Philippines - Social Expenditure Management Project

Document of The World Bank Report No: 19799-PH PROJECT APPRAISAL DOCUMENT ONA PROPOSED LOAN IN THE AMOUNT OF US$100.0 MILLION TO THE REPUBLIC OF THE PHILIPPINES FOR SOCIAL EXPENDITURE MANAGEMENT PROJECT January 24, 2000 East Asia and Pacific Region  CURRENCY EQUlIVALENTS (Exchange Rate Effective October 1, 1999) Currency Unit = Philippine Peso (P) PHP= US$ 0.024 US$ 1 = P40.858 FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS APIS Annual Poverty Indicators Survey BEATS Budget Expenditure & Accountability Tracking System CAS Country Assistance Strategy CBIMS Community-Based Information & Monitoring System CHED Commission on Higher Education CIDSS Comprehensive & Integrated Delivery of Social Services COA Commission on Audit DBM Department of Budget & Management DECS Department of Education, Culture & Sports DOH Department of Health DSWD Department of Social Welfare & Development FIES Famnily Income & Expenditure Survey FMIP Financial Management Improvement Program GOP Government of the Philippines LGU Local Government Unit MOOE Maintenance & Other Operating Expenditure MTPDP Medium-Term Philippines Development Plan NCR National Capital Region NEAP National Education Academy of the Philippines PBAC Prequalification Bids & Awards Commnittee PBDT Procurement Benchmark & Disbursement Target PEAC Prequalification Evaluation & Awards Commnittee PESS Philippines Education Sector Study PIP Project Implementation Plan PMO Project Management Office PSEP Philippine Social Expenditure Priorities SSD Social Sector Department TA Technical Assistance USAID United States Agency for International Development Vice President: Jean-Michel Severino Country Manager/Director: Vinay Bhargava Sector Manager/Director: Alan Ruby Task Team Leader/Task Manager: Jayshree Balachander  SOCIAL EXPENDITURE MANAGEMENT PROJECT CONTENTS A. Project Development Objective Page 1. Project development objective 3 2. Key performance indicators 3 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 4 2. Main sector issues and Government strategy 4 3. Sector issues to be addressed by the project and strategic choices 6 C. Project Description Summary 1. Project components 6 2. Key policy and institutional reforms supported by the project 7 3. Benefits and target population 8 4. Institutional and implementation arrangements 8 D. Project Rationale 1. Project alternatives considered and reasons for rejection 9 2. Major related projects financed by the Bank and other development agencies 10 3. Lessons learned and reflected in proposed project design 10 4. Indications of borrower commitment and ownership 11 5. Value added of Bank support in this project 11 E. Summary Project Analysis 1. Economic 11 2. Financial 12 3. Technical 12 4. Institutional 12 5. Social 13 6. Environmental assessment 14 7. Participatory approach 14 F. Sustainability and Risks 1. Sustainability 14 2. Critical risks 15 3. Possible controversial aspects 15  G. Main Loan Conditions 1. Effectiveness Condition 16 2. Other 16 H. Readiness for Implementation 17 I. Compliance with Bank Policies 17 Annexes Annex 1: Project Design Summary 18 Annex 2: Project Description 21 Annex 3: Estimated Project Costs 25 Annex 4: Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary 26 Annex 5: Financial Summary for Revenue-Earning Project Entities, or Financial Summary 31 Annex 6: Procurement and Disbursement Arrangements 32 Annex 7: Project Processing Schedule 41 Annex 8: Documents in the Project File 42 Annex 9: Statement of Loans and Credits 43 Annex 10: Country at a Glance 45  PHILIPPINES SOCIAL EXPENDITURE MANAGEMENT PROJECT Project Appraisal Document East Asia and Pacific Region EACPF Date: January 24, 2000 Team Leader: Jayshree Balachander Country Manager/Director: Vinay K. Bhargava Sector Manager/Director: Alan Ruby Project ID: P065113 Sector(s): SY - Other Social Sector Lending Instrument: Specific Investment Loan (SIL) Theme(s): Poverty Targeted Intervention: Y Project Financing Data E Loan O Credit El Grant El Guarantee El Other (Specify) For LoanslCredits/Othem: Amount (US$m): 100.00 Proposed Terms: Variable Spread & Rate Single Currency Loan (VSCL) Grace period (years): 5 Years to maturity: 20 Commitment fee: 3/4 of 1% Service charge: 1.00% Frlnq an, _A______ Government 7.22 0.00 7.22 IBRD 80.00 20.00 100.00 IDA OTHER 0.50 0.00 0.50 Total: 87.72 20.00 107.72 Borrower: REPUBLIC OF THE PHILIPPINES Responsible agency: DEPARTMENT OF BUDGET AND MANAGEMENT (DBM) Department of Budget and Management (DBM) Address: Espinosa Building, Gen. Solano St., San Miguel, Manila Contact Person: Assistant Secretary Laura B. Pascua Tel: (63-2) 735-4934 Fax: (63-2) 735-4961 Email: lbpascuagdbm.gov.ph Other Agency(ies): Department of Education, Culture & Sports (DECS) Address: Rizal Building 1, University of Life Complex, Meralco Avenue, Pasig City Contact Person: Undersecretary Antonio Valdes Tel: (63-2) 633-9342 Fax: (63-2) 633-9342 Email: Department of Social Welfare & Development (DSWD) Address: Batasan Pambansa Complex, Constitution Hills, Quezon City Contact Person: Undersecretary Belinda Manahan Tel: (63-2) 931-9147 Fax: (63-2) 931-9146 Email:  Estimated disbursements I Bank FY/US$M: Annual 41.0 58.0 1.0 Cumulative 41.0 99.0 100.0 Project implementation period: 2000-2002 Expected effectiveness date: 02/28/2000 Expected closing date: 12/31/2002 XS PAD Porm Odober 9, I9J -2-  A. Project Development Objective 1. Project development objective: (see Annex 1) The project objective is to support the provision of basic social services during a period of continuing fiscal difficulties in the aftermath of the East Asian financial crisis, while introducing significant improvements to public expenditure management in the social sector - in particular, the Departments of Education (DECS) and Social Welfare (DSWD) - with oversight by the Department of Budget and Management (DBM). The government of the Philippines allocates a sizeable portion of the budget for the social sector (43.5% in 1999), but expenditure levels are below those in countries with comparable income. Moreover, as personnel expenditures account for the lion's share of public social expenditures, the projected budget deficit (about 17 percent of revenues and 3% of GDP for 1999), is likely to have a disproportionate impact on non-personnel services categories in the budget. Since 1996, as a result of cash constraints and procurement difficulties, the social sector departments have been unable to fully execute even the inadequate provisions in their budgets for non-personnel items. For example, no textbooks have been procured under this education budget item since 1996. There is therefore a considerable backlog and an urgent need to de-bottleneck the provision of basic inputs for social services primarily utilized by the poor. Simultaneously, the project seeks to strengthen fiscal discipline and enhance service delivery by supporting agency-led reforms of procurement, financial and information communication systems. Weak management, and in particular, complicated and inefficient procurement procedures and weak financial monitoring have resulted in poor sector performance, including of World Bank-funded projects. Procurement by the agencies are ridden with allegations of graft and have been evaluated to be grossly inefficient. Records showing the distribution and utilization of items received are not properly maintained. Weak financial management, the lack of an integrated financial management system and inadequate financial reporting in the agencies has resulted in poor budget execution and management of cash. This has been further exacerbated by weak communication links between the central and regional offices. The current fiscal difficulties make it all the more necessary to address these long-standing problems. 2. Key performance indicators: (see Annex 1) The key sectoral impact indicators for the project are the following: * a 5% increase in the elementary school cohort survival rate from 65 to 68 * improvements in 5 minimum basic needs indicators in barangays assisted under the project * an overall improvement in the efficiency and effectiveness of projects financed procurement in DECS by 30% (cost of items procured, quality, timeliness, and delivery to end users) * timely and reliable financial reporting Key output indicators are as follows: Quantum increase in the provision of key non-personnel inputs to social sector programs including: * 900 classrooms constructed * 5,000 teachers trained * 26,000 school buildings repaired * 25 million textbooks distributed -3 -  * 450,000 desks and chairs distributed * basic social services in 1,000 poorest municipalities in the country through 3,000 projects for 300,000 beneficiary families provided * 150 residential and community-based centers for facilities operated * I million persons belonging to disadvantaged and distressed populations assisted Public expenditure management in DECS and DSWD improved including: * department-wide adoption of improved procurement practices * operation of a simplified and improved financial management system * establishment of an effective information and communications network between the central and regional offices B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: R99-55(IFC/R99-46) Date of latest CAS discussion: 05/04/99 The 1999 CAS for the Philippines was discussed by the Board in May 1999. A specific objective of the CAS is to enhance human development and social services for the poor. The CAS identifies the Social Expenditure Management Project as the key instrument both for protecting basic social services during the period of budgetary constraints and for improving public expenditure management in the social sector. By funding priority programs targeted to the poor and key non-personnel inputs intended to improve the quality of basic social services, the project will support the overall CAS objective of restoring stronger growth with greater equity and poverty reduction. The project will also specifically support the achievement of the CAS social development targets for primary school completion and minimum basic needs. 2. Main sector issues and Government strategy: (a) Public Social Expenditure. The share of social services in the GOP national budget has risen from about 30% in 1990 to over 40% in 1999. At the same time, the share of social services in local govermnent expenditures also doubled during this period from about 15% to 30% in a context of increasing devolution of social services to local governments. However, levels by subsector are still low compared with averages for middle income countries, particularly for health, (about 1% GDP compared to the 2.2% norm). Moreover, intra-sectoral allocation of resources is inefficient. For example, in education, increasing shares have been going to higher education and an overwhelming proportion (about 90%) is devoted to personnel services. Sixty percent of the national health budget is devoted to tertiary hospitals. The specific issue faced in the aftermath ofthe financial crisis and identified in a 1998 social expenditure review Philippines Social Expenditure Priorities (Report No. 18562 PH, PSEP) is the insufficiency of cash to cover key non-personnel expenditures such as textbooks, desks and teacher training. This has exacerbated existing budget execution difficulties related to procurement and financial management. As a result, no textbooks have been purchased by DECS, for example, since 1996, and in 1998, the DOH managed to spend only 25 percent of its approved budget for drugs and medicines. The cumulative deficits have led to a serious deterioration in the quality of basic social services. (b) Eui There are significant differences in the regional distribution of available public resources and consequently of outcomes. In basic education, better regional distribution of public resources is a priority; at the secondary and tertiary levels, the priority is to have better programs of targeted subsidies. In health, large regional and income class differentials exist for key indicators. The financing of personal health care -4 -  relies heavily on out-of-pocket spending which is highly detrimental to the poor. At present there is no coherent strategy for actively targeting public resources to the most disadvantaged areas of the country. (c) Qualitv and Efficiency. The low quality achieved in the public sector in education, despite high unit costs is an important issue that must be addressed. Inefficient procurement is an important reason for the high costs of service delivery. Improving teacher effectiveness and deploying teachers more efficiently, improving student learning by providing textbooks and rationalizing the curriculum and language of instruction have been recommended in a 1999 education sector review, the Philippines Education Sector Study (PESS). With respect to post-basic education, there is a need to slow down and reverse the haphazard expansion of low quality State Universities and Colleges (SUCs). The overall management of the system rests with the Commission on Higher Education Development (CHED) which, however does not at this time possess the authority, resources or expertise to perform its functions effectively. In health, the poor absorptive capacity of the DOH to utilize appropriated and donor funding, and inordinate delays and inefficiencies in procurement have resulted in low quality of services in the public system and chronic shortages of essential drugs (e.g., for TB). (d) Decentralization. Current budgeting and management arrangements for education, with DECS retaining a good deal of control at the central level, have thwarted efforts to enhance local control and local accountability over basic education. The delivery of health services was devolved to local governments in 1991 . However DOH has been unable to effectively re-engineer itself to meet its mandate as a policy-setting, supporting, monitoring and regulatory agency of devolved health services. Meanwhile, inherent and inherited problems of devolution remain unresolved - e.g. fragmentation of technical supervision and the health personmel system, and a capital investment and maintenance backlog. The DSWD has devolved services to local governments effectively, but needs to strengthen reporting and communication systems with the periphery. (e). Public Expenditure Management. Weakness in management of the sector, and especially of procurement and financial management, exacerbates the structural problems listed above. The current situation of procurement management in the social sectors is particularly serious. The implementation of Bank financed health projects has been delayed due to major procurement problems and there are frequent procurement-related scandals in DOH and DECS. At the present time, the departments are not able, on account of the lack of qualified staff and appropriate operating systems and procedures, to procure efficiently and at reasonable cost. Weaknesses infinancial management systems are government-wide and have been identified in a number of studies initiated by the DBM and Commission on Audit (COA). Major weaknesses in the social sector departments include the absence of a reliable, integrated and timely information system, lack of capacity, weak internal controls and poor links between planning and financial management functions. Communication and Information Systems for effective management are weak at the national and regional levels. There is an urgent need to establish communication systems for improved financial and procurement management, both at the center and decentralized levels. Efficient communication systems are also critical to ensure that policies are properly understood and implemented as responsibilities are increasingly devolved to the periphery. Government Strategy. The Government's Medium Term Development Plan (1999 - 2004) recognizes the need for improvements in resource allocation, for structural reform of policies, strategies and programs, and efficiency improvements in management and service delivery in the social sectors. It - 5 -  proposes to sustain and accelerate the current DECS strategy to decentralize education management, empower field level managers and increase the participation of other local stakeholders, in particular, Local School Boards. In higher education, it seeks to improve governance by accelerating structural reforms at the CHED. The Govermnent's priorities for the health sector are to secure adequate funding for public health programs; strengthen the capacity of DOH regulatory agencies; support the formation and effective performance of devolved health service networks; provide fiscal autonomy to public hospitals and expand the coverage and benefits of the national health insurance program. The DOH is currently undertaking an organizational reform towards deconcentration and streamlining of the central office. To enhance the effectiveness of social welfare services, the DSWD will strengthen services provided by the department, and LGU and NGO capacity to deliver social services. 3. Sector issues to be addressed by the project and strategic choices: Although the potential sectoral reform agenda is broad, the Bank and the GOP agreed that focusing on a small set of priority actions for which there was a high level of agency commitment was likely to yield the best results. In view of the on-going re-organization of DOH, the agency was not included in the project. If successful, the operation could be repeated, with a second batch of sectoral reforms and including DOH. The project will therefore address two major sector issues in two of the social sector departments - DECS and DSWD: (i) lack of adequate resources for basic services, in particular, for non-personnel expenditures, and (ii) weak public expenditure management. The assurance of adequate and timely funding of basic social services heavily utilized by the poor and for key inputs such as textbooks, was identified in the PSEP as the top priority in the aftermath of the financial crisis which has resulted in the rationing of cash to levels below the spending authority of departments since the last quarter of 1997. The efficient utilization of available resources was a second priority. A series of procurement related scandals in government agencies has prompted the new government to seek to overhaul current procurement systems and procedures. Bank assistance in this regard is therefore timely from the government's point of view, besides having a high priority under the country portfolio performance improvement plan. The development of systems and capacity for budget execution at the agency level has been identified by the DBM as an area for priority action in its effort to improve overall public expenditure management, and move towards a Medium Term Expenditure Framework, devolving greater responsibility to the agencies to manage for performance. C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): The project has two components: Component I comprises selected on-going programs in the education and social welfare departments of the GOP for the provision of basic social services largely benefiting the poor. Out of the proposed loan, the Borrower has proposed disbursement of up to $20 million (about 20% of the loan amount) for expenses incurred after February 1, 1999. Retroactive financing has been proposed to finance budgeted social expenditures which had to be sustained and implemented as scheduled in the aftermath of the crisis. Component II is designed to strengthen public expenditure management of the agencies including procurement, financial management and information communication systems. I. Protection of Basic Social Services A. Basic Education: Provision of key inputs for irnproving the quality of basic education including: (a) - 6 -  textbooks and teacher's manuals; (b) construction and repair and maintenance of classrooms; (c) desks and chairs and (d) teacher training. B. Social Assistance for Disadvantaged Groups: (a) The Comprehensive Integrated Delivery of Social Services (CIDSS), for the implementation of the rninimum basic needs through a demand-driven approach targeted at the poorest municipalities; (b) the Maintenance and Operation of Centers and Institutions including orphanages and centers for the handicapped; and (c) Assistance Program for Distressed and Disadvantaged Populations including special programs for squatters, street children, rape victims, etc. I1. Strengthening Management Capacity and Systems in the Social Sectors An integrated technical assistance package to strengthen financial management, procurement and information communication systems, by developing and installing appropriate systems and providing on-the-job learning and training for concerned staff. - . .. - .. ; :IrnicatIEvek-: -%'of EComponent Sedor costs! % of inancing. Bank- .________________________ -___.__.___. {U$$MI Total I_11 t ancing I. Protection of Basic Social Services 0.0 0.0 A. Basic Education Primary 80.21 74.5 76.00 76.0 Education B. Social Assistance for Disadvantaged Social Funds & 25.01 23.2 22.00 22.0 Groups Social Assistance II. Strengthening Management Public Financial 1.50 1.4 1.00 1.0 Capacity and Systems in the Social Management Sectors* Front-end Fee 1.00 0.9 1.00 1.0 Total Project Costs _ 107.72 100.0 100.00 100.0 Total Financing Required 107.72 100.0 100.00 100.0 _~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ *Includes a Japanese special PHRD grant for $500,000. This component will also be implemented through the institutional capacity building funds of two on-going Bank-financed projects - the Third Elementary Education Project and the Early Childhood Development Project. 2. Key policy and institutional reforms supported by the project: The project will develop and install appropriate procurement, financial management and information communication systems in the agencies, including appropriate reorganization of structures and processes. Specifically, with respect to the reform of procurement systems, each agency will be required to obtain technical assistance to review existing systems and processes for procurement and identify ways of improving their efficiency and transparency; also to review the organization and capacity of staff and identify the learning/training required to ensure that procurement skills are upgraded and maintained. Departments will also be required to: (i) strengthen logistics management and inventory control procedures including using the services of independent groups composed of representatives from non-governmental organizations and civic organization; (ii) reduce steps and lead-times in the procurement process; and (iii) develop and adopt standard procurement manuals embodying principles of efficiency and transparency. -7-.  With respect to reform of budget execution and financial management under a Financial Management (FM) Improvement Program, the project will seek to achieve the following: a) a simplified and timely budget monitoring and reporting system; b) improved financial programming, prioritization and cash flow forecasting; c) computerized payroll management; d) an effective assets and inventory management system; e) strong internal controls and f) greater cohesion between planning, budgeting and program management. It will expedite the on-going budget execution computerization. 3. Benefits and target population: The main benefits of the project are two-fold: first, a quantum increase in the provision of key inputs designed to improve the quality and effectiveness of basic social services. Specifically, the project will result in the following: * the construction of about 900 classrooms, and repair and maintenance at 26,000 sites; the distribution of 25 million textbooks and 450,000 desks and chairs; and the training of about 5,000 teachers. It is expected that there will be a 10% reduction in the dropout rate in the 2000-2001 school year. * the provision of basic social services in 1,000 of the poorest municipalities in the country, the maintenance and operation of about 50 centers for disadvantaged populations and assistance to victims of disasters and natural calamities expected to reach I million beneficiaries. Significant benefits will accrue from the strengthening of procurement and financial management systems. Recent procurement of textbooks using Bank procedures, for example, has resulted in better quality textbooks at a savings of 40% of DECS negotiated prices for past procurement. Cost effectiveness is expected to increase significantly as departments improve the management of cash and assets, financial reporting, internal controls and inventory management. The primary beneficiaries of the project are disadvantaged groups who depend on publicly provided social services such as basic education and social welfare programs. 4. Institutional and implementation arrangements: Project Management. The project will be implemented for a period of about 3 years, from February 2000 to December 31, 2002. Overall responsibility for the project will be vested in the lead agency, the Department of Budget and Management (DBM) in collaboration with the Conmmission on Audit (COA). The central and regional offices of the implementing line agencies (IAs) DECS and DSWD will be responsible for the implementation of their specific components. An Inter-agency Steering Committee will provide overall strategic direction for the project, review project progress and solve any inter-agency issues or problems that may arise. In each of the departments, an Agency Steering Committee chaired by the concemed Undersecretary and including the Assistant Secretaries/Directors of Finance, Procurement and Information Systems as well as relevant program managers, will provide strategic direction for the project, review progress and solve any problems that may arise during implementation. Project Management Offices (PMOs) have been established within each agency. These units, which will coordinate all project activities, are headed by a full time manager who will report to the Undersecretary for Finance of each respective IA. Each of the three PMOs will: (i) support and facilitate the expeditious implementation of each component within their department in conformity with agreed procurement procedures; (ii) establish an efficient reporting system and monitor project implementation as agreed with DBM; (iii) review and validate payment requests from implementing units and preparing -8 -  statements of expenditure; (iv) ensure that agreed conditionality benchmarks are met. Each of the PMOs will be staffed by a core group of agency personnel for finance, procurement and monitoring and national consultants as necessary. Each of the lAs will also establish regional project management groups (RPMGs) comprising financial management, procurement personnel and the concerned regional directors. The regional groups will be responsible for: (i) coordinating and monitoring procurement emanating from their regions; (ii) monitoring delivery of goods and services emanating from procurement within their regions and from the national level; (iii) providing project status reports to the IA PMO as required; (iv) undertaking monitoring and evaluation within their respective regions; and (v) preparing SOEs relating to regional expenditure. Financial Management. A financial management assessment was carried out in the three departments to develop the FM Improvement Program under component 2. The assessment revealed major weaknesses in the areas of FM organization, linkages between planning, budgeting and programs, financial programming and cash management, budget execution reporting, assets and inventory management and internal controls. Terms of reference have been prepared for hands-on technical assistance to help develop and establish the FM Improvement Program. The TA will include the development of simplified PMRs for project monitoring purposes within six months of TA effectiveness. Disbursement will be against Statements of Expenditure (SOE). Annual audit reports will be provided by the COA. Project Monitoring. Project components will be monitored at the level of the implementing agencies by program and collated and reviewed in formats prepared by DBM, consistent with the PMR requirements. In addition, the project will pilot two additional strategies for monitoring project inputs: a) community-based monitoring system and b) participatory audits involving the private sector. The Community Based Information and Monitoring System (CBIMS) aims to provide a community level perspective of public social services, including tracking their impacts from the perspective of the beneficiaries. It will focus on disadvantaged communities, involve simplified data collection and use monitoring approaches and structures already in use under the Minimum Basic Needs (MBN) survey. D. Project Rationale 1. Project alternatives considered and reasons for rejection: A review of Bank support in the aftermath of the Asian financial crisis presented the following alternatives: a) a social protection investment project; b) a social sector adjustment loan, c) a social fund. The first alternative was rejected because new social sector investment projects in the Philippines require a long start-up phase and would not address the urgent need for protecting basic social services. Moreover, it would not address the main bottlenecks identified by the PSEP which were the lack of cash to finance non-personmel expenditures and weak procurement and financial management capacity to implement on-going programs. An adjustment loan was rejected because the agencies were assessed to be too weak to effectively implement a large sector reform program. The agencies had themselves rejected ambitious sector-wide reform plans in favor of focused, time-bound actions to improve sector management that would address the urgent need for the efficient implementation of on-going social sector programs. Social funds were not considered because they could not meet the need to protect on-going basic social services in the short term. 9-  2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned). ty SecXtor mssue P#Set (PSR)~ *Rain;s Implementation Development Bank-financed Progress (IP) Objective (DO) (Jointly with ADB). Improve the Early Childhood Development U S quality and coverage of early childhood development services in 3 regions with worst ECD indicators (Jointly with OECF); Improve access Third Elementary Education S U and quality of education in 26 poorest Project provinces. (Jointly with ADB, AusAid and other Women's Health and Safe S S donors); Improve the delivery of Motherhood Project women's health services Improve quality and access to primary Urban Health and Nutrition S S health care for urban poor communities Project Other development agencies Asian Development Bank Secondary Education Improvement Non-FormalEducationProject Integrated Community Health Services Project Mindanao Basic Education Project USAID (Governance, including Accelerating Growth, procurement and financial management Investment and Liberalization reform) with Equity (AGILE) IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) 3. Lessons learned and reflected in the project design: The project addresses the primary lessons learned from a review of the social sector portfolio in the Philippines that management capacity of the agencies has to be improved, particularly with regard to procurement and financial management and that project design should be kept simple. Lessons from Bank projects in other crisis countries included in the project are: (i) focusing on selected, established programs of government for basic services facilitates effective implementation and Bank supervision; (ii) implementation readiness can be improved by upstream agreement and actions on procurement and financial management; (iii) high standards of accountability and transparency must be maintained to assure good governance; (iv) institutional capacity of implementing agencies need strengthening; and (v) good monitoring and evaluation systems need to be established so that timely corrective action can be taken to improve project effectiveness. - 10-  4. Indications of borrower commitment and ownership: The project is a response to a specific request from Government (in particular, the DBM), for support for the maintenance of basic social services in a period of fiscal difficulties; and strengthening departmental capacity for public expenditure management in preparation for greater devolution of budget responsibilities to agencies. Specifically, the DBM and COA are collaborating in the planned establishment of an integrated financial management system in the GOP, of which the systems to be developed under the project shall be prototypes. The new management of the social sector departments had also themselves embarked on a process of reform of procurement and financial management systems. The project has been designed to be help develop and implement those reforms to which the agencies have demonstrated commitment by themselves initiating actions. DECS has, for instance, agreed to use ICB procedures for the purchase of textbooks and NCB procedures for civil works in the face of stiff opposition from local vested interests. The DSWD has prepared SOEs for $18 million towards retroactive financing and has implemented some recommendations from project preparation studies to strengthen expenditure management, including a procurement training for its staff at the Asian Institute of Management. 5. Value added of Bank support in this project: Bank support will add value in several ways: (i) it will ensure the timely availability of cash for some of the most important investments in the social sectors in the Philippines; (ii) the Bank will bring international experience and necessary resources to bear and in particular for the strengthening of financial, procurement and information systems; (iii) international standards of transparency and accountability in the use of resources will result from the Bank's participation; (iv) Bank involvement will ensure high standards of monitoring and evaluation. E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (supported by Annex 4): o Cost benefit NPV=US$ million; ERR= % o Cost effectiveness * Other (specify) The project is designed to de-bottleneck the backlog in the provision of key social sector inputs, providing benefits that are long overdue to poor sections of the population dependent on publicly provided social services. An assessment of the nature of the goods fnanced, the prevailing market conditions, and the proposed reform of the intemal management of relevant departments was undertaken and warrants confidence in the ability of the loan to improve the welfare of poor Filipinos. A benefit incidence study, which is the most appropriate tool, is being undertaken as part of the poverty assessment based on the Annual Poverty Indicators Survey (APIS) recently concluded with Bank assistance and will shed more light on the degree to which project benefits will accrue directly to the poor. An appropriate response to the large shocks that have hit the economy over the last 2 to 3 years is for households to smooth consumption by borrowing against future income streams. Because the shock has been economy-wide, it is natural to use extemal funds to fmance this consumption smoothing, but private capital markets are unlikely to deliver such financial resources directly to households. The efficiency effects of consumption smoothing are significantly augmented when the resources are used to forestall otherwise irreversible deterioration in human capital, associated with withdrawal of children from school, and general poverty. There is thus a clear alignment of efficiency effects and desirable equity outcomes. Apart from the overall economic rationale for the project, specific project interventions meet efficiency and equity criteria. The targeting properties of the interventions are pro-poor. The activities of - 11 -  the DSWD, including those financed under the loan are essentially redistributive in nature, and are unlikely to be offset in alternative private transfers. The envisioned improvements in welfare associated with expanded public involvement in the social sectors will be all the greater if the efficiency of delivery of these services is increased. The financial management and procurement reforms financed by the loan aim to do exactly this. In principle, such reforms can have very large internal rates of return, as the resource costs associated with altering management structures and incentives are relatively modest. Based on bid prices for goods begun to be procured under the project, savings on project related procurement alone, would for example, result in a return of over 66 percent. On the other hand, the success of the long term procurement and financial reforms depends crucially on the willingness of senior civil servants to embrace the proposals, and to induce compliance amongst staff. These additional non-financial requirements for successful reform mean that while the economic return can be enormous, it is subject to a high level of uncertainty. 2. Financial (see Annex 5): NPV=US$ million; FRR= % The project overall does not lend itself to the calculation of precise financial rates of return. However, an indication of the large expected financial rates of return can be obtained by calculating only the likely savings from project related procurement. Based on recent bidding for textbooks following Bank procedures, compared to prices paid by GOP for these items in the past, the effect of Bank procedures is to reduce prices by 40%, thus increasing the quantity of real resources purchasable by 67% (1/(1-0.4) = 1.67). This two thirds increase in supply amounts to US$ 29.50 million, yielding a return of 27% on the project loan of US$ 100 million, without considering the financial benefits attributable to the other components or indeed any other procurement under the project. Moreover, if procurement reform is institutionalized, the stream of benefits will not only continue indefinitely, but could apply to the entire budget of the departments and not only the items financed under the loan. Fiscal Impact: As the project will finance appropriated budget expenditures, it will have no additional fiscal impact. On the other hand, the project will relieve the constraints on cash for priority social programs and will partly finance the projected 1999 budget deficit of about P 100 billion ($2.5 billion). 3. Technical: In the case of education, well-established national norms will be used for school building construction and textbooks. The use of Bank procurement guidelines ensures that appropriate and cost-effective technologies are adopted in other cases - e.g. desks and chairs. Line agency technical norms will be used for DSWD programs. Inputs are consistent in scale, quality, quantity and cost with the proposed activities of the project and implementation is technically feasible. 4. Institutional: a. Executing agencies: The DSWD is one of the most progressive of Government agencies and one of the best managed. It is open and actively seeks innovations that will improve its operations, piloting, for example, both the COA's computerized procurement system and the DBM's Budget Expenditures and Accountability Tracking System (BEATS). It repositioned itself after the devolution of the delivery of social services to local governments (in EO #15 dated August 20, 1998) and is undergoing a rationalizing and streamlining plan which will operationalize the changes in structure, roles, functions, organizational processes, technology and structure. It was the first agency to avail the procurement/management training by the Asian Institute of Management offered to the departments under a Special PHRI) Grant obtained to - 12 -  support the project. The prospects of full implementation of the proposed expenditure improvement program in this agency are very good. DECS is one of the largest government agencies and management capacity, especially at the middle levels, is weak. Although the role of management is critical given the magnitude of its operations, development support to the agency has, in the past, focused on the provision of educational inputs, and to some extent, on capacity building for policy development. The new management is committed to maximizing scarce budgetary resources for basic educational inputs such as textbooks and school buildings by improving efficiency and reducing corruption. To this end, a number of procurement related reforms have already been initiated and drastic changes in current procedures will be made by adopting Bank procedures for the procurement of items financed under the project. Strengthening management capacity and in particular financial management, also figure high on the agency's agenda. However, the capacity of the agency to institutionalize current reform efforts and implement the additional changes required is yet to be tested. b. Project management: The project's management structure is already mostly in place and the personnel assigned to the project have the necessary capacity to deliver results. The project will be coordinated by the DBM, which has already demonstrated the necessary leadership and capacity in encouraging the agencies to participate in the project and commit to serious reform. Undersecretaries of the agencies have been actively involved in project preparation and departmental orders creating counterpart PMOs have been issued. The agencies are also committed to replicating arrangements at the regional level and building necessary capacity. 5. Social: The financial crisis, combined with El Nino and La Nina, has affected Filipino society adversely through rising unemployment, lower incomes, and higher prices, making it difficult for the poor and vulnerable groups to access basic health care, education and social services. Although the Government had planned a range of social sector programs, there were significant shortfalls in the implementation of these programs since 1997 due to budget constraints. A social assessment was carried out in mid 1999 through stakeholder workshops, participatory field consultations, key informant interviews with donors, government staff and civil society, and a review of secondary materials, including accomplishment reports of line agencies and independent impacts evaluations. These have revealed that poor and vulnerable groups are greatly dependent on public social services such as those being supported by the project and that the need far exceeds what the government has been able to provide. For example, between 1986 and 1994, the household's share in education expenses at the elementary level increased by 30% and at the secondary level by 42%, straining poor households and causing reductions in enrollment. Teachers have resisted being deployed in remote schools primarily because of limited facilities and lack of incentives. Hardly any teaching materials have been supplied in schools in the last two to three years, and poor children are the most adversely affected as a result. Poverty forces some families to send children to school without breakfast. Absenteeism is common among children from poor families as a result of having to care for siblings or help parents at home or on the farm. These problems have been exacerbated as a result of the crisis as parents have transferred children from private to public school. - 13-  6. Environmental assessment: Environment Category: C The project is expected to have negligible environmental impact. Resettlement. As the project entails no infrastructure construction besides the expansion of classrooms belonging to existing schools, there will be no resettlement. DSWD's programs related to the provision of minimum basic needs are for very small works such as filling of potholes in access roads, not exceeding an amount of about $4,000, so land acquisition will not be an issue. Besides, all activities under CIDSS are designed and implemented by the beneficiaries themselves. Both agencies have certified to the Bank in writing that the programs fnanced under the project will not involve resettlement. Indigenous People. The implementation of project programs will be carried out in compliance with the stipulations of the Philippine legislation on Indigenous People, in particular the Indigenous People Rights Act of 1997 which defines a framework compatible with WB OD 4.20, and are expected to have beneficial effects on Indigenous People. 7. Participatory Approach (key stakeholders, how involved, and what they have influenced or may influence; if participatory approach not used, describe why not applicable): a. Primary beneficiaries and other affected groups: Primary beneficiaries of the budgetary programs selected for funding under the project are low income families availing of public social services such as elementary education and social welfare programs of the government. These families appear to be relying more heavily than ever on public services as a result of the financial and weather-related crises. They cited the need to improve the quality and service orientation of government programs, as well as monitoring of inputs supplied under these programs. A community-based information and monitoring system (CBIMS) has been developed as a result and will be piloted under the project. b. Other key stakeholders: The DBM and line agencies involved in implementing the project have fully participated in its development, from the concerned Secretaries to project staff, and have made key decisions regarding items to be financed under the project, adopting Bank procurement guidelines and defining the technical assistance to be provided under the project. NGOs and agency personnel such as teachers and frontline health and social welfare personnel were consulted during the social assessment. F. Sustainability and Risks 1. Sustainability: The project will fnance programs regularly covered by budgetary allocations and hence the maintenance and operation of assets created is assured. The sustainability of the proposed procurement, financial management and information/communication reform, on the other hand, depends to a large extent on the political will, integrity and management capacity of the leadership of the implementing agencies to implement and sustain the reform actions recommended under the TA and agreed under the project. - 14 -  2. Critical Risks (reflecting assumptions in the fourth column of Annex 1): Risk Risk Roting Risk Minimization Measure From Outputs to Objective Poor targeting of social programs M Selection of basic social services that tend to benefit the poor Capacity of implementing agencies to S Appropriate input of TA agreed to strengthen implement programs in an efficient and agency capacity. timely manner Locally responsive and quality service S Project monitoring and supervision by the delivery at the level of interface between implementing agencies, the beneficiaries and the clients and implementing agencies Bank From Components to Outputs Timnely release of cash for project M Targeted cash release program agreed with implementation DBM Political stability and/or continuation in S Reform agenda widely recognized as high policies of departmental leadership priority in the agencies Procurement under the project conforms M Dialogue and close monitoring by the World to Bank approved procedures as agreed Bank Office Manila project team during project preparation Slow disbursement as a result of S Advance preparation of bidding documents; procurement bottlenecks technical assistance Delays in the implementation of actions S Adherence to agreed improvement actions for the procurement, financial and covenanted communications improvement programs Overall Risk Rating S Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk) 3. Possible Controversial Aspects: The proposed expenditure management improvement program will affect certain vested interests outside and inside the government. As a result of the procurement improvement program, suppliers who have in the past profited from preferential access and lack of transparency will be adversely affected. This is already apparent in the procurement of textbooks and school buildings, where the use of Bank procedures has resulted in substantial reductions in price and has opened up the competition to new or non-traditional suppliers. The FM reform will also increase transparency in the financial management of the agencies and is likely to be resisted by any vested interests that may be affected as a result. - 15 -  G. Main Loan Conditions 1. Effectiveness Condition None, as the following prior actions for Negotiations were met: * Setting up of SEMP Project Steering Committees and core PMOs consisting of project coordinator, accountant and procurement specialist. * Request for proposals (RFP), including agreed terms of reference for the Integrated Expenditure Management Improvement TA to be sent to shortlisted consultants. * Manual of Operations approved by GOP. * Memorandum of Agreement (MOA) agreed between DBM, COA, DECS and DSWD covering the implementation of the TA. 2. Other [classify according to covenant types used in the Legal Agreements.] The following conditions were agreed during negotiations. Management aspects of the project or executing agency (a) that the Steering Committee chaired by the Secretary of DBM and consisting of Undersecretaries from DECS and DSWD will be maintained with terms of reference satisfactory to the Bank, to monitor the progress of the Project and to coordinate its components. (b) that the Agency Steering Committee in each of DBM, DECS, and DSWD, will be maintained, headed by the Secretary or the Undersecretary responsible for Financial Management and Procurement, and key financial management and procurement staff, to oversee implementation of the Project. (c) that a PMO in each of DBM, DECS, and DSWD, will be maintained, headed by Project coordinators, and assisted by financial, accounting, procurement and monitoring and evaluation specialists for supervision and monitoring of the Project. Project implementation (d) that the Project will be carried out in accordance with the Manual of Operations for the Project, containing (i) operational procedures for determining the eligibility of Comprehensive and Integrated Delivery of Social Services Activities and the appraisal and financing criteria therefor; (ii) procedures for procurement, financial management, disbursement, supervision and impact evaluation in respect of the Project; (iii) policy and procedures to ensure the participation of indigenous peoples in the design and implementation of Comprehensive and Integrated Delivery of Social Services Activities; and (iv) procedures for the monitoring and reporting of Project activities. (e) that DECS and DSWD shall by September 30, 2000, furnish Financial Management, Procurement and Communication Improvement Plans satisfactory to the Bank, and thereafter implement such Improvement Plans according to a schedule satisfactory to the Bank. (f) that DECS shall develop an independent system satisfactory to the Bank for monitoring the delivery of basic education facilities of textbooks, desks and chairs, and shall thereafter monitor the delivery of such items according to a schedule satisfactory to the Bank. -16 -  (g) that DSWD shall monitor procurement of items under the Project through a community-based monitoring system satisfactory to the Bank, based upon the minimum basic needs survey, and utilizing the Barangay Inter-Agency Committee. (h) that a mid-term review of the Project will be held on March 15, 2001. H. Readiness for Implementation EI . a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. Z 1. b) Not applicable. 1 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation. 1 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. FII 4. The following items are lacking and are discussed under loan conditions (Section G): None 1. Compliance with Bank Policies 1 1. This project complies with all applicable Bank policies. Cl 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies. a BaIacIder Al= Ruby yLB Team Leader Sector Manager/Dlrector Country ManagerlDirector - 17 -  Annex 1: Project Design Summary PHILIPPINES: SOCIAL EXPENDITURE MANAGEMENT PROJECT Sector-related CAS Goal: Sector Indicators: Sectorl country reports: (from Goal to Bank Mission) Enhance human development Improved education outcomes Beneficiary assessments The economy of the by improving the delivery of and reduction in gaps in and analysis of APIS (annual Philippines continues its basic social services minimum basic needs poverty incidence surveys) recovery and does not suffer from further shocks Improved social expenditure Budget expenditure management in the social Policies and systems as well as sector Audit reports knowledge and skills arising from procurement, financial, and information management reforms are institutionalized in the lAs Project Development Outcome I Impact Project reports: (from Objective to Goal) Objective: Indicators: Sustained and improved Increase in the elementary Annual Poverty Indicator Provision of basic social delivery of basic social school cohort survival rate Surveys services benefits the poor services during a period of continuing fiscal difficulties in Improvements in minimum Census data Major deficiencies in sector the aftermath of the East Asia basic needs indicators management can be overcome financial crisis through Social Welfare and Education by the proposed action plans financing of key MIS for improving financial non-personnel expenditures Improvements in the cost management, procurement, and improved public effectiveness of project Procurement documents and and communications expenditure management financed procurement by at reports least 30% Timely and reliable financial Budget and financial reports reporting - 18-  _ Ky ferfomianre _e 2rardiy of ,j6) r,,1IAuors A...ttitorl-- y. rIvalufin irTa I Ass ions Output from each Output Indicators: Project reports: (from Outputs to Objective) component: Gaps in terms of educational I.Number of classrooms Agency quarterly and annual Identified basic social services inputs relieved by the completed to specification reports are targeted mainly at the poor provision of textbooks, desks 2.Number of classrooms and benefit the poor and chairs, and teacher repaired/rehabilitated LGU reports training, and the construction 3.Number of desks and chairs and repair/maintenance of distributed to identified Project Monitoring Reports Capacity of implementing classrooms schools (PMRs) agencies to implement 4.Number of textbooks activities in an efficient and distributed to elementary and Project Supervision Reports timely manner will be secondary schools (PSRs) enhanced by procurement, s.Number of teachers trained financial, and information Surveys and assessments management reforms Community-based information monitoring system (CBIMS) reports Gaps in basic social services i.Number of individuals and Delivery of social services at relieved by the effective groups served by the the level of interface between implementation of social different programs lAs and clients is locally welfare and development 2.Improvement in minimum responsive and of good quality programs and timely provision basic needs (MBN) of inputs and services indicators for food and nutrition, health, water and sanitation, shelter, and income. Procurement and Financial i.lmplementation of Support of IA management to Management Reform benchmark actions to reforms improve procurement and financial management in the departments of health, education and social welfare - 19 -  Project Components I Inputs: (budget for each Project reports: (from Components to Sub-components: component) Outputs) A. Protection Of Basic Agency quarterly and annual Timely release of cash for Social Services physical and financial reports project implementation Basic Education Project Monitoring Reports Political stability and/or Construction of about 9000 8.50 (PMRs) continuation in policies and classrooms conunitment to reform of Project Supervision Reports departmental leadership Repair and maintenance of 14.90 (PSRs) about 25,000 school buildings Procurement under the project Surveys and assessments conforms to Bank approved Purchase of 450,000 desks and 9.62 procedures as agreed during chairs Community-based information project preparation and monitoring system Distribution of 25 million 44.00 (CBIMS) reports The hierarchies within the lAs textbooks are committed to implementing the programs Provision of short-term 3.25 in-service and degree-upgrading training for 2,000 elementary and secondary school teachers Social Welfare 13.00 Implementation of CIDSS Maintenance and Operation of 8.60 Centres and Institutions Provision of Assistance to 3.41 Distressed and Disadvantaged Populations B. Strengthening 1.50 Management Capacity And Systemu In The Social Sectors Integrated Technical assistance for financial management, procurement and information communication - 20 -  Annex 2: Project Description PHILIPPINES: SOCIAL EXPENDITURE MANAGEMENT PROJECT The project has two main components: Component I comprises selected on-going programs in the education and social welfare departnents of the GOP for the provision of basic social services largely benefiting the poor. The project will de-bottleneck the backlog in the supply of key inputs for these services. Component II is designed to strengthen fiscal discipline and enhance service delivery by public expenditure reform. Specifically, it will support the revamping of the procurement, financial management and information communication systems of the agencies. By Component: Project Component I - US$ million A. Education (US$ 80.2 million). Budget support to be provided to DECS will consist of five activities covering the provision of key inputs for improving the quality of basic education: (i) School Construction (US $ 8.5 million equivalent). There is an estimated backlog of 15,000 classrooms in elementary schools throughout the country. In the past, the government's school building program has been mostly implemented by the Department of Public Works and Highways. The project provides funding for the DECS executed portion of the school building program with a view to benchmarking good practices using competitive bidding procedures. A total of about 900 classrooms will be constructed under the project. Under Filipino law, priorities for the construction of school buildings are determined on the basis of the school-age population (50%) and current shortages (40%); 10% is allocated by the Secretary of DECS. (ii) Repairs and Maintenance (US $ 14.9 million equivalent). The project would support the school repair and maintenance program. For CY 1999, already ongoing repair programs procured under government LCB procedures, packaged in contracts of less than P 2 million, and all new repairs, to be procured under Bank NCB procedures would be included for Bank financing. For CY 2000, a new approach would be introduced, providing a repair and maintenance fund of about P 10,000 to eligible schools in the country. The School Repair and Maintenance Fund would assist towards the introduction of greater school-based management and autonomy of the principal. (iii) Desks and Chairs (US $ 9.6 million equivalent). The project would support the procurement of about 450,000 desks and chairs, under Bank ICB procedures. (iv) Textbooks (US $ 44.0 million equivalent). The project would support the procurement of about 25 million textbooks under International Competitive Bidding (ICB) procedures approved by the Bank. Such procurement has resulted in significant savings (up to 60%) and improved quality of textbooks. -21 -  (v) Teacher Training (US $ 3.2 million equivalent). National and regional level teacher training programs will be supported under the project. The programs cover those managed by the National Education Academy of the Philippines, and those of the Bureaus for Elementary and for Secondary Education, and include degree upgrading programs and short-term in-service training activities. B. Social Welfare Promrams (US S 25.0 million) The project will fund the following: (i) the Comprehensive and Integrated Delivery of Social Services; (ii) the Maintenance and Operation of Centres and Institutions; and (iii) Programs for Distressed and Disadvantaged Populations. (i) Comprehensive and Integrated Delivery of Social Services (CIDSS) (US S 13.0 million) CIDSS is a proven and highliy successful barangay-centered activity with projects currently being implemented in 5th and 6th class municipalities. The poorest barangays are identified using a collection of 33 indicators related to income, education, health, access to clean water, shelter, nutrition and child labour. Communities use the same indicators to determine their most urgent needs, after which a Peoples Organisation (PO) is established which submits a proposal for a community-based project to the DSWD field office. DSWD field offices release funds to POs based on approved project proposals. Examples of CIDSS projects as of the end of 1998 include road improvement; access to potable water; electrification; housing; sanitary toilets; and campaigns against domestic violence. The project will finance grants to POs to purchase materials for minor works and monitoring and supervision expenses. DSWD field offices and Barangay Development Committees monitor fund utilisation and outputs during project implementation. (ii) Maintenance and Operation of Centres and Institutions (US $ 8.6 million) These include: (i) residential care facilities; and (ii) community based care and services. Residential Care: Residential care facilities operate 24 hours a day and are located throughout the country. They provide temporary residential care, psychological treatment, access to medical help, and general rehabilitation to abused women and children, substance abusers, mentally ill, the elderly, and people with disabilities. Community Based Centres: These non-residential centres provide productivity and skills capability building for disadvantaged women so that they can contribute to family income without having to migrate to urban centres or abroad. This program targets women from depressed barangays in all sixteen regions. A second program is the Social and Vocational Rehabilitation Program for Persons with disabilities. This operates in six centres in Regions NCR, I, VII, IX, XII. (iii) Assistance Programs for Distressed & Disadvantaged Populations (US $ 3.4 million) Protective Services for Children and Youth in Especially Difficult Circumstances: Interventions are preventive and rehabilitative and include publicity and awareness campaigns, and services designed to promote physical and psychological recovery from abuse, neglect and exploitation. Assistance to Persons with Disability and senior Citizens: Rehabilitation services and opportunities for senior citizens and people with disabilities are provided. The program includes integrated day services for senior citizens and children, the Tuloy Aral Walang Sagabal which caters to disabled children and youth, - 22 -  and programs for persons with disabilities (PWDs) and older persons. Assistance to Victims of Disasters and Natural Calamities: This program provides augrnentation, logistics and co-ordination support to LGUs, including emergency relief packages, and materials and personnel for shelter repairs. LGUs are also assisted in conducting disaster preparedness capability building activities. Project Component 2 - US$1.50 million Component 2, Strengthening Management Capacity and Systems in the Social Sectors (US $ 1.5 million) An integrated technical assistance for financial management, procurement and information communications seeks to achieve the following: Financial Management (a) improved financial programming capacity and technique; (b) timely and quality budget execution reporting; (c) control over payroll expenditures that account for major part of the current spending; (d) credible assets and inventory management system (acquisition, accounting, utilization and disposal) within each department; (e) strong intemal control procedures; and (f) greater cohesion between planning, budgeting and finance divisions and performance and results orientation. Procurement distribution (a) a procurement operations manual for all procurement activities in each department's center including all Regional Offices embodying efficient and transparent procurement procedures; (b) a well-defined organizational structure for procurement, both at the center and in the regions, staffed with qualified, experienced and trained staff; (c) all procurement is carried out and concluded efficiently and quickly within the original bid validity; and (d) sound procedures for the monitoring and quality control in ensuring that delivery of goods, supplies and works are carried in accordance with the contract and are in accordance with Specifications. Communications (a) in each agency, the present information and communications system to be extended with additional hardware and software, as needed, so that all regional centers are efficiently connected to the center; (b) the capacity and capability of the existing information and communications systems of the IA to be upgraded, as necessary, to take advantage of recent improvements in technology; (c) Information Systems Plans (ISP) for communications to be upgraded or established; and (d) a comprehensive training program for all the staff of the lAs to be identified and implemented. Three national teams of consultants will locate in the central office of the respective IA. The teams will comprise financial management, procurement and distribution, and communications personnel. lAs will provide a SEMP Steering Committee (chaired by the undersecretary responsible for finance), office space, utilities, and counterpart functional personnel. The Consultants and their counterparts will work closely - 23 -  with the IA steering committees but they will report to the national coordinator of their respective firm who will report to the SEMP Project Coordinator. Teams will address the immediate and then longer-term financial management, procurement, and communication needs of the IA. The requirements of each IA differ and this will have to be taken into account by the firm responding to RFP for the consultancy. - 24 -  Annex 3: Estimated Project Costs PHILIPPINES: SOCIAL EXPENDITURE MANAGEMENT PROJECT . - - - f- ; Xual Fooeign Total Project ,, _,,.oect_,_,,__l_i, US $m_l_on US smiliion DSWD sub-component 25.01 0.00 25.01 DECS sub component 54.21 26.00 80.21 TA component 1.50 1.50 Front-end Fee 1.00 1.00 Total Baseline Cost 79.22 28.50 107.72 Physical Contingencies 0.00 0.00 0.00 Price Contingencies 0.00 0.00 0.00 Total Project Costs 79.22 28.50 107.72 Total Financing Required 79.22 28.50 107.72 Local Foreign Total ---Us $miliUon :US $umllion US $mtlion Goods 44.04 26.00 70.04 Works 23.87 0.00 23.87 TA Services 1.50 1.50 Social Services and Training 8.45 0.00 8.45 Incremental Operating Costs 2.86 0.00 2.86 Front-end Fee 0.00 1.00 1.00 Total Project Costs 79.22 28.50 107.72 Total Financing Required 79.22 28.50 107.72 - 25 -  Annex 4 PHILIPPINES: SOCIAL EXPENDITURE MANAGEMENT PROJECT Economic Analysis 1. Background The current economic and fiscal crises have translated into lower real incomes, higher unemployment, and a reduction in non-salary expenditures in the social sectors. According to data from the 1998 Annual Poverty Indicators Survey (APIS) and the 1997 Family Income and Expenditure Survey (FIES), per capita income declined by 12.1 % in real terms with average family income declining in all income deciles except for the top decile. Families in the bottom decile, whose income declined by 29%, were the most affected. The unemployment rate increased from 8.7% in 1997 to 10.2% in 1998, food prices increased by 6.4% and overall inflation increased to 11.6% by the beginning of 1999. Although the National Government Department allocated a sizeable proportion for the social sectors (43.5% in 1999), the share allocated to Maintenance and Other Operating Expenses (MOOE) has decreased from 55% in 1992 to 39% in 1999. The social groups that have been most affected by the crisis include: small farmers; upland communities; workers in the construction, manufacturing, and mining sectors; and laid-off urban workers (Balisacan, 1999; SEMP Social Assessment, 1999). a. Education The Governinent of the Philippines devotes a significant share of its public expenditure budget to education. In 1994, 17 percent of the public sector budget was allocated to education. By 1998, the allocation reached a high of 22.3 percent. Despite high levels of investment, the education system in the Philippines continues to be plagued by long-standing inefficiencies including high unit costs and low quality, the latter attributed in part to the chronic under funding of non-salary recurrent inputs (World Bank, 1999). On average, about 87% of the budget allocation for basic education is earmarked for personnel services. The remainder is distributed between MOOE (9%), school building programs (3%) and other Capital Outlays (1%). Recent budgetary shortfalls have been absorbed by MOOE and Capital Outlays. For example, the total textbook requirement for the period of 1997-1999 is estimated at 100 million copies at a cost of PhP 6 billion. Only 31 % of the total requirements (PhP 1.85 billion) was budgeted for during that period. Actual execution was about 30% of the allocated amount. In 1998, the total demand for classrooms was estimated at 20,500, of which DECS budget could only cover 32% or 6,500 new classrooms. In addition, routine school repairs and maintenance have become de facto responsibility of community members, parents and teachers. Moreover, the maintenance budget (calculated on a per student basis) had declined in real terms from PhP 510 in 1970 to PhP 135 in 1997. The crisis has also effected the growth of school enrollment rates which fell from 3.3% to 0.7% between the 1996/97-1997/98 and 1997/98-1998/99 school years. Secondary school enrollment declined even more sharply over the same period. It fell by 7.9% for overall secondary enrollment and by 9.3% for enrollment in the first year of secondary school. Data from the APIS and FIES show that 6.4% of households have removed their children from school with the proportion of households in the poorest income decile reaching 12.4% (Balisacan, 1999). Other impacts of the crisis are higher rates of school absenteeism and desertion, lower rates of students' participation in extra-curricular activities, and quality erosion particularly in already under-served areas of the country. This threatens the major achievement of - 26 -  the Philippines in basic education - high participation rates. b. Social Welfare The Department of Social Welfare and Development (DSWD) provides assistance to economically disadvantaged groups including poor women and their children, senior citizens without income, abandoned and abused children, and persons with severe disabilities that prevent them from working. The economic and fiscal effects of the crisis mean that while demand for these services is likely to rise, without external resources, the available supply will contract. Indeed, in 1998, budget cuts resulted in a 25 percent funding reduction. While the DSWD budget in fact suffered a smaller real reduction than those of some other departments, the extreme vulnerability of its clients, and the likely increase in their number, suggest the social value of additional resource allocations is high. 2. Project Components a. Education The SEMP will finance the following: textbooks (US$ 44.0 million); teacher training (US$ 3.6 million); new classrooms (US$ 8.5 million); desks and chairs (US$ 9.6 million); school repairs and maintenance (US$ 14.9 million). Vital expenditures in non-personnel items are expected to halt the erosion of quality at the elementary and secondary school levels. b. Social Welfare Three programs within the DSWD will be supported by the project The first two programs - the Assistance Program for Distressed and Disadvantaged Populations (APDDP) and the Residential and Day Care Facilities - are targeted to individuals in generically "bad" situations. For example, the APDDP provides assistance to victims of natural disasters, to persons with disabilities, and to children and youths in especially difficult situations. Similarly, the residential care facilities provide shelter and rehabilitation for abused women and children, substance abusers, the mentally ill, and others, while the day care centers provide work environments for the disabled, training for low-income women, etc. The third program within the DSWD to be supported by the project is the Comprehensive Integrated Delivery of Social Services (CIDSS), which aims to attack poverty through participatory programs that strengthen households, communities, and local governments. This program is geographically targeted to the poor, and is based on the identification of 33 minimum basic needs (MBN) indicators of deprivation (including income, education, health, access to clean water, etc.). Poverty alleviation is effected through demand driven-project choice and implementation, as monitored by CIDSS field offices. c. Public expenditure management reforms The project will seek to improve the performance of the education and social welfare programs not only by ensuring the availability of cash for key non-personnel inputs as outlined above, but by revamping the procurement and financial management systems of these agencies. It will also establish a communication system, primarily between the central and regional offices to facilitate expenditure management. - 27 -  3. Economic Analysis I. Linkages to Country Assistance Strategy and Economic and Sector Work The project is fully consistent with the goals and priorities of the latest CAS for the Philippines. The SEMP is highlighted in the CAS as a key instrument to protect social services and improve sector management and efficiency. It is also consistent with the recommendations included in the Country Economic Memorandum of 1998, which calls for a social protection strategy in the aftermath of the East Asia crisis. In the immediate term, the social protection strategy would help to make food more affordable for poor households, maintain the purchasing power of poor households, maintain public spendingfor social services, and develop livelihood and mnicro-finance programs. 11. Rationale for Public Intervention a. Education Public intervention in the education sector, particularly in basic education, is usually justified on equity and efficiency grounds. Both issues are addressed by the interventions included in the project. On equity grounds, it is argued that since education is often a strong determinant of earnings, investments that attempt to equalize educational opportunities (and the quality of education) may help to equalize the distribution of income. For example, expanding basic education in rural areas may improve farming productivity and increase rural incomes thereby reducing rural/urban income disparities. At the same time, by opening opportunities for children from poor rural families, education may facilitate upward mobility. It is important to note however, that reducing inequality in the distribution of schooling and public expenditure is only a step towards reducing overall income inequality since other equally important policies and factors also play a role in reducing income inequality (fiscal, wage, and labor market policies, discrimination, etc.) In the Philippines, even though participation rates are already high, access to schooling for the poor remains a problem. The disparity in enrollments between the rich and poor increases even for higher grades at the primary level. In Grade 6 while more than 95 percent of the rich are still enrolled, 25 percent of the poor have already dropped out of school (World Bank, 1999). Filmer and Prichett using 1993 DIemographic and Health data show that Filipino children between the ages of 15 and 19 that richer children tend to attain Grade 6 before their participation begins to drop off (1998). Poor children however, begin to drop out after Grade 2. By Grade 9, 66 percent of poor children are not in school while 75 percent of rich children are still enrolled (World Bank, 1999). The interventions in this project are key to increasing access to schooling for poor children. For example, the provision of textbooks by the government could significantly increase the participation of poor children whose parents cannot afford to purchase textbooks and workbooks. Similarly in the case of school maintenance, it is the poor who often suffer when budgets are cut as they cannot afford to raise adequate funds to ensure that their classroom are equipped for instruction (World Bank, 1999). The 1999 World Bank education sector study for the Philippines "Philippine Education for the 21st Century" argues that since teacher compensation is one of the largest expenditures in basic education, increasing teacher effectiveness would be a major step towards improved efficiency. It further suggests that the major problems are: i) suboptimal deployment of teachers and (ii) inadequate preparation of teachers themselves. By funding teacher-training activities, this project helps address some of the - 28 -  inefficiencies in the system. It is generally agreed that there is strong relationship between the quality of education and economic growth, with various studies showing stronger growth effects from investing in quality rather than in quantity of schooling. At the micro level, studies on the returns to investments in education indicate that the social rate of return is usually higher for primary education and lowest at the tertiary level. The fact that education increases income should not be interpreted as an additional argument for public provision. However, for those levels of education for which public provision is desirable, it must be of good quality in order to truly optimize public investment and strengthen human capital. b. Social Welfare The activities of the DSWD, including those financed under the loan, are essentially redistributive in nature. There is thus a clear equity rationalization for such interventions, as long as it can be shown that the direct effects of the project are not offset by adjustments in private sector transfers to the beneficiaries of DSWD services. There is some evidence that the DSWD relies (to an unspecified extent) on philanthropic donations, voluntary support, and other uncompensated inputs. Private inter-household transfers are also extensive, and elastic (see Cox and Jimenez (1997). However, two arguments can be used to sustain a case in favor of public provision as deployed with the project funds. First, a large share of the funds are directed to improving the delivery of DSWD services (e.g., training personnel in LGUs), so additions to these funding sources are unlikely to be offset by reductions in private transfers. Indeed, it is arguable that private contributions to DSWD programs could increase if they are perceived to be used more efficiently because of improved administrative capacity. Second, in light of the economic and budget crisis, some domestic philanthropic sources may have tightened, while the demand for redistributive funds, as manifest in the demand for DSWD services, has increased. In this case, there is little reason to expect that the net impact of additional public provision targeted to the poor will be much smaller than the gross increase in funds made available through the project. e. Public expenditure reforms The question of the rationale for public intervention does not arise in the case of internal organizational and expenditure reform in the areas of procurement and FM. No amount of private sector activity will, in itself, improve the efficiency of the public sector. It should be noted that this argument does not mean that there is no decision margin regarding the functional activities undertaken by the government - e.g., whether to provide health care, schooling, etc. - but just that whatever it does provide should be provided efficiently. Although this point sounds trivial, it is actually not. See Diamond and Mirrlees (1971). III. Cost-benefit/Cost-effectiveness or Related Analyses a. General issues As the project is being prepared on a very short timetable to provide budgetary support for programs in the social sector, a full formal cost-benefit analysis is not undertaken. Given the strong equity/poverty objectives of the project, the primary evaluative tool should be a benefit incidence study. The success of the project in reaching the poor depends on the specific delivery and funding allocation mechanisms outlined above. While it is difficult to make accurate predictions about the degree to which - 29 -  project benefits accrue to the poor, the nature of the goods financed, the prevailing market conditions, and the fact that the loan also finances reform of the internal management of the relevant departments, mean that some confidence is warranted. In addition, since the loan funds expenditures that would have been part of the government's regular budget if not for fiscal pressures, it is possible to indirectly evaluate the project by examining the appropriateness of the government's overall budgetary policies. The Philippines has traditionally had high educational enrollment rates, suggesting that its education sector policies have been reasonable (although the quality of education in poor areas needs to be explicitly verified). The CIDSS component of the DSWD program appears to have been especially successful in targeting disadvantaged groups. b. Education Some of the interventions included in this project mirror those adopted under the Third Elementary Education Project. The economic analysis of the project drawing on a study by Tan et al (1996) illustrates the cost-effectiveness of providing workbooks and classroom furniture as compared with the provision of pre-school education in the Philippines. In their 1997 study, Princhett and Filmer using data from the same study examine the per dollar cost-effectiveness of workbooks and furniture with other inputs such as reductions class size. Both studies find that the provision of workbooks and classroom furniture in the Philippines is more cost effective than any of the other interventions tested. For both mathematics and the Filipino language, the cost effectiveness ratio computed as the cost in pesos per standard deviation gain in achievement was much lower for workbooks and classroom furniture than pre-school education (ust over 100 in comparison to ratios ranging from 3,000 to 29,000). C. Financial management and procurement reforms It is possible to provide some rough calculations of the return to the financial management and procurement reform component of the loan. This smaller but somewhat more ambitious component of the project focuses on improving the efficiency of the public sector, specifically of the departments through which the first component funds will be allocated. In principal, the social return to such investments can be extremely high. Indeed, much of the benefit from reform can be achieved at little resource cost, as long as the public sector is flexible enough to alter internal incentives, and senior civil servants are receptive to change. The unpredictability surrounding these somewhat intangible inputs, and the political opposition that inevitably confronts institutional changes, mean that while potential returns are truly enormous, they are also considerably uncertain. Current procurement practices are laborious, with delays of up to two years not uncommon. Also, despite such long time lags, unit prices paid by the government are not low - for example the switch to World Bank procurement guidelines has resulted in lowering the price of textbooks by more than 40 percent compared to negotiated prices paid by DECS for past procurement. Project funds for textbooks amounts to about US$ 44.0 million. The effect of the procurement reform is to reduce prices by 40 percent, thus increasing the quantity of real resources purchasable by 67 percent (l/(1-0.4)=1.67). This two thirds increase in supply amounts to US$ 29.50 million, yielding a return of 27% on the US $107 million project investment. This in fact is an underestimate because it does not include savings from the procurement of other items, nor does it include the benefits attributable to the social programs or the public expenditure reform component. Thus the return on the bank financed program lending could be as high as 10,000 percent. Indeed, this return is calculated under the assumption that the procurement reform is only effective in reducing prices of goods purchased with the project funds. If prices of all publicly purchased inputs in the social sectors were reduced similarly, the return would be enormous. - 30 -  Annex 5: Financial Summary PHILIPPINES: SOCIAL EXPENDITURE MANAGEMENT PROJECT Years Ending Year 1 |Year 2 |Year 3 | Year 4 | Year 5 Year 6 | Year 7| Total Financing Required Project Costs Investment Costs 33.8 61.0 I.S 0.0 0.0 0.0 Recurrent Costs 11.0 0.3 0.2 0.0 0.0 0.0 0.0 Total Project Costs 44.8 61.3 1.7 0.0