Philippines - Environment and Natural Resources Sector Adjustment Program Project

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Documat of The World Bank Z Z 77 - P/tt FOR OMCLAL USE ONLY Rqirt No. P-5452-PH REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$158 MILLION AND A PROPOSED CREDIT OF SDR 50 MILLION (US$66 MILLION EQUIVALENT) TO THE REPUBLIC OF THE PHILIPPINES FOR AN ENVIRONMENT AND NATURAL RESOURCES SECTOR ADJUSTMENT PROGRAM MAY 29, 1991 thr docil dbieas a Ite cted dWibution and may be usisosd whopients ody i the peatormati on their offida duie Its conteTs way not otherwbe be dbdksed without World Bank authorization  CURRENCY EQUIVALENTS Appraisal (May 1990) US$1.0 = P21 P1.0 US$0.047 Current (May 1991) US$1.0 - P28 P1.0 - US$0.036 FISCAL YEAR January 1 to December 31 ACRONYMS A&D - Alienable and Disposable ADB - Asian Development Bank BFAR - Bureau of Fisheries and Aquatic Resources (DA) CARP - Comprehensive Agrarian Reform Program CBRM - Community-Based Resource Management CFLA - Community Forest Lease Agreement CFSA - Community Forest Stewardship Agreement CG - Consultative Group CSC - Certificate of Stewardship Contract CVRP - Central Visayas Regional Project DA - Department of Agriculture DAR - Department of Agrarian Reform DENR - Department of Environment and Natural Resources DOD - Department of Defense EFF - Extended Fund Facility ffARM - Philippines Forestry, Fisheries and Agricultural Resource Management (Study) GDP - Gross Domestic Product GEF - Global Environment Fund GET - Global Environment Trust Fund COP - jovernment of the Philippines ICB - International Competitive Bidding IFC - International Finance Corporation IMF - International Monetary Fund IPAS - Integrated Protected Areas System ISF - Integrated Social Forestry LCB - Local Competitive Bidding MLT - Medium-Long Term NEDA - National Economic Development Authority NGO - Non-government Organization OECF - Overseas Economic Cooperation Fund O&M - Operations and Maintenance OPSF - Oil Price Stabilization Fund PSSD - Philippine Strategy for Sustainable Development RRDP - Rainfed Resources Development Project SOE - Statement of Expenditure TLA - Timber Licensing Agreement TPSA - Timber Production Sharing Agreement UNDP - United Nations Development Program USAID - United States Agency for International Development WID - Women in Development  FOR OFFICIAL USE ONLY UZLZZZM NVIRONNENT AD NATURAL RSUERCES OSECTR ADJUSTNENT pROGRAM Table of Contents Pag2 No. LOAN AND CREDIT SUZMOARY ... .................................... i I. COgNTY POLICIES AND AM GROUP ASSISTCE ST ..........T.. 1 A. Introduction . ............................................. 1 B. Recent Economic Developments ............................... 2 C. Medium-Term Strategic Framework ............................ 2 D. Bank Group Assistance Strategy ............................. 4 E. Aid Coordination and External Financing .................... 11 F. IFC Operations ........................................... 11 G. Summary .................................................,.11 II. THE ENVIRONMENT AND NATURAL RESOURCES SECR .................. 12 A. Overview ......... 12 B. Rural Natural Resources Management Issues .................. 13 C. Institutional Issues ........................................ 16 III. THE SETOAL ADJUSTMENT PROGRAM .............................. 19 A. Perspective and Objectives ......... ...................... 19 B. The Program .............................................. 21 IV. THE PROPOSED PROJECT .......................................... 28 V. REC.3D.ATION ............................................... 40 Annex A. Key Economic Indicators Annex B. Statement of Bank Loans and IDA Credits Annex C. Policy Agenda Action Matrix Annex D. Supplementary Project Data Sheet Annex E. Description of Global Environmental Facility Component Annex F. Estimated Costs and Financing Annex G. Allocation of Loan and Credit Proceeds Annex H. Letter of Sectoral Policy Hans: IBRD 22867, 22869 This report is based on the findings of an appraisal mission to the Philip- pines in May 1990. Mission members included T. Wiens, W. Magrath, J. Smyle, R. Sedjo, and R. Aquino. Task Manager for this project was T. Wiens, and reviewers included A. Contreras and R. Burcroff. The project was cleared by D. M. Dowsett-Coirolo, Division Chief and G. Kaji, Dbe'ctor. This document has a restricted distribution and may be used by rfoipe.tis only in the performance I of their offlcial duties. Its entents may not otherwise he dLsclosed without World Rank authorimtion.  THE PHILIPPINES ENVIRONMENT AND NATURAL RESOURCES SECTOR ADJUSTMENT PROGRAM LoAn and Credit SUmmary Borrower: Republic of the Philippines. Amount: Loan: US$158 million equivalent. Credit: SDR 50 million (US$66 million equivalent). Terms: Loan: 20 years, including 5 years of grace, at the standard variable interest rate. Credit: Standard, with 35 years maturity. Descrigtion: The project would be a hybrid operation, consisting of a quick-disbursing sector adjustment program based on policy and institutional reforms, and an investment project in support of institutional strengthening and regional communi- ty-based resource management activities. The objectives of the sector adiustment Drogram are to preserve what remains of the biological diversity of the Philippines; where these resources have been degraded or destroyed, to reestablish them wherever practicable and financeable; and elsewhere to introduce sustainable land use practices. The means to these objectives, as pursued in the program of legislation, administrative action, and studies, are primarily to: (a) determine what areas of the Philippines must be preserved undisturbed and introduce an effective management syitem; (b) impose user fees for public resources which discourage rent-seeking behavior; (c) improve enforcement of logging regulations; (d) provide secure tenure rights to users in return for sustainable resource use; (e) provide extension services to upland populations; and (f) establish mechanisms for support of community-based resource management and livelihood projects. The investment component, implemented over a seven-year period, would finance: (a) the design of an Integrated Protected Areas System, including a suitable legislative framework; (b) program support for management of ten priori- ty protected areas; (c) improved monitoring of logging operations and enforcement of forestry laws and regulations through provision of equipment, training and technical assistance to selected DENR regional and local offices; and (d) development in four regions of the capacity of local governments and line agencies to generate and service small- scale community-based resource management and livelihood projects in watershed areas, combining community organizing and pre-cooperatives development; improvements in tenure and  e ii resource management; introduction of sustainable means of livelihood; and improvement of infrastructure and services. Benefits: The loan and credit would support the efforts of the Govern- ment to introduce sustainable development policies and institutional reform. As a result, incentives and opportu. nities for depletion and degradation of tropical forest and erosion of hilly areas would be reduced; incentives and resources for introduction of sustainable upland land uses and protection of natural forests and biodiversity would be expanded; a sound institutional basis for the preservation of the biological diversity of the Philippines would be in place; local governments and field staff of line agencies in about 48 municipalities, 26 provinces, and four regions would have the training, experience, and organizational framework to deliver support to rural communities in the uplands; and the livelihood and tenure status of about 20,800 families from among the poorest segments of the Philippines population would be directly enhanced. Improved public recovery of rents would provide the means of financ- ing long-term environmental protection. Risks: The risks arise mainly from possible delays, inadequate implementation, or non-sustainability. The principal con- cern is that legislative action could be unduly delayed, prove deficient when completed, or be ineffectively imple- mented. However, key legislative drafts have been submitted to Congress, and the most critical has already passed both the House and Senate in satisfactory form, .o that early passage of a reconciled bill is very likely. Government's commitment to carry out the needed reforms is very high, and a significant number of prior actions have already been taken. The implementation of the investment component is also subject to risks due to institutional weaknesses and possible reluctance of beneficiaries to adopt recommended practices. The emphasis of project design on long-term institutional strengthening and incorporation of lessons from prior projects will mitigate these risks. Financing Plan: --- (US$ million) --- IBRD 26.0 132.0 158.0 IDA (US$ equivalent) 0.0 66.0 66.0 OECF 0.0 100.0 100.0 GEF 10.5 9.5 20.0 Japan-WB TA Grant 3.3 1.3 4.6 NDF 0.0 1.0 1.0 Gov't and beneficiaries 19.4 0.0 19.4 309.8 369.O Apuraisal Report: Not applicable. Maps: IBRD 22867, 22869  REPORT AND RECO1MENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND CREDIT TO THE REPUBLIC OF THE PHILIPPINES FOR AN ENVIRONMENT AND NATURAL RESOURCES SECTOR ADJUSTMENT PROGRAH I submit the following report and recommendation on a proposed loan for the equivalent of US$158 million and a proposed IDA credit of SDR 50 million (US$66 million equivalent) to the Republic of the Philippines to support an Environment and Natural Resources Sector Adjustment Program. The loan would have a term of 20 years, including five years of grace, at the Bank's standard variable interest rate, and the IDA credit would be on standard terms, with 35 years maturity. Part I of this report assesses the medium-term strategic framework and Bank/IDA country assistance strategy. Part II dis- cusses sectoral issues, and Part III presents the sector adjustment program. I. COUNTRY POLICIES AND BA1N GROUP ASSISTANCE STRATEGY A. Introduction 1.1 As a result of stabilization and adjustment measures undertaken in the latter half of the 1980s, the Philippines economy registered a remarkable recovery during 1987-89. The fall of the Marcos administration and the return to democracy under a new administration led by President Corazon Aquino since March 1986 generated significant international goodwill for the country and a sizeable increase in official development assistance. As a result of this assistance and the Government's economic adjustment efforts (at both the macroeconomic and sectoral reform levels), economic growth averaged about 61 per annum in 1987-89 and key macroeconomic balances improved (the fiscal deficit and current account showed substantial improvements in 1987-88). However, several underlying structural problems were not solved; these includ- ed a still high level of public sector deficit, low levels of savings and investment, a resultant large external and internal public debt, an overvalued exchange rate, and high levels of poverty and unemployment. By the end of 1989, the current account deficit had widened to 3.31 of GDP, compared to 11 in 1988, and the consolidated public sector deficit stood at 41 of GDP, com- pared to 3.1X the year before (Annex A). The Philippines economy was thus in a vulnerable position when it was hit in 1990 by a series of exogenous shocks, most notably the Gulf crisis. 1.2 The updated Country Brief was distributed on January 4, 1991. A Report entitled Country Economic Memorandum: Issues in Adjustment and Compet- itiveness was distributed on October 31, 1990. In addition, a Memorandum on IDA Eligibility of the Philigpines was distributed on April 12, 1991 (IDA/SecM91-124).  -2- B. Recent Economic Developments 1.3 Despite the deterioration ef the fiscal situation and the weaken- ing of the current account, economic growth continued in 1989 (GDP grew by 5.6X). Private investment registered reasonably strong gains and public investment in infrastructure -- although rising -- was insufficient to offset the deterioration of the capital stock, itself caused by inadequate operations and maintenance (O&M) systems. Consequently, transportation and energy infra- structure, as well as the services sector, came under increasing pressure, resulting in breakdowns in transport deliveries and power supply. During 1990 a series of exogenous shocks and setbacks weakened the fragile economic recov- ery that had begun in 1987. Policy slippages compounded the situation, and a slowdown in growth resulted. GDP grew by only 2.51 in 1990 (which implies stagnant per capita income) and inflation accelerated to 14X, compared to average real growth of 6X and inflation of 10 per annum in 1987-89. 1.4 The downturn began in early 1990 with a prolonged drought that stretched through the first half of the year. The drought curtailed agricul- tural production and, as a result of inadequate water resources, serious power shortages soon followed. In July 1990, a devastating earthquake caused severe physical and human loss: nearly 1,600 persons were killed and assets valued at about 1 of GDP were destroyed. The earthquake was soon followed by another equally strong shock--the Gulf Crisis, which placed severe pressures on the balance of payments. In 1990 alone, the cost of oil imports rose by US$400 million and workers' remittances declined by US$50 million. All of these fac- tors undermined confidence that the economic recovery could be sustained, and both manufacturing output and private investment faltered as a result. 1.5 These exogenous shocks were initially compounded by hesitant domes- tic policy. In reaction to developments in September, the Government raised domestic oil prices by an average 331, which was insufficient to prevent the deficit in the Oil Price Stabilization Fund from growing. Meanwhile, Govern- ment expenditures continued to grow, especially capital expenditures as a result of a pick-up in project implementation, but 'rre not compensated by increased revenue mobilization. Monetary policy showed large fluctuations, particularly in the uecond and third quarters, in response to fiscal pres- sures. By October 1990, the program supported by the IMF's Extended Fund Facility (EFF) was substantially off track. C. Medium-Term Strategic Framework 1.6 The Government's economic program in the medium term consists of three main parts: (a) a stabilization program; (b) concerted efforts to deepen the economic adjustment program and thereby to achieve sustainable growth; and (c) programs to alleviate poverty. 1.7 Stabilization. In November 1990, the Government took several actions that were most urgently needed: it devalued the exchange rate, result- ing in a nominal depreciation in the value of the Peso to the US Dollar of about 251 in 1990, thus eliminating the real appreciation that had occurred in 1988-89; it convened a "Budget Summit" between the Executive and Legislative branches, which resulted in an agreement to limit the 1991 budget in nominal terms to the 1990 levels (a decline in real terms); it raised oil prices by an additional 33% in December, which stemmed the erosion of the OPSF deficit; it  adopted an import surcharge of 91 (as a temporary measure to increase fiscal revenues); and it raised the Central Bank's resprve requirements from 211 to 25X. 1.8 As a next major step, in January-February 1991 the Gavernment formulated and agreed with the IMF on a Stabilization Program, aimed at improving the fiscal balance and controlling the money supply. The program is supported by a Standby Arrangement which was approved by the laP's Board on February 20, 1991. Principal objectives of the stabilization program are: (a) to reduce the fiscal deficit from 5.21 of GNP in 1990 to 3.51 GNP at end-1991 and 2.51 by end-1992; (b) to reduce the annual rate of inflation from 141 in December 1990 to around 91 by the end of 1991 and to 71 by end-1992; (c) to reduce the current account deficit from 5.81 of GNP in 1990 to 4.51 In 1991 and to below 41 in 1992; (d) to reconstitute official reserves to the equiva- lent of 2-1/2 months of imports by end-1992; and (e) to promote a gradual recovery of growth from 1-21 in 1991 to 3-4X in 1992. To achieve these objec- tives, the Government undertook to reduce the public sector borrowing require- ments; to limit the supply of base money; to place a ceiling on short-term external debt; to eliminate the OPSF deficit by August 1991; and to increase international reserves. Attainment of these objectives is expected to lay the basis for restoration of fiscal health and external viability. GDP growth is projected to increase gradually to 5-6Z per annum, the investment savings gap to narrow, and the current account and external debt position to improve as shown in Table 1 below. Tabt 1: StERY INDICATS (In Percentages) 190iaL...... ..raif Projected 1980 1986 1989 1990 1991 1992 1993 1994 1995 Relt GDP Growth Rate 5.3 1.4 5.6 2.6 2.5 3.9 5.0 5.3 5.3 Real per Capita Growth Rate Total Coneuvption 1.6 -1.0 4.8 0.8 -2.7 -1.0 0.6 2.0 3.0 Share of GDP: Gross Investoent 31.4 12.1 18.6 18.1 18.9 20.9 22.6 23.3 23.3 DCesstic Savings 23.1 16.2 16.0 13.7 16.6 19.4 21.3 21.7 21.7 current Account Batance -5.4 3.1 -3.3 -5.? -4.0 -2.9 -2.5 -2.7 -2.9 Total Debt Outstanding Disbursed 49.5 92.2 65.1 65.6 73.3 73.3 69.6 68.9 66.2 Growth Rate: GDP Deflator 15.6 0.9 10.6 14.2 12.0 10.0 10.0 10.0 10.0 1.9 AdJustment and Growth. At the Philippines Consultative Group (CG) meeting in Hong Kong in February 1991, the Government elaborated on its stabi- lization program and articulated the need to deepen its adjustment efforts. Foreign donors expressed strong support for the economic policies now in place and stressed the cr'ical need for the Government to adhere to the stabiliza- tion program. Donors agreed to provide about US$3.3 billion of assistance in 1991, about the same level as was pledged during the previous CG meeting held in Tokyo in July 1989. 1.10 The Government's objective for the medium term is to restore sustainable economic growth, led principally by the private sector, through a  - 4 - labor-intensive, export-led strategy, while attempting to reduce high levels of poverty through income generation and targeted programs. In order to meet the growth objective, a substantial upgrading and renewal of the capital stock in Infrastructure is required. At the same time, the Government recognizes that efficiency improvements across the economy are needed urgently. The Government also plans to make a substantial impact in improving the economic conditions and opportunities of the poor in both the urban areas and the many small towns and villages that dot the Philippines archipelago. Nearly half of all families, or some 30 million persons, live below the poverty line in the Philippines and while there has been some progress in recent years, this may be reversed if slow economic growth persists. Thus, a vital part of the Government's medium-term strategy--on both p-oductivlty and equity grounds --is to restore economic growth to at least 5-6X per annum. This would allow a reasonable rate of per capita income growth. 1.11 Pgv_MrX Alleviatign. The Government is deeply concerned about income distribution issues, to which it has directed special efforts in the past, such as agrarian reform, vocational training, and health and nutrition programs. Poverty in the Philippines is concentrated in the rural areas -- it is estimated that 571 of the population lived below the poverty line in 1985, and since then there has been only modest improvement. Overall, approximately seven million persons were added to the ranks of the poor between 1979 and the present. Pockets of poverty and deprivation are also growing in the congested and deteriorating urban areas: expenditures on rural infrastructure and serv- ices have declined steadily since the 1970s, and agricultural productivity in staple crops is low. An essential element of the Government's strategy in- volves developing rural projects complemented by initiatives in environmental management, which have a significant poverty impact. Emphasis is being placed on rural infrastructure development; irrigation investment; agricultural research and revitalization of the national extension service; credit, infra- structure and extension for poor upland communities; rehabilitation of the rural credit system nationally; and development of the small coconut farm subsector. D. Bank Group Assistance Strategy 1.12 The Bank Group's assistance strategy in the Philippines is to support the medium-term framework that is being put in place, first through assistance in macroeconomic policy reforms and, second, through support of lasting sectoral reform programs. The economic and political sustainability of this medium-term strategy depends upon actions regarding a number of struc- tural issues facing the country. At the minimum, the following elements are needed in order to achieve these goals: firm macroeconomic management; increased domestic resource mobilization; increased efficiency in public investment; increased efficiency in private investment through improvements in the regulatory framework; and continued efforts to reduce the debt burden, with a view to regaining creditworthiness. 1.13 Over the long term, in order to reduce poverty and ensure sus- tainability of economic and social progress, the reform and adjustment program should include: widespread provision of family planning services; continued efforts to protect the natural resource base; a concerted attack on inequali- ty through a strengthened land reform program; and targeted interventions in supplying social services.  - 5 - 1.14 Key constraints to future growth and development remain and need to be tackled. These are: (a) low levels of domestic resource mobilization (low savings and inadequate tax effort), exacerbated by the large exter- nal debt and adverse balance of trade developments; (b) limitations in basic infrastructure, particularly in genera- tion and distribution, transport (roads and ports), and telecommunications, as well as inadequate maintenance of existing capital stock; (c) institutional weakness in the public sector, over-centrali- zation, inadequate guidelines and procedures for administra- tion delegation; and (d) continued high population growth (2.3X), which results in over 750,000 new entrants to the labor force annually and poses an enormous challenge to job creation. 1.15 The outlook for achieving sustainable growth and confronting social inequality hinges upon the ability of the society to develop a consen- sus regarding the many challenges facing the economy. The past five years have seen major changes in the functioning of the executive-legislative-judicial institutions. While this broad participation has not been an easy task, it has become a central feature to developing this consensus. As the country prepares for national elections in mid-1992, progress on the economic reform agenda is likely to remain a dominant issue. 1.16 Past Assistance. As of March 31, 1991, the Philippines had re- ceived 124 Bank loans (of which two were on Third Window terms) amounting to US$6,536.2 million and six IDA credits amounting to US$105 million (Annex B). The last IDA credit was approved on June 27, 1979. IFC's total gross invest- ments as of March 31, 1991, amounted to US$417.6 million and investments held by IFC (outstanding) totalled US$172.6 million. The share of the Bank Group in total MLT debt disbursed and outstanding is currently about 15X, and its share in total debt service (after rescheduling) is about 20X. These ratios are expected to decline gradually, while net flows are projected to remain positive in 1991-95. 1.17 Bank lending to the Philippines grew from an annual average of about US$90 million a year in the early 1970s to about US$420 million and seven loans in FY8O-84. However, the lending program decreased sharply in FY85 and FY86, because of the limited scope for policy-based or project lend- ing amidst the political and economic turmoil that prevailed. Economic recov- ery and reorientation of Government policies after March 1986 facilitated a return to a normal volume of Bank lending. In FY87, lending totalled US$332 million, mainly accounted for by the Economic Recovery Loan. In FY88, lending increased to US$483.5 million, and remained at about the same level in FY89 (US$495.6 million). In that year, a project for health development expanded the Bank coverage of social sector issues. In FY90, lending increased to US$941.8 million, partly on account of the Debt Management Loan of US$200 million, which supplemented the Bank's regular assistance program for that  -6- year. Other loans supported energy, municipal development, industrial invest- ment, urban water supply and small coconut farms development. 1.18 The Bank Group has financed projects in most sectors of the economy, with particular emphasis on agriculture, which accounted for almost one-third of total Bank/IDA lending prior to 1985. Lending for SECALs, ener- gy, water supply and sewerage, and social sectors have been growing in impor- tance, as can be seen in their shares in Table 2 below. Tebt* 2: OISTRIUUTION Of 80i LENDING BY SECTOR, FY83-90 (us$ sit tlams an percentage) Suetor At I Agriculture 250.0 2? 45.0 5 121.8 8 (2) ()(1) Induetry/DFI 4 - - - 65.0 4 (1) (1) Power/Energy 73.5 8 100 10 455.5 32 (3) (1) (2) frwrwt 102 11 114 11 - T1) (2) UrbanwVter Suppty & 168.1 18 229 23 225 16 Sewerage (4) (2) (4) EdcRationVHeatth/Popul 24.4 3 - e 70.1 5 (1) (1) SALs/SECALs/ 302.3 33 500 51 500 35 Debt Reduction (1) (2) (2) Total 0 vI 143v*4 100 NOTE: The rmfer of projects is shown in parentheses. 1.19 The Dolicy-based loans, which began as early as 1980 with structural adjustment lending and continued with a policy loan for agriculture inputs, have been particularly important in helping to launch the economic recovery, to tackle the heavy external debt burden, to help reform public sector enter- prises and to assist the reform process in the energy and financial sectors. The objectives of these loans are summarized in Table 3. 1.20 Current and Future Assistance. In FY91 to date, five loans have supported elementary education, communal irrigation, emergency earthquake reconstruction, industrial restructuring and cottage enterprises. 1.21 The Bank Group's assistance strategy for future lending will be centered upon six areas: (a) DeeRening the Adjustment Program: One or two operations to strengthen the structural adjustment that was initiated in the 1980's will be pursued. The next stage is to take the program several steps further by focussing on reforms in trade policy and removal of remaining anti-export bias. Attention will also be paid to the debt overhang and measures to reduce the debt burden;  -7- Teble 3: BANK GROUP ADJUSTMENT LENDING SINCE 1983 Loan vate Amount POticy Focus (USS N) SAL-1 1980 200 Tariff reform, begin removal of quantitative restrictions on imports and Improve export frsnework. SAL-11 1983 302 Restructured investment incentives, reduced sales nd eXcise taxes on imports. Agriculturat 1984 150 Removal of price and other controls on agricultural outputs Inputs and ir4uts and break up of the Sugar and Coconut nnopoltles. Economic 1986 300 Reforms of pubtic financial institutfons, trade restrictions. Recovery public Loan investment, and tax system. Reform Program 1987 200 Restructured controls on public corporations, mplemented Goverrnent Corps. program of privatization and ctosure for over 200 corporations Financial Sector 1989 300 Reformed Central Sank regulation and control of prfvate banks improved legal system, conpetition ong banks, depositor pro- protection, interest rates. Debt Management 1989 200 Supported buyback of USS1.33 bittion of external debt Loan at a cost of US665 million; iprovement In debt menagement system. (b) Furthering the Role of the Private Sector: Building on the progress achieved under the Reform of Government Corpo- rations Loan, the Bank Group will continue to assist the Government's efforts to privatize large public enterprises. These efforts will encompass rationalization of investment incentives, simplification of the regulatory framework and other measures to improve private Investment; (c) Exnanding and URgrading the Infrastructure: Projects in telephone system expansion, geothermal development, rural electrification, irrigation operations and maintenance, and municipal development (water supply and sewerage) are planned; (d) DeveloRing Human Resources: Projects for vocational training, and expansion of engineering and science education are planned; (e) Environment and Natural Resource Management: The Environ- ment and Natural Resource Adjustment Program will have a major impact on the management of scarce natural resources in the country and will also help to combat poverty in the outlying regions and preserve biodiversity. Other initia- tives on the environment may also be undertaken, such as solid waste disposal systems; and (f) Alleviating Poverty: Projects for rural infrastructure and provision of rural finance are under preparation. A project on family planning and population might be consid- ered, focussing on the health aspects, if the Bank Group considers that there is a firm enough base to move ahead in this area. The Bank Group's efforts to support poverty  * 8 - alleviation will continue to be broad-based through both self-standing operations and appropriate targeting within the framework of other sectoral projects. 1.22 The overall level and pace of Bank assistance to the Philippines will depend upon a stable situation existing and the success of policy makers in the Philippines to strengthen the macroeconomic framework and to deepen the adjustment program. In order to support economic growth, the Bank plans to concentrate on investment lending in infrastructure -- power and transport -- and human resource development. Policy-based lending would focus on reforms of the regulatory framework and private sector development. A lending level of US$500-$600 million per year is planned for such normal operations. Addi- tional lending for debt reduction and for long-term sustainability issues, such as poverty and population, will be considered. Regarding IDA, on the basis of the Philippines' limiced creditworthiness, its low level of per capita income (which has declined to US$645), and its high incidence of pover- ty, the Management has determined that the country is eligible for IDA re- sources, given that the macroeconomic framework has now been strengthened. 1.23 At the same time, unless the Philippines can work itself out of its heavy external debt burden and mobilize additional resources, its develop- ment program will not be sustainable. Among East Asian countries, the Philippines is the only one with such a formidable constraint. To date the Philippines has pursued a debt strategy built around preserving its good relationships with all creditors, while at the same time taking steps to improve its debt structure. To this end, the Government has obtained resched- uling of Paris Club and commercial debt, and has retired part of its commer- cial debt through buybacks and debt-equity swaps. The Bank's role and its dialogue with the Government has been particularly useful with respect to debt management and the mobilization of external resources, most of which comes from official sources. Indeed, Bank advice and support on debt issues will be critical in the long process of reestablishing commercial creditworthiness, which is likely to take at least five years, defined as the country's being able to attract new borrowings on a voluntary basis from commercial sources. 1.24 Since the country assistance strategy hinges largely on two funda- mental aspects -- growth and poverty alleviation -- the strategies in these two vital areas are elaborated below. 1.25 SuDoorting Growth. The past assistance strategy encouraged ef- forts to engender growth and ensure the distribution of related benefits, as reflected in the active lending program throughout the 1970s. The effective- ness of Bank assistance was, however, constrained by overall policy distor- tions and the subsequent political upheaval. In recent years, the need to encourage efficiency has become paramount. The Bank has focussed upon: supporting macroeconomic reforms (domestic resource mobilization, export competitiveness, financial sector reform); correcting price signals and remov- ing trade distortions; rationalizing the investment regime; supporting the Government's Privatization Program and assisting the reform of public enter- prises. Clearly, if the Philippines is to attract a greater share of the substantial flow of foreign investment funds now moving into neighboring East Asian countries, it needs to offer a comparable policy environment to private investors.  1.26 Regarding the grivate sector, the Bank will continue to follow a multi-faceted approach designed to improve the operating environment. Criti- cal to private sector performance will be continued movement by Government toward further deregulation of economic activity. There has been major progress toward deregulation, and simplification of procedures in iny sec- tors, including agriculture, finance, trade, power generation and telecommuni- cations, within the frameworks established under a series of Bank-supported programs. Howev3r, there remains considerable scope for further action and deregulation in the critical areas of transport (both road and maritime), and industry. 1.27 Regarding the public sector, it is essential to increase the capacity of the infrastructure and services sectors to supply inputs required by private enterprises. Again, the need to obtain efficiency improvements in the public sector will continue to guide the assistance strategy. Attention will be given to improving the level, content, and process for allocating public investment and expenditures. Studies undertaken under the Debt Manage- ment Loan will help to provide the basis for future action on O&H expendi- tures. 1.28 The Bank will continue to encourage efforts to improve domestic resource mobilization. Support will take the form of technical advice (on taxation), through economic and sector work and policy support, as well as through investment vehicles to improve cost recovery and rationalize user- charges in major sectors. There is considerable scope, and great need, for increased internal cash generation from public entities. Another area with potential is local revenue generation: a study of the fiscal aspects of local government is underway, associated with a review of the Government's plans for decentralization. 1.29 Poverty Alleviation. The Bank's assistance strategy in the poverty area draws from the Government's program (para 1.11), as well as a Bank study of the poverty issue in the Philippines, which was distributed to the Board (Report No. 7144-PH, dated October 17, 1988). The proposed agenda has three main elements: sustainable rural development (incorporating both land reform and addressing the linkages between poverty and environmental degradation); family planning; and expanded, rationalized, social sector support. In all three areas there will be a need to involve and support private voluntary and non-governmental organizations: the Philippines is relatively well-endowed with such institutions, and government policy is conducive to their integration in service delivery. In mid-1990 the Govern- ment launched a poverty alleviation program, PRO-POOR, comprising line agency programs targeted for the poorest municipalities in the country; the public works infrastructure component is the most significant in terms of expendi- tures. 1.30 All of these efforts will be supportive of, but not dependent on, Government's implementation of the Comprehensive Agrarian Reform Program (CARP), on which progress has been slow, due to lack of financial resources, inadequate infrastructure, and weak institutional systems. The Government feels that to redistribute land without adequate services only builds frustra- tion. Thus, the importance of rural infrastructure projects is again under- scored.  - 10 - 1.31 Family Planning Program. The current level of population growth is straining the country's already over-burdened natural resource base and the Government's ability to mobilize adequate resources for the provision of social services. Vigorous implementation of a broad-ranging strategy is needed to provide family planning education and services as well as improved maternal and child care. The Government has taken initial steps in this direction and the Bank is assisting with technical advice. 1.32 Human Resource Development. Per capita expenditures on social services have declined in real terms from the levels attained in the 1970s. Despite expanded access to education, quality has fallen. There are also substantial unmet needs in vocational and technical training, as well as informal training; improved skills in science and engineering are needed to support industrialization and technology transfer, and to strengthen the national technical capacity for environmental management. In health and nutri- tion, standards of service delivery have similarly declined, with a consequent rise in disease. The absolute number of persons lacking access to clean water and sanitation facilities has increased substantially over the last decade. In all these areas the poor suffer a disproportionate share of the decline. The Bank's strategy is to address the problems at two levels: by targeting increased expenditures to critical areas (primary education, vocational train- ing, urban health, nutrition, basic urban infrastructure), and by encouraging more efficient use of the resources now allocated through rationalization and reorientation of policies. Improving access of the poor to adequate curative care should be a key element in the strategy. The Bank's human resource strategy will involve major changes in the areas of health and education, and structured support of the already large, but inefficient, private sector role in service provision. 1.33 Regarding Women in Development (WID), a Bank assessment on the Philippines was completed in 1989. While the indicators showed that women have reasonably good access to education, employment opportunities and serv- ices, the main areas identified for improvement involve maternal health and family planning services. In addition to the family planning initiatives, the Bank will continue to include WID components in suitable projects aimed at improving the economic conditions of the urban and rural poor. 1.34 Economic and Sector Work. As mentioned above, the Bank is engaged in a number of economic and sector studies which will help to underpin the macroeconomic dialogue and to define development issues and future lending strategies in key sectors. The last economic report focussed on issues of competitiveness, in the context of macroeconomic policy and industry and trede issues. The next economic report will focus on domestic resource mobilization and management, including budget systems, and selected public and private investment issues. Reports on poverty alleviation, natural resource manage- ment and the environment, energy, financial and education sectors have been completed over the past two years. Their findings formed the basis for cur- rent lending operations in those areas. Other economic and sector work in progress, or planned, includes studies of the capital markets (including the social security system and pension funds), regionalization and decentraliza- tion, employment (focussing especially on the informal sector), family plan- ning, and irrigated agriculture programs.  - 11 - 1.35 Coordination with the IMF. There i8 extensive coordination be- tween the Bank and the IMF, both in developing and in monitoring progress under the economic reform program. Staff frequently cross-partieipate in each other's missions. Various Fund agreements have supported programs initiated by the Bank, including reforms in the public, corporate, and financial sec- tors, and improvements in public investment and expenditure allocations. Likewise, Bank operations have supported reforms which have been primarily under the guidance of the Fund, including tax and exchange rate reform. Some issues, such as trade liberalization and the removal of marketing monopolies in agriculture, have been jointly developed and supported. The work on capi- tal markets is being closely coordinated, so as to mesh with the objectives of the stabilization program. E. Aid Coordination and External Financing 1.36 Successful implementation of the country assistance strategy will require continued close coordination with the donor community. The Bank is well placed to continue this role, through its Chairmanship of the Philip- pines CG. At the CG meeting held in Tokyo in July 1989, the Multilateral Assistance Initiative (MAI) for the Philippines was launched. The February 1991 CG meeting held in Hong Kong reviewed progress under the MAI and concluded that it was generally good. The next CG meeting is tentatively scheduled for early 1992. 1.37 The support of the international community will continue to be critical for the Philippines to meet its external financing requirements. The unidentified financing needs for the 1991-92 period have been estimated in excess of US$2 billion under the conservative assumptions that GDP growth will average 2.5X over the rext two years and that two crucial variables, oil prices and international interest rates, will remain about at their current level. The support pledged at the recent CG is expected to contribute sub- stantially towards meeting the Philippines external financing needs. In addition, continuing good relations with bilateral and commercial creditors are expected to contribute to this end by means of further debt rescheduling and restructuring, as well as provision of new loans. F. IFC Operations 1.38 The size of IFC's portfolio was mentioned in para. 1.16. IFC's assistance revolves around promoting the development of competitive upstream industries to help broaden the country's industrial base. New investment opportunities in the Philippines are emerging as firms currently based in Korea, Taiwan and Japan look offshore for lower-cost production sites. IFC is assisting this process by liaising between foreign sponsors and potentially suitable local firms. Changes in trade, investment and financial policies are also opening up new opportunities to local business, and here too IFC is facilitating new ventures through its extensive overseas contacts. In addi- tion, new vehicles for promoting long-term financing, such as guarantee facil- ities for local currency loans, are being developed by IFC. G. SUmmam= 1.39 In the past five years, the Philippines has experienced economic recovery, strong growth and, more recently, some setbacks that resulted in a  - 12 - slowdown of growth. However, starting in November 1990, the Government has taken actions and formulated a stabilization program that offers the prospect of improved fiscal health and a return of external viability. The Government's medium-term framework consists of the stabilization program, a deepening of the adjustment program, and poverty alleviation measures. If sustainable growth is to be restored, it is essential for the Government to pursue further economic reforms that lead to a substantial improvement in macroeconomic balances and in efficiencies across sectors. On the assumption that macroeconomic performance continues to be satisfactory, a level of Bank lending of around US$500-600 million per year is planned, aside from special initiatives in such areas as debt reduction, environment, population and poverty (para. 1.22). Criteria for judging performance will include progress under the stabilization program (para. 1.8) and progress in deepening the adjustment effort (paras. 1.21-28). 1.40 The Bank's activity will focus on supporting both macroeco- nomic and sectoral reform programs. Investment lending to stimulate growth through financing of key projects in the energy, transport, infrastructure, agriculture and social sectors will feature in the Bank's program, as will operations to support the private sector through appropriately priced funds for investment and through actions to rationalize the trade and invest- ment regimes facing potential investors. Special emphasis will be given to poverty alleviation initiatives through developing the rural infrastructure and through support for such activities as family planning. The latter would also have a beneficial impact on women in development. Regarding the external financing outlook, it is likely to take five years at least, before the Phil- ippines will be able to attract voluntary new borrowings from commercial sources, so that continued work on debt reduction measures or instruments will continue to be an important area of Bank involvement. 1.41 The Environment and Natural Resources Sector Adjustment Program presented below is directed towards protection of the natural resource base, but would also primarily affect inequality and poverty, mobilize additional tax revenues, and improve private investment efficiency by reducing incentives to extract economic rent from exploitation of public resources. II. THE ENVIRONMENT AND NATURAL RESOURCE SECTOR A. Overve 2.1 Economic "sectors" are usually defined as a set of distinguisha- ble institutions contributing to the economic product of society. The envi- ronment and natural resource "sector" is better defined as a set of processes of enhancement, depletion or degradation of the stock of social capital which either foster or threaten the sustainability of economic development. In the Philippines, certain processes have been judged of greatest economic signifi- cance to the economy, where policy changes and other interventions could achieve significant enhancement of natural resource management and thus make a substantial contribution to the country's prospects for sustainable develop- ment. These processes include the disappearance or degradation of forests, which once covered nearly one-half of the Philippine land area; the erosion and changes in hydrological regimes which result from the conversion of forest to other land uses, notably shifting cultivation and pasture; the conversion  - 13 - of mangrove swamps to fishponds; degradation of coral reefs; and depletion of nearshore fisheries through overfishing and destructive techniques. These problems are linked in three ways: (a) all involve use of common access resources which in theory are publicly-owned and managed, but in practice have been subject to nearly unrestrained private exploitation; (b) all involve the livelihood of a large, impoverished, and largely neglected segment of the rural population, including upland farmers and small-scale coastal fishermen; and (c) all are related to each other through the physical or biological links of common ecosystems. 2.2 Other processes, such as depletion of mineral resources and air and water pollution, exist in the Philippines and are serious in particular areas, but have been regarded as less significant economically. The causes of these problems are relatively obvious, most frequently arise from point sources, and strategies for solution involving a combination of regulation and investments are more readily identified, even if their implementation remains beyond the capacities of the Philippine government at present. The proposed Program discussed below deals with rural resource management issues. Industrial pollution will be the target of another Bank operation under preparation, and efforts are being made, particularly in energy and power projects, to strengthen environmenta-l procedures and oversight capacity. B. Rural Natural Resources ManaFement Issues 2.3 Rural natural resources play an important part in the Philip- pines' economy. Agriculture, forestry and fisheries together employ half the labor force, earn one-fifth of export revenues and contribute about one quarter of GDP. In addition, over 60X of the populace live in rural areas. In terms of national comparative advantage, the agricultural sector has been shown to be a more efficient earner and saver of foreign exchange than the industrial sector. However, a long-term process of resource degradation and depletion threatens the sustainability of this economic role, as follows. 2.4 In the Philippines, half the land is classified as "Alienable and Disposable" (A&D), which may be privately owned, and the other half, mostly above the 181 slope, as public "Forest Land". Of the 15 million ha of Forest Land, only six million ha have significant tree cover, and only one million ha is productive, old-growth forest. Government underpricing of rights to har- vest the public forest has induced excessive logging, and discouraged interest in reforestation or plantation forestry. Logging in the uplands has opened new areas for settlement through road creation and partial clearing of for- ests. It has also reduced to critically low levels the forest habitat of the many species of flora and fauna endemic to the Philippines, and directly contributed to short-run soil erosion problems. It is mainly due to logging (licensed or illegal) that the old-growth dipterocarp forests, the most valu- able commercially, have shrunk from ten million ha in the 1950s to only one million ha today. 2.5 Rapid population growth, resulting diminution of unoccupied arable lowland, inequitable land distribution and landlessness, and general impover- ishment create a pressure for migration. Because of the availability of semi-cleared land in the uplands, on which immigrants can build a better livelihood, the direction of migration is to the uplands, as well as to the  - 14 - urban areas. As a result, today about 18 million people, one-third of the total Philippine population, live in upland areas, of which perhaps 8-10 million are farming on Forest Land. The annual per capita incomes of such upland farmers average about P2,000 (US$95), less than half the official poverty line for rural residents. Continuing immigration accounts for the high rates of growth in upland population, as much as 3.5X in logging conces- sion areas, compared with a national average of about 2.41. However, a high proportion of forest inhabitants are members of (non-hispanicized) ethnic minorities, whose claims to "ancestral lands" often predate Span:sh occupa- tion. 2.6 Immigrating farmers, as well as most long-established upland popu- lations, employ extensive subsistence farming techniques (mainly shifting cultivation of rice, corn and root crops). Shifting cultivation is employed because it minimizes labor and cash input requirements by substituting land for labor and fertilizer. In areas of open access, which applies de fac to most upland areas including all the newly settled land, lack of secure tenure or titling provides no incentive for land improvement or nutrient maintenance as the viability of shifting cultivation diminishes. These farming techniques tend to promote very high rates of erosion on some four million ha of land al- ready occupied. (This is not true of all upland farmers - long-established indigenes frequently employ sensible conservation techniques, and in general display more concern for the land and local environment than immigrant groups.) 2.7 In the upstream areas of watersheds, erosion leads to direct loss of soil and nutrients, abandonment of fields and compensatory conversion of further forest areas to cultivation. Downstream, erosion and unchecked rainfall runoff contributes to siltation, causes alternate floods and water shortage, and critically reduces the efficiency of water use. In combination, these effects are damaging to water conservancy systems in the lowlands, reducing productivity and increasing costs of maintenance and restoration of the irrigation and hydropower systems. For example, an upstream sheet erosion rate of about 50 t/ha/year in the Magat watershed has reduced to 25 years the effective life of a reservoir originally designed to last 100 years. Deterio- rating productivity in the lowlands contributes to the migratory "push" (completing a vicious circle). The degradation of the uplands thus entails high social costs. 2.8 Like the uplands, coastal and near-shore fisheries are a public resource, the open-access nature of which has attracted the most impoverished elements from adjacent agricultural and coastal areas and induced them to use non-sustainable extraction techniques. Most of this population (a labor force of around 770,000 persons) is dependent on the near-shore (municipal) fisher- ies, which are extremely sensitive to two habitats which figure in different parts of the life cycles of various fish, namely the mangrove forests and the coral reefs. The accelerated cutting for fuelwood and conversion of mangrove areas to brackish water fishponds have reduced the 450,000 ha of mangroves thought to exist in 1918 to 240,000 ha in 1980 and 150,000 ha today. Coral reefs have been destroyed by the cutting and export of coral and severely damaged by certain fishing techniques. Only 30X of the remaining reefs are considered to be in good to excellent condition. Near-shore habitats are also ecologically linked with the inland and upland areas: increased water turbid- ity and reduced light penetration due to soil erosion reduces growth, or even  * 15 - kills through smothering, the off-shore coral reefs and seaweed beds. Destruction of coastal mangrove forests opens interior areas to increased typhoon damage, creating a backwards linkage. 2.9 Most of the population employed by the fishing industry are poor, and have few livelihood alternatives which do not add to excessive pressure on the resource base. Overfishing beyond the sustainable yield and use of destructive fishing methods are general consequences. Competition between commercial fisheries (mainly larger boats, supposed to keep well off-shore), and the small-scale "municipal fisheries" (with boats under three tons), is also severe, even in the near-shore areas. The municipal capture fisheries account for 75% of employment in fisheries and for 50% of annual production, while the commercial fisheries employ only 6X of the workers but catch 26X of the fish (the remainder being aquaculture). 2.10 Macroeconomic Consequences. The likely consequences of a "policy" of inaction on these issues are quite clear: the primary forest will disap- pear within a few years, as 7-8 million cu m are extracted each year (under license or illegally). The residual, left in poor shape from the first cut, will be further degraded as continued migration from the lowlands and upland population growth adds to the existing pressure. By the year 2000, perhaps one-fourth of the residual will remain, but with little commercial value; the remaining area will be under shifting cultivation, grassland, and brush. Possibly 30 years from now, long before hardwood forests planted today could mature, timber suitable for furniture or construction use will have been exhausted, and fuelwood and pulpwood will be in short supply. Fuelwood de- mands will long since have depleted the remaining mangroves, and the areas will have been converted into fishponds to partially offset the expected decline in the coastal fisheries, due to excessive fishing pressure and reef destruction. 2.11 The economic losses arising from this scenario (within the span of a single generation) include relative losses to the future Philippine popula- tion arising from excessive exploitation of resources by the current popula- tion, as well as absolute losses arising from unproductive or destructive uses of resources. Even rough quantification of these costs is quite difficult, because: (a) understanding of some of the biophysical processes involved in degradation remains incomplete; and (b) insufficient monitoring of various forms of degradation in the Philippines prevents extrapolation from individual cases or pilot studies. Nevertheless, the magnitude of social costs is cer- tainly enough to justify serious concern. 2.12 For certain losses to the future population, it is possible to cite indicative magnitudes. It is clear that soil erosion is leading to significant losses of fertility in seven to eight million ha of upland area which will eventually be needed for crops or tree plantations. In areas of overgrazed grassland, as in the Magat Watershed, annual losses of soil and nutrient may cost more than P 1,000 (US$50) per ha, on a replacement cost basis. There are about two million ha of open grasslands nationwide, indicat- ing an annual loss approaching P 2 billion (US$100 million). Downstream losses - drastically shortened life of dams, increased maintenance and reha- bilitation costs for irrigation facilities, and loss of crops due to flooding or decreased dry season water availability - are also significant. Estimates of current and future annual losses to fisheries arising only from excessive  - 16 - fishing pressure (excluding destructive methods) are in the range of P 1.0-1.8 billion (US$50-90 million). Loss of the remaining habitats which harbor the diverse and often unique flora and fauna of the Philippines entails future losses of potential tourist revenues (an industry whlich now annually generates over US$600 million in receipts, and which has been growing at 17X p.a.), and Incalculable losses associated with the potential development of medicines, pharmaceuticals, various biochemical products and planting materials based on the genetic pool now preserved in tropical forests and coral reef environ- ments. On the other hand, protection of resources from rapid depletion will also entail significant costs, For example, as a measure to relieve excessive harvesting pressure on domestic forests, the Government has recently liberal- ized imports of logs. In 1989, the first year of liberalized imports, report- edly about 600,000 cu m of logs were imported, at a foreign exchange cost of over US$130 million. 2.13 There are also significant fiscal implications: full rent recov- ery on timberlands alone would yield additional annual Government revenues of up to P3.5 billion (US$125 million), or 0.4X of GDP, equivalent to nearly 3X of National Government tax revenues. Not all of this would be collectible, however: conversion of production forests to protected status, which should result from legislation in Congress or administrative decision by DENR, would involve a sacrifice of potential tax revenues, if domestic log production were decreased. The ban on log and lumber exports already imposed, by shifting potential rents downstream to the processing and manufacturing sector, has also made it more difficult to extract rents from the logging industry. C. Institutional Issues 2.14 The 1987 Constitution gives explicit recognition to management of the environment, linking the better use of natural resources to the goals of expanded productivity, sustainability and equity through open democratic processes and distributive justice. The agencies with the most direct respon- sibility for the achievement of these ideals are the Department of Environment and Natural Resources (DENR), the Department of Agriculture (DA) and the Department of Agrarian Reform (DAR). The establishment of DENR represents a major effort to create a natural resource and environmental lead agency. DENR is responsible for management of public lands, including forest land and coastal mangroves, whereas DA's efforts are confined to A&D ltAnd. Management of coastal fisheries by default falls largely within the authority of DA's Bureau of Fisheries and Aquatic Resources (BFAR), although in principle small- scale, near-shore fisheries are supposed to be under municipal control. DAR's focus has been on agrarian reform in rice and corn areas and limited areas of resettlement in the uplands, although it is now charged with overall coordina- tion of CARP, which is scheduled to distribute some seven million ha of public land over the next few years. 2.15 At the national level, the most significant organizational issues relating to natural resource management stem from the inappropriate mandates, resource limitations, confusion arising from reorganization, and potential for corruption of the line agencies charged with managing natural resources, and from the ineffectiveness of local governments and user groups which still need to be empowered. DENR's predecessor was primarily a regulatory agency rather than a developmental one, although it was ineffective in performing  - 17 - even this more limited role. It viewed the management of the public Forest Land as its exclusive responsibility, was unwilling to recognize ancestral land rights of indigenous Filipinos and the de factp rights of recent immi- grants to the uplands, and resisted attempts by other agencies to service the upland population. However, DENR has begun to take a developmental role, which has been well articulated in its Philippine Strategy for Sustainable Development, corresponding Action Plan, and presentations to international donors at a Mini-Consultative Group Meeting on the Environment held in Manila in February 1990. Nevertheless, the DENR remains poorly staffed and equipped to provide the range of services required under its current mandate, both in meeting the needs of upland farmers and its traditional regulatory role. The nucleus of a service program exists within DENR's Integrated Social Forestry (ISF) program, but it requires strong leadership, training, and the resources for a major expansion. Poor mobility and communications limit the ability of DENR field staff to perform their traditional functions as forest managers, much less provide services to agricultural communities in which they have no comparative advantage. DENR is also handicapped in some important respects by inadequate legislation and regulations. 2.16 Conversely, DA, although long developmental in orientation, has con- centrated on the lowlands and lacks the expertise (not to mention the staff, travel budget, transport and communications equipment) required to contribute to agricultural development in rainfed hilly lands. It has recently initiated a new thrust toward support of upland agriculture, but is not yet equipped to challenge DENR's monopoly on service provision to populations occupying public land. The field organization absorbed from 3FAR suffers from the same defi- ciencies in relation to the artisanal fisheries. In general, the services which are required in the uplands and coastal communities include: (a) commu- nity organizing; (b) assistance in securing or improving resource tenure; (c) research on and extension of appropriate production technologies; and (d) modest provision of credit or equivalent inputs. DAR, despite its focus on land tenure issues and coordinative role in CARP, is directly involved mainly with land classified A&D. DENR has the legal mandate to issue the limited tenure instruments (renewable 25-year leases) that are constitutionally au- thorized for utilization of public Forest Land. 2.17 Effective provision of such services can only occur at the communi- ty level, yet power and authority in the Philippines have traditionally been concentrated at the apex of the administrative hierarchy. Hence, the ongoing government reorganization, which has involved a commitment to regionalized management of line agencies, increased empowerment of local governments, and improved collaboration between government and private organizations (NGOs) at all levels is a positive development. Nevertheless, actual devolution of power has been slow and effectively resisted by vested interests. Genuine empowerment of local government awaits provision of a local revenue base, as well as some revisions in legal codes. Although the most effective measures to build local capacity for resource management have been associated with NGOs working from the bottom-up, the numbers of NGOs with effective field capabili- ties are few, and fewer still are the NGOs able to serve and strengthen other NGOs. 2.18 The potential for corruption is particularly high in those agen- cies directly responsible for allocation, management or regulation of natural resources use. Lacking proper pricing of access rights, profit or rent from  - 18 - obtaining and maintaining such rights is sufficient to support high levels of illegal payments. Imposition of onerous rules and regulations, interpreted with administrative discretion, gives officials the power to command such payments. Unless the system for allocation, management and regulation of resource use is first changed to reduce reliance on rules and administrative discretion and also to increase mandatory resource user fees to levels commen- surate with economic rents, government decentralization programs may simply decentralize the locus of corruption. 2.19 Of course, incentives for unlicensed access, illegal exploitation, and nonpayment of user fees would remain and possibly even increase--conse- quently there is no escaping the need for thorough monitoring and enforcement programs. This need is increasing as public policy in the forestry sector is shifting from an emphasis on regulation of production to protection from exploitation. Although the extent of illegal logging is a matter of conjec- ture, it is possible that the volume of logs removed illegally (including illegal practices of licensed concession holders) approaches in size the legal harvest. Even though DENR has broad police powers, there is insufficient disincentive for illegal practices because: (a) DENR has neither arms, vehicles, nor communication systems to match those of illegal operators, nor does it get systematic police or military support; (b) DENR must prosecute cases of violations in court, yet is unable to obtain convictions due to insufficient and poorly- paid legal staff, unsympathetic courts, and a legal system offering many opportunities to the defendant; (c) DENR's monitoring is confined to transport arteries; it is not equipped to monitor on-site logging activities or lumber mills; and only succeeds in identifying and prosecuting low- level operatives; and (d) DENR's monitoring systems are not designed to minimize lower- level staff collusion in illegal activities. 2.20 The legal and regulatory framework which supports the activities of Governmental institutions is too frequently ineffective, outdated, unreal- istic, or inconsistent with sound policies. Laws too often were written with no consideration of enforceability, or have never become enforceable due to lack of implementing regulations or necessary budgetary appropriations. On certain issues, the problems with the legal framework appear virtually intrac- table. For example, Philippine land law has both formal and local common law components, which are often mutually inconsistent and provide (for instance) no basis for recognition of communal property rights, however ancient in origin. Moreover, the Constitution and other laws flatly forbid any aliena- tion of "Forest Reserves", and limit administrative powers to reclassify such land for non-forest uses, no matter what actual uses prevail. In other in- tances, the law is mainly obsolete: for example, the National Parks enabling legislation dates from 1932 and has been modified by a large number of acts, executive orders, proclamations, and presidential decrees since that time. Both enabling legislation and the gazetting legislation require a complete  - 19 - overhaul. The legal backing for DENR's powers to protect the forests is also flawed: e.g., DENR is given nominal police authority, but not the authority to bear arms or to draft the services of law enforcement agencies; fines and penalties prescribed by earlier laws have been trivialized by infla^.on; and liability and penalities for violations are focussed on the cutting and trans- port of forest products, rather than marketing and processing points; and on individual violators rather than the sponsoring corporate organizations. III. THE SEgTORAL ADJUSTMENT PROGRAM A. Perspective and Oblectives Reforms in Pers2ective 3.1 The Bank's concern with rural environmental degradation in the Philippines dates from the late 1970s, when, in order to protect downstream irrigation infrastructure from watershed degradation, it flnanced a Watershed Management and Erosion Control Project (Ln. 1890-PH). The design of this pioneer effort was flawed in several respects, and the Bank's understandlng and concern for the problems of environmental degradation did not mature until the 1983 Agricultural Sector Memorandum (Report 4318-PH), which placed halting environmental deterioration In forestry and fisheries at the core of future Bank lending strategy in Philippine agriculture. The Central Visayas Regional Project (Ln. 2360-PH), an innovative and experimental area development program targeting the links between poverty and environmental degradation in the uplands and coastal zones, was the first result. Experience with implementa- tion of this project in turn contributed to recognition that the root causes had to be addressed through modifications of national policy requiring insti- tutional and legislative change and cutting across entrenched interests. Parallel growth of public consciousness in the Philippines, along with the change of Government and subsequent institutional reorganization, facilitated initiation of a major strategy study in 1986, the Forestry, Fisheries and Agricultural Resource Management (ffARM) Study (Report No. 7388-PH, January 17, 1989). The DENR followed up with formulation of the Philippine Strategy for Sustainable Development (PSSD), which was endorsed by the Cabinet in November 1989 and presented to the donors at a Mini-Consultative Group Meeting in February 1990. The proposed Sector Adjustment Program results from discus- sions of the ffARM Study and PSSD with Government. 3.2 Involvement of Other Donors. Technical and financial assistance from other multilaterals and various bilaterals in recent years has increas- ingly focussed on rural environmental degradation and related poverty prob- lems. The ADB has initiated a major Forestry Sector Program Loan centered on reforestation and a Forestry Master Plan study, with matching funding by Japan's OECF; a Fisheries Sector Program Loan; a Low Income Upland Communities Project; and preparation of new projects in mangrove replanting and industrial tree plantations. New Zealand has begun to implement an industrial tree plantation project. USAID has completed an upland agricultural project, and has recently initiated a major program of assistance, including debt-for- nature swaps, in the environment and natural resource sector. Technical assistance by ferm= in concluding a forest inventory, AbtralLa in land resource planning and data base construction, Sweden in a SPOT-satellte mapping of land uses (through the World Bank's ffARM Study, which was also  - 20 - assisted by Canada and MMDZ), the United States in an NGO-implemented study of biological diversity issues, and the FrA Foundation ln development of agro- forestry, have helped establish the bases for future programs. There have been frequent exchanges of views among donors, and three consultative meetings with donors have been organized by DENR (June 1989, February 1990, and October 1990), with the result that donor programs in the sector are reasonably well coordinated. Objectives of the AdJuStment proram 3.3 Based on the strategy for improved management of natural resources recommended by the ffARM Study, the Bank has been working closely with DENR, DA and DAR to develop a Program combining policy and institutional reform and a redirection of administrative attention and effort. Because the ADB program loan for fisheries and a project for replanting mangroves deal adequately with these areas, policy measures involving management of small-scale capture fish- eries and mangrove areas have been excluded from this Program, and elements involving forestry have been defined to be complementary to the ADB Forestry Sector Program Loan and follow-up operations under preparation, which empha- size production forestry, processing efficiency and reforestation. The broad objectives of this Program are to preserve what remains of the biological diversity of the Philippines; where these resources have been degraded or destroyed, to reestablish them wherever practicable and financeable; and elsewhere to introduce sustainable land use practices. The means to these objectives, as pursued in this Program, are primarily to: (a) determine what areas of the Philippines must be preserved undisturbed and introduce an effective management system; (b) introduce user fees for public resources which discourage rent-seeking behavior; (c) improve enforcement of logging regulations; (d) provide secure tenure rights to users in return for sustain- able resource use; (e) provide extension services to upland populations; and (f) establish mechanisms for support of small-scale, community- based resource management and livelihood projects. 3.4 The Government has expressed a commitment to implement a program of policy and institutional reform in the environment and natural resource sector consistent with these objectives. The 1987 Constitution provided a firm mandate, which has been reinforced by growing public awareness of environmen- tal problems (especially deforestation), corresponding initiatives in Con- gress, and the concern of external donors. Significant actions have already been taken, unilaterally as well as in the context of the externally-supported programs. The Government has formulated a Philippine Strategy for Sustainable Development as a broad policy statement, which has been discussed and formally approved by the Cabinet. This is supplemented by an Action Plan, under which legislation has already been submitted to Congress, various task forces and studies have been initiated, and new administrative actions have been taken.  - 21 - The nature of the problems requires a comprehensive approach to solution, combining legislative and administrative actions with public investment and institutional strengthenitvg. Variations in the content of the actions is possible; indeed, flexibility is necessary in dealing with highly-charged issues involving serious tradeoffs between private and public interests. The program described below was developed in response to these considerations. B. The EXogrm Preseryation of Biological Diversity 3.5 The objective is to protect for the benefit of future generations a representative selection of the critically-limited remaining areas of rela- tively undegraded habitats for flora and fauna native to tropical forests, mangrove swamps, and coral reefs. Actions required include: (a) submission and passage of enabling legislation which defines, establishes, and makes provisions for proper management of a national protected areas system; (b) identification of appropriate sites for preservation, based mainly on considerations of biodiversity, size, ability to protect from degrading activities, and tourism value; (c) provision of the budgetary funds and programs to gradually upgrade management of parks and reserves, beginning with a small number of high-priority sites; and (d) protection of priority sites from degradation ty existing and new occupants, largely by prevention of illegal logging, shifting cultivation, forest fires, and hunting and gathering activities (including fishing, within marine reserves). 3.6 Surveys of the conditions of the 60 existing parks and reserves are now underway, and candidate sites will be identified which could fill gaps in or better serve the purposes of a protected areas system. Representation of lowland forests, freshwater swamp, mangrove, tropical pine forest, and the marine environment would be given special consideration; and existing reserves in degraded condition or which serve no legitimate purpose would be disposed of. Based on a prioritization of sites, and detailed estimates of budgetary costs for adequate development and maintenance, including a program to obtain support from existing occupants, a development program for an Integrated Protected Areas System (IPAS) would be formulated. Satisfactory enabling legislation to establish a legal foundation for IPAS has been drafted and submitted to Congress. Passage of this legislation would be followed by completion of implementing guidelines and regulations and submission to Con- gress of budgetary requests based on management plans for an initial develop- ment program encompassing a core of high-priority protected areas. 3.7 Pasture Leases. Commercial grazing on steep slopes has been a major source of erosion and a cause of forest fires in the Philippines. A medium-run target would be to eliminate such leases from parks, reserves, critical watersheds, and all areas with slopes over 50X. DENR would conduct a  - 22 - review of the locations of existing leases in relation to these criteria; would cease to renew or issue pasture leases in such areas and cancel leases Insofar as its authority permits (barring wholesale legislative authorization, which is unlikely, tlme-consumlng documentation of contract violations will be required to provide sufficient cause for cancellation of such leases). As a first step, a review has been completed of pasture leases in the Magat Water- shed in Luzon, where pastoral activities are the primary cause of degradation, and leases on lands draining into the Magat River have been cancelled. Simi- lar steps would be taken in the near future for ten priority protected areas and an additional critical watershed. Rent Reeover 3.8 Increasing the level of fees or charges for use of public resources to recover a high proportion of economic rents is intended to reduce the incentive to exploit these resources and increase pressure for more efficient utilization; reduce the scope for administrative abuse; and provide signifi- cant additional budgetary revenues for Government. Current forest charges mainly constitute a legislated fee of P30 (US$1.42) per cu m of roundwood extracted; previous to the log export ban, about 20X of the export value was captured by an export tax (however, a large volume of undeclared or misde- clared exports escaped this tax). Current estimates of average economic rent (domestic market value of stumpage less extraction costs and "normal" profit) in prevailing market conditions (influenced by the log export ban) range from P 210-1,500 per cu m, or between 101 and 401 of wholesale value, depending on log quality, costs of logging in varying conditions, etc. If exports were allowed and border prices prevailed, then rent would approach two-thirds of the border price--in other words, with the export ban, some of the rent is sacrificed as a subsidy to domestic processing. The approach to capturing a higher proportion of economic rent would differ as between existing and new licenses. The area under new licenses, including anything which replaces cancelled or expired concessions, ls likely to be fairly small. However, a strategy of protecting primary forests and opening up residual forests to logging has been accepted in principle by DENR as part of a Master Plan for Forestry Development. If this proves technically and politically feasible to implement, most existing concessions would be cancelled, and large areas not now under concession management would be newly licensed. 3.9 Existing Licenses. Government charges are governed by existing legislation and outstanding leaseholds (TLAs). DENR has administrative power to set fees commensurate with the costs of specific services, but no legal au- thority to set tax rates. DENR has nevertheless used its limited mandate to require of all concessions a refundable "reforestation deposit" of P10,000 (US$476) per logged hectare (about one-half the official compensation rate for contract reforestation). Presidential Memorandum Order No. 298 issued in June 1990 under the President's emergency powers further authorized DENR to collect from concessions an Environmental Fee, which was promptly set at P500 per cu m of logs; although the legality of this charge has been challenged, DENR has begun collecting it. New legislative bills have passed the House and Senate, requiring an increase in the Forest Charge to 20% or 401, respectively, of the Manila wholesale price of roundwood (this would apply to both new and existing timber concessions). The bills are presently in Bicameral Committee for reconciliation, which is expected to involve choice of a compromise figure (probably 301). Estimated to yield P 600-1,200 per cu m for different grades  - 23 - of log, the new level of Forest Charge should capture at least 75X of avail- able economic rent in logging, about 100l for medium quality logs under aver- age logging conditions, and would make logging of steep slopes unprofitable. DENR would monitor the level of economic rent and recommend future adjustments in legislation. As changes in laws and regulations affecting logging and processing may affect the level of rents and their distribution among subsec- tors, DENR would also conduct a study examining the effects of measures such as the current bans on export of both non-plantation roundwood and lumber to indicate their impact on both efficiency and rent recovery. 3.10 New Licenses. The 1987 Constitution effectively abolishes the concession system, as applying to new licenses, and requires instead "co- production" or joint ventures between Government and private loggers, known as Timber Production Sharing Agreements (TPSAs). Since the only asset the Gov- ernment contributes to such ventures is the stumpage, this provision effec- tively mandates full rent recovery and provides a legal basis for close moni- toring of logging costs and profits of new licenses. As a first step in this direction, a DENR administrative order applied to expired or suspended con- cessions provisionally imposed a "forest management fee" of P250 (US$11.90) per cu m. Subsequently, guidelines were issued for TPSAs requiring a public bidding process, which would be the best approach for recovering full economic rent. Although, prior to these guidelines, three pilot TPSAs were initiated as experiments, Government's share was negotiated rather than bid, and yielded revenues of only about 20X of wholesale log prices. Full implementation of the TPSA program has been stalled due mainly to uncertainty over the impact of impending Congressional action on logging bans. DENR has inventoried a number of expired concessions, however, and during 1991, it plans to expand imple- mentation of TPSAs beyond the pilot level, employing competitive bidding for at least two logging areas and applying the Community Forest Management Agree- ment (CFMA) concept to a third. Market prices and logging cost data developed from co-production arrangements would be used in estimating the level of economic rents and targeting legislative changes in fees for existing conces- sions. 3.11 Mangrove Areas. A study supported by the ADB Fisheries Sector Program Loan will determine an appropriate rental fee for use of mangrove areas converted to fishponds. DENR would review this study and support action by DA to increase the rental fee, in order to increase pressure for abandon- ment of unproductive fishponds and reduce incentives to make new conversions of mangrove areas to fishpond use. A new DENR-DA administrative order, ap- proved by DENR and pending approval by DA, provides that mangrove areas in which fishponds are idle or abandoned revert to DENR control as forest reserve and be made available for re-establishment of mangrove forest under appropri- ate Stewardship Contracts. A survey financed by the ADB Program Loan would also establish the locations of idle or abandoned fishponds, and DA would take administrative action to revoke licenses and ensure reversion. DA's actions above are conditions for the second tranche release (projected for June 1991) of the ADB loan; DENR, through its membership in the Coastal Zone Resources Management Committee, would support these actions. Enforcement of Forestry Law and Regulations 3.12 DENR would implement a strategy for improved enforcement, applied initially in selected areas where illegal operations have been identified as  - 24 - prevalent. This would seek, in the short run (1991-92), to increase the effectiveness of enforcement by concentrating efforts on a few critical points and activities, and removing current constraints on monitoring and enforcement activities. In the long run, DENR would seek to intensify direct management presence of its foresters within the forests, particularly where TLAs are cancelled, primary forests are given protected area status, and TPSAs or CFMAs are extended. A satisfactory plan for an intensive monitoring and enforcement program has been developed, and terms of reference for technical assistance in its implementation have been agreed. Major features of the short-run program would include: (a) cooperation with the Department of Justice to speed up prose- cutions and reduce obstructionism of local courts, through appointment of special courts and particular fiscals (prose- cutors) to have jurisdiction in forestry cases, and through training of judicial personnel in forestry law and conse- quences of environmental degradation; (b) cooperation with the Department of Interior and Local Govern- ment to assist in apprehensions, requiring, in addition to a Memorandum of Agreement between DENR and DILG, detailing of a small, mobile strike force for selected joint enforcement operations; and involvement of the Philippine National Police in monitoring committees at all levels; (c) introduction of a multiple-point monitoring system including direct surveillance at lumber mills, aerial surveillance of primary and selected residual forests to identify illegal cutting and small-scale processing activities; and ground surveillance of access and transport routes, equipped with adequate communications systems; (d) program monitoring by committees at central, regional, and provincial levels including DENR, local government, military, church, and other NGO representation, the committees to receive regularily published indicators of performance such as volume of confiscated logs and other property, mill clo- sures, cancellation of TLA concessions, and legal prosecu- tions; to review enforcement-related DENR programs and dis- cuss major violation problems; and to serve as the entry points for monitoring information provided by NGOs; (e) legal services to ensure well-prepared court cases, through contract hiring of lawyers and assistance in prosecutions; (f) provision of adequate transportation and communications equipment to field personnel responsible for enforcement; and (g) programs to win community support and defuse the livelihood issue, such as targeting various existing Government programs to generate constructive means of livelihood.  - 25 - Tenure RISA 3.13 Certificate of Stewardship Contracts (CSCs). Due to constitution- al provisions, the only form of tenure open to occupants of public Forest Land at present consists of renewable 25-year leaseholds, mainly the CSCs issued to existing occupants in areas designated for the Integrated Social Forestry Program. These include both individual and collective (Community Forest Stewardship Agreement) contracts. In the past, CSCs had limited tenure value, as they were not clearly heritable, renewable, or transferable. A recent administrative order and revised contract document ensure that CSCs are her- itable, renewable, and transferable (with restrictions to prevent development of absentee pseudo-landlords), on terms that give them substantial tenure and collatoral value in the eyes of recipients. 3.14 Manglr_v CSCs. A version of the CSC contract appropriately modi- fied to provide exclusive tenure for individuals or groups of residents will- ing to replant and manage mangrove areas for livelihood purposes on a sus- tained yield basis has been approved and issued. 3.15 Indigenous Communities. As many as five million members of in- digenous or minority communities have land occupancy claims predating the introduction of Spanish or American land systems of property rights. Many are upland cultivators or forest occupants, and the logical targets of efforts to extend conservation-oriented land and forest management techniques. However, their cooperation is discouraged by the fact that neither Government nor established law, which regards them as 'squatters' on public land, recognize their claims to collective or individual land tenure, although the 1987 Con- stitution authorizes the recognition and protection of "ancestral domains". An important legal precedent exists in the form of an early Supreme Court decision which states, in effect, that land subject to documented claims predating Spanish and American property rights law is not subject to that law. Legislation is now before Congress which would set up a Commission to deline- ate and adjudicate such claims. Although the difficulties of documenting claims and presence of conflicting claims will make this a slow and difficult process at best, initiating the process would in itself discourage further encroachment on ancestral lands and encourage cooperation from indigenous groups. DENR has supported this interpretation and approach, and submitted parallel legislation providing better administrative mechanisms for dealing with the interests of indigenous communities pending the work of this Commis- sion. Without waiting for the passage of this legislation, DENR has set up a task force to delineate ancestral claims and provide land titles when claims are uncontested to indigenous cultural communities in the Cordillera Adminis- trative Region. It has also expanded the use of the Community Forest Steward- ship Agreements (CFSA) program, to turn over resource management rights to increasing numbers of such communities, with no prejudice to their land rights as defined in the future. 3.16 Local Communities. Of the 15 million ha of public land currently reserved for forest use and managed by DENR, only about 6-7 million are actu- ally forested, and substantial remaining areas may be reforested as financial resources permit. Present "contract reforestation" programs cover only the establishment period (three years), after which the seedlings and their even- tual timber production become Government property. As such, they are likely to be damaged or destroyed by local residents seeking to use the land for  - 26 - other purposes. To create an incentive for community maintenance and manage- ment, DENR has devised and issued a new contractual instrument, the Forest Land Management Agreement, providing a substantial share of benefits at matu- rity (including selective harvesting rights) to registered groups of local residents in return for the obligation to sustainably manage the reforested area. 3.17 Sound management of critical watersheds, national parks, and nature reserves is now often compromised by the presence of occupying popula- tions, often predating the legal establishment of such public reserves and often with substantial tenure claims. Where such populations cannot be reset- tled or evicted or the boundaries of the reserve defined to exclude them, an alternative strategy is to involve these populations in the protection and management process while legitimizing and supporting livelihood activities which can be reconciled with this process. However, DENR's current legal instruments, such as the CSC and CFSA, and the related developmental programs are based on laws excluding use of such instruments from critical watersheds, national parks, and nature reserves. The draft IPAS legislation submitted by DENR seeks legislative authorization for extension of limited tenure instru- ments to protected areas in instances where the corresponding Management Plan finds such residence can be made consistent with general management objectives and where a long-term protective management program defining corresponding community and individual obligations has been established and funded. This legislation would also define a role for protected area management personnel in developing buffer zones around protected areas. Extension Services 3.18 In areas where land use conversion has occurred and where farming is potentially sustainable, the objective is to induce adoption of sustainable and conservation-oriented farming techniques, which requires a Government-led effort to develop community organization, provide tenure security, and extend agro-forestry technology. Previous extension efforts in the uplands have been characterized by a small but relatively complete program led by DA, mainly among communities of indigenes, a larger (ISF) program led by DENR focussed mainly on issue of CSCs, and a large number of pilots conducted by NGOs active in the uplands. Larger scale externally-funded projects such as the Bank's CVRP and USAID's Rainfed Resources Development Project have drawn heavily on NGO techniques. Both publicly and NGO-sponsored programs have had a measure of success in obtaining adoption of sustainable farming techniques, and the techniques and principles have been proven to increase farm incomes while reducing environmental degradation. However, delivery of extension and commu- nity development services in the uplands has only begun to go beyond pilots and demonstrations. Although CARP targets only a fraction of upland resi- dents, its implementation has greatly expanded the number of clientele slated to receive services. ISF is DENR's lead program for increasing the sustain- ability of livelihood of communities residing on public forest land. With support from CARP and external donors, DENR has already taken steps to give ISF new administrative independence and prominence, and to enlarge and enrich the objectives and capabilities of this program under recently-issued guide- lines. An entirely new category of civil service positions (Social Forestry Technicians) has been created, and so far about 1,000 staff have been recruit- ed and trained to serve the non-traditional functions mandated by the new guidelines.  - 27 - 3.19 The objective of the adjustment program is to further develop a pollcy framework and organizational structure appropriate for a much-expanded upland extension program. DENR has recognized, through statement of policy and program implementation, that the population presently residing on public Forest Land is in large part there to stay; that earlier policies of ignoring or evicting them were counterproductive; and that, in the interest of utillz- ing them as a positive force in resource conservation, it is crucial that issues of their livelihood, tenure, and necessary technical, economic, and social services be addressed by the Government. In principle, community services should be provided by the functionally-relevant agencLes regardless of where the communities are located. In practice, service provision for all agencies continues to be constrained by the existing geographical distribution of agency staff, difficulties of redeployment, limited budget for redirection of effort, and shortages of staff with appropriate qualifications. Because DENR's mandate for management and protection of public resources requires that it promote sustainable development of communities residing on public forest land, DEWR in the short run would take a lead role in stimulating and coordi- nating service provision for such communities. In so doing, it would actively promote a transition to coordination of service delivery by local governments, provision of agricultural extension by the DA, and provision of health, educa- tional, and other services by the appropriate agencies. In subjects such as community organizing or agroforestry, where DENR, DA and DAR have common training requirements, DENR would assist in implementing a common training program for regional and local staff of all three agencies. The above princi- ples have been affirmed in Resolution No. 01-90 of Cabinet Cluster A (Rural Development), signed by the Secretaries of the departments and agencies in- volved in rural development. 3.20 Census of Forest Occupants. The completion of an accurate census is a clear prerequisite for expansion of the ISF program. The census is required to pinpoint areas of concentration of occupants such as upland farm- ers, and establish whether the users are untenured (residing on public Forest Land) or potential recipients of titles (occupants of A&D land who are also utilizing public Forest Land). Such a census was carried out in 1989 and an advisory task force including non-governmental experts has been set up to evaluate the preliminary results and take any corrective actions necessary. 3.21 NGO QLnkagu. Training, organizational and management capabili- ties, and motivation relevant to upland extension work are concentrated in NGOs in the Philippines. However, these NGOs tend to be scattered and limited in their scope of activities, and often would be reluctant (or be better advised not) to expand their scale of operation. There are a number of compe- tent NGOs which are willing to produce training materials, provide sites for field training, and supply training staff or trained field workers for commu- nity organization work. Such NGOs would be increasingly employed by Govern- ment, under contractual arrangements, in support of programs such as ISF or Community Forestry. In addition, NGO leaders and members at the municipal level would be invited to participate along with political and administrative representatives in committees established for coordination and supervision of Government service delivery and natural resource regulation and management. DENR, in particular, has established (through Administrative Order) policies and procedures favoring involvement of NGOs, and would continue to deepen its ongoing process of accreditation and involvement of NGOs along the above  - 28 - lines, and where possible devolve regulatory and coordinative powers to local resource management committees with NGO representation. Community-Based Resource Manafement and Livelihood Prolects 3.22 Among the significant constraints in upland farming are the gener- al poverty of the population, lack of cash savings, and lack of collateral for borrowing. Yet, introduction of sustainable and conservation-oriented farming techniques requires infrastructure, such as access roads or paths and small- scale water impoundments, temporary llvelihood support, to the extent that agroforestry is to replace shifting cultivation, and inputs such as seedlings and fertilizer. Government programs for provision of these requirements are justifiable on both poverty and environmental grounds. Financial provision has been included in the CARP program and (for nursery establishment, seed- lings provision, and employment in replanting) in the ADB/OECF Forestry Pro- gram Loan. The main concern of the adjustment program is to ensure that the funds are effectively utilized. 3.23 The recommended approach is that funding for these activities, whatever their source and institutional sponsorship, be administered on a pooled basis at the provincial or municipal level. Requirements for disburse- ment should draw on the experience of projects sponsored by NGOs, or the better-managed community-development projects. For example, a preliminary stage of community organization and expression of needs should precede dis- bursement for infrastructure; and construction should be executed using commu- nity-based management and labor-intensive (income-generating) techniques. Provision of credit should be linked to two forms of sustainability - adoption of sustainable agricultural techniques, and sustainability of the credit program (either through use of local revolving funds or a program to develop creditworthiness of borrowers). DENR has issued guidelines for its ISF and Community Forestry programs which are consistent with such agreed principles of implementation. IV. THE PROPOSED PROJECT Origin. Rationale and Objectives 4.1 Originating from the dialogue with Government concerning the stra- tegic recommendations of the ffARN Study (paras. 3.1 and 3.3), the present operation would support implementation of those recommendations for reforms in the environment and natural resource sector required for sustainable growth. The specific objectives of the project would be to develop an effective pro- tected areas system, charge user fees for public resources which discourage rent-seeking behavior, improve enforcement of logging regulations, provide secure tenure rights to users in return for sustainable resource use, offer extension services to upland populations, and develop mechanisms for support of small-scale, community-based resource management and livelihood projects in impoverished upland areas. The operation would also help to fill a gap in meeting the estimated foreign exchange requirements of the Government's devel- opment program. In the past, such operations have also served as vehicles for attracting substantial co-financing from other donors, which has enhanced  - 29 - their overall balance of payments impact, and this Ls also expected to be the case with the proposed operation. Summary Proletl Descrition 4.2 The project would consist of a sector adjustment component aimed at implementing major reforms in the incentive, legal, and regulatory struc- tures governing management of Philippine natural resources -- especially forests and soils on public lands, and an investment component which would strengthen the central and local public institutions charged with monitoring or managing these resources. 4.3 Sectoral Adjustment Comnonent. The actions needed to fully imple- ment the olLcyX reforms encompassed by this program are summarized in the policy-action matrix in Annex C, and would be supported by and monitored under the proposed project. Actions viewed as most critical to achieving the objec- tives of the program are summarized in Table 4 below (pp. 30-32). Most ac- tions have already been completed; actions requiring more time or prior stud- ies, which are highlighted in boldface, would be conditions of effectiveness or release of the second tranche (June 1992) of the loan and credit associated with the adjustment component (Annex C). It is understood that disbursement of the second tranche, in addition to stated conditionalities, would require maintenance of a satisfactory macroeconomic framework. 4.4 Investment Component. The proposed component, to be implemented over a seven-year period, would finance: (a) consultancies to carry out the design of an Integrated Protected Areas System (IPAS), leading to submission of enabling legislation to Congress and development and funding of management plans for areas initially gazetted for inclusion within IPAS; (b) provision of equipment, training and technical assistance to DENR national, regional and local offices to enable improved monitoring of logging operations and enforce- ment of forestry laws and regulations in Regions II, X, and Samar; and (c) provision of technical assistance, training, equipment, infrastructure, and inputs to develop in Regions I (including Cordillera Administrative Region), II, IX, and X the capacity of local governments and line agency field staff to plan, generate and service small-scale, community-based resource management projects in watershed areas, combining community organizing and pre-coopera- tives development, improvements in tenure and resource management, introduc- tion of sustainable and non-destructive means of livelihood, and improvement of infrastructure and social services. Details of the investment component follow, and are further explained in the Project Implementation Volume. Detailed Features of the Investment Component 4.5. Integrated Protected Areas System Design Studies. This component, to be implemented over a 15-month period which began in October 1990, consists of studies by consultants, which have been initiated using Japan-World Bank Technical Assistance Grant funding, and would be monitored and supervised under the proposed project. Remaining technical assistance funds would be disbursed as part of the cofinancing package of the project. The work is divided into the following components: (a) legislative study of IPAS, involv- ing drafting of enabling and gazetting legislation, implementing guidelines, and related executive orders; (b) design studies covering terrestrial, marine  I3Ab J: SELECTED ACTIOS TO SE NONITORED UHDER TUE PROJECT