Evaluation Study Reference Number: CAP: PHI 2008-20 Country Assistance Program Evaluation 26194 June 2008 Philippines Country Assistance Program Evaluation: Increasing Strategic Focus for Better Results Operations Evaluation Department CURRENCY EQUIVALENTS (as of April 2008) Currency Unit – Peso (P) P1.00 = $0.024 $1.00 = P41.80 ABBREVIATIONS ADB – Asian Development Bank ADTA – advisory technical assistance AFC – Asian financial crisis ARMM – Autonomous Region of Muslim Mindanao ASEAN – Association of Southeast Asian Nations BESRA – Basic Education Sector Reform Agenda BFS – Bahay Financial Services BHF – Balikatan Housing Finance BIMP-EAGA – Brunei, Indonesia, Malaysia, Philippines-East ASEAN (Association of Southeast Asian Nations) Growth Area BIR – Bureau of Internal Revenue CAPE – country assistance program evaluation CCAO – central court administration office CFMO – central financial management office COSS – country operational strategy study DILG – Department of Interior and Local Government DMC – developing member country DOH – Department of Health DPSP – Development Policy Support Program EA – executing agency EPIRA – Electric Power Industry Reform Act ERC – Energy Regulatory Commission EVAT – expanded value-added tax GDP – gross domestic product GFI – government financial institution GOCC – government-owned and -controlled corporation HSDP – Health Sector Development Program HSRA – Health Sector Reform Agenda IA – implementing agency IMF – International Monetary Fund LAR – land acquisition and resettlement LEMP – law, economic management, and public policy LGC – Local Government Code LGU – local government unit LGUGC – LGU Guarantee Corporation LWUA – Local Water Utilities Administration MBUSS – Mindanao Basic Urban Services Sector MDG – Millennium Development Goal MEDC – Mindanao Economic Development Council MTPDP – Medium-Term Philippine Development Plan MWSS – Metropolitan Waterworks and Sewerage System NBFI – nonbank financial institution NFA – National Food Authority NGO – nongovernment organization NHMFC – National Home Mortgage Finance Corporation NPC – National Power Corporation NPL – nonperforming loan NRW – nonrevenue water O&M – operation and maintenance OCA – Office of the Court Administrator OED – Operations Evaluation Department PDF – Philippine Development Forum PSRP – Power Sector Restructuring Program RCAO – regional court administration office SBGFC – Small Business Guarantee and Finance Corporation SEC – Securities and Exchange Commission SEDIP – Secondary Education Development Improvement Project SME – small- and medium-sized enterprise TA – technical assistance TVET – Technical and Vocational Education and Training WSS – water supply and sanitation NOTE In this report, "$" refers to US dollars. Key Words philippines, adb, asian development bank, country strategy and programs, partnership, sector assessment, operations evaluation, operations evaluation department, agriculture, infrastructure, transport, energy, urban sector, health, education, water supply, finance, environment, private sector development, decentralization, local government, governance, policy dialogue, technical assistance, capacity building Director General H. S. Rao, Operations Evaluation Department (OED) Director R. Adhikari, Operations Evaluation Division 2, OED Team leader R. Bolt, Principal Evaluation Specialist, OED Team members T. Ueda, Senior Evaluation Specialist, OED G. Crooks, Evaluation Specialist, OED S. Shrestha, Evaluation Specialist, OED B. Palacios, Senior Evaluation Officer, OED F. De Guzman, Evaluation Officer, OED R. Perez, Senior Operations Evaluation Assistant, OED C. Roldan, Senior Operations Evaluation Assistant, OED Operations Evaluation Department, CE-17 CONTENTS Page EXECUTIVE SUMMARY i MAP I. INTRODUCTION 1 A. Objectives 1 B. 2003 Country Assistance Program Evaluation 1 II. DEVELOPMENT CHALLENGES AND THE GOVERNMENT’S PLANS 1 A. Economic Performance 1 B. Government Development Strategy and Plans 3 III. ASIAN DEVELOPMENT BANK’S ASSISTANCE PROGRAM AND PERFORMANCE 4 A. Program Overview 4 B. Country Strategy Positioning 5 C. Institutional Performance 11 D. ADB’s Results Contribution 16 E. Overall Top–Down Assessment 18 IV. EVALUATION OF THE SECTOR ASSISTANCE PROGRAM 20 A. Economic Management, Public Policy, and Social Services 20 B. Private Sector Enabling Environment 25 C. Urban Development 31 D. Agriculture and Rural Development 33 E. Water Supply, Sanitation, Waste Management 36 F. Overall Bottom-Up Assessment 38 V. FINDINGS, LESSONS, AND RECOMMENDATIONS 38 A. Findings, Lessons and Conclusion 38 B. Strategic Issues for the Future 42 The guidelines formally adopted by the Operations Evaluation Department (OED) on avoiding conflict of interest in its independent evaluations were observed in the preparation of this report. Romeo Bernardo (Senior Strategy Advisor), Teresa Ho (Health Sector Specialist), Steven Tabor (Country Program and Strategy Evaluation Specialist), and Sarath Thalakada (Finance Sector Specialist) were the international consultants. Bing Villarante (Rural Development and Portfolio Specialist), Rowena Bernardine Vicente (Macroeconomic and Public Policy Specialist), Isabel Paula Patron (Fiscal and Public Expenditure Management Specialist), Paulo Rodelio Halili (Energy Specialist), Jose Antonio League (Urban Development Specialist), and Noel Gamo (Finance Sector Specialist) were the national consultants. To the knowledge of the management of OED, there were no conflicts of interest of the persons preparing, reviewing, or approving this report. APPENDIXES 1. List of Lending and Nonlending Operations 46 2. Evaluation Approach and Ratings 52 3. Progress on Addressing Recommendations from the 2003 Country Assistance Program Evaluation 59 4. Summary of ADB Country Programs Since 1998 60 5. Harmonization and Development Partner Activities 63 6. Asian Development Bank Operations, Portfolio, and Trends 66 7. Philippines Socioeconomic trends, Government Response, and Issues 72 8. Economic Management, Public Policy, and Social Sectors 83 9. Private Sector Development 102 10. Urban Sector 113 11. Agriculture and Rural Development Sector 118 12. Water Supply, Sanitation, and Waste Management Sector 124 EXECUTIVE SUMMARY Background By the end of 2007, the Asian Development Bank (ADB) had approved $9.8 billion in public loans and $148.8 million in technical assistance to the Philippines. Through its private sector operations for the same period, ADB had approved $275 million in loans and $37 million in equity investments. Evaluation Purpose and Approach The first Philippines country assistance program evaluation (CAPE) was completed in early 2003 for ADB support to the Philippines. It covered ADB’s assistance since 1966, but focused on the 1980s and 1990s. The 2008 CAPE assesses the performance of the ADB assistance program since 2003 as an input for preparation of the new country partnership and strategy. The evaluation method is based on the Operations Evaluation Department’s CAPE guidelines. The approach involved surveys, interviews, and discussions with Government oversight and line agencies and ADB staff responsible for the lending and nonlending operations under implementation during the CAPE period. Project site visits were made by the CAPE team to eastern Mindanao, north Luzon, and Iloilo to obtain regional and local government and beneficiary views on ADB assistance, and the team attended Philippines Development Forum events as an observer. Country Context and Challenges Key Challenges. At the beginning of the CAPE period, the ADB–Philippines partnership was faced with three key challenges: (i) an excessively broad country strategy and program with weak implementation performance; (ii) a large fiscal deficit resulting in low government spending on essential public goods; and (iii) a weak investment climate, and wide regional disparities resulting in persistent unemployment, inequality and poverty, particularly in the southern and eastern areas of the Philippines. Government Plans and ADB’s Program at the Beginning of the CAPE Period. Since 1999, the Government’s plans covered an extensive set of development needs and programs. But there was a weak link between plans and the budget despite the prevailing fiscal problems. Similarly, ADB country strategies and plans at the beginning of the CAPE period were overly broad-based with wide sector and geographic coverage. Furthermore, ADB’s ongoing investment operations experienced implementation delays; problems with land acquisition and resettlement; procurement delays; shifting political support for urban, agriculture, and education reforms; and a dearth of counterpart finance by 2002–2003 when fiscal constraints were most severe. Improved Growth Rates. During 2002–2007, the Philippines achieved 6 consecutive years of annual gross domestic product (GDP) growth averaging 5.6% over the period. Driven largely by an expanded service sector, growth was accompanied by low to moderate inflation, low real interest rates since 2001, and unprecedented current account surpluses that boosted the country’s balance of payment position. In early 2008, risks began to emerge to the sustainability of this growth rate arising from a slowdown in the United States economy and other external factors such as high commodity prices. Persistent Unemployment and Poverty. Poverty incidence declined from 33.0% of the population in 2000 to 30.0% in 2003, but then increased again to 32.9% in 2006 despite robust growth performance. Unsatisfactory job creation is reflected in