Philippines - Economic Integration Program

Documnt of The World Bank FOR OFM-CLAL USE ONLY Nj MICROFICHE COPY Feport No. :P- 5881-PH Type: (PR) Title: ECONOMIC INTEGRATION PROGRAM Author: KHARAS, H Rept No, P-5881-Pn Ext.:80505 Room:D8093A Dept.:EA10C REPORT AND RECONMENDATION OF THE PRESIDENT OF THE INTERNATIONAL RANK FOR R STRUCTION AND D TO THE EXECUTIVE DIRECTORS ON A PROPOSED WAN IN AN AMO EQUIVALENT TO US$200 MILION TO THE REPUBLIC OF PHILIPPINES FOR AN ECONOMIC INTEGRATION PROGRAM NOVEMBER 2, 1992 This document has a restricted distribution and may be used by recipients only in the performace of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY AOL (as of June 30, 1992) Currency Unit = Peso (P) US$1 = P 26.1 WEIGHTS AND LMASURES 1 mete 3.2808 feet (ft) 1 kilometr (m) 0 0.62 mile (mi) 1 square kilometr (sq kmi) - 0.3861 square miles (sq mi) 1 liter (1) 1.1 quarts (qt) or 0.26 gallons (gal) 1 liter per capita per day (1cpd) = 0.2642 gal per capita per day ABREMATI AND ACRNMS BOT - Build-Operate-Transfer CBP - Central Bank of the Philippines cG - Consultative Group DDSR - Debt and Debt Service Reduction ElL - Economic Integration Loan ERB - Energy Regulatory Board ERL - Economic Recovery Loan GC - Government Corporation GDP - Gross Domestic Product GNP - Gross National Product ICB - Intenaional Competitive Bidding IRR - Implementing Rules and Regulations LTFRB - Land Transportation Franchising and Regulatory Board MARINA - Maritime Industry Authority NG - National Government NGO - Non-Govermment Organizaton NPC - National Power Corporation ODA - Official Development Assistance OPSF - Oil Price Stabilization Fund QR - Quantative Restriction SAL - Structura Adjustment Loan WSP - Wholesale Price ESALCAR January 1 - December 31  FOR OMCIAL USE ONLY I" eOf Q1 Loaa d PgranSummary .................................. . . i FM. mmeEconomy ............................................ I A. Intmcduction ....................................... . . . 1 B. PoiRcy efznsn tie *1 9 s .................................. 1 C. RecentEcnomnic evelopmenls .... ............................. 2 FRAJ . Ihe Adjsnt Ptogam .......................................... 4 A.. is Adjustneat Efort In Perpectve ............................. 4 B. IIoCuffent PoUcy Ageb .................................... 4 C. lhe Govenme ReformPn om ...............................rg 6 mAR m.: Projected Macoeconomic Deveopments and Fancing Needs . ............ 13 A. Ecoinic Prospects ...................................... 13 B. Fnancgs . ................................... .. 1S nnoPpE ILoan .......................................I:..e.. 17 A. Backgound and Lan Objective ............................... 17 B. BE Status and Bank/Fund Coordinat..n.... 18 C. ConddonsofEffecdveessandTrancheReldeae .... ................. 18 D. Ds*enient ....19 B. Proumen: ............................. . 20 F. AccountsandAudits . . . ............................. 20 G. lontring .... 20 H. Risks ................................... 20 PAII Wold Bank StWe and Opetios ............................. 21 A.. noducion ............................................ 21 B. Pan Bank Lenling. ....................................... 22 C. Portbo Sau nd the Link to Country AssistneS W . ............. 24 D. lhe BanVs FtwmAssistan StratW ............................. 25 B. TwoKeySSustnabffity Isss: Poverty pnd theE nw nm ............. 29 F. Scale ad Composition of Lading .............................. 31 0. Useof lDAResources ...................................... 31 H. Citeia for Judging Sucm ................................... 32 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 dislosed without World Bank authoration.  I. AU CoordinaIon ...................... 32 J. IFCandIvIGA . ..... ................ 32 P r ................ ........................... 33 1 Iitorsof Policy Reonm .................................... 12 2 DsbutionofBankLedigbySo", Y84-92......... 23 3 Bank Group Adjusten LaendI sI 1986 ........................... 24 Annex I Key Macroeconomic bdiatom .34 Anne I Policy Letter .38 Amu M PoHcyMatrix . 61 AnnexIV Stu of BankGwupOpeaiousinthePbilippines .65 Annex V Tintie of Key Events .68 IBRD No. 24105  -BLIC- T -ECNI--IRWION LnA and 1!g_ _wnm= Republic of the Philippines Mount: US$200 million Ta: 20 yeas, including five years of grace, at the Bank's standard variable intrest rate DulrJnogn: ETh , roposed program supports the consolidaton of a suitable medium-term frmework in which structural reform, coupled with debt and de1' service can be implemented in a growth-orented manner. Ihe program addresses those areas which are considered essnial for integrg all regions of the Philippine economy with the rest of the world. These include: (i) maroconomic management through improvement of Central Bank finances and appropriate energ pricing policies; Qi) promotion of investment through implementation of a new foreigp investment act, privazation and encourgemet of private participation in fastructure project; (iii) ratonalizadon of the tariff regime and remova of quantitative restrictions on imports; (iv) introducton of greatsr competiton into land and sea wanport; ad (v) removal of retictions on foeig exchange ansactons on both the curr and capital accou. The loan would finance general imports of goods at a time when freign resves are being reduced by the needs of the debt and debt sevice reduction opao and an inciient investment reovery. ad Rift: The mai benefit from the loan will derive from the Support it wll give to the Governments efforts to achieve a more compeotive economy. The indicatrs of success would be (i) a substial increase in private foreign and domestic investmnt; (ii) a more efficiet allocation of resources thanks to trade reform, coupled with more effective domestic import-sbstiton brought about by more competve internal transport; ad (iii) greater macecnmic stability in te face of exnal shocks. Ihe main risk relate to possible delays or inadequate impleaon of refori, if instability in the forep exchage mart canot be managed through noal mic means, especially if fiscal balances deteiore. However, there is a high level of Government comunitment to the refrm and many pd,ro actions have already been tak  ihe proposed loan would be disbursed in two tranches, of US$120 million and US$80 million equivalent respectively. The first tranche would be available upo ffcdveness of the loan and the second tranche would be released upon completion of agreed acstons, expected to be In the third quarter o; 1993. Not applicable None MRD No. 24105  RlRT AND RECOMATION OF THE PIRIDENT or TM RNATIONAL BANK FOR RECNSUCTION ANI DEVEPOM TO THE EXECVsE DIRECTORS ON A PROPOSE LOAN TO TM REPUBLC OF TIE PHNES FOR AN ECONOMIC INEGRATION PROGRAM I submit for your approv the following report and re ndon o a proposed Economic Integatio Loan tD the Republic of the Philppines for the eqwaent of US$200 million to support the Govermw's medium term program of om c tbi on ad stucu reform Th loan wod ave a term of twenly yas, including a grac period of five years, at die Ban's andard vaiable PART I =EOOMY A. ISAdudo 1. The most reet Country Brief wa distributed in June 1992. IT latest Coutry Ecoomic Repot, entiled Pubc Seoer RwPilSliaon and lagditusM Oteport No. 10056- PR) ws distrbd on Februy 20, 1992. The Presidens Report on the Second Vocaional Tranig Project (Repor;. Ilo. P 5732-PH), which was distributed on May 11, 1992, also contDas an update on reo economic develpments and on the Bank's asiste strteg. A briefig note on the recently nded debt and debt servke reduetion (DDSR) agreement with commecal bans was diributed to the Board on September 25, 1992. 2. Following a peaceful and democratic trasion of power for the first time in m than twenty yeas, the new AdIIstatio of Prident Ramos has sought to develop a growth-oriend adjutmn prom focsn on world competveness in producton and people empome domldlRy. The first stVp in is program has been the successfu conclusin of a comprehive 8_COCM tD restrctue medium nd long term extra debt held by cmmerild banks (see Bridefing Not, SaM-lZ73). t is neoked that the full beb of this W would only be adcived if paralll ac no are tn on a stabiliaon prgm and alo on strut mesures to Integrate th Phipineconomy more closely widt the economy. ITe Government, aided by the Bank through its poliqy diaogue, has deloped a broad program of reom to complement Is debt reducto program, building on the policis put In place by the Aquino Adminion. The main ecoomic develop_ent ismes undelying the Govmen's policy agenda, and the BankWs strateg and suppt for ti program, are smumarized beow. B. Poic in the 19ft S. Alowugh the Philippine econmy grew strongy in the 1970s, by around 6.5 prcet per ye, the n for strca adjusmt was evident by dhe end of the decade. Externa debt had rapidly to 53 perct of GDP by 1980 and the heavy inven ir t o geerate growth had produced unsustainable curmret accou deficb of over 8 percen The public corpoate sector was epning rapidly into high risk, capital intensive projects. Foreig capital was beig iated into piate through public financial without adequat supervision or of projt di. And industri sr growth was incrasingly ring on cotucdon in tie nontaded goods soeor, rathr ta on fier growth. Tbes defects in the growth proces were appr In tbe lure to ahieve asubstantia t s ationIntructure of employmen towwads the fbra we earing sector, and In the abce of dgnificant progrs In reducing poverty. The  -2- Identfied problem, theW, was to raise the efficiency of Ivetnt trough displined demand and through a mediumterm adjustm program targeted at reructuring of the industria sectr, finanial irdiation and energ pricing. 4. The Philippin has progressed significanty in implementing this adjusn program. Since 1983, and particaly since the mge in Government In 1986, the authorities have made concerted efts to correct a wide array of structua problems. Reforms in agricultura pricing and marketing, theofinan sector, privadzaon, trade and tariff liberadization, direct and indirect taxes and invesment incenives he been undetakn, along with procedumes to set priorMies for public Investments. Sugar and coconut mowpolies hav been disbanded, interest rates are now determined by market forces, the bias twards capi ntensity in investment incentives has been effectively removed, the Board of lyonve_ has steamlined procedur and taken on a more promotional role, a value added tax and Imved income tax measures have been iplemented reducing tax disbrtions, and trade reorm has been pursued. Taken together, these measures have subnll opened the economy to competiton and correctd majr policy-induced intenal distortions. 5. The reform effort of the Philippines has received substanil support from the intermational cmmqunity. The Bank has provided broad support for the implementation of structura reforms with a sies of policy4ased structural and sectotal adjustment loans, and the IMP has supported the Govemmept with program In place on an uninterupted basis since 1985. Official donors have provided sgnificn new resource flows through the mechanism of the Philippines Assistance Program/Multil*eru A.htme Initiative, commit about US$8 bilion over the last three years. At the same tdme, the pWiippins has sgt to reduce its external debt sernce burden through a seres of rescheduling _greemm with the Paris Club and private cotmercial banis. In addition, a combination of debt re on, Intate - including a debt buybacL in 1990 supported by officia donors - have led to a total cmmerci debt reduction of over US$3.3 billion as of the end of 1991. C. RecemgcDag nI Ds&mou 6. Depitsuccesses in strcturd reforms and an initrecovery of growth between 1986"89, the twin goals of stabilization and sustainable growth have eluded the Govemment. Slippage in fiscal and monetay policy in late 1989, together with the Gulf crisis and an unprented s&des of natural disste_,undermined econmic perfmance. The fiscal and current account deficits worened in the second part of 1989, and these woisome developments coninuedduing 1990, result in a slowdown of growth to 2 percen 7. Ihe worening of fiscal balances in 1990 has been the most important cause of the poor econamic perfman. The deficit of the consolidat public sector increased from 4.2 percent of GDP in 1989 to 5.3 percen In 1990. The delay in adjustng domestic oil prices to changes in the exchange at and ntaona pries led t a large deficit in the Oil Price Stabilizaion Fund (OPSF), compounded by gowg domestic Interest rates as the Governmet sought to protect the deficit by mainining an ovaled eoxha rate. The fiscal imbalances were therefore also reflected in the deterioration of the &ten ban - the current account defict increased from 2.5 to over 5 percent of GDP. 8. The 1990 developments upset the Government's macroeconomic program, supported by an Exteded Pund Facility agreed with the IMF in March 1989 and subseently revised in November 1989. In NOvmber and Decenmber 1990, the Goveme took corrective measures, and frmuted a stabin progm focusing on tightr fiscal and monetay policy that won the support of an BE Staod-By Arngement in March 1991. A Budget Summit was held between the Execuive and the  -3 - Lgaw brandhes, rdlng In an Wreemen to llmit th 1991 budget at the same nominal lvd as 1990; domsdc oil prices wer brought In line with intern *nal prices; an import surcharge of 9 pecn was IntoduOd as an additioa temporary reveaue measure; the exchange rae was allowed to diprecat by abot 25 percent; and rSeve reqiemet On commercia bak deposits wee rise from 21 to 25 percen. 9. Overl, the Government has made considerable progress in achieving iS stabilizadon goas, even within the original targes major expenditures for disaster relief The deceeati of economic activity and e effts of th irport surchargv - together wi the decline In itaiona oil pices and Iest rates - have led to a subntial Improvement in extel b s and allowed a lWe increase in interna teserves by about US$2.5 billion in 1991. Ihe decline In domesdc nomina Interest tes, following a mar exchange rate deprecialon in late 1990, and the hap reductin in capial etsin te fir half of 1991 have led to a large improvement in the National Gownment (NM deficit he deficit of t!s OPSF has also been mfmd Ito a modest surplus, allowing for a rcduon of domestic oil prices of about 14 percent in Augu 1991, again In December 1991 and most reety In May 1992. All told, the consolidated public sector deficit for 1991 was 2.7 percent of GNP, coompard with a program target of 3.5 percent of GNP, a significant accomplishnt, and an important bads for the proposed operation. 10. Achievement of the stabilization targets has not been easy, because of the need to sterlize lrge amout of forei capital that have retned to the country. Sterzaion of these inflows bas created an asin in the supply of public domestic debt which, in tmn, has slowed the decline In Inere rtes. In addimon, deficit of the Cental Bank of the Phippines (CBp) in 1991 has been fnance through isng debt; but the reldng itest dcarges create e tations of future CBp deficits ad an associated tra of inflationary money creadon. These factors are minting expected real trstates in the Phlpines at levels which, at around 11 percent, are high compaed to i aionad re. Bringi down intre ates is, therefore, seen as one of the key elements in the recovery of pha-t investment 11. The sharply contactonary monetary and fiscal stance has been successfully sustaind by the Governent. through 1991 and 1992, creatig an emerging track record of decidsve m c which, albeit at a high shorttem cost in tem of foene growth, has pired fresh confidnce. Reuning flight capital, atrcted by high peso interest rates, has allowed the Cea Bank to puase over US$3 billion since 1991 In freign excha markets, causg unacomed problems with stiliztn and an appreciating crn. GDP has however delied in 1991, by I percent, and has bee fat In th fist half of 1992, when an incipient recovery was choked off by competven losses and sers enegy sh ges have reslted in duption of productve activi acros all sectors. Howver, as emergqcy measures taken by the Govetnment to stem the energ crsis ar mplemented and as price stabiity is restored, the economy is expected to resume growth. 12. In spite of substatl ptogress on fiscal consolidation - the public sector deficit ha been reduced to a projected level of less dtan 2 percen of GNP in 1992 - moneaty mamgement problems, read to the szeable exasion of foreig excag resves, led to a delay of the second review of the IMP Stad-By Arrangemet, origily sedled fo April but actually completed in October. In the contet of this rview, the Stsnd-BY has been extended through March 31, 1993.  -4 PART EL AD1(1 ROGT A. MEfLBrLin 13. Despite the stcuctl tefom Intied In the 1980s and he progress tn maco mic stabato, the economy has yet to attan an efficin sustainable growth path. T1ree principal fator hav consained progress. Fist, the recrd on Implemeatn as been mied. The abity of the Govetment to sustn a stable c nviraoment has been complicad, as tn many other nwuls, by political presse and by the presence of high exten debt. Teo debt burden has prevened te consolided public sector dfick (incun the Cnta Bank) from being further reduced in the absence of reseduling of ine obligato. In addiio, high external debt obligations have been pnasble for large recrent deficis of the CBP, and the continued suscepiility of CBP net Income -A balance d to excage rate movement has hurt the effectiveaess of monetary 14. Second, economic pefomace has been csained by the high degree of uncraity regrig the future course of policies. To some extent, his has resmted from political diffrences bewe the Govermet and 1he Leslate, but the station also owes in part to continued high exten debt obliaons. Ivmesto in the Phipines face the prospect fui exteMnad transaons may be dirupted by resictimpbsed oan trade or sapital flows. A history of such intventine exists; in 1983 te Govment rolled back trade refos and Imposed quantiave restricto on imports and a complex import licensing scheme. In 1991, an acrosste-boa tariff surhg of 9 pecen was imposed on hImrt. Feas of such actons tag place in the fuue persis - Wgered by balance of paynoo pressur tha coud result ther from increases in global inest rates or from a faiure to reach a raeduling acord wth creditor banks. Similarly, investors face the prspect tha domestc poitic preses could tier unilateral action lmiing exten debt sevice and force a cosdy mn_o wit- 1 ; h foe comm_ bobs. 15. Thr, trad and inetm refm have been more tentatve tan neesary, at leas in pat becas of the foreig excag presses t have continuously resufaced whever growth has recovered. As a result, the eo=nomy remains parialy protcted, unable to benit fully fom inegraton withe rest of the world. B. Ck rua PolicyAeDA 16. Mme Philiine Govemen see to addres these three c tthrough the Impltof a strong macrconomic and strtal reform program, suported by a comprehe reductiOf commerca bank extenal debt and debt service. Ither e atree broad component in he eoomic Intert progm. First, remaining distoions in the real sector of the econmy need to be removed. The Goveenmt has introduced a oeral Forei Investm Act, passed by Congress In June 1991, to alow for highe proporo oforeif equity ownership in most companies and to expand the sect where fg investment can fredy flow. As part of this exmsion, the Government has a progatoecooorage ptepa pninmaorinmfioructeprojecthghrBd-OpugahTlsfer W ) schems, and both foreign and domesic private investment are cted to tabe advantge of these new opportunq e.  -S . 17. In adton, th Govnmen has receny removed, In July 1992, most of the remlai eroicto (Qs) on. imprs, completing a process of tarifficatlon which was sated with the first SAL in 1980. One of the key components of is procs, the liberaizaon of commril vehicles pots, wil hep reduce he co of Intal transprt and hus pmo domic competition by interat htnal makets. It will be complemented by measures to roeuce the regulatory nglehold aroud tnsport seces t has led to high costs for the rest of Industry. Transport servic, especiy truckg and ier-Idand shbippig, have long been dominated by monopolistc finciso holdes and the new rerms are designed to Introduce greatr compeiton in the areas, fist by admi rdfoms and then by ter tuonalIzation n a now Transport Sevices Act ITh Ms wil eiminate comic baders to entry In and ex from the Industry, allow fr a broad band offes at wil failitate price-based competlt a and elimi operauor subsidies. 18. The second comonent of Intrito involves the libeizati of the fore exchange marke Until this years lagdy unenorceable reations haEie been restricdtg the trade and ue of foeg exchange. For xamle, foreign capital accounts were segregated In spal Foreg Curency Deposit Uni and coud nt be sorced from export or oth trade earnng, although de faCt the Phuips has long had an open capil account, fueled by lage volumes of worker remittances nd by under-Invoicing of exports. By August, almost all restricdons on sale or purcae of foreign curcy had been removed. Thus, the Philppine Goverent has successfy reormed the forei exchanp arket Ii a manmer that is central to the policy objective of achieving a markeatdermined exchange rat. 19. lhetird component of Integration focuses on nstdonal capabilities to provideInproved tools for eonmc managemen Th most important priority In thds regard i to improve the condn of Catal Bank finances. The Central Bank has lar net forei excha labiities which were I d r lst ifparldy through borrowing to defend the peso in the ealUy 1980s and pardy truwgh the prvisof foward cover to public corporations at nadeque price. The opeating deficits of the CBP e nOW so larg as tO affect sgnIfntly Its cAaty to carry out an Indqedet monetary policy. Indeed, if the CBP losses wer fuly monetized, nmfation would accelerate and the peso would depredate shaply in nominal tems; In addtio, without leducng CBD deficits, the proposed liberization of the exchae rat coud not be sstained. 20. As an essent first step towards a cowprehensve soludo to the CDP finaci condiion, US$960 milion of foreig currency swas, entered wih domestic commercial ba in 1983 and subsquaey olled ov, have been uwoA exiWngui a costy foreign, crny lbit. In addiion, the Treasmy plan to help finane the CDP dect by placing deposits with it at zero inteast, by Isuing it a speW seies of htest beaing bonds and by budgetig for_. increae in CBP capital. ians needs to be follwed up by a aoe resucturing of ase and liabilites of th CBP - both domesdc and foreign - and an adequate hcra in authrized CBP capital, as discussed in detail in the Bas, 'CiU Market SW (Report No.10053-PH). Sepaate disci are procedi with the CBP along dtese lines in collaboraton wih the ID. 21. The Goveament refom program is supported by a program for the reducion of commaeal bank extenal debt and debt service. Agreement on a ce rtcgt of public restructured extnal commercil bank debt wreached In outine in Augcat 1991, and it is being implmented in stages: in Febrary, 19 the term st was issued; in May, 19 a cah buyback was concluded; in July the agreement to restuctur remainig dets Into debt exchag bonds was signed; and in October, 1992 the deal was fially closed.  -6 - 22. Ibis debt staegy Is ecsary to allow thke Goveament to pursue a broadening and deepg of the reform process with a consitet mediuterm financing plan in place, benefitting the fisa siwution directly, by a reduction in eal interest servce, and indirecty, by a reduction in domestc est rt that should follow the opeaton, If the experience of otier countries following debt retuction is any guide. Just as the debt agreement is crucial to allow the implementation and sustainablity of the Goverament refbrm program, the ful benefits of the comprehensive debt agreement reached with comnercial crditors will only be achieved if the operation proceeds in parallel with an adequate ma;roeconomic stailization program and with strucural measures to itegrate the Philippine eoomy more closely witi the itenational economy. 23. (3overnmer acknowledgement of these priies for adion is based on the successes and failur of past policy expermes. Its commitment to action is rooted in the emergence of a window of oppormity provided by the unprecedtd level of foreign exchange reserves built up over the past year trougb efctive stabilization policies (although these have been reduced from a peak of US$5.4 billion reached in March to US$4 billion in September as a result of the reqirements for financing the cash buyback, unwinding of Central Bank swaps and provision of collateral for debt exchange bonds) and by the willinns of commacial banis to entertain a comprehensive debt setlement. 24. Ihe current proposal for Bank assistance builds on these developments, and is based on three pillars: firs, actions already undertaken by the Government, including several Iey legislative initves, where the Bank has been actively enging the Goverme through its policy dWogue; second, the conclusion of the ageement between the Government and its commercial bank creditors, resolving medum and long term commercial bank debt; and third, addtional actions by the Government to deepen the reform effort C. The Goemment Refgrm nrogm 25. The Governmt, aided by the Bank through Its poicy dWogue, has developed a broad program of reform to complement its debt reduction program The reform agenda of the Aquino Administration was spelled out in a medium-term program, *33m Philpine Agenda for Sued Qmoh eomet, presented to and endorsed by the Consultative Group at its meeting in July 1989; piogress reports on this agenda were presnted to and endorsed by CG meetngs in February 1991 and 1992. The new Adm n has expressed i desire to build on thi agenda and this is reflected In is Letter of Development Policy (Arne U). Key deti ar mmarized below. 1 26. EgWim 3b Foieign IML iI Act of June 1991 has subtantily libetalized the environment for foreig investment. The passage of this legslation is a considerable step forward in two important respects. Frst, it allows entry into all bar a few specified sectors on a short 'negative i. he shift to a negative Hst makes the legiation tasparent and is accompanied by removal of the requiremeot tht forein investonrs obtai authorizatio from the Board of Investment. Second, 100 percent foreign equity is to be allowed in all bar a few sectors. Resticted areas Indclude public works construco, natural resouce extraction, retai trade and a few selected professional activities. While cert manuf n acdvities may be eligible for inclusion on the negative list ater a transitional period of three years, the intent is to ensure that the list wil continue to be short by specifing crieia in a transparent fashion in the Implementing Rules and Regulations. ' Reform in most of these areas has been supported by the Bank in the context of its ongoing policy dialogue and discussions related to preparation of the Economic Inegration Program. Key items are underined. They are so dicatd in the Policy Mat in Annex 3.  -7 - 27. The proposed Bank loan supports these foreign Investmen developmes and provides a monitor of thek Inme Rides n Regleadons falthis Act. e criteria under which sectors could be addi to he negaive list for foreign investunet at a later date, once the transitional three year open window i over, have beean 6fined in a supplementary appendix (issued in April 1992), wbich provides for a more taparent system, but still leaves room for intpreto and thus must be carefully moniored. The policy hite, however, is to keep the negative list as short as possible, pardicularly in manufacturig. In the futre, areas not covered by the Act, such as baking and tnsport, may also be covered under secomr specific legislation. Other complementay measures to encourage foreign investment relte to the fll and immediate repatration of dividends, profits and capital from all registered foreign invesutm embodied in the foreign exchange liberalization measures, and streamlining of procedures for obtain work pemts for foreignps. 28. & d elSsfekMMd = Schemes. Mesures included inthe proposed loan would also ennce private secor paticipation in BOT schemes. Pision of infastructre via BOT schemes is one ara where sniicant foreign invest is anticipated, and has been made possible by passage of an aI S XBO and by periodic approval of a listing of projects and sectors eligible for BOT. Pardy becaus of low maan and investment by cash-strapped public enteprises, infrastructure has emerged as a significant bottleneck to growth, with periodic breakdowns in power, water and transport systems, and private participation in this sector will be crucial. 29. The proposed loan includes the review of the gudelines for private sector access to ODA on market terms. The domestic pvate sector is also expected to patcipate acdvely In BOT, espciay In power and teleconicatins, but currently faces financa constraints. The local utC::3 companies hav the domestic baking ystem, and because of country risk, are cumntly unable to tap financig sources. Meanwhile, foreign ODA is available for iatrucre projects but canot be easly mobilized for private sector uses. The Government has consequently ised a set of Impeing liRules and Regulations idicat how ODA may be cnnelled into private sector infrructure projects on market, not concsonal, terms, and is discussing with the Bank altnative for catalyzing private sector financing for i c ure. 30. Prival. The Government has achieved consdrable success in is program of pdvaaon of state corporans. Ihe World Bank's Govwtment Corporations Reform Program had sported pivzation by reqiring that at least 50 percent of assets should be offered for sale before second tranche release. The Government has progressed weU beyond this. It has etended the life of th.e AM Pg irziaonTms -a key instition for managing privatization - unt December 1993, and acieved a sales taret of 68 percent of public corporate assets. Several other big ticket items are being preped for sale, including the Naon Steel Corporatiand te Manila Hotel. he Govnment is also exploring pdvazan into further areas such as energ generaion, water boards and ports. The proposed loan woud enend the support for privadzati bond the tem of the Government Corpotions Reform Pogram, to ensure that the pace of priaization is maiained in a quatitave Sea. 31. i refornm. In August 1991, a new Tariff Code MO 470) was introduced with the objecdve of euragng export-oriented growth by lowering nominal and efective protection, b.in:ulating invement by reducing tariffs on capital goods, and simplifying CUstoms administration by reducing tariff dispron and toe nmber of tariff band. Ihe program of tariff reform and trade liberalizaton - inited in 1980 wih the first Philipine SAL - bas gone trough several stages. In 1980-82 and again In 198649, d reductions of adminisave restctions on imports were accomplished, but, in the inrm, extn pyents cises were responsible for periodi intuptions of the implementation  -8- of the tra lbeaI atIon progra Passage of the 1991 Tariff Code ra mJor adJustmet In au. The averg s mport-weigbted tarlff, which has been brougt down fiom 43 prcent in 1980 to 20 paeen currently, will be Arthr reduced to 14 prcet by July 1995, and with te elInatIon of most quantative restriions tarlfs wi become the princpal source of protection for almost all domestically prode tadable goods. Ih mamnmum taff wi be 30 percent (with a few eacepdons largly In grdcultu where a 50 perceat rate will apply), and thae would be just four tariff bands, considerably reducin the ahnst complexty of implementing the tariff code. In genal, raw materials and capa goods Impt wll carry lower tarffs than consumer goods, but both the level and dispersion of efectv prtectio rat would also be brought down; the level of efective poction is scheduled to fal fom 35 pecn to 28 peret in manuf for ample. Ihe phasing in of iff reductions is necess to avoid hap losses in reveumo in the near term, and allows protected Industrie tim to adjust tOD the nw regime, theeby secuing a broad political coalition In favor of refom. The pace of tariff Wjusti,_ has been alrated with the removal of dt etUraory acrosshboad import srcag May 1992, and the reducto of intra-ASEAN trffs on a n uber of key products. 32. Ihe 1991 Tariff Code did not cover some tems whee importation was previously govened by qutiative restictons. Thus, the Government has Inrduced new taiff acording to the Code In order to make opertonad both its eadlier decision to remove QRs on some 208 Iems and its recet deciso to liberalize 68 addItional item. The Governent has aopted two principles in setting tarffs on these Ims: ) the transitional tariff rate is no more than double the sttory tariff rate that wil pival afterJuly 1995 (with the sole exceptionof corn); and (i) these tariffs are to be phased outby July 1995. 33. The reduction of tariff dispersion under the new Tariff Code and the removal of remaning I--l WM'- restrcton on imports will simpfy considerably customs diniogmandive efficie of resourcal on. This is to be firaer reinforced by meaures tan custms i I I - -1 to strmline procedur, reduce smuggling and strengthen revenue collecon. The Govermen has signed an for a comprehensie imort s 4ulaneLshm building on a succesfu pflot project undertaken by a prvate firm, the Societe Generate de Surveillance. Furher _uawW will occur as the Govermet moves from Home Conumpton Value as the basis for impt valation to a system of Fair Maket Value which is more widely used across the world. The Bank, in claboration with tIhe MP, is also workng on additional measures to improve customs administation wiho te objecie of raiing tadff collections towards their potential levels. Through the tariff rvision, the Govm has reted its policy of dc-emaing the role of tariffs in indusi and trade prmoton. Th effectie tax on epore associaed with tarffs should be reduced throu te operatn of newly e lied o-atop ahops for streamlining tax and duty drawbacks for exporters. 34. Qr . Ihe Goverment I about to complete a significant program of replaci quanttaive restctons on imports with tariffs. Although in the beginng of 1992 the PhilIppines no logr had widespread QRs on imports, these still existed in a few selected are. Mm has made a policy docision to remove ORs fFom 276 im= t iems, ilu a broad range of consumer elecroc and agrcultal products, corn, commercial vehicles and related spare parts. The liminaton of Qts on the importation of commercial vehicles is an Important stp towards reducing cost in the tansport sector, and has broad likg tioughout the economy. Similady, liberalizaton of corn Is an impo_ meu for the frter growth of the livestock industry. Following recut nuKoiDmostQB& Inmuachg quantiatve restrictiom wil remain on only a few Items, coverig arund 2.5% of import items. In most of these cases (69 items, luding drugs, i and frearms), resction rflect health and safety concers. In other cases, they are the result of legiaton qpeificaly reated to certain products (agricultural goods) where the Goverment has undaken to  -9 - preet legilaton to Cogres for th removal of QR-based prowco Last, there ar a set of restrictions on products In sectors which hoe price regulatons, including coad and petroleum products. In theso latter cases, the Govemmet hu preented a timound acton program for removal of QRs in tndem wit a broader derelaton of these sector. 35. With the ages on tarnf d themva of QRs suppoted by the prwposed loan, the Phippines w ll be one of the most open counries in the region. Ihe i, however, a cost in ter of f fiscal revenues and it Is esseal t the success of the trade reform program these reves be replaced. 36. l. LTbraiza Ihe Government I redefining its role in the aportctor thro a thre-ronged strategy. Fist, the pe system of heavy regulation is beng refed to inroduce grtr elements of market-deteed competiionL In the past, entry and exit in the ransport sevices indutry was higy gulated, resfting in a costly and hnfficie transp industry. High transport costs are an importat reaon why domestic competition remains weak, why internd marks stay fi_ and why the bis bowar economic activity ocated in Metro Maila remains stong. M2 Govnmen has recntoly issued a anew olicy direcive which viws entry into and exit fom the transportn idustry as a buiness decsion, promotes cmpetion on maor mutes through Providing for at les two frchise holders, libaizes rate seing, and pbas out specal financing and incentive pmrog. eU DI h eiiogbv bee kWeentesd vja nw fIn rulnes agd gMces of the rglaoy board which oversee operations In land and sea taort and eit a ultmately. wfll bemne jnstMohd Wdan Ar new D