in culture-based (e. g., halal and kosher food) markets. The 2006 Investments Priorities Plan, meanwhile, includes activities aimed at job-creation, agribusiness development, entrepreneurship as well as MSME development, modernization of infrastructure and logistics, energy independence, market driven export development, and strengthening of the country's global competitiveness. To improve the investment climate, investment incentives shall be rationalized, registration procedures simplified and major infrastructure projects completed, among others. To further improve competitiveness and governance, an Anti-Red Tape Task Force headed by the DTI Secretary was created by virtue of Executive Order (EO) No. 557 dated 08 August 2006.
Strengthening and Deepening the Financial Svstem. To support a growing economy, it is imperative to have a healthy financial system built upon two pillars: a robust banking system and a fully-functioning capital market. The Bangko Sentral ng Pilipinas has laid down a broad range of banking sector reforms to complement the development of the capital market. The enactment of the Special Purpose Vehicle (SPV) Law would facilitate the asset clean-up of banks to restore the credit supply to the economy. For the first half of 2006, the non-performing loan (NPL) ratio of universal and commercial banks was back to single-digit levels, a significant reversal from a peak of 18.8% recorded in October 2001.
With the globalization of the financial market, the BSP is continuing to align local banking practices with internationally accepted standards. The Philippine banking system's capitalization and risk management standards will be fully compliant with BASEL I1 by 2007 while its corporate governance and financial transparency standards have been set up to be consistent and aligned with OECD recommendations.
Important laws have been put in place in laying the groundwork for capital market development and among these are the passage of the Securitization Law and the elimination of documentary stamp tax in secondary trading. The establishment of the Fixed-Income Exchange (FIE) enhances transparency and provides for a more efficient secondary trading of fixed income securities. Other key legislative measures to further deepen the capital market are now pending in Congress, including developing a central credit information bureau system (i.e. Credit Information Bureau Bill); widening the pool of institutional investors (Le. Revised Investment Company Act); and providing a better debt resolution framework (Le. Corporate Recovery Act).
Energy
The Philippines is among the few developing countries implementing a sophisticated, competitive Wholesale Electricity Spot Market (WESM) as part of its reform program. This is an ambitious and complex task given the objective of attracting private sector participation, and the prevailing political and economic environment. The 62 Electric Power Industry Reform Act (EPRA) provides a sound framework for the power sector structure and privatization. But its implementation requires coordinated actions with a carefully planned timetable.
The Government is fully committed to the restructuring and privatization of the power sector and is determined to implement the following interrelated actions: (i) restoring and sustaining power sector financial viability, including the implementation of universal charge to cover stranded IPP contract costs and stranded debt of NPC/PSAL,M, respectively; (ii)reducing market risks and ensuring a smooth transition to competitive energy markets, including early appointment of IPP Administrators; (iii)enhancing efficiency and private sector investment in the sector, and (iv) ensuring long-term security of power supply.
Education and Health
The provision of education is vital in breaking the Filipino’s vicious cycle of poverty, and provides the people, particularly the youth, with more opportunities. Government is committed to deliver quality basic education, provide more resources to schools to widen coverage and improve the management of operations of the public school system. Towards this end, in the proposed 2007 budget, the government is allotting 40.3% of the social services sector budget to the Department of Education. It is expected that the additional budget would support efforts to: strengthen higher education; raising provisions for the public school system; increase allocation for textbooks; construct more school buildings; and fund for repair and maintenance of schools.
As for the health sector, government is ensuring an equitable, sustainable, and quality health for Filipinos, particularly the poor. Government’s strategy includes: increasing the number of fully immunized children from 80% in 2005 and by 2010, at least 87% of children with age ranging from 0 to 11 months have already been immunized; widening the poor’s access to half-priced medicines through the Botika ng Barangay (BnB); and increasing the allocation for the subsidy for indigents under the National Health Insurance Program (NHIP).
Governance and Anti-Corruption
On August 23, 2006, the Department of Budget and Management submitted a proposed P1.1 trillion national budget to Congress for 2007. The proposed 2007 national budget is P73.1 billion, or 6.9% higher than the proposed 2006 general appropriations. With infrastructure and education as the focal point in improving the country’s competitive edge, the Department of Public Works and Highways is allocated P57.7 billion to spend on infrastructure, representing a 10.5% increase from the amount provisionally allocated for infrastructure in 2006. The Department of Education, on the other hand, is expected to build an additional 6,000 classrooms, purchase 42 million textbooks and hire 10,000 new teachers and fill another 882 other principal positions.
To ensure that funds allocated for these sectors are spent efficiently and expeditiously, measures are being set with regards to improving public expenditure management and procurement, as well as strengthening performance management and 63 public service delivery. Anti-corruption measures are also being put in place to ensure that public services are effectively provided.
Zmvroving Public Exvenditure Mananement. Government is shifting gears towards a results-oriented budgeting to make its agencies become more accountable for the country’s development agenda. While “performance budgeting” and “results-based budgeting” are not really new concepts, it will be the first time that the DBM is requiring agencies to qualify and quantify their budgets by their major final outputs. The new budgeting approach introduces the following:
Paper on Budget Strategy. The Development Budget Coordination Committee (DBCC), chaired by the DBM Secretary, introduced in the 2007 budget preparation a more strategic approach in resource allocation by way of a paper on budget strategy (PBS). The PBS aims to improve the link between planning and budgeting. It tightens the prioritization of new or expanded programs and projects given resource constraints. rn Forward Estimates. These are a system of rolling three-year financial estimates and are the government’s first best effort at estimating the future costs of existing programs and policies. As bases for future costs, the FEs become an important tool for recognizing expenditure pressures and the adequacy of funding for existing policies. As such, an FE communicates commitment to strategic priorities and improves predictability of funding.
Initial progress on the use of electronic financial management systems in budget releasing, accounting, and procurement has also been made. DBM central office is now using eBudget system for releasing and the eNGAS accounting module of COA has been installed in 82 NGAs, 47 LGUs and 8 GOCCs. Installations are now on-going for 14 NGAs, 23 LGUs and 3 GOCCs. The objective of the eNGAS is to computerize the accounting system of government and to make the system open to the public for scrutiny, thereby raising financial integrity and accountability of government spending.
Procurement Reform. The new government procurement system, while relatively new, has achieved substantial progress. Standard Bidding Documents have been issued for mandatory use last year. Just recently, generic procurement manuals were issued in accordance with the law. Launched in 2001 using the Canadian Mercks System, the government electronic procurement system has now shifted to its own PhilGEPS effective September 2006. All of these are translating into competition and transparency, and cost savings. Our procurement reform, cited among best practices, has helped bring down cost of textbooks and medicines. The inclusion of the private sector and the NGOs to sit in as observers in the Bids and Awards Committee, as mandated under Memorandum Order 144, is one of the landmark provisions of the Procurement Law.
Strengthening performance management and imvroving public service delivew. The establishment of Organizational Performance Indicator Framework (OPIF) encourages agencies to focus their efforts on the delivery of outputs relevant to the goals. The OPIF serves as mechanism to effectively evaluate agency accomplishments by
64 identifying and monitoring performance indicators and targets agreed upon between the agency and the Department of Budget and Management. The OPIF-based budget has been road-tested in crafting the 2007 budget. Twenty national government agencies have adopted that framework and have identified their respective major final outputs (MFOs), thus realigning their programs/activities/projects with these MFOs.
With this results-oriented budget fi-amework in place, allocation of the budget is made according to absorptive capacity, implementation readiness of new projects, and cost efficiency.
Anti-corruotion. Government is fighting corruption through good governance and intensified anti-graft and corruption campaign. Thus far, lifestyle checks on government officials with the rank of director and above have been conducted, resulting in the dismissal of 13 officials: two'from DPWH, six from BIR, five from BOC and the preventive suspension of three officials: one from BI and two from BOC. Government is also working on enhanced strategic collaboration and partnership with government and non-government entities.
The strong support of the government on anti-corruption is evident with the increases in the budget of the Office ofthe Ombudsman since 2002. With a larger budget, the number offield investigators and prosecutors was increased. Consequently conviction rates involving high-ranking officials filed before the Sandiganbayan also increased from a low of 14% in 2003 to 24% in 2004 and eventually to a more impressive level of 33% in 2005.
In conclusion, we would like to convey to the Bank that the Government remains firmly committed to the agenda outlined above and to continue with reform efforts already instituted.
Thank you.
Yours sincerely, fin
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0 I I* 0 Lg Annex 111: Summary of the CAS
Our Country Assistance Strategy (CAS) seeks to support Islands of Good Governance in national government agencies, local governments, and dynamic sectors in the Philippines that demonstrate how improved accountability and service delivery lead to better economic and social outcomes.
The strategy, which was discussed by the Board in May 2005, builds on the Government’s 2004- 2010 Medium-Term Philippines Development Plan. It has two main goals: economic growth and social inclusion. It also identifies two important levers for pursuing these goals: achieving fiscal stability and improving governance. In order to more closely align Bank Group support with national budget priorities, we are shifting away from financing discrete projects toward more programmatic engagement with selected key agencies and sectors. This will occur at three platforms of engagement -- national, local, and the private sector.
At the national level, improving governance and financing within the existing budget will require working through and improving in-country systems and processes. One implication is a move towards more sector-wide operations (SWAP’S)focused on core functions and services within the budget, away from specific investment projects that are not compatible with fiscal constraints.
At the local level, our strategy involves a greater integrated, cross-sectoral focus on the Local Government Unit (LGU) as the direct client in order to increase the likelihood of better outcomes across all services delivered by the LGU. Linking financing and capacity building to a clear performance framework in a practical way will facilitate good governance at the local level.
At the private sector level, our strategy promotes private investment by helping to strengthen regulatory agencies, reduce the cost of doing business, improve financial intermediation, and finance investments for public-private projects as well as in sectors with high growth potential. This involves greater coordination with IFC and MIGA on issues related to the relationship between the public and private sectors.
Our strategy seeks to provide the most value through the appropriate level and blend of lending, advice, and knowledge sharing. The effectiveness of the programs we support depends to a large degree, on the extent of political momentum for reform and the pace of change. Accordingly, the scale of IBRD commitments is determined by progress on fiscal reforms, reflecting the overarching importance of fiscal adjustment in the short-term and the need to mitigate and manage risks.
The CAS base case program assumes a scenario of modest fiscal reform in which lending would be in a range of $450-900 million of investment lending over the three-year period. In a high case scenario, reflecting substantial and sustained fiscal reforms, the Bank would be prepared to provide total lending, including DPL, of up to $1.8 billion over three years.
After a year and a half of CAS implementation, the improved fiscal situation will allow us to strengthen our support further through development policy lending, for the first time in six years. The inclusion of this DPL will put us into the enhanced base case of the CAS, which allows for development policy lending of up to $450 million over the three year period, with the proviso that total Bank lending would not exceed $1.2 billion over the period. The trigger for entry into the enhanced base case has been met, specifically that “a track record of policies and associated outcomes have been established, with a reduction of the CPSD of about 1.0 - 1.25 percent of GDP relative to 2004, as part of a sustained adjustment effort compatible with a deficit reduction of 2 71 percent of GDP during 2005-07. A significant portion of the fiscal adjustment would again be expected to derive from increases in the tax revenue to GDP ratio.” l5 [See CAS, Table 121
In addition to the DPL, we will provide support to the fiscal and governance agenda through an FY07 National Program Support Revenue Administration Reform project. Other investment lending will build upon the successful FY06 delivery of our first two national program support projects for education and health. In FY07 we will support improvements in the delivery of public services and addressing corruption vulnerabilities through an FY07 National Program Support for National Roads project, which strengthen the government’s own integrity development plan at the department level. Similarly, more efficient and effective public service delivery will be the objective for the national program support projects for Mindanao rural development (phase two) and participatory irrigation. An FY08 national program support project for social welfare and development will also support governance and expenditure management improvements related to the delivery of social services.
Our AAA support through economic and sector work, technical assistance, trust funds, policy dialogue, and involvement in the Philippines Development Forum (PDF, Consultative Group) all play a critical role achieving the CAS objectives of fiscal stability and improved governance. A significant AAA work during FY07 will be the commencement of the Public Expenditure Review. This task responds to an acute need to support transparency in budget allocation and execution, critical for translating fiscal gains into improved public service delivery. The policy dialogue in the power sector led by ADB and also in tandem with JBIC will also support fiscal stability (through reduction of contingent liabilities) and better governance (through creation of a framework for public-private partnerships).
In carrying out the assistance strategy, we will continue to draw on the relationships forged within the Philippine Development Forum (PDF; Consultative Group). The PDF involves a process for developing consensus and generating commitments among different stakeholders toward critical actionable items of the Government’s reform agenda. The PDF has become an important mechanism for policy dialogue and alignment of development partners’ programs and those of Government.
l5 At this time, we are managing the lending program within the envelope of the enhanced-base case. While the current pipeline might allow us to go beyond this envelope and the fiscal trigger for the high-case may well be met, we would prefer to make this assessment at a later time. In late-FY07 we will prepare the CAS progress report; at that time, we will be in a better position to assess the likelihood of moving into the high case. 72 Annex IV: Environmental and Social Aspects
In general, specific safeguards policies do not apply unless there is a sub-component on investment lending. According to the Bank’s OP 8.60 on DPL, para 11 on Environmental, Forests, and other Natural Resource Aspects, the Bank “determines whether specific country policies supported by the operation are likely to cause significant effects on the country’s environment, forests, and other natural resources. For country policies with likely significant effects, the Bank assesses in the Program Document the borrower’s systems for reducing such adverse effects and enhancing positive effects, drawing on relevant country-level or sectoral environmental analysis. If there are significant gaps in the analysis or shortcomings in the borrower’s systems, the Bank describes in the Program Document how such gaps or shortcomings would be addressed before or during program implementation, as appropriate.”16
Recent Technical Assistance and Analytical Work
The recent technical assistance and analytical work on the ENR sector and the social aspects have consistently pointed out the sound framework but weaknesses and challenges of the implementation of the laws and procedures of the environmental and social aspects. The studies include the following:
Country Safeguard Svstems Review. The Bank is currently undertaking a country safeguards systems review on environmental assessment (EA), indigenous peoples (IPS) and involuntary resettlement. The objective of the review is to assess the country safeguard systems, practices and implementation performance vis-a-vis the Bank’s safeguard policies to see where the gaps and weaknesses are to be able to help the government close the gaps for greater future reliance of the country systems. The review indicated that while the country systems on EA and IP are very comprehen~ive’~and reasonably comparable with internationally-accepted standards, including the World Bank’s systems, the Philippines EA and IP systems are facing serious implementation challenges. In particular, the EA system is implemented as a bureaucratic permitting exercise rather than as a useful planning tool to improve the design and ensure the environmental and social soundness of the project, resulting in continued degradation of the natural resource base”. The review has identified implementation weaknesses that need to be strengthened and filled in and also recommended actions on how to comply the system in a cost-effective manner, which are relevant
l6 There is a similar para on Poverty and Social Zmpacts (OP8.60, para lo), of which PREM will be taking the lead. Presidential Decree (PD) 1586 (Philippine EIS System); Republic Act (RA) 6969 (Toxic Substances and Hazardous and Nuclear Waste Control); RA 7586 (National Integrated Protected Area System); RA 7 160 (Local Government Code); RA 7942 (Mining Act); RA 8371 (Indigenous Peoples Rights Act); RA 7638 (Department of Energy Act); RA 8345 (Agriculture and Fisheries Modernization Act); RA 8550 (Fisheries Code); RA 8749 (Clean Air Act); RA 9147 (Wildlife Resources Conservation and Protection Act); RA 9003 (Ecological Solid Waste Management Act); RA 9275 (Clean Water Act). Annual air pollution averages continue to exceed national standards; surface water pollution and contamination of ground water with coliform bacteria are increasing; total forest cover is improving but forest protection and rehabilitation need to be expanded; number of rare, threatened and endangered species increasing; soil erosion and flooding increasing; only 5% of coral reefs in excellent conditions; seagrass cover decreasing and catch per unit effort (CPUE) on fish is decreasing (Philippines Environment Monitor 2004). 73 to providing favorable environment for private sector development and growth under the investment climate focus of the DPL.
Part of the Country Safeguards Systems Review included a more in-depth look at the Zndigenous Peoples Rights Act (ZPRA) of 1997. The Bank is currently reviewing the Philippines IPRA to identify strengths and weaknesses of the country’s social policy for the indigenous peoples and to identify areas for the National Commission on Indigenous Peoples (NCIP) to develop and implement a program to strengthen its implementation of the IPRA for greater future reliance. The review finds that IPRA has a more than adequate framework to protect the rights of IPSin the Philippines. However, its implementation is beset by the following issues: 1. The IPSare not yet fully identified, their territories not yet completely delineated, their customary laws have yet to be fully codified; 2. Lack of provisions for representations from non-IPS: IPRA recognizes property rights already existing within the ancestral domain but it does not have provisions for adequate representation for non-IPs which is important in dealing with communities where non IPS also reside.
The review also finds that the NCIP, as a young institution, lacks the skills and resources to implement the IPRA. It is under-funded relative to its enormous mandates which include delivery of services, provision of social infrastructure and livelihood projects to very diverse IP groups. It also has the enormous task of delineating ancestral domain areas and issuance of land and domain titles.
Philippines Environment Monitor (PEM) Series. The annual Philippines Environment Monitor (PEM) series that started in 2000 provides a snapshot of key environmental trends and indicators in the country. It promotes awareness in the protection of the environment, identifies issues and problems with the environment and encourages appropriate measures and actions to address the potential adverse impacts of polices aimed at promoting growth and expansion. The PEM series indicated that, while in general there are existing laws and regulations in ENR management, implementation remains a major challenge. The findings and recommendations of the PEM series would provide inputs into DPLs.
Governance of Natural Resources in the Philippines (2003) and NRM Wav Forward Action Plan (20051. This work analyzed NRM and governance in the Philippines, identified recent trends, current challenges and future goals. The review also focused on crucial issues for natural resource governance: property rights, institutions and financing. As part of its analysis of the overarching issues, the review considered cross-cutting governance concepts such as participation, accountability, transparency, corruption and service delivery. The review indicated that 50 years of severe natural resources degradation have taken a catastrophic toll on the country. The main causes of degradation include pollution, urbanization, sedimentation, conversion to other land uses and overexploitation, which are exacerbated by weak natural resource management, limited financial resources and ineffective environmental institutions.
Grant and Lending Operations
National Program Support for the Environment and Natural Resources Management (NPS-ENRM). The NPS-ENRM is one of the programmatic sector-wide lending operations identified in the CAS. It is a budget support currently under preparation and scheduled for Board Delivery in FY08 74 (standby for FY07). The NPS-ENRM will support the DENR implement its core mandates, including strengthening its capacity to enforce ENR laws and regulations, implement an integrated ecosystem management approach and strengthen its planning and budgeting process to minimize the disconnect between what is planned and what is actually implemented. The program is envisaged to improve DENR performance in implementing its core mandates and address the weaknesses in the country’s ENR sector, including enforcement of ENR laws and regulations.
Japan Social Development Fund for Mainstreaming Indigenous Peoples in Selected Agrarian Reform Communities (ARCS). This is a grant provided to the Department of Land Reform (DLR) and the National Commission on Indigenous Peoples (NCIP) to help the latter prepare the Ancestral Domain Sustainable Development and Protection Plans (ADSDPPs) in IP territories, strengthen the safeguard aspect of the IPRA (i.e., the certificate preconditiodfree and prior informed consent [CP/FPIC] process) and pilot test innovative approaches for mainstreaming IP concerns in ARCS. While this grant is limited in scope and coverage, it has a wider implication in terms of addressing the weaknesses of the country’s P system by developing mechanisms and procedures to strengthen and streamline the CP/FPIC process of the IPRA.
75 Annex V: IMF Public Information Notice
IMF Executive Board Concludes Mid-2006 Post-Program Monitoring Discussions with the Philippines Public Information Notice (PIN) No. 06/114 October 12. 2006
Consultation with the
On October 11, 2006, the Executive Board of the International Monetary Fund (M)concluded the Mid- 2006 Post-Program Monitoring discussions on the Philippines based on the information available through that date.'
Background
Considerable progress has been made with reforms, despite significant obstacles. Implementation of the far- reaching package of economic reforms launched in 2004 was initially slow due in part to political events. At the same time, surging international oil prices threatened to derail the extension of VAT to energy products, a key component of the fiscal reforms. Nevertheless, the non-financial public sector deficit was cut to 2 percent of GDP in 2005,3% percentage points below the 2003 level, reflecting tight controls on government spending and a marked turnaround in the finances of the National Power Corporation following a series of tariff hikes. The VAT reform, which took full effect in February 2006, looks set to further reduce the deficit this year, and has the potential to permit much-needed increases in spending on social services and infrastructure. Steps have also been taken to strengthen the banking system.
GDP growth in the first half of the year was 5.6 percent, with growth in agriculture particularly strong. Despite higher oil prices and the VAT reform, private consumption has been the main growth driver, buoyed by rapid growth in remittances. While investment has remained weak, exports have rebounded from last year's poor showing. Inflation remains above the Bangko Sentral ng Pilipinas (BSP)'s inflation target of 4-5 percent for 2006, but this is due largely to base effects from oil shocks and the VAT rate hike, and inflation has been easing in recent months.
The national government deficit fell to P 147 billion (2.7 percent of GDP) in 2005, from 3.8 percent of GDP in 2004. Through August this year, the cumulative deficit was P 34.2 billion, P 46.6 billion lower than in the corresponding period in 2005 and substantially below the full year target of P 125 billion (2.1 percent of GDP). With revenue collection broadly on target, the faster-than-expected pace of adjustment stems from the deadlock over the 2006 Budget, which was not passed by Congress; as a result, the 2005 Budget has been re- enacted which has constrained spending. The authorities are making efforts to increase social and infrastructure spending, including through the supplemental budget.
The strong performance of remittances and exports has helped to insulate the current account from surging oil prices. There has also been a pick-up this year in foreign direct investment. ThePhilippine peso was negatively affected by the emerging market sell-off in mid-May, but has since recovered strongly. This has allowed the BSP to resume its accumulation of reserves, which adjusted for pledged assets reached $21.5 billion at end-August, up from $18.0 billion at end-2005. The authorities have also used the greater availability of foreign exchange to prepay short-term external debt.
76 A key challenge for the Philippine economy will be to sustain the reform momentum, which will help maintain the confidence of markets and insure against market volatility. On current policies, growth is expected to increase to 5% percent in 2007, but could be significantly higher over the medium term on the back of additional reforms that put public debt on a steeper downward path and boost investor confidence and investment. The main downside risks to the outlook are a renewed surge in oil prices and a slowdown in the global economy.
Executive Board Assessment
Executive Directors commended the Philippine authorities for the strong macroeconomic performance- including robust growth, moderating inflation, and an improved external position-as well as the progress made in structural reforms. In particular, they welcomed the large fiscal adjustment in 2005 and the further decline in the fiscal deficit in prospect this year, aided by the VAT reform, which has also contributed to improving market confidence. In addition, the oil price shock had been well-handled, and important steps are being taken to strengthen the banking sector.
While stronger fundamentals have made the Philippines more resilient and less vulnerable to shocks, Directors cautioned that important vulnerabilities remain. Although on a declining path, the public debt is still high, with external commercial borrowing requirements continuing to be sizeable. Against this backdrop, Directors encouraged the authorities to sustain fiscal consolidation and other reform efforts to ensure debt sustainability, maintain the confidence of markets, and spur investment and the rate of economic growth.
Directors were encouraged to see tax revenues this year running significantly ahead of GDP growth for the first time in a decade, due primarily to the VAT reform. They looked forward to further improvements in tax administration, in particular through full operationalization of the Bureau of Internal Revenue reform program that is being developed with donor assistance.
Directors judged the authorities' fiscal plans for the current year to strike a good balance between further adjustment and much-needed expansion in capital and social spending, financed by a portion of the proceeds from the VAT reform. Given that the 2006 budget was not passed by Congress, the authorities' efforts to increase priority infrastructure and social spending through a supplemental budget and the public enterprises are understandable. However, Directors emphasized that any off-budget expenditures should be transparent and well-contained.
Directors welcomed the authorities' plans to balance the budget by 2008, as well as to significantly increase social services and capital spending over the medium term. They observed, however, that achieving both objectives will require further increases in revenue. While strengthening tax administration has the potential to yield part of the needed additional resources, Directors were of the view that additional tax measures will also be needed for sustainable fiscal consolidation.
Directors considered the monetary policy stance to be appropriate, with risks to the inflation outlook being evenly balanced. While inflation is above target due to past oil price hikes and the VAT reform, there appears to be little evidence that supply shocks are having second-round effects, and inflation is expected to return to target in 2007. However, Directors concurred that the BSP should remain vigilant against possible price pressures.
In the banking sector, Directors were encouraged by progress made toward resolving the non-performing assets (NPA) problem, and looked forward to significant additional NPA sales facilitated by the extension of the Special Purpose Vehicle (SPV) framework. Directors also welcomed the recent consolidation in the banking industry and efforts by banks to raise new capital. Nonetheless, they urged the BSP to maintain pressure on banks to strengthen capital and pursue sound risk assessment practices. Raising capital will be
77 particularly important for those banks that are shown to be undercapitalized based on new accounting standards, and in light of the pending introduction of Base1 11. Directors stressed that any regulatory relief provided to banks that require time to comply with the new regulatory standards should be tied closely to clear and transparent recapitalization plans. To ensure full effectiveness of the strengthened regulatory framework, Directors encouraged the authorities to continue pressing for the passage of long-delayed amendments to the BSP Charter that would strengthen the legal protection for supervisors and increase their leverage over problem banks.
Directors supported the priority which the authorities are assigning to promoting financial market development. While the recent disruption in the trust industry carries lessons for investors, it has also highlighted the need to improve disclosure of risks and take better account of customer risk appetite. Directors considered recent debt swaps to be important for the development of the domestic debt market. They looked forward to progress with legislative initiatives designed to foster domestic financial market development, including measures to create a credit information bureau and promote retirement saving vehicles.
Directors regarded the sharp reduction in power sector losses since 2004 as a key achievement in the authorities' reforms. They emphasized that close monitoring of the National Power Corporation's (NPC) finances going forward will be essential to ensure that this improvement is maintained. While recognizing the challenges involved in power sector privatization, Directors underscored the importance of pressing ahead with the sale of power sector assets.
Philippines: Selected Economic Indicators, 2002-07 2002 2003 2004 2005 2006 2007
Staff proj. 11
Growth and prices (in percent change)
GDP growth 4.4 4.9 6.2 5.0 5.0 5.4
CPI inflation (average) 3.0 3.5 6.0 7.6 6.7 5.0
Public finances (in percent of GDP)
National government balance
(authorities' definition) -5.3 -4.6 -3.8 -2.7 -1.7 -1.9
National government balance U -5.6 -4.9 -4.2 -3.0 -2.1 -2.3
Nonfinancial public sector balance 3/ -5.7 -5.6 -5.0 -2.1 -1.8 -2.3
Revenue and grants 41 20.9 20.9 20.5 22.1 22.8 22.4
Expenditure 5/ 26.6 26.4 25.5 24.2 24.6 24.6
Money and credit (in percent change)
Broad money (M3) 9.5 3.3 9.2 9.0 12.3 6/
Interest rate (91-day Treasury bill, secondary market,
end period, in percent) 5.9 6.5 8.4 6.4 6.2 71
Credit to the private sector (net) 1.2 1.8 4.6 -1.5 -1.0 6/
Balance of payments (in percent of GDP)
78 Trade balance -1.2 -1.3 -6.6 -1.1 -6.8 -6.3
Current account balance -0.5 0.4 1.9 2.4 2.4 1.7
Gross international reserves
In billions of U.S. dollars 16.2 16.9 16.2 18.5 21.5 8/ ..I
Adjusted, in billions of US. dollars 9/ 14.3 14.1 15.2 18.0 21.5 81 ...
Adjusted, in percent of short-term liabilities 10/ 123.9 122.9 122.9 133.0 ... ..I
Post-Program Monitoring provides for frequent consultations between the Fund and members whose arrangements have expired but who continue to have Fund credit outstanding. Particular focus is placed in these consultations on policies that have a bearing on external viability.
IMF EXTERNAL RELATIONS DEPARTMENT Public Affairs Media Relations Phone: 202-623-7300 Phone: 202-623-7100 Fax: 202-623-6278 Fax: 202-623-6772
79 AnnexVI: Tables
Table 1 : National Government Operations
2000 2001 2002 2003 2004 2005 (Percent of GDP) Total revenue 15.3 15.5 14.3 14.5 14.4 14.7 Tax revenue 13.7 13.5 12.5 12.4 12.3 12.6 Bureau of Internal Revenue 10.8 10.7 10.0 9.9 9.6 9.9 Bureau of Customs 2.8 2.6 2.4 2.5 2.5 2.6 Nontax revenue 1.6 2.0 1.8 2.0 2.1 2.1 Bureau of Treasury 0.9 1.3 1.2 1.3 1.3 1.3
Total expenditure 19.3 19.6 19.6 19.1 18.3 17.4 Current expenditure 16.6 16.4 16.4 15.4 15.3 Personnel services 6.6 6.7 6.4 5.8 5.5 Maintenance and other operating expenses 2.4 2.1 1.8 1.7 1.6 Allotments to local government units 2.5 2.8 2.7 2.3 2.3 Interest Payment 4.2 4.8 4.7 5.2 5.4 5.5 Capital expenditure and equity expenditure l/ 3.3 2.9 3.1 2.6 2.7 2.4 Net lending 0.1 0.1 0.1 0.1 0.1 0.0
Balance -4.0 -4.0 -5.3 -4.6 -3.8 -2.7
Financing 6.1 4.8 6.7 6.6 5.0 4.3 Net domestic 3.6 4.2 3.9 3.3 3.3 2.6 Net foreign 2.5 0.6 2.8 3.3 1.7 1.7
Source: Bureau of Treasury, IMF 1/ Includes capital allotments to local government units
80 Table 2: Consolidated Public Sector Financial Position
2000 2001 2002 2003 2004 2005 (Percent of GDP) Consolidated public sector deficit 4.6 4.8 5.6 5.2 4.8 1.8 Public sector borrowing requirement 5.2 5.2 6.8 6.4 5.8 3.4
National government -4.0 -4.0 -5.3 -4.6 -3.8 -2.7 CB restructuring -0.6 -0.6 -0.4 -0.4 -0.4 -0.3 Monitored GOCCs -0.6 -0.7 -1.2 -1.5 -1.8 -0.4 OPSF 0.0 0.0 0.0 0.0 0.0 0.0 Adjustment of net lending and equity to GOCCs 0.1 0.1 0.1 0.1 0.2 0.0 Other adjustments -0.2 0.0 0.0 0.0 0.0 0.0
Other public sector 0.6 0.4 1.2 1.2 1.0 1.6 SSS/GS IS 0.5 0.4 0.6 0.4 0.5 1.0 BSP 0.0 0.0 0.0 0.2 0.1 0.1 GFls 0.1 0.1 0.1 0.1 0.1 0.1 LGUs 0.0 -0.1 0.4 0.4 0.3 0.2 Timing adjustment of interest payments to BSP 0.0 0.0 0.0 0.0 0.1 0.1 Other adjustments 0.0 0.0 0.0 0.1 -0.1 0.0 Source: Department of Finance
81 East Lower Key Development Indicators Asia & middle Philippines Pacific income Age distribution, 2005 (2005) Male Female
Population, mid-year (millions) 83.1 1,885 2,475 7074 Surface area (thousand sq. km) 300 16,301 39,946 6084 Population growth (x) 1.7 0.8 1.o 5054 Uban population (%of total population) 63 42 49 49-44 30-34 GNI (Atlas method, US$ billions) 108.3 3,067 4,746 20.24 GNI per capita (Atlas method, US$) 1,300 1,627 1,918 GNI per capita (PPP, international $) 5,300 5,914 6,313 1014 04 GDP growth (“A) 5.0 8.7 6.9 15 10 5 0 5 10 15 GDP per capita growth (%) 3.3 7.8 5.9 percent
(most recent esthnate, 2000-2OW)
Poverty headcount ratio at $1 a day (PPP, X) 15 12 Under-5 mortality rate (per 1,000) Poverty headcount ratio at $2 a day (PPP, “A) 47 41 Life expectancy at birth (years) 71 70 70 Infant mortality (per 1,000 live births) 26 29 33 75 1 Child malnutrition (% of children under 5) 28 15 12
Adult literacy, male (% of ages 15 and older) 93 95 93 Adult literacy, female (% of ages 15 and older) 93 87 85 Gross primary enrollment, male (% of age group) 113 116 115 Gross primary enrollment, female (“A of age group) 111 114 113
Access to an improved water source (% of population) 85 79 82 1990 1995 2033 2w4 Access to improved sanitation facilities (% of population) 72 51 57
0 Philippines E4 East Asia & Pacific
Net Aid Flows 1980 1990 2000 2005
(US$ mi//ions) ~~ ~____ Net ODA and official aid 300 1,274 578 463 Growth of GDP and GDP per caplta (X) Top 3 donors (in 2004): Japan 94 647 304 21 1 United States 50 248 75 79 OT Germany 12 44 23 39
Aid (“A of GNI) 0.9 2.9 0.7 0.5 Aid per capita (US$) 6 21 8 6
Long-Term Economic Trends
Consumer prices (annual % change) 18.2 12.7 4.0 7.6 GDP implicit deflator (annual % change) 14.3 13.0 6.3 6.2 +GDP -GDP Dercauita
Exchange rate (annual average, local per US$) 7.5 24.3 44.2 55.1 Tens of trade index (2000 = 100) 99 87 100 84 198&90 1990-2000 2000-05 (average annual growth %) Population, mid-year (millions) 48.1 61.1 76.5 83.1 2.4 2.2 1.8 GDP (US$ millions) 32,450 44,312 75,909 98,371 1.o 3.3 4.7 (“7 of GDP) Agriculture 25.1 21.9 15.8 14.3 1 .o 1.7 3.8 Industry 38.8 34.5 32.3 32.2 -0.9 3.5 4.0 Manufacturing 25.7 24.8 22.2 23.3 0.2 3.0 4.5 Services 36.1 43.6 52.0 53.4 2.8 4.0 5.6
Household final consumption expenditure 66.7 71.5 63.8 79.8 2.3 3.5 4.5 General gov’t final consumption expenditure 9.1 10.1 13.1 9.7 0.6 3.8 0.8 Gross capital formation 29.1 24.2 21.2 15.1 -2.3 4.1 2.7
Exports of goods and services 23.6 27.5 55.4 47.3 2.9 7.8 8.8 Imports of goods and services 28.5 33.3 53.5 52.0 3.3 7.8 5.4 Gross savings 25.4 19.5 18.2 17.5 -0.6 9.6 14.1
Note: Figures in italics are for years other than those specified. 2005 data are preliminary estimates. .. indicates data are not available a. Aid data are for 2004.
Development Economics, Development Data Group (DECDG). 82 Philippines
Balance of Payments and Trade 2000 2005 Governance Indlcators, 2000 and 2005 (US$ millions) I Total merchandise exports (fob) 37,347 40,231 Total merchandise imports (cif) 43,318 47,777 Voice and accountability Net trade in goods and services -7,841 -8,942 Political stability Workers’ remittances and compensation of employees (receipts) 5,161 10,668 Regulatory quality
Rule of law Current account balance -2,225 2,354 as a %of GDP -2.9 2.4 Control of corruption --, Reserves, including gold 15,063 18,495 0 25 50 75 ica
Country’s percentile rank (0-100) Central Government Finance lil2005 02000 higher valves imp+ better ratimp (“A of GDP) Revenue 15.3 14.7 source: KaufmannXraayMastNzzl, World Bank Tax revenue 13.7 12.6 I Expenditure and Net Lending 19.3 17.4 Technology and Infrastructure 2000 2004 Overall surpius/deficit -4.0 -2.7 Paved roads (% of total) 21.0 9.9 Highest marginal tax rate (%) Fixed line and mobile phone Individual 32 32 subscribers (per 1,000 people) 126 446 Corporate 32 35 High technology exports (% of manufactured exports) 72.6 63.8 External Debt and Resource Flows Environment (US$ millions) Total debt outstanding and disbursed 58,299 60,550 Agricultural land (% of land area) 41 41 Total debt service 7,060 11,570 Forest area (x of land area, 2000 and 2005) 26.7 24.0 HlPC and MDRl debt relief (expected; flow) - - Nationally protected areas (% of land area) 5.7
Total debt (% of GDP) 77.3 67.2 Freshwater resources per capita (cu. meters) 5,869 Total debt service (% of exports) 14.1 21.0 Freshwater withdrawal (% of internal resources) 6.0
Foreign direct investment (net inflows) 2,115 970 C02 emissions per capita (mt) 1.o 0.94 Portfolio equity (net inflows) -1 83 418 GDP per unit of energy use (2000 PPP $ per kg of oil equivalent) 7.2 7.8 omposltlon of total external debt, 2004 Energy use per capita (kg of oil equivalent) 560 525
(US$ millions)
IBRD Total debt outstanding and disbursed 3,627 2,885 Disbursements 152 129 Principal repayments 349 376 Interest payments 223 124
S$ millions IDA Total debt outstanding and disbursed 207 197 Disbursements 10 0 Private Sector Development 2000 2005 Total debt service 5 8
Time required to start a business (days) - 48 IFC (fiscal year) Cost to start a business (“IOof GNI per capita) - 20.3 Total disbursed and outstanding portfoiio 697 357 Time required to register property (days) - 33 of which IFC own account 312 263 Disbursements for IFC own account 104 18 Ranked as a major constraint to business Portfolio sales, prepayments and (% of managers Surveyed who agreed) repayments for IFC own account 48 45 Macroeconomic instability .. 38.4 Corruption .. 35.2 MlGA Gross exposure 53 92 Stock market capitalization(% of GDP) 34.4 40.8 New guarantees 0 n Bank branches (per 100,000 people) .. 7.8
Note: Figures in italics are for years other than those specified. 2005 data are preliminary estimates. 8/13/06 .. indicates data are not available. - indicates Observation is not applicable.
Development Economics, Development Data Group (DECDG) 83 Millennium Development Goals Philippines
With selected targets to achieve between 1990 and 2015 (estimate closest to date shown, +/- 2 years)
Goal 1: halve the rates for $1 a day poverty and malnutrition 1990 1995 2000 2004 Poverty headcount ratio at $1 a day (PPP, % of population) 19.8 14.4 15.5 13.1 Poverty headcount ratio at national poverty line (%of population) 36.8 33.0 30.0 Share of income or consumption to the poorest qunitile (“YO) 5.4 Prevalence of malnutrition (%of children under 5) 34 28 31 28
Goal 2: ensure that children are able to complete primary schooling Primary school enrollment (net, %) 96 93 97 94 Primary completion rate (% of relevant age group) 68 65 66 66 Secondary school enrollment (gross, %) 72 77 79 83 Youth literacy rate (% of people ages 15-24) 97 97
Goal 3: ellmlnate gender disparity In education and empower women Ratio of girls to boys in primary and secondary education (%) 100 103 102 Women employed in the nonagricultural sector (% of nonagricultural employment) 40 40 41 41 Proportion of seats held by women in national parliament (x) 9 11 12 15
Goal 4: reduce under-5 mortality by two-thirds Under-5 mortality rate (per 1,000) 62 49 40 34 Infant mortality rate (per 1,000 live births) 41 35 30 26 Measles immunization (proportion of one-year olds immunized, %) 85 72 81 80
Goal 5: reduce maternal mortality by threefourths Maternal mortality ratio (modeled estimate, per 100,000 live births) 200 Births attended by skilled health staff (% of total) 53 58 60
Goal 6: halt and begin to reverse the spread of HIV/AIDS and other major diseases Prevalence of HIV (% of population ages 15-49) 0.1 Contraceptive prevalence (% of women ages 15-49) 36 48 47 49 Incidence of tuberculosis (per 100,000 people) 336 293 Tuberculosis cases detected under DOTS (%) 0 48 73
Goal 7: halve the proportion of people without sustainable access to basic needs Access to an improved water source (“YO of population) 87 85 Access to improved sanitation facilities (% of population) 57 72 Forest area (% of total land area) 35.5 26.7 24.0 Nationally protected areas (% of total land area) 5.7 C02 emissions (metric tons per capita) 0.7 0.9 1.o 0.9 GDP per unit of energy use (constant 2000 PPP $ per kg of oil equivalent) 9.1 7.5 7.2 7.8
Goal 8: develop a global partnership for development Fixed line and mobile phone subscribers (per 1,000 people) 10 28 126 446 Internet users (per 1,000 people) 0 0 20 54 Personal computers (per 1,000 people) 3 10 20 45 Youth unemployment (“YO of total labor force ages 15-24) 15.4 16.1 21.2 28.3
Education Indicators (%) Measles immunization(x of 1-year olds) ICT Indicators (per 1,000 people)
5w
7 4w 75 3w 50 2W 25 1w
0 0 1990 1985 2Mx1 2W4 2wo 2002 2w4 *Primary net enrollment ratio 0 Fixed + mobile subscribers +Ratio of girls to boys in primary & 0 Philippines 0 East Asia 8 Pacific Internet users
Note: Figures in italics are for years other than those specified. .. indicates data are not available. 811 3/06
Development Economics, Development Data Group (DECDG). 84 IBRD 33466R
120E Batan I Ilocos X Northern Mindanao Islands 1. Ilocos Norte 58. Bukidnon Basco PHILIPPINES 2. Ilocos Sur 59. Camiguin 1111 3. La Union 60. Lanao del Norte PROVINCE CAPITALS 4. Pangasinan 61. Misamis Occidental 20N 62. Misamis Oriental Luzon Strait CAR Cordillera Admin. Region REGION CAPITALS 5. Abraa XI Davao Region 6. Apayao 63. Compostela Valley NATIONAL CAPITAL 7. Benguet 64. Davao del Norte 8. Ifugao 65. Davao del Sur Babuyan RIVERS 9. Kalinga 66. Davao Oriental Islands 10. Mountain Province MAIN ROADS XII SOCCSKSARGEN II Cagayan Valley Babuyan Channel 67. South Cotabato RAILROADS 11. Batanes 68. Sarangani 12. Cagayan 69. North Cotabato 13. Isabela 70. Sultan Kudarat Laoag City 1 PROVINCE BOUNDARIES 14. Nueva Vizcaya 6 KabugaoKabugao 1122 15. Quirino XIII Caraga REGION BOUNDARIES
71. Agusan del Norte BanguedBangued III Central Luzon 72. Agusan del Sur Vigan TuguegaraoTuguegarao INTERNATIONAL BOUNDARIES 16. Aurora 73. Surigao del Norte 5 9 17. Bataan 74. Surigao del Sur TabukTabuk 18. Bulacan 19. Nueva Ecija ARMM Autonomous Region BontocBontoc 1010 IlaganIlagan 20. Pampanga 2 1313 125E in Muslim Mindanao LagaweLagawe 21. Tarlac 75. Basilan 8 Luzon 22. Zambales 76. Lanao del Sur San Fernando 3 LaLa TrinidadTrinidad CabarroguisCabarroguis
77. Maguindanao BaguioBaguio BayombongBayombong NCR National Capital Region 78. Sulu 7 79. Tawi-Tawi 1414 1515 IV-A CALABARZON LingayenLingayen 23. Batangas 4 1616 24. Cavite BalerBaler 25. Laguna PalayanPalayan 26. Quezon TarlacTarlacTarlac 1919 PHILIPPINES 27. Rizal Iba 2121 2222 SanSan FernandoFernando Polillo IV-B MIMAROPA 2020 1818 28. Marinduque MalolosMalolos Islands 29. Mindoro Occidental BalangaBalanga QuezonQuezon 30. Mindoro Oriental 1717MANILA PasigPasig 31. Palawan 3434 32. Romblon TreceTrece MartiresMartires 2727 SantaSanta CruzCruz 2424 DaetDaet 2525 2626 V Bicol 2323 33. Albay LucenaLucena 3535 3636 Catanduanes 34. Camarines Norte Lubang BatangasBatangas Islands PiliPili 35. Camarines Sur Virac BoacBoac 36. Catanduanes CalapanCalapan 2828 37. Masbate Mamburao 3030 Marinduque Legaspi 38. Sorsogon 3333 Sorsogon Mindoro Sibuyan Philippine Burias VI Western Visayas 2929 Sea 3838 39. Aklan Mindoro Strait Romblon 40. Antique Ticao CatarmanCatarman Sea Tablas 41. Capiz 3232 Sibuyan MasbateMasbate 5252 Samar 42. Guimaras Busuanga 3737 43. Iloilo Masbate 44. Negros Occidental 5353 Semirara Visayan Culion Islands KaliboKalibo CatbaloganCatbalogan Roxas City VII Central Visayas Sea Borongan 45. Bohol Linapacah 3939 NavalNaval 4949 5050 46. Cebu 4141 47. Negros Oriental Panay TaclobanTacloban Cuyo 48. Siquijor 4040 Islands 4343 5151 Leyte Leyte VIII Eastern Visayas San Jose de IloiloIloilo JordanJordan Cebu Gulf 49. Biliran Buenavista BacolodBacolod 4242 50. Eastern Samar Dumaran 4646 5454 51. Leyte CebuCebu Dinagat 52. Northern Samar MaasinMaasin Negros 53. Western Samar 10N Bohol Siargao 54. Southern Leyte 4444 4545 SurigaoSurigao
Puerto Princesa TagbilaranTagbilaran 7373 IX Zamboanga Peninsula 3131 4747 55. Zamboanga del Norte Mindanao 56. Zamboanga del Sur Palawan DumagueteDumaguete SiquijorSiquijor Sea Mambajao 7171 57. Zamboanga Sibugay Siquijor 5959 4848 Camiguin Tandag 7474 ButuanButuan CagayanCagayan Sulu Sea Dipolog Oroquieta dede OroOro ProsperidaoProsperidao 6262 6161 7272 Bugsuk IliganIligan 5555 5858 MalaybalayMalaybalay 6060 MarawiMarawi Balabac PagadianPagadian 7676 Mindanao 5757 5656 6464 6363 TagumTagum 6767 6666 Cagayan CotabatoCotabato DavaoDavao Zamboanga MatiMati Sulu Moro Gulf 7777 Isabela MaganoyMaganoy KidapawanKidapawan DigosDigos Mount Apo City IsulanIsulan (2,954 m) Basilan 7070 Davao 7575 KoronodalKoronodal This map was produced by 6565 Gulf 6969 the Map Design Unit of The Jolo Sulu AlabelAlabel World Bank. The boundaries, colors, denominations and MALAYSIA 6868 any other information shown 7878 on this map do not imply, on the part of The World Bank 0 50 100 150 Kilometers Tawi-Tawi Group, any judgment on the 7979 Celebes Sea Sarangani legal status of any territory, or any endorsement or 5N Bongao acceptance of such 0 50 100 Miles 125E 120E boundaries. JUNE 2006