Philippines - Reform Program For Government Corporations

Docmnt of The World Bank FOR OMCLAL USE ONLY Repot No. 11768 PROJECT COMPLETION REPORT THE PHILIPPINES REFORM PROGRAM4 FOR GOVERNMENT CORPORATIONS (LOAN 2956-PE) APRIL 2, 1993 T " ., .. N.r j ! Industry and Energy Operations Divisions Country Department I 1ast Asia and Pacific Regional Office 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.  CURRENCY EQUIVALENTS Currency Unit = Philippine Peso (PP) US$1.00 = PP 20.80 (at Appraisal) US$1.00 = PP 25.38 (at Completion) US$1.00 = PP 24.64 (as of October 1992) GLOSSARY OF ABBREVIATIONS APT Asset Privatization Trust CAG Corporate Affairs Group COA Commission on Audit COP Committee on Privatization DBM Department of Budget and Management EO Executive Order ERL Economic Recovery Loan GC Government Corporation GCMCC Government Corporation Monitoring Coordinating Committee GFI Govermment Fnancial Institutions LOI Letter of Instruction NEDA National Economic Development Authority NFGI Non-Fnancial Government Institution PAL Philippine Airlines PD Presidential Decree PES Performance Evaluation System FISCAL YEAR January 1 - December 1  FOR OMCIAL USE ONLY THE WORLD BANK Washlngton, D.C. 20433 U.SA Offlce of Dlrnotor4eneral Operatons Evaluaton April 2, 1993 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on The Philippines Reform Program for Government Corporations (Loan 2956-PH) Attached is a copy of the report entitled 'Project Completion Report on The Phflippines Reform Program for Government Corporations (Loan 2956-PH)' prepared by the East Asia Regional Office. The PCR is of good quality and provides a reasonable description of the Reform Program, its accomplishments and limitations. Part II, prepared by the Borrower, is particularly informative, candid and forward-looking. The loan helped the Borrower make substantial progress towards its objectives of creating an institutional framework to limit and rationalize Government Corporations (GCs) through abolitions, consolidations, privatization and improved efficiency of the retained GCs. A legal framework has been put in place that regulates the establishment and operation of the GCs that will remain in operation, and provides for their better monitoring and evaluation. The privatization drive got under way, with 85 GCs having been offered for sale by Januaty, 1992, representing 62% of the assets book value of GCs to be privatized. Four-fifth of these have been actually sold, partiaLhy or fully. An additional 59 GCs have been scheduled for abolition.. All these measures, which exceeded the loan targets, have already begun to contain the fiscal drain of the govcrnment corporate sector. While it is early to assess the long-term fiscal and economic effects of the Reform Program, a good start has undoubtedly been made. The Operations Evaluation Department intends to carry out an audit of this loan. The audit would focus primarily on the trade-offs between controls and financial safeguards on one hand, and the need for expediency in the privatization process on the other. Could a streamlined, faster disposition of public assets lead to an acceleration of the overall economic growth of the country? If so, would it be worth it to run the risk of selling some of these assets at low prices, thus allowing the emergence of private windfall profits? How can the optimal price for privatized corporations be determined? The audit would also explore the role of Bank supervision, the coordination of tranche release decisions with the cofinanciers, and the follow-up actions that may be necessary to carry the Reform Program to its desired conclusion. Attachment Ihis document has a restricted distribution and may be used by recipients onty in the perfonnance of their official duti. Its contents may not otherwise be disclosed without World Bank authorization.  FOR OFCIAL USE ONLY The Phflippines Reform Program for Government Corporadons L n" 2956-PH Project Completion Report Table of Contents Page No. PRUFACE ..................... i EVALUATION SUDMMARY ..................... iii PArT L PROJECr REVIEW FROM BANK'S PERSPECIVE .................. 1 1. ProjectIdentity ...............1 . 2. ProjectBackground ............... 1 3. The Reform Program for Government Corporations. 2 4. Project Implementation and Tranche Release Conditions. 3 5. Bank and Borrower's Role in Project Design and Implementation. 6 6. Accomplishments of the Reform Program. 7 7. Sustainability ................ ............................... 11 8. Lessons Learned from Project Experience ....... ................... 11 PART II. PROJECT REVIEW FROM BORROWER'S PERSPECIIVE ......... .. 13 PART L STATISTICALINFORMATION ......... ........................ 59 1. Related Bank Loans ........................................... 61 2. Project Timetable ............................................ 62 3. Cumulative and Actual Disbursements ............ ................. 63 4. List of Studies Undertaken During Project Preparation . .64 5. Svmmaiy of Status and Dispositive Actions for GOCCs . .65 6. Compliance with Tranche Conditionalities ..74 7. Use of Bank Resources A. StaffInputs .78 B. Missions .79 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.  4- - PrQject Completion Report The Thilppines Reorm 1rogrm for Govement Corporations Loan 29S6-PH Neface lhis report present an vluaion of the results achieved under the Reform Program for Government Corxportions In the Philippines, for which Loan 2956-PH was approved on Iune 15, 1988. The US$200 millin loan which focussed on the Non-Fancial Goverme Institutions, implemeated a major stut adjustmen of te public corporate sector in te PhiliWines. The loan which was nade to the tpublic of the Philippines, sought to establih a polcy ad inttutona fiamework to .duc, iHmit and rationalize governme acutivities using the corporate fotm, and instiute improvents in the efficiency and efecveness of retained government corporations. The loan closed on Februay 29, 1992, after a six-month extension of the loan closing date. The last disbursemn was made on Februa 24, 19. This PCIR was prpnd by the Industy and Energy Opeatfions Division, Country Department I, East Ada Region (Pef, Evaluation Summary, Pats I and ID). The PCR draws on the Staff Appraisd Report, supervision repors, coespondence between the Bank and the Government oe the Philippines, irnal Bank memoranda, and program data provided by the Government. It presents a review of the implementon of the project, the program of actions to ahieve tanche reease condition.., and the exent to which the policy and nstitutional objectives were achieved. The Govenmen has bee helpfil in providing useful dat for Part m and submitted a Project Completion Report as contrbution to this PCR.  -I i I Projec Completio Report Ih Philippims Reform Program for Govment Corporations Loan 2956-PH Evaluation Summaiy 1. The Reform Program, which focussed on the Non-Financial Government Institutions (NFGIs), constituted a. major structural adjustment of the public corporate sector in the Philippines. The Project sought and successfully implemented a policy and institutional framework to reduce, limit and rationalize government activities using the corporate form, and instituted improvements in the efficiency and effectiveness of GCs, to reduce their heavy burden to the economy and through privatization promote the developing, financing and improved efficiency of previous government corporations (GCs). The Bank loan of US$200 million equivalent was disbursed in three tranches (US$75 million, US$75 million and US$50 million) against general imports based on a standard negative list over a period of five years. Release of each tranche was made upon the Government's fulfillment of the various conditions stipulated for each tranche. A $200 million loan from the Overseas Econonic Cooperation Fund (OECD) cofinanced the project and was disbursed in two tranches, in parallel with the first two tranches of the Bank (para. 3.1) 2. The key elements of the reform program were: (a) approval of legislation for sector reorganization and divestiture, and the issuance of a policy statement enunciating government policies for the establishment, retention and operation of GCs; (b) issuance of legal instruments improving the sector's institutional framework and defining the functions and responsibilities of the government agencies dealing with GCs, their boards of directors and chief executives; (c) rationalization of the exsting corporate portfolio and appropriate disposition of GCs through privatization, liquidation, consolidation, conversion to non-profit status, and transfer to departments; (d) institutional strengthening of the retained GCs through the establishment of an oversight mechanism establishing long-term planning, monitoring the corporate sector, and introducing measures to improve GC performance; and (e) technical assistance to support the above efforts (para. 3.2). 3. Substantial progress in the reform program was required prior to Board presentation, allowing the disbursement of the first loan tranche of US$75 million immediately after loan effectiveness, on December 29, 1988. These reforms include: (a) establishment of an improved legal framework for the public corporate sector; (b) completion of all studies for the rationalization of the sector (Table 4, Part 1E1); (c) approval of the disposition recommendations for most GCs; (d) approval and establishment of adequate institutional mechanisms for the program (ie., COP, the Asset Privatization Trust (APT), GCMCC and CAG), including their staffing, budget and operational guidelines; (e) approval of a privatization plan for each corporation; (f) initiation of corporate planning; (g) establishment of  I iv - improved accounting and auditing standards; and (h) a satisfactory starting of the privatization program (para. 4.1). 4. The Government's compliance with the 13 conditions governing the release of the second tranche of the Program was satisfactory. However, because of a delay in one of the conditions for the release of this tranche, a waiver was requested on the condition for a plan to computerize the accounting of GCs. The request was approved and the second tranche for US$75 million equivalent was released on July 9, 1990 (para 4.2). 5. Although most tranche release conditions were complied wihh by the original closing date, there was a delay in completing the agreed privatization target. Because of this delay, the loan closing date was extended six months to February 29, 1992 and the third tranche of US$50 million was disbursed on February 21, 1992. At this time the Government substantially surpassed the privatization targets, particularly by offering for sale 30% more GCs than required for the third tranche release. This included the total of partial privatization of several large corporations like Philippine Airlines, Philippine National Bank, several Banks, hotels, etc (para. 4.3). 6. Considerable up-front work had been done by the Government and was implemented even prior to Board presentation. Although the change in government temporarily slowed project implementation, the Bank found strong support for the project in virtually every part of the new government. Additional time was also required to solve difficult economic, political and military challenges presented to the new government, obtain the approval of the new constitution, and elect and install a new Congress. Staff changes in various parts of the Government, also contributed to the delay. As a result, the original timetable could not be met during project preparation and implementation and had to be revised. However, the Government strongly endorsed and implemented the reform program (paras 5.5-5.7). 7. Overall, the reform program was implemented successfilly, in an open and transparent manner, with a high level of competency and commitment by key agencies and the establishment of a set of guiding principles. Although the country's macroeconomic conditions were difficult during the implementation period, with high interest rates and political instability being major impediments to most of the actions of the reform program, all required actions were implemented satisfactorily and in most cases ahead of the agreed schedule. & The project led to the creation of a legal framework that put in place policies for establishment and operation of GCs, and set the stage for implementation of various recommendations coming from the studies. The project also provided institutional strengthening through a performance evaluation system, corporate planning and computerization of accounting and auditing systems of GCs. The disposition program, particularly the privatization of GCs was also successful (paras. 6.3-6.5). Other project components (performance evaluation, corporate planning) were also implemented successfully (paras. 6.9-6.10).  -V.. 9. In the short tern the Project has contained the drain on government resources through the reduction of the size and scope of government activity in the public corporate sector. A number of factors tend to indicate that the project impact in terms of reductions in sector size, budgetary impact, and performance vwill be limited in the short-term. The long term is too early to be assessed, but it is clear that the substantial reduction in the number of GOCs and the establishment of mechanisms to improve the performance of the retained GCs should bring major improvements in the corporate sector (paras. 6.7-6.8). 10. The climate of reform initiated by the program was sustained. Most components were relatively unaffected by political and economic changes as commitment by the Government and executing agencies remained firm and stable. The objectives sought by the program have not only helpvd contribute to a number of short term benefits in the area of public corporate sector efficiency, but are also likely to have a long term developmental impact. The long term benefits of the rationalization program are also likely to be sustaining (para 7.1). 11. The main lessons to be drawn from the operation are: (a) The key element of success for a complex reform program is the Government commitment and ability to implement it; (b) Reforming the public corporate sector is a massive and complicated effort, which would require sufficient time for the project, and Bank involvement over several years and several operations to ensure the maximum benefits; (c) strong institutional support is required for project success; (d) intensive supervision is required during the shorter horizon of these projects; (e) there is a large payoff in investing in project design and preparation; (f) flexibility is an important element in project implementation; (g) agencies with adequate powers and a transparent divestiture process are criical for the success of the privatization (para 8.1).  The PhilUppines Reform Pirogram for Government Corporations Loan 2956-PH Projec Completion Report PART 1 PROJECT REVIEW FROM BANK'S PERSPECTIVE 1. Prlect Idenot Project Name: Reform Program for Government Corporaions Loan No.: 2956-PH RVP Unit: Easd Asia and Pacific Country: he hlMppines Loan Amount: US$200 million Board Approval: June 1S, 1988 Loan Sinfg: September 1, 1988 Effective Date: November 9, 1988 Closing Date. Faeb y 29, 1992 2. Boje B 2 1 in the 1 , to Philippines acieived substantial eonomic ad socid progress, but the public corpot stor expanded rpdly as the Governmen sought to expand Infastructr, eneqrg and other ecoomic and social services. In the early 1980s, the economic situation startd to detrorate as ling pdce for export goods, increased oil pnces, high interes r on foreign borrowig, natua calami and stuctural weaknes placed severe strains on the balance of payment and h natio_ budget. nh lack of suitable and timely adjustment, increased on short term borrowing, and politi urmoi compounded the problem untl the acoelerated cpvital flight precipiatd a crsis. liii crisis had a devauit effect on domestic industy and on a fragile financial system, leding to the bankr1ptcy of about 400 privat enteprises, a serious criis for the goverment finuancil isuD ons and a vas publc deficit larely due to the need to subsidize about 300 goverment coporation (GCs)- 2.2 Ihe economic cdris hii the ned to eminae tie public corporate sector's coutdbudon to the publc sector deficit and its sbare in the eral debt burden, which became a major conern to the Government and to the insttutions providing official and private financial assistace to the Philippines. To ded with h cdsis and to provide an adequate foundation to accelerate ewonomic reoovery and foster eoonomic growth, the Government focussed its attention to sreamlining and tionalizng the operatios of the govemnt corporate sector, which was criti for the country's economi stabliztion and recovery programY IupuGCd hihdeL^: whU.s.a~b be diu.ko by rkths 6 a isl lrm e^ twnopb flip uaWh - _bmgh d *ruueq *qummi6psmlgpoind0 yAs w.uq_gda -~ hAaiamsvbusln h i pstlab hAsut.futpM  - 2- 3. Tbe Refonn Program for Government Corporations 3.1 Th Reorm Progrm, which foused on the Non -.naial Governmen ntittions (NFGls), consttuted a mjo streotul adjutmet of the public coporate sector In the Philppis. The Project sougt and swoessflly implemented a policy and itituonal framework to reduce, Nmit ad rationalie govenment wdviies usng die coporate form, ad instituted mprovemn in th efficieny and effectiveness of OCs, to reduce their havy burden to the economy and tough p dvatnatlo promote the deveopig, financing and umproved efficiny of previous GCs. Th Bank loan of US$200 milion equivalent was disbursed in three tanches (US$75 million, US$75 million and US$50 mion) sainst genal imports based on a standard negative list over a period of five yeas. Relea of each trnhe was made upon the Government's ffilment of the vaious conditions stpuated for each tanche. A $200 million loan from the Japan Overseas Econumic Cooperation Fund (OECF) cofinanced the projec and was disbursed in two tranches, in parallel with the first two tranwlies of the Bank. 3.2 The key elements of the reorm program were: (a) approval of legislatio for sector reorganiion and divesftiure, and the issunce of a policy statmen enniaD g governmeat poLicies fr the estabish _mt, reeton and operation of (Cs; (b) iuuance of legal instument improving the sector's stitonal framework and defining the functons and responsibiltes of the government agencies deal with GCs, their boards of directors and chief executves; (c) rationalizoon of the existing coporate portfolio and appoprate dispodtion of GCs through privadtzaon, liquidation, consolidatn, convesion to non-profit status, and transfer to departments; (d) institutional trengthenin of the retained GC through the establishment of ank oversight mcdnm estbhing long-erm planning, monitoring the corporate sector, and intoducig measures to Improve GC performance; and (e) technical assistce to support the above efforts. These components are described below. 3.3 Legal Framework and Poliey Statement. The Project 3s based on an improved legal framework for the sector, whih defines sasfactorily the basic podces, role and ognizaton of the govermet corporate sector in the economy and established the stage for the rn and pvatzatio of mos Gs. This inchldes a numbor of las and otier leg Instrumets, s follw: zing the GCs (Administative Order 59); SUtngdthn the Government Corporation Monitoi Coorinan Committee (OCBMCC), (Executive Order 236); GCMCC Guidelines (Excutve Order 127-A); Guidelines in the Procesing and Approval of Contrts of the National Govement (Executive Order 164); Proclaiming and Launching a Program for the Expeditious D lopodfin and Privaizaton of Ceran GCs and/or Assets Thereof; and Creatn the Committee on Privatization (COP) and the Asset Prvavtton Fund (Proclamaon 50 and SOA). The Govemet's policies are also reflected in its Letr of Developmet Policy of Apil 27, 1988. 3.4 Corpate lonalton Pram. The Goverment has carried out dtailed studies analyzinSg the or ton, finan, markets and prospoet of eac (c. Pollowing the policies enndied undr the improved legd framework and in agment with the Bank, rules and citerda weo esdblished to aionali the existing portfolio of 296 GCs and to reduce it to about 15% of this totl. The objective of the ratonalization program wer to: (a) incas the efficiency and produtvity of te economy by allowing fair compeftiion and widrawing the Govement from activities whh could be best performed by the private sotor, (b) minimie the Govermen's role and lnvolvement in GCs and reduce the budgetay burden of its loans and contrbutions, which were a major case of the public sector deficit and (c) concentrato efforxt and resoures in mpoving the rficiency of to raind GCe. The raionalzadon program envisaged tha only 37 of the exstg 296 GCs wer to remain Inte public sector. Of the 2S9 (Ce to be disposed, amost 80% were to be transferred to the pdvate setor (132 GCB to be privatized, anotr 67 GCs to be iquiated and 8 CCs wern to be  -3- conveted to non-profit private entities), 16 OCs were to be consolidated with other OCs and 36 OCs wene to be regulazed (incorporated into relevant govermnent departments). 3.5 Istutional Framework. The Government established adequate institutions to implement the project's objectives and policies as follows: (a) GCMCC, to implement government corporate policies and monitor and improve the perfonnance of GCs; (b) COP, to oversee the implementation of divestment under the ationalizaion program; (c) the Presidential Commission on Government Reorganizaon, to prepare the required legislation, recommend the disposition of GCs and implement dispositions other than privatizadon1'. 3.6 Technical Ass(staT A). TA was important to support the project implementation, strengthen the institutional framework and help improve the performance of the retained GCs. The National Eoonomic Developmert Authority coordinated the TA program which was financed through grant from the Asian Development Bank (ADB), US Agency for International Development (USAID), United Nations De'elopment Program (UNDP) and Japan as follows: (a) COP and the disposition entities in the divestiture program (financed by a $4.5 million grant from USAI) for the valuation, marketing and of sales of GCs; (b) GCMCC and the Corporate Affairs Group (CAG) in establishing a monitoring and performance evaluation system for GCs (financed by a $S0,000 grant from ADB); (c) Demrtment of Budget and Management (DBM) in implementing the program of consolidation, changes of atachments and liquidation of GCs, as well as affecting necessary changes in the charters of GCs (financed by a $462,000 gant from UNDP); (d) DBM in improving the accounting of GCs by establishing a computerized accounting systems, based on the standard chart of accounts approved by the Commision on Audit (COA), (financed by a X40 million grant from Japan). 4. Program inplementation and Tranche Release Conditions 4.1 The Frst Tranche Releas. Substantial progress in the reform program was required prior to Board presentation, allowing the disbursement of the first loan tranche of US$75 million immediatey after loan effectiveness, on December 29, 1988. These reforms in-,lude: (a) establishment of an improved legal framework for the pubLhc corporate sector; (b) completion of al studies for the rationalizion of the sector (able 4, Part O); (c) approval of the disposition recxmmendations for most GCs; (d) approval and establishment of adequate institutional mechanisms for the program (i.e., COP, the Aset Privazation Trust (API), GCMCC and CAG), including their stffin, budget and operatonal guidelines; (e) approval of a privatization plan for each corporation; (t) initiation of corporate planning; (g) establishment of improved accounting and auditing stndards; and (hi a satisfactory aring of the privatization program. 4.2 Tle Seonud Tranche Release. The Government's compliance with the 13 conditions governing the release of the second tranche of the Project was satisfactory. However, there was a delay in the compledon of a plan to computerize the accounting of ten aCs and a waiver was requested for this minor condition. Ihe request was approved and the second trane for US$75 million equivaleat was released on July 9, 1990. The specific conditions for the release of the second tranche and the actions taken by the Governme it to oomply with them include: no ftzi=wdUak Wamoaa~too P smd1Ce.mmbzIian Oommmat gba.i 5osn*hm oveby On DVadmagt Data 4r MONSemt.  - 4 - (a) Final decision on the manner of disposition of a11 Cs. Ihe President approved the disposition acton for 291 of the 29 GCs. The decisioa on eight pending cafe, mainly hospitals with complex and controvers}al privatizadons, were stdU being reviewed and were completed by the third tanche release; (b) Completion of all steps necessary to get 30 OCs in vendible forn and offred for sale, representing at least 20% of the gross value of the assets of CCs to be privatized. lhe actual value and number of pnvazation surpassed the tranche targets. By Febray 1990, 42 GCs representig 28% of the assets of the GCs to be privatized were offered for eale; (c) inalition of an implemeation plan for the consolidation, regularization, conversion and abolition of about 100 Grs. Implementation plans were prepared for 96 of the 98 GCs approved for the mendoned actions and necessary actions were completed for the disposition of tho above-mentioned 26 GCs. (d) Completion of review of the charters of the corpoaions to be retned and formulation of recommendations regarding membership of their boards. DBM prepaed recommendations to the President regarding the chartrs of the GCs to be reaned. (e) Fi naization of an a plan to introduce computerizaon of accountig systems to 10 GCs. The conta for this study waS signed in March 1990, however, difficulties in reaching agreement in the provision of the technical assistnce deayecJ the finaizaton of the plan. M Approval of a corporate plan by the Board of Directrs of five OCs. Corporate plans, based on computerizd finanoial projectons were developed and approved by the Boards of Directors of five large corporations9'. (g) Design of a peformance evaluation and incenive system. Tho tehnical ast provided a background study allowing the Government to design and establih a saisfactory performace evaluation and inentive system, whic vw appied to five large GCs in 1989 and to the largest 18 GCs in 1990. (h) Appointmet of adequate staff for the CAG. The required 40 persons wee appointed to CAG and GCMCC. 0I) Satisfacty progress towards amendments of chartes of (Cs to incorporate prnciples set forth in para. 7 of the Letter of Development Policy. After Cabinet approval, three bills were presene to Congress and cerdfied as Administve Bills by the President to elmnate automatic goventment guaaees for debts of GCs, stnCdz the general feues of GC8, and define subsidies for mandated activities. SI ii..f*ddhpa. (&Waii p 4.4A) h..Wecfdb 0 (M fw w"diyXsmLdmbii wen Rm*Wwdi do sam mi k4 bmb. Mriy Of t r.qkO eddaml.ui. erm wmswi,ld _gait.hlm1._d. _ihjsm fruma aOC erm *ibu u_cii4gmmm A fihil spmwms mi 199 IWI_ .sa.lzsInas 501 Oefdw 79 wIl b tee _ aer_d, 122 wil be pdvuhd 59 wil be liudu 6 wIl be a.wcd ii. p.ld famiim 17 wDinb .elati 1_ wil be _eut~.