Philippines - Social Expenditure Management Loan Project

Report No. PID7858 Project Name Philippines-Social Expenditure (@) Management Loan Region East Asia and Pacific Region Project ID PHPE65113 Borrower Republic of the Philippines Implementing Agency Department of Budget and Management (DBM) Espinosa Building, DBM Compound Gen. Solano Street, San Miguel, Manila Tel: (632) 711-1107 Fax: (632) 735-4927 Date PID Prepared April 27, 1999 Date PID Updated January 24, 2000 Projected Appraisal Date November 10, 1999 Projected Board Date February 15, 2000 Background 1. The share of social services in the national government's budget has risen from about 30% in 1990 to over 40% in 1999. At the same time, the share of social services in local government expenditures also doubled during this period from about 15% to 30%, in a context of increasing devolution of social services to local governments. However, expenditure levels by sub sector are still low compared with averages for middle income countries, particularly for health (about 1% GDP compared to the 2.2% norm). Moreover, the intra-sectoral allocation of resources is inefficient. The specific issue faced in the aftermath of the financial crisis and identified in a 1998 World Bank review of social expenditures (Philippines: Social Expenditure Priorities Report No. 18562-PH), 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 the Department of Education, Culture and Sports (DECS), for example, since 1996, and in 1998, the Department of Health (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. 2. 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 worrying. The implementation of two Bank financed health projects has been seriously delayed due to major procurement problems and there are frequent procurement-related scandals in the 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 in financial management systems are government-wide and have been identified in a number of studies  initiated by the Department of Budget and Management (DBM) and the 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. Efficient communication systems are also critical to ensure that policies are properly understood and implemented as responsibilities are increasingly devolved to the periphery. 3. 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. 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 agency capacity for financial and procurement management in preparation for greater devolution of responsibilities to agencies for budget management (proposed to be introduced under a Medium Term Expenditure Framework). Specifically, the DBM and COA are collaborating in the planned establishment of an integrated financial management system in the government, 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 help develop and implement those reforms to which the agencies have demonstrated commitment by themselves initiating actions. Project Objective 4. 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, DECS and the Department of Social Welfare and Development (DSWD). Project Description 5. The project has two components: Component I, the Protection of Basic Social Services comprises selected on-going programs in the education and social welfare departments for the provision of basic social services largely benefiting the poor. These include (A) the provision of key inputs for improving the quality of basic education (US$ 80.2 million) including: (i) textbooks and teacher's manuals; (ii) construction and repair and maintenance of existing elementary and secondary schools; (iii) desks and chairs and (iv) teacher training; and (B) social assistance for disadvantaged groups (US$ 25.01 million) including (i) the Comprehensive Integrated Delivery of Social Services (CIDSS), for the provision of the minimum basic needs through a demand-driven approach targeted at the poorest municipalities; (ii) the maintenance and operation of centers and institutions including orphanages and centers for the handicapped; and (iii) assistance program for distressed and disadvantaged populations including special programs for squatters, street children, rape victims, etc. 6. Out of the proposed loan, the Borrower has proposed disbursement of up -2 -  to $20 million (about 20t of the loan amount) for expenses incurred after February 1, 1999. Retroactive financing has been proposed to finance budgeted social expenditures which had to be sustained and implemented as scheduled in the aftermath of the crisis. 7. Component II, for Strengthening Management Capacity and Systems in the Social Sectors (US$ 1.5 million) provides an integrated technical assistance (TA) 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. Specifically, with respect to the reform of procurement systems, the TA will review existing systems and processes for procurement and identify ways of improving their efficiency and transparency; 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 organizations; (ii) reduce steps and lead-times in the procurement process; and (iii) develop and adopt standard procurement manuals embodying principles of efficiency and transparency. 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. Financing 8. A Social Expenditure Management Project (SEMP) is proposed for an amount of $100 million. The project will retroactively finance expenditures incurred since February 1, 1999 for up to 209 of project costs. Benefits and Risks 9. Benefits. 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, 450,000 desks and chairs, and the training of about 5,000 teachers. It is expected that there will be a 10t reduction in the dropout rate in the 2000-2001 school year. - the provision of basic social services in 1,000 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 1 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 40t of DECS negotiated prices for past procurement. Cost -3 -  effectiveness is expected to increase significantly as departments improve the management of cash and assets, financial reporting, internal controls and inventory management. 10. Risks. The main risks are as follows: (1) lack of capacity of implementing agencies to carry out the expenditure reform program and implement programs in a timely and efficient manner; (2) political instability which could result in changes in departmental leadership, putting the proposed reforms at risk; and (3) resistance to the proposed expenditure reform program as they affect certain vested interests outside and inside the government. To minimize these risks, an appropriate input of technical assistance, including of change management, has been provided to strengthen implementation capacity; appropriate implementation covenants have been obtained; and preparation for project implementation is well advanced. Project implementation oversight from DBM is expected to be intensive, as was the case throughout the project preparation phase; due to the fact that the project-initiated reforms are seen as pilot initiatives that will later be carried out in other key departments. Further the field-based project team is engaged in intensive dialogue with the Borrower. Poverty Category 11. Program of targeted intervention Environmental Aspects 12. In accordance with the Bank's Operational Directive on Environmental Assessment (OD 4.00, Annex A), the proposed program has been placed in Category "C" and will not require an environmental assessment. Contact Points: The InfoShop The World Bank 1818 H Street, N.W. Washington, D.C. 20433 Telephone (202) 458-5454 Fax: (202) 522-1500 Ms. Jayshree Balachander The World Bank Resident Mission in the Philippines 23/F, Taipan Place Emerald Avenue, Ortigas Center Pasig City, Philippines Telephone (632) 637-5855 Fax (632) 637-5870 Note: This is information on an involving project. Certain components may not be necessarily included in the final project. - 4 -  Processed by the InfoShop week ending February 18, 2000. Additional financing for this component will be available from the MIS components of the Bank financed Third Elementary Education and Early Childhood Development Projects. - 5 -