Philippines - Third Municipal Development Project

D/VA -*t)T - T Documeot of The World Bank FOR OMCIAL USE ONLY MICROFICHE COPY Report No. P- 5692-PH Type: (PM) UCHIMORA, / X80452 / 08 021/ AS2IN RePon No. P-5692-PH MEMORANDUM AND RECONMENDATION Or THE PRESIDENT OF THE INTERNATIONAL. BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$68 MILLION TO THE REPUBLIC OF THE PHILIPPINES FOR A THIRD MUNICIPAL DEVELOPMENT PROJECT MARCH 3, 1992 71is locument has a restriced distribution and may be used by recipients only In the performance of their official duties. Its contents may not otherwise be disclosed without World Dank authorization.  CURRENCY EOUIVALENTS (as of December 31, 1991) Currency Unit - Peso (P) P 1 US$0.037 US$1.00 P 27 WEIGHTS AND MEASURES 1 meter (m) 3.28 feet (ft) 1 kilometer (km) 0.62 mile (mi) 1 square meter (sq m) 10.76 square feet (sq ft) ABBREVIATIONS AND ACRONYMS DOF - Department of Finance DPWH - Department of Public Works and Highways LLA - Local Loans Account NDF - Municipal Development Fund RPTA Real Property Tax Administration GOVERNMFWT FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY ZjIRD MUNIGIPAL DEVEMLEgnTPf CUN= Loan and Prolect Summary AgRorrower: Republic of the Philippines agY2jiarLCLes: Local governments -Amount: US$68 million equivalent Terms: Repayable in 20 years, including five years of grace, at the Bank's standard variable interest rate. Relgnong Texms: Maximum maturity of 15 years including three years of grace at an interest rate based on the prevailing weighted average interest rate on time deposits of 61-90 days plus a spread of 20. Financin Plan oa Foeiegn lo-tal - - - (US$ million) - - - - Local Governments 16.2 - 16.2 DPWH 12.3 - 12.3 Mnicipal Devt. Fund 17.2 - 17.2 IBRD 18.6 49.4 68.0 Total 64. 4.4 113.2 e Return: A minimum rate of return of 15% for each subproject. Staff AuDraisal Relport: Report No. 10042-PH IBRD Map No. 23396 This document has a esricted distribution and may be uset '- s-cipients only In the performance of their ofiaW duties Its contents may not otherwise be disclosed without World Bank authorization.  MEMORANDUN AND RECOMNENDATION OF THE PRESIDENT OF THE IBUD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF THE PHILIPPINES FOR A THIRD NUNICIPAL DEVELOPMENT PROJECT 1. I submit for your approval the following memorandum and recommendation on a proposed loan to the Republic of the Philippines for the equivalent of US$68 million to help finance a Third Runicipal Development Project. The loan would be made at the Bank's standard variable interest rate, with a maturity of 20 years, including five years of grace. About US$34.4 million of the loan would be onlent to cities and municipalities through the Government's Municipal Development Fund (NDF) for a maximum period of 15 years including three years of grace at an interest rate based on the prevailing weighted average interest rate on time deposits of 61-90 days plus a spread of 2%. 2. Bjckgrod. Due to the population shift from rural to urban areas which has accompanied economic development in the Philippines, th. country's urban population increased from 18 million (37% of total population) in 1980 to an estimated 29 million (48%) in 1990. The burden of the population shift is being borne by cities and municipalities which must provide services, infrastructure and facilities to meet the needs of their growing economies and populations. However, owing to the limited financial resources and technical and managerial weaknesses of the local governments, the supply of services and facilities has not kept pace with the increased demand, and this has resulted in congested roads, flooding due to inadequate drainage facilities, unsanitary putlic markets and slaughterhouses, and uncollected garbage. 3. Recognizing the increased importance of local governments, the National Government has acknowledged tht - the provinces, cities and municipalities should play a larger role in economic and social development and is proposing to shift more responsibilities to the local levels as part of its emphasis on decentralization. The revised Local Government Code, signed into law in October '991, modifies many of the existing laws and regulations governing national-local government relationships, increases resource transfer to the local governments, and devolves some of the local functions currently undertaken by national agencies to the local governments. With this, the role of national government agencies would shift from direct intervention and control over local matters to policy guidance and support of local government operations. 4. Project Objectives. The proposed project aims at assisting cities and municipalities in the Philippines to expand and upgrade their infrastructure, services and facilit'as by: (a) strengthening the National Government's institutional framework for assisting local governments; (b) strengthening the local governments' investment planning, financing and implementation capacities; (c) strengthening the local governments' maintenance capacity; and (d) improving local fiscal performance. 5. Lessons Learned from Previous Bank Operations. Experience under previous Bank projects has indicated the local governments' interest in loan financing and the effectiveness of loans in strengthening municipal management. The Bank has three projects where loan funds are on-lent to cities and municipalities in the Philippines. Funds under the ongoing projects are fully committed and requests have been received for additional financing. Repayment  -2- performance under thesa projects has been satisfactory and the Government has initiated action to ^aduce arrears. Local executives have shown a wlllingness to .ndew take politically unpopular reforms to increase revenues if they can show improvem*nta iL facllities and services to their residents. The first project, the Regional Cities Development Project (Loan 2257-PH, 1984), ls scheduled to close in March 1992. 6. The Bank's municipal development strategy focusses on establishing an lnstitutional framework within the national government to provide local governments wlth access to credlt financing and technical assistance. Key elements of this instltutional framework are: (a) an inter-agency Project Steering Committee for coordination and policy guldance; (b) a project office under the Department of Public Works and Highways (DPWH) to appraise subprojects and assist project cities and municipallties with preparation of investment proposals and subprojett implementation; and (c) the MDF within the Department of Finance (DOF) to administer onlending to local governments. Project funds are provided to cities and municipalities that qualify for inclusion in the project, are able to prepare investment proposals, and agree to undertake necessary fiscal, administrative and managerial improvements. This selection process has introduced an element of competition for funds among local gover-nrncts and has allowed the projects to include only those cities and municipalities which have shown a willignQess and capacity to make necessary policy changes and improvements. 7. Rat&o9=lJe for Bank Involvemnnt. The proposed project forms an integral part of the Bank's municipal development strategy and would build on the institutional framework to support such development which was established and strengthened under earlier projects. Continued Bank involvement at this time would be important to sustaln investment momentum and continue capacity-bulldlng both at the national and local government levels. The project is also very timely assisting the Government to develop and carry out its ongoing decentralization program. 8. Project Dscrip$Lon. The proposed project would include: (a) 5gJ3ojbets (about US$85.4 midllion) including construction and/or rehabilitation of basic infrastructure and facilities, procurement of equipment, and hiring of consultants. The subprojects are divided into: (i) national components, investments to be funded through the national budget and implemented by DPWH; and (ii) local components, investments to be funded and implemented by the cities and municipalities. Bank loan funds would be provided to the cities and municipalities through the MDF to finance up to 90% of local component costs. The project office would appraise each subproject, for approval by the Project Steering Committee and the Bank. (b) Maintenance Prg (about US$9.8 million) to improve the planning and implementation of infrastructure maintenance by selected local governments. Four-year maintenance plans, including annual requirements for manpower, equipment and materials, would be developed by about ten pilot cities and municipalities, under the guidance of the project office. Bank loan funds would be provlded as a grant to the local government through DPWH to finance 70% of the costs in the first year, 50S in the second year, and 30S in the third year.  3 (a) La (about US$14.0 million) to improve real property tax records management and increase real property tax collection. Bank Loan funds would be provided as a grant to the local governments through the DOF to finance additional contractual staff, equipment and supplies required to prepare tax maps, update and streamline property tax records, and follow-up on collection performance. Computerization of property tax records would be contingent on the availab-ility of appropriate software. (d) Muncipal Program (about US$3.1 million) to train local officials in, among others, project preparation, contract management, construction supervision, municipal finance and revenue administration, and environment assessment through the Local Government Academy. (e) Te* nicUal Afsistance (about US$1.3 million) for (i) a study of institutional options for further lending to local governments; and (ii) an environnantal sanitation and solid waste study. 9. While established a86 a revolving fund, the MDF has functioned primarily as a mechanism for disbursing funds to local governments, including funds from donor agencies other than the Bank. To improve the MDF's lending operations, the following changes are being introduced: (a) A separate Local Loans Account (LLA) has been established within the MDF to cover all lending to local governments. (b) A MDF/LLA Policy Statement bas been developed to guide MDF lending operations. A key provision is the shift in MDF's lending terms and conditions toward prevailing market rates. Given the lack of appropriate comparators, the reference market rate has been set at the weighted average interest rate on time deposits of 61-90 days, with a spread of 2%. This rate was agreed by the Bank and the Government for onlending of Bank funds under any project to government financial institutions receiving fixed interest rate loans with maturities of over eight years. Under the proposed project, the MDF lending rate would be increased from 11% at present to 14% in 1992 and would be increased by 1.5% each year starting in 1993 until the rate is equivalent to the market reference rate. (c) DOF's Special Project Management Service which handles the MDF would be restructured by December 1992 along functional lines to provide a clearer focus on lending operations. The long-term institutional arrangements for local government loan financing would be examined through the institutional study included under the technical assistance component of the proposed project. 10. Total project costs are estimated at US$113.7 million, of which US$68 million would be financed by the proposed Bank loan. A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and disbursement, and the disbursement schedule are shown in Schedule B. A timetable of key project processing events and the status of the Bank Group operations in the Philippines are given in Schedules C and D, respectively. The Staff Appraisal Report, No. 10042-PH dated February 27, 1992, is being dLstributed separately. A map is also attached.  -4- 11. Project Imolementation. The project would be implemented over a seven-year period, 1992-98. Under the overall coordination of the Project Steering Committee, project implementation reaponsibilities would be as follows: (a) DPWH would be responslble (i) through the project office, for preparation, apptaisal and supervision of subprojects, and (ii) througb its regional offices, for implementation of the DPIH national components of subprojects; (b) the local governments would be responsible for preparing subprojects, implementing local components of subprojects, and RPTA; (c) DOF for managing the MDF and RPTA; and (4) the Local Government Academy for the Municipal Training Program. 12. Agemes Reached. During negotiations, agreements were reached with the Government on: (a) the reorganization of the Special Project Management Service by December 31, 1992; (b) Bank review of the appraisal report and on- lending agreement for each subproject; and (c) by December 31, 1992, preparation by DO? of an Action Plan for carrying out computerixation under the RPTA component. Assurances were obtained from the Government on the availability of counterpart funding and adequate staffing of the project office and the Local Government Academy. 13. EnXimental Aneggs. The project is expected to have a positive health and environmental impact. The rehabilitation and construction of public markets with NDF financing would result in clean and hygienic conditions for the preparation, handling, storage and display of food for human consumption, particularly fish and meat. Improvements in flood control and drainage systems would reduce flooding, damage to private property and infrastructure, and disruption to economic activities and social life. Subloans for landfills with proper disposal methods would result in reduced air pollution from burning and possible contamination of groundwater. 14. Program ObJective Categories. The proposed project would be targeted at cities and municipalities outside of Metro Manila and its immediate surrounding provinces where the poverty incidence is about 55-60%, higher than the 1988 national average of 48%. In determining subprdject scope, preference would be given to investments with a higher poverty impact. Public market improvements, which are expected to account for a large part of project subloans, would benefit the poor families who shop, and the local farmers who sell, at these markets. Investment planning, contract management, property tax administration and other local administrative practices would be strengthened through the proposed project. 15. Beneflts. The proposed project would improve the delivery of services, infrastructure and public facilities at the local level, strengthen local government management capacity, and improve the National Government's ability to assist the cities and municipalities to respond to the needs of the increasing urban population. 16. Risks. The main project risks relate to the acceptability of moving toward market rates for municipal lending as envisioned under the project, the technical and managerial limitations of the local governments, the capability of the project office to handle a larger number of cities and municipalities than under previous projects, and the political uncertainty surrounding the upcoming national elections. However, the proposed on-lending rates are estimated to be affordable by the cities and financially stronger municipalities, and project procedures are being streamlined, based on experience to date, to accommodate larger numbers of local governments.  17. Fggndatign. I am satisfied that the proposed loan would comply with the Articles of ABreement of the Bank and recoimend that the Executive Directors approve it. Lewis T. Preston President . Attachments Washington, D.C. March 3, 1992  -6- THIRl MNICIZPL DEELOPMENT PROJECT Estimated Costs and FinancLng Plan (US$ million) Local Foreign Total Estimaeed Prolect Costs A Subprojects 38.2 3'.6 69.8 Mainte.ience Program 4.6 3.6 8.1 Real Property Tax Administration 7.2 4.8 12.0 Municipal Training Program 1.4 1.0 2.4 Technical Assistance 4.7 2.1 6.8 Bse Lga (in June 1991 prices) 56.0 43. 99.1 Price Contingencies 8.3 6.3 14.6 Total Project Cost 0249.4 11a.7 Fnncug-Pla Local Governments 16.2 - 16.2 DPWH 12.3 - 12.3 NDF 17.2 - 17.2 IBRD 18.6 49.4 68.0 Total 64_.3 49.4 113.7 it~a Includes taxes and duties estimated at US$17.4 millions.  -7- Page 1 of 2 PHiILI~UM THIRD MUNICIPAL DEVELOPMENT PROJECT Proc9Efmnt Method and Risbursements (in US$ millions) PQscur met Method La Total Progect Elements ILQA OtbQ r Nu hAi 1. Subprojects 1.1 Works - 77.1 - - 77.1 (43.9) (43.9) 1.2 Goods - 4.2 - - 4.2 (2.5) (2.5) 1.3 Consultant Services - - 0.6 0 0.6 (0.3) (0.3) 2. Maintenance 2.1 Works - 5.9 2.0 i - 7.9 (2.0) (0.6) (2.6) 2.2 Materials - - 1.9 L4 - 1.9 (0.6) (0.6) 3. RPTA Services - 13.5 / - 13.5 (9.5) (9.5) 4. Consultant Services 4.1 Project Implementation - - 4.4 A - 4.4 (4.4) (4.4) 4.2 Municipal Training - - 2.7 h - 2,7 (2.7) (2.7) 4.3 Studies - - 1.3 A - 1.3 (1.3) (1.3) TOTALS - 87.2 26.4 - 113.7 ( - ) (48.4) (19.6) ( - ) (68.0) La Att aounts fnctude contingeInes. wers In brackets ore the respective snounts financed by the Band. IBF means Not Bank Financed. sorves to be procwued in accordane with Sa Suidelnes.