Philippines - Country assistance strategy

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 15362-PH MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR THE REPUBLIC OF THE PHILIPPINES FEBRUARY 15, 1996 Country Operations Division Country Department 1 East Asia and Pacific Region This document has a restricted distribution and may be used by recipients only in the perfonnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  The last Country Assistance Strategy for the Philippines was dated January 6, 1994. CURRENCY EQUIVALENTS (as of December 1995) Currency Unit = Peso (P) US$1 = 26.21 IF = US$0.038 ABBREVIATIONS AND ACRONYMS ADB - Asian Development Bank ADF - Asian Development Fund AFTA - ASEAN Free Trade Agreement ASEAN - Association of South-East Asian Nations BOI - Board of Investment BOT - Build-Operate-Transfer CARP - Comprehensive Agrarian Reform Program CCPAP - Coordinating Council for the Philippines Assistance Program CG - Consultative Group COA - Commission on Audit CPM - Computerized Management System CPPR - Country Portfolio Performance Review CPSD - Consolidated Public Sector Deficit DBM - Department of Budget and Management DENR - Department of Natural Resources EFF - Extended Fund Facility ESW - Economic and Sector Work FDI - Foreign Direct Investment FIAS - Foreign Investment Advisory Service GEF - Global Environment Facility GNFS - Goods and Non-Factor Services GOP - Government of the Philippines IDF - Institutional Development Fund IFC - International Finance Corporation JEXIM - Japan Export-Import Bank LGU - Local Government Unit MIGA - Multilateral Investment Guarantee Agency MTDP - Medium Term Development Plan MWSS - Metropolitan Waterworks and Sewerage System NEDA - National Economic and Development Authority NGO - Non-Governmental Organization NIC - Newly Industrialized Country NIPA - NGOs for the Integrated Protected Areas NPC - National Power Corporation ODA - Official Development Assistance OECF - Overseas Economic Cooperation Fund OED - Operations Evaluation Department PCR - Project Completion Report PER - Public Expenditure Review PSII - Private Sector Infrastructure Initiative SECAL - Sector Adjustment Loan SRA - Social Reforrn Agenda USAID - United States Agency for International Development FISCAL YEAR January I to December 31  FOR OFFICIAL USE ONLY MEMORANDUM OF THE PRESIDENT OF THE [BRD TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR THE PHILIPPINES L Economic and Social Performance A. Legacies from the Past 1. After nearly two decades of struggling with economic and political crises, the Philippines is now emerging on a stronger growth path. Bolstered by successful structural adjustment, improved macroeconomic management, and a more stable political situation, the country's growth rate has accelerated to 5.7 percent in 1995. Exports have surged, and investor confidence has increased. Moreover, due to economic adjustment, the gains of growth have been spread more widely, and the poverty rate is falling (although slowly). 2. Yet the economic and political crises of the early 1980s have left a lasting impact on the Philippines: economic performance has lagged drastically behind its dynamic neighboring countries; a higher burden of public debt and less progress in reducing poverty are two of the enduring legacies. At the same time, the excesses associated with the Marcos regime (1967-86) have produced a consensus within the country that the path to economic recovery should remain genuinely democratic and participatory, notwithstanding the economic successes of alternative approaches in the region. 3. The Philippines is now reaping the benefits from its structural adjustment program, which has provided the underpinnings for the current economy recovery. The debt crisis and accompanying collapse of output in the early 1980s gave impetus to an extended period of reform that was pursued with renewed vigor by the incoming Aquino administration in 1986. By the early 1990s, an array of reforms including price, trade and investment liberalization, financial restructuring and privatization had rendered the economy among the most deregulated in the region. And devolution of fiscal resources and responsibilities to local government units (LGUs)- -mandated at the end of 1991 and implemented gradually thereafter--has been enthusiastically embraced at the local level as a means of further decentralization of economic and political power. 4. Despite an initial economic recovery during 1986-89 when growth averaged 5.5 percent, per capita income stagnated in 1990-92, reflecting the negative repercussions of political instability, an unusual concentration of natural disasters, and a neglect of basic infrastructure. By 1992, real per capita income had recovered merely to its 1978 level. 5. This period of 'lost growth" is reflected in limited progress on poverty reduction. Social indicators present a mixed picture. The major social indicators remain comparable to the average for lower-middle-income countries (LMICs), even though per capita income in the Philippines is about a third below the average of this group (Annex A4). Income distribution is however heavily skewed; in 1994, the top decile accounted for 36 percent of total income, representing a slight decline from recent years, but about 20 times the share of the lowest decile. There is also a This document has a restricted distribution and may be used by recipients only in the performance of their |oficial duties. Its contents may not otherwise be disclosed wiLhout World Bank authorization.  -2- marked disparity among the two largest islands, Luzon and Mindanao, with development of the latter retarded by the persistence of secessionist violence, which has declined in recent years but not ended. The proportion of people living in poverty feli by 13 percent between 1971 and 1991 but remains high. The incidence of poverty in 1991 using the official poverty Une for family income is estimated at 39 percent of the population (31 percent urban; 47 percent rural); a further decline in poverty incidence to 36 percent in 1994 is officially estimated. B. Recent Economic Developments 6. In June 1992, President Ramos was elected in the first peaceful democratic transition of power in more than twenty years. The new Government has gained credibility through strengthening law and order, resolving the inherited power crisis by expediting private investrnent in power generation through build-operate-transfer (BOT) schemes (a model of private sector involvement), and further liberalizing trade and the capital account. 7. Private perceptions of economic management and prospects have improved, and an economic recovery, led by robust expansion of exports and investment, has been underway for two years. Real GNP growth in 1994 was 5.3 percent and increased to 5.7 percent in 1995 despite a drought-induced agricultural slowdown. In 1995, merchandise exports grew by 29 percent in dollar terms and industrial production expanded by over 7 percent in real terms. Unemployment had fallen to 8.3 percent by October 1995 from 10.6 percent in 1991, with about 3 million jobs added during this period, although substantial underemployment in agriculture and the urban informal sector remain major problems. 8. Inflation fell to a low of 5 percent (year-on-year) in early 1995, aided by rising money demand and an appreciating nominal exchange rate in 1994, but had risen to 11 percent by year end reflecting sharp increases in agricultural commodity prices due to the drought and rapid (though decelerating) monetary expansion. Since 1993, monetary policy has had to contend with the dual objectives of limiting the market-driven exchange rate appreciation while preventing excessive monetary expansion (para. 21). Public sector deficits have been reduced--the consolidated public sector deficit (CPSD) fell to one percent of GNP in 1994, in advance of scheduled deficit reductions targeted in the context of a June 1994 IMF Extended Financing Facility (EFF), and was further reduced in 1995. The deficit reduction through 1995, however, reflects increased proceeds from privatization and tight curbs on public investment, rather than tax reform and improved tax collection, which remain on the agenda. Two positive recent developments have been the implementation of the expanded value-added tax in January 1996 and the increase in regulated oil prices in February 1996, which will improve the balance in the oil price stabilization fund. 9. The current account deficit rose to over 5 percent of GNP in 1993 but has declined significantly since then, reflecting rapid growth of exports and remittances. The sizable deficits of recent years in part reflect the rising demand for capital goods imports such as power and telecommunications equipment-consumer goods comprise only 10 percent of imports--and have been accompanied by rising savings and investment rates and an overall balance of payments surplus in 1994-95. A growing portion of the current account deficits has been financed by private foreign investment, with net inflows of direct and portfolio investment doubling to US$1.4  billion between 1992 and 1994, and increasing further in 1995. Rapid export growth has reduced the external debt servicing ratio to below 16 percent, or half its level of the late 1980s. The Philippines regained access to international bond markets in 1993 and borrowing in the syndicated loan market has also resumed. 10. A brief period of financial market instability in the first quarter of 1995, aggravated by repercussions from the Mexican crisis (in common with other emerging market economies), was handled effectively by the financial authorities, through a combination of intervention to support the peso and sharp increases in the central bank's overnight interest rate (that were subsequently reversed) to curb speculation. Nonetheless, the market turbulence was a reminder of the need to maintain sound financial policies and accumulate international reserves. Table 1: Basic Economic Indicators 1983-85 1986489 1990-92 1993 1994 1995 1996-98/a (EIsL) (Proi.) Average Real Growth Rates (V/): GNP 4.8 5.5 2.3 2.6 5.3 5.7 6.0 Exports GNFS -2.8 12.2 3.6 6.2 19.5 18.9 12.1 Imports GNFS -11.6 18.4 6.0 12.2 17.9 12.7 10.5 Shares of GNP (/e): TaxRevenue 10.6 12.1 14.5 15.1 15.5 15.6 17.1 National Government Balance -2.0 -3.2 -2.2 -1.4 -0.3 -0.1 0.3 Consolidated Public Sector Balance - -3.7 -2.9 -2.0 -1.0 -0.3 -0.1 Gross National Saving 18.2 18.1 18.5 18.5 20.1 20.5 24.7 Gross Domestic Investment 22.5 18.7 21.6 23.8 24.4 24.1 27.8 Exports GNFS 22.3 25.4 25.8 28.3 30.2 34.5 39.0 Current Account Balance -4.3 -0.7 -3.1 -5.3 -4.3 -3.6 -3.1 External Debt 82.1 81.2 62.0 61.2 56.9 54.0 48.5 NG Domestic Debt 18.7 25.1 30.5 44.9 38.3 33.0 25.0 Other. Inflation (Year Averages, CPI) (0/a) 27.8 5.9 13.9 7.6 9.0 8.1 6.0 RealEff.ExchangeRate(1990=100) 94.6 100.8 102.8 106.9 114.1 - - Debt Sevice Ratio (/h) 35.4 30.5 21.3 18.7 17.9 15.4 12.9 Gross Intl. Reserves/Imports (mos.) 1.2 2.7 2.7 3.2 3.1 3.0 3.5 a/ Refers to 1998 for shares of GNP and other rstios. II. External Environment 11. Trade. A decade of structural adjustment has positioned the Philippines to take advantage of recent initiatives to liberalize trade and finance. Manufactured exports now account for nearly 80 percent of the total, up from 47 percent in 1983, reducing vulnerability to commodity price fluctuations. The share of exports has grown from 22 to 34 percent of GNP over the same period, rendering the Philippines more open than the average of LMICs (Annex A4). Prospects for manufactured exports have improved due to: recent agreements to liberalize trade through the  -4 - World Trade Organization (WTO) and the ASEAN Free Trade Agreement (AFTA); the dynamic outlook in the region that should facilitate trade expansion; and increasing foreign direct investment, which rose in net terms from US$130 million in 1991 to about US$800 million in 1994, improving domestic access to foreign capital and technology. 12. Capial Flows. Private capital flows have grown rapidly during 1994-95. Net foreign direct investment (EDI) inflows were somewhat higher than portfolio inflows in 1993-94, prompted by major privatization initiatives. However, the growth in gross flows has been more rapid than net flows--the sum of private investment inflows and outflows rose to nearly US$9 billion in 1994 from US$2 billion in 1992--and not surprisingly, the shorter-term portfolio flows have tended to dominate within both inflows and outflows. Net short-term borrowing also increased to US$1 billion in 1994. 13. The increase in such short-term borrowing and portfolio flows reflect the rapid growth of trade and investment opportunities in the Philippines, and have been an important contributor to the private-led recovery. They nonetheless subject the Philippines to greater vulnerability, both through the possibility of excessive inflows which can complicate monetary management, and through the risk that larger potential outflows in response to domestic or external shocks can accentuate the difficulties associated with the initial shock. 14. Migraion. An estimated 4.5 million Filipino workers are currently employed overseas, primarily in the Middle East, neighboring East Asian countries, and the United States. Remittances from overseas workers in 1994 amounted to nearly US$6 billion. Unrecorded flows that circumvent the banking system may also be significant. Such flows therefore constitute a major item in the balance of payments as well as an important source of income for domestic residents. The wide geographical distribution of migrants reduces the vulnerability of the Philippines to fluctuations in individual host country circumstances, although the risk of major external shocks such as the Gulf crisis, which temporarily reduced remittances, still constitutes a point of vulnerability. m. The Philippines' Development Objectives and Policies A. Policy Challenges 15. The key policy challenge facing the Government is sustaining the current economic recovery. The fundamental factors that have constrained development in the past are uneven macroeconomic management, weak implementation, and bottlenecks in infrastructure. There has been improvement on all three fronts in recent years. Yet much still remains to be accomplished, and the pace of adjustment in all three areas will likely determine the pace at which growth can be sustained. In addition, the high incidence of poverty and continuing environmental degradation remain critical areas for policy attention. In assessing economic strategy and prospects, it is also essential to incorporate the nature of the current democratic renewal the Philippines is undergoing. The system of power sharing between the executive, legislative and judicial branches of government, and between central and local governments requires extensive consensus building. The political impact of economic measures is an ongoing concern for policy, suggesting that delays in implementing difficult measures cannot be discounted.  -5- (i) Macroeconomic Management 16. A decade of structural reform has substantially improved the prospects for sustained growth. The nature of the current recovery, which has been led by investment and exports (in contrast to the 1986-89 recovery), indicates greater durability of the growth process. With a more stable political environment and macroeconomic management, private investment can be expected to remain an important stimulant to growth. However, an enduring recovery is not assured given: national savings and investment remain modest, especially by regional standards; public debt remains substantial; and there are risks that the fiscal position could deteriorate in the absence of further adjustment, as privatization revenues decline and trade tariffs are reduced. 17. Fiscal adjustment is needed to maintain a sound macroeconomic framework that would raise public savings and allow for higher levels of public investment while permitting the public debt burden to decline. It is also vital for improving the Government's flexibility to manage larger private capital flows in the context of the open capital account. 18. The elements of a fiscal adjustment package have been under consideration for some time, and significant legislation has recently been submitted to Congress. This would broaden the tax base and lower tax evasion through a simplified system less subject to discretion, reduce current tax exemptions within the investment incentive regime, and rationalize government expenditures including through streamlining of the civil service. However, the nature of the bills that will emerge is still uncertain, and in the case of tax reform will have to be accompanied by more vigorous efforts to strengthen tax administration and reduce tax evasion. 19. Increasing Savings To maintain a rapid growth rate it will be necessary to raise the domestic savings rate--both public and private savings in the Philippines are substantially below those in other ASEAN countries. Increased public savings through enactment of the above tax and expenditure package is therefore vital to allow public investment to rise, and is also needed to contribute to the growth of national savings. Changes in private savings are fundamentally a function of confidence and growth; thus building a track record of sound macroeconomic management will be critical in increasing private savings. The recent financial deepening represents an encouraging start. Further financial sector reforms to deepen the capital market and increase the private sector's role in managing contractual savings are being considered. 20. Managing Capital Flows. As previously noted, larger private capital flows pose two types of challenges to policy: the risk of major capital outflows; and the difficulties of conducting nkonetary policy with excessive inflows. Regarding the former, maintaining sound macroeconomic fundamnentals remains the most effective deterrent. In particular, enacting the tax and expenditure policies noted would improve the flexibility of fiscal policy to respond to a rise in outflows and to adjust the current account in response to an extended period of lower capital inflows. In addition, as the -stock of foreign-owned assets and publicly-held liabilities build, it would be prudent to raise international reserves beyond traditional norms of import coverage. The Government has in fact programmed a rise in reserves to about 3.5 months of imports by 1998. Over the longer term, more ambitious targets may be appropriate; for example, Indonesia, Malaysia and Thailand maintain reserve coverage in the range of 4.5 to 7.5 months of imports.  -6 - 21. The appropriate response to capital inflow surges depends on the nature and causes of the inflows: monetary expansion through unsterilized intervention need not be inflationary if real money demand is on a sustained rising path; alternatively, real exchange rate appreciation need not imply external imbalance if export sector productivity is improving--Philippine export growth has been rising even as the real exchange rate has appreciated since 1990. Unfortunately, it is difficult to know, a priori, the causes of inflows, or to what extent the growth in money demand or exports would be sustained. Moreover, sterilized intervention is rendered more difficult in the Philippines by the large and costly stock of government debt already outstanding. The Government's monetary program for 1995-96, supported by its Fund program, has hence adopted an eclectic approach to monetary policy, that allows for full monetization of capital inflows if inflation remains within an agreed upon acceptable range, but reverts to base money targeting if inflation overshoots targets,. as is the case currently. (ii) Improving Public Sector Implementation 22. Relatively weak implementation of policies and projects has constrained the effectiveness of development programs in the Philippines. Endemic tax evasion, institutional problems of public procurement, and the traditionally weak role of LGUs are symptoms of the underlying difficulties. In the' current context, civil service reform and fiscal decentralization are the areas where the payoffs from policy attention are potentially the largest. 23. Civil Service Reform. Rising private participation and devolution are changing the public sector's role from direct provider of services to facilitator for efficient private activity. Regulatory proficiency is assuming increased importance. It is therefore particularly important that government be staffed by a professional cadre that is able to adapt to the public sector's changing role. The capacity to attract and retain staff at the executive levels is currently lacking and needs to be addressed, both within government and among key regulatory agencies and state enterprises. A combination of voluntary retirement and targeted retrenchment of surplus staff would complement the reform of the incentive system in achieving the desired skills mix. The extent to which legislation that emerges from Congress enables the Government to enact effective civil service reform will determine the need for further actions at the policy level. 24. Local Government DevolutionL The process of devolving major responsibilities for agricultural extension, forest and watershed management, rural infrastructure, health and certain welfare programs to LGUs is well underway. There is already encouraging evidence of improvements in the quality of service delivery in selected LGUs. Several concerns have nevertheless emerged. Planning and implementation capacities vary widely across LGUs, and resources allocated under the LGU code have favored urban LGUs. The incentive for local governments to raise revenues within their own jurisdictions can be improved. A related concern is the lack of a mechanism to address the issue of externalities: where the benefits of a project extend beyond the local jurisdiction, there should be some means for the central government to promote such activity. The challenge will be to address emerging concerns, while preserving the benefits of devolution that are already evident. In particular, strengthening the ability of poor LGUs to improve service delivery constitutes a key challenge for the Government.  -7 - (iii) Upgrading Infrastructure 25. Investment requirements in infrastructure for the upcoming decade are projected at US$50 billion, or nearly 7 percent of projected GDP. Given the scarcity of public resources, the Government is focusing on attracting private investment to undertake infrastructure projects where appropriate, and has requested Bank technical assistance to address a range of issues associated with rising private participation (para. 78). The successful experience with overcoming power shortages through the BOT model in 1993 has encouraged the Govemment to boost private sector involvement across a spectrum of activities. The BOT program is being expanded beyond the initial schemes which applied in the power sector to incorporate transport, water supply, industrial projects and a tourism estate. At the same time, the Government recognizes that traditional public investment will continue to be needed across many sectors where private investment cannot be attracted cost effectively. This is particularly the case for most of the arterial highway network as well as rural infrastructure. 26. Over the past year, the need to address the intensifying water resources management challenge has been increasingly recognized. In Manila and other urban centers, the problems relate to supply shortages, leakage due to defective and antiquated connections, and inadequate disposal facilities; outside the major urban centers, an excessive number of local water districts that are not financially viable pose a significant management problem. There is also a need to strengthen the institutional capacity to address conflicts in water allocation across subsectors (water supply, sanitation and irrigation) and adapt the regulatory framework to the prospect of increasing private participation in the water subsectors. In June 1995, Congress granted full authority to the President for a limited time to take whatever steps may be needed to redress the deteriorating water situation. In response, a decision was taken in September to turn over Metro Manila's water management to the private sector, with IFC selected as lead advisor to the Government for enacting the transaction. 27. Enhancing Conpetition. The Philippines already ranks as among the most deregulated economies in the region. Yet the scope for competition in a number of sectors has been inhibited by unequal access to productive assets. An important element of the Government's strategy is to further open the economy to foreign trade and investment as a means of encouraging more competition. 28. The priorities include: (i) improving the efficiency of the financial sector--the expansion of full service foreign banking from four to fourteen international banks in 1995 is expected to expand the provision of financial services and increase competition; (ii) further rationalization of the tariff structure which has cut the maximum tariff rate on nonagricultural commodities to 30 percent and is scheduled to compress the tariff structure to one rate of 5 percent by 2004; (iii) phasing out quantitative restrictions on imports (except rice) by March 1996; (iv) liberalizing restrictions on foreign investment in retail trade; (v) deregulating energy pricing by end-96; (vi) restructuring the National Power Corporation (NPC) and privatization of its generation facilities; and (vii) adapting the regulatory framework particularly in sectors such as energy, water, sanitation, transport and telecommunications, where private participation is slated to grow. The importance for global competitiveness and productivity growth of a strategy that promotes high  -8 - quality human resource development is recognized, but the appropriate role for the public sector and a strategy for action still needs to be developed. (iv) Poverty Aleviation 29. The disappointing performance on poverty reduction in the past (para. 5) is the result of several factors: the capital and import intensive manufacturing production that occurred in the 1960s and 1970s, reflecting the then prevailing incentive structure; lagging agricultural growth and unequal land distribution, which limited the benefits of agricultural growth to the poor; and the lack of sustained growth since 1983, notwithstanding the extensive structural reforms that were enacted in the decade following the debt crisis. 30. A sustained period of growth in the context of the current more favorable policy environment is essential to raise employment creation and reduce poverty at a faster pace than achieved in the past. While unemployment has fallen in recent years, effective utilization of the labor force remains a major concern. Agriculture and government services together still account for 62 percent of the labor force (with 45 percent in agriculture). With rural labor supply growing faster than demand and government employment unlikely to expand significantly, the capacity of industry and private services to absorb labor market entrants and the underemployed will remain strained. The Government's strategy of encouraging further competition from domestic and foreign investors is appropriate for maximizing the employment generating potential from the current recovery. 31. With economic recovery now underway, the Government has focused new attention on poverty, recognizing that growth will need to be supplemented by effectively targeted poverty alleviation measures. The shares of public investment in health, education, and agriculture are targeted to increase sharply through 1998. The Government has worked closely with nongovernmental organizations (NGOs) in poverty alleviation projects such as micro credit delivery schemes, livelihood creation programs, and in the provision of social services to the poor. Its social reform agenda (SRA), launched in September 1994, focuses on the provision of health, nutrition, education, and shelter to targeted groups. In the context of the SRA, 20 provinces in the country, including a number with among the highest incidences of poverty, have been identified for special focus in terms of targeting poverty alleviation programs. However, there needs to be a sharper focus on priorities, coupled with technical assistance to LGUs where necessary. This is particularly the case since devolution has constrained the ability of the central authorities to finance or implement social and environmental programs (except in the 20 priority provinces), while only 15 percent of the country's 25 million poor live in the 20 provinces. 32. Rural Development The Government, in particular, is shifting attention to poverty issues in rural areas, recognizing the impact of lagging growth on political stability. Currently, three government agencies--the departments of agriculture (DA), agrarian reform (DAR), and environment and natural resources (DENR)--oversee different aspects of rural development, respectively focusing on: productivity growth (particularly in high priority crops), land reform, and sustainable development of upland areas. There is, however, a growing recognition of the need for a comprehensive rural development strategy that would include cost effective means for supporting small farmers, improving rural infrastructure and providing incentives for expanding  -9 - nonagricultural employment in rural areas. Hence there is a need to revisit the appropriate government responses in these areas, particularly in light of the opportunities and challenges presented by decentralization. 33. Agrarian ReformL The Govermnent has focused on agrarian reform as an important means of achieving its poverty alleviation goals in rural areas. The Aquino Government put forward the comprehensive agrarian reform program (CARP), which includes redistribution of public and private agricultural lands to landless farm workers to serve as a centerpiece of its economic program. The current administration is pursuing the objectives of the CARP as well. However, progress has been slow--only about 31 percent of the targeted redistribution during 1987-98 had been completed by 1994--due to financial constraints, weak implementation capacity, and legal contestability. In the meantime, the uncertainty over the status of private holdings has reduced the incentive to invest in agriculture. 34. Child and Gender Issues. About a third of children under five are malnourished, infant mortality of 42 per 1000 live births is slightly higher than the LMIC average, and the quality of primary education available to poor communities is low, contributing to high dropout rates among poor children. Dropout rates for girls are however lower than for boys, and available health data do not indicate systematic bias in health provision against females, although problems linked to maternal health remain severe. The status of women is considerably higher than in comparator countries; however, women are disproportionately employed in low wage and informal sector activities, and have weaker access to credit particularly in agriculture. The stark data on children in particular highlights the importance of broad-based growth including within agriculture; it also strengthens the rationale for more spending on safety nets such as through targeted and cost effective nutrition programs, and away from general subsidy programs such as of the National Food Authority. (v) Environmental Protection 35. Sustainable development is threatened by over-exploitation of natural resources and pressures from a growing population and rapid urbanization. Upland agriculture, forestry, and fisheries present major natural resource management problems in the Philippines. Presently, about 18 million people live in upland areas, of which 8-10 million farm on officially designated forest land, driven there by their poverty--the per capita income of upland farmers is estimated at less than half the official poverty line for rural residents. Farming techniques in parts of the upland areas tend to promote very high rates of erosion, reducing agricultural productivity, and increasing siltation of vital infrastructure such as irrigation, hydroelectric, and municipal water installations. Deforestation is continuing at a rate of about 100,000 ha annually. Similarly, large segments of mangrove forests have been destroyed, in many cases replaced by fish ponds or overharvested for fuelwood, with adverse effects on the marine ecosystem. 36. The already serious pressure on the urban environment has increased with faster industrial growth. Industry is a major source of water pollution and toxic hazardous waste through uncontrolled discharge in unsafe landfills. Private households are the chief contributors to organic water pollution and solid waste, while vehicles are the major source of air pollution. Inadequate  - 10- pollution reduction efforts thus far reflect: weak enforcement of environmental standards; lack of incentive to invest; and lack of information about cost effective abatement strategies. 37 Increased employment opportunities outside of upland and coastal agriculture will be central to alleviating environmnental concerns within these areas. The Government is in addition promoting more sustainable farming techniques and vigilance against illegal logging through community based efforts in conjunction with local governments and NGOs. Regarding urban pollution, the Government's efforts are focused on controlling industrial air and water pollution and improving human and industrial waste management. Enforcement of existing environmental regulations remains difficult, however, primarily reflecting inadequate institutional and financial capacity. In addition to improving its own enforcement capacity, the Government is trying to create an incentive structure within industry that promotes greater self-enforcement. Raising gasoline prices, which is needed on economic grounds, would also contribute to efficiencies in transport use. B. Economic Scenarios and Risks 38. Base Case. Our base case scenario is for GNP growth through 1998 to average 6 percent, somewhat below the official target of nearly 7 percent, but one that would still represent the most encouraging period of expansion since the debt crisis. In assessing economic prospects, we have assumed that the Government is able to maintain the CPSD at below 1 percent of GNP, reducing the public debt burden (Table 1), and hence lowering risk premia associated with government debt. Tighter fiscal and monetary policies in the next year are assumed to reverse the recent rise in inflation. The key assumption underlying this scenario is that further fiscal adjustment is accomplished primarily by increasing revenue through tax reform, improved tax collection, and streamlining of the civil service. However, some setbacks to this politically difficult agenda have been incorporated, limiting the rise in public savings to about 2.5 percent of GNP through 1998, inhibiting to some extent the potential growth in public investment. 39. Private savings and investment would continue to rise gradually, reflecting the more favorable overall outlook and the progress anticipated in improving the environment for private investment in infrastructure. A gradual decline in the current account deficit is consistent within this framework. The pace of export growth would fall relative to the near 20 percent real growth witnessed in 1994-95 as the recovery matures. Real export growth of 12 percent in 1996-98 would nonetheless be sufficient to allow for further reductions in the debt service ratio. 40. The strength of the recovery is expected to be limited by the accumulated deficiencies within infrastructure--particularly with respect to water, transport and urban congestion--and the need to contain external deficits. In addition, weaknesses in governance and implementation capacity may limit the pace of expansion. These factors are difficult to quantify but remain critical to the pace and ultimate sustainability of growth. 41. High Case. A higher growth rate of 7 to 8 percent could become feasible through more favorable policy implementation that results in a stronger balance of payments performance. Full enactment of the existing set of fiscal legislation under current consideration is projected to raise public savings by 4 percent of GNP by 1998. The faster growth of public investment within such  an improved fiscal scenario would achieve a more rapid alleviation of infrastructure bottlenecks and hence induce more private investment including EDI. Under these circumstances, faster export growth approaching 20 percent might be maintained, aided by higher productivity growth in the export sector, facilitating the more rapid output expansion. Risks and Down-Side Scenarios 42. The likelihood of sustained, rapid growth is lower in the Philippines compared to the East Asian NICs, reflecting weaker macroeconomic fundamentals such as a lower savings rate and a higher public debt burden. With over two thirds of National Government expenditures accounted for by personnel, interest payments, and allotments to LGUs, the budget remains fairly inflexible, exacerbating the output costs of forced fiscal adjustment. And as previously discussed, the increased reliance on potentially volatile private capital flows can accentuate the impact of weak policy or external shocks, underscoring the need to maintain sound macroeconomic policies. 43. External Shocks. Recession among industrial countries constitutes the most damaging potential external shock to the Philippines; in 1994, 70 percent of exports were destined for the U.S., Japan and the European Union. By contrast, the rapid growth in share of manufactured exports has sharply reduced vulnerability to price shocks among major commodity exports. Vulnerability to oil price increases has also declined; imported oil now comprises only six percent of merchandise imports. A large portion of external debt is also fixed rate bilateral debt, and thus less subject to interest rate risk. However, domestic debt, which accounts for over half the debt stock and 80 percent of interest payments, is primarily short-term, rendering the budget highly sensitive to domestic interest rates and investor confidence. 44. Policy and Implementaion Weaknesses. The capacity for policy formulation in the Philippines is quite strong, and at the conceptual level there are few contentious policy issues with the Bank. The current administration has been effective in forging working coalitions on selected issues of high priority. However, enacting politically difficult measures could become more difficult to accomplish as the 1998 elections approach. And weak governance within public institutions still constrains implementation. The current transition period for LGU devolution also carries with it risks that implementation may suffer, particularly in the poorer and rural LGUs, which would tend to perpetuate existing inequities by constraining the implementation of poverty alleviation efforts. 45. Contingent Liabilities. A separate risk category concerns the use of guarantees for attracting private investment in infrastructure. Excessive government guarantees for commercial risk could result in an untenable build-up of contingent liabilities, particularly if an economic downturn were to render forecasts of commercial activity optimistic. In a number of cases, BOT agreements contain significant penalties if parastatals cannot deliver on their commitments regarding supportive infrastructure, constituting an additional financial risk to the Govenment. To minimize such risks, appropriate criteria for granting and pricing guarantees need to be adhered to; recent progress in this area (para.79) improves the prospect that Government guarantees will henceforth be suitably priced and provisioned for and therefore remain compatible with projected fiscal capacity.  -12- 46. A Down-Side Scenaio. An ineffective package of fiscal reforms emerging from Congress and/or difficulties in implementing the package that does emerge form the elements of a policy induced down-side scenario. This would make it more difficult for the Government to increase the resources available for public investment and to reverse the recent increase in inflation. With monetary policy (higher interest rates) forced to play the dominant role in combating inflation, private investment would also suffer returning the country to a period of stagnation. Fiscal deficits would increase reflecting slower growth, higher interest rates, and the inability to reform the tax system. IV. Policy and Project Implementation Since the Last CAS A. Policies and Performance 47. The Bank's last CAS was issued in January 1994. The policy dialogue at the time was particularly intense in the energy and financial sectors. In the former, the Bank had played a major role in the development of the National Energy Sector Plan, which was instrumental in addressing the power crisis. Through a financial sector adjustment loan and prior sector work, we had advised the Government on key aspects of the central bank restructuring--in which its nonperforming portfolio was transferred into a separate entity and the new Bangko Sentral ng Pilipinas (BSP) was given increased autonomy--improving the conduct of monetary policy. A basic economic report had also recently been issued. 48. Nonetheless, the power crisis had not been fully resolved, business confidence was largely lacking, and the recovery was extremely hesitant. The Bank's primary objective was therefore-to assist the Philippines attain a sustainable path of higher growth led by the expansion of an internationally competitive private sector. The major themes of Bank focus were: macroeconomic management and improved policy implementation, provision of infrastructure through improved project implementation, and improving the business environment (Attachment 1). With more rapid growth, the Goverrnent's capacity to address poverty alleviation and environmental protection was deemed to improve, and supportive Bank interventions were programmed. The criteria for judging progress and success were fiscal management, the degree to which infrastructure bottlenecks were effectively addressed through policy reforms and project implementation in power, water supply and sanitation and transport, and the extent to which the economy remained open and globally competitive. 49. Overall economic performance has clearly been more favorable than anticipated, particularly with respect to the pace of output and export growth and the improvement in business confidence. The faster-than-anticipated expansion coupled with increased privatization revenue has made it possible to overperform on the fiscal criteria set in the previous CAS without the aid of the politically more difficult tax reform deemed necessary at the time. The strategy for power has clearly paid off in terms of accelerated private participation in generation to relieve shortages, although an effective de-politicization of energy price setting remains to be accomplished. For the other sectors highlighted, the authorities are actively pursuing options for reform, and the prospect of rapid growth has added urgency to the alleviation of bottlenecks and managerial deficiencies. The economy has clearly become more open and competitive in the past two years, notwithstanding the re-imposition of selected import quotas in 1994. These are to be removed by  - 13 - early 1996 in compliance with commitments to the WTO. Preliminary evidence indicates a pick- up in the pace of poverty alleviation; but environmental degradation has continued unabated. 50. The outcome over the past two years has hence been consistent with the 'base case" of the prior CAS using the criterion of policy implementation, whereas the economic outcome has been more consistent with the 'high case" Bank lending fell sharply in FY95 relative to the levels associated with either the high or base case (but is expected to rebound in FY96). The FY95 decline can be attributed to: the ongoing shift out of adjustment lending; an increasing focus on project implementation; and a stronger emphasis on quality at entry that was facilitated by the Philippines' improved access to private capital and consequent reduced need for Bank finance. At the same time, technical assistance from the Bank to address specific policy and institutional concerns has been increased, in line with the Government's desire for greater access to non- lending services. B. Portfolio Perfonnance and Management 51. As of August 1995, the Bank had 29 projects under implementation with an undisbursed amount of US$1.5 billion. Infrastructure, including industry and energy, accounts for 57 percent of the cumulative project portfolio, with agriculture and natural resources representing 20 percent, population and human resources 15 percent, and macroeconomic and multi-sectoral loans the remaining 8 percent. Of the current portfolio, four projects are rated unsatisfactory in terms of implementation progress, of which two have problems in terms of development objectives' (Table 2). The 13.8 percent ratio of projects with unsatisfactory implementation progress is below the Bank-wide average of 17.8 percent, but above the regional average of 10.4 percent. While there has been a disconnect in the past between regional ratings of projects and OED evaluation of these, in the recent PCRs completed by the region, the OED evaluation considered the PCR conclusions to be realistic and satisfactory. Table 2 also indicates a considerable improvement in OED's own ratings for projects approved after the debt crisis and initiation of substantive structural reforms. 52. Our past experience in managing the Philippine portfolio indicates that implementation problems tend to re-emerge regularly; hence, focus and follow-up on portfolio issues is needed on an ongoing basis. Since 1994, management of our portfolio has become more strongly focused on client participation through annual programming missions and twice yearly country portfolio performance reviews (CPPRs) carried out by the resident mission, supplemented by iterative discussions with the Government and other donors on specific and generic issues. A productive dialogue has commenced with key government agencies to help identify and address issues for improving portfolio performance. Through its portfolio reviews the Bank has learned that: (i) a substantial amount of supervision time needs to be spent in the early stages of implementation- perhaps the most important Bank input is assistance in expediting procurement; and (ii) borrowers should adequately organize themselves for implementation as early as project appraisal. I A sustained period of unsatisfactory ratings on implementation progress tends to lead to similarly adverse outcomes on development objectives.  -14- Table 2: Portfolio Performance, 1964-95 OED Rated Region Rated Active Projects (as of August 1995) Operations Approved Operations Approved No. of Operations and during 1964-85 and during 1986-89 and Closed ARPP Supervision Closed (as of August (as of August 1995) Ratings 1995 ) No. of No. of Develop- Implement- Operations Operations ment ation Objetives Progress Sector Total S U Amount Total S U Amount S U S U Amount (USS (USS (USS million) million) million) Agriculture/Environment 36 25 11 1140.7 1 1 0 23.5 5 1 5 1 610.3 Infrastructure 19 16 3 799.5 2 2 0 71.2 6 0 4 2 472.0 Finance/Industry 12 8 4 471.2 3 3 0 325.0 2 0 2 0 238.0 Human Resources 10 7 3 254.9 0 0 0 0.0 6 0 6 0 479.1 Energy 9 9 0 252.2 0 0 0 0.0 7 1 7 1 1194.8 Structural Adjustment 2 0 2 502.2 3 3 0 800.0 1 0 1 0 200.0 iTOTAL 88 65 23 3420.7 9 9 0 1219.7 27 2 25 4 3194.2 53. We are undertaking a comprehensive review of our portfolio in FY96, utilizing a1l available management tools including restructuring and cancellation if necessary to resolve outstanding issues for the problematic projects, particularly if they have been under implementation for an extended period. We will also provide quarterly supervision/technical assistance for selected projects through the increased use of trained local consultants, and disseminate successful approaches to project implementation to facilitate wider adoption. 54. Cross Sectoral Issues. Most of the generic issues affecting the portfolio in recent years including slow release of funds to implementing agencies, restrictions to Special Accounts, and delayed audit submissions are being addressed adequately, although through FY95 disbursement performance had not improved (Annex Al). Key remaining issues include disbursement and procurement problems, which affect the portfolio across the board. 55. Disbursement problems are primarily due to: complex, decentralized procedures exacerbated by devolution, that have slowed collection of documentation required for withdrawals; a general lack of incentive to prepare withdrawal applications; inadequate budget provision for some projects; and procurement delays. 56 Procurement continues to be a major problem across several projects. The main factors are: (i) inadequate capacity in government agencies to deal with often complex procurement arrangements; (ii) past flow-of-funds constraints; and (iii) institutional (including political) constraints in speedy resolution of procurement processing. To alleviate procurement problems  - 15 - for prospective projects, we intend to design these with a minimum number of procurement packages, and use - advance procurement actions where possible to minimize delays during implementation. We will also improve the capability of the Government to deal with complex procurement arrangements through the conduct of in-country workshops on Bank procedures and requirements, and use our field office and front office support unit more intensively to handle procurement issues as they arise. Finally, we are examining the potential of using new procurement technology, which has significantly improved procurement performance and disbursement ratios in the Engineering and Science Education Project, for other Bank projects in the Philippines. 57. From the Government's perspective, problem management would be improved by enhancing the overall quality and effectiveness of supervision, monitoring and assessment by key agencies. Critical to that effort will be irnproved coordination between central and line agencies to link financial monitoring of project implementation to physical accomplishments, and assess projects' impact on development effectiveness in a timely manner. NEDA has in fact begun efforts to improve coordination and regularize development effectiveness monitoring, an undertaking which is expected to increase benefits from the existing investment program and also provide crucial information to shape a more effective pipeline of projects. 58. Technical Assistance.. Over the past two years, we have provided technical assistance through IDFs to support capacity building. Ongoing IDFs include strengthening the Commission on Audit's (COA) institutional capacity to improve its audit functions, enhancing the Government's project management capabilities through a computerized project management (CPM) system, and strengthening the Department of Budget and Management's (DBM) public resource management capacity. We have also assisted in enhancing the Government's monitoring system for foreign assisted projects. 59. Field Office Role. We have taken a number of actions to strengthen the role of our resident mission in Manila as it relates to portfolio management and capacity building. The expanding role of the field office for supervision support is discussed in para. 109. C. An Evolving Government View of Bank Assistance 60. In the 1980s and early 1990s, adjustment lending was the primary vehicle for policy dialogue between the Government and Bank on macroeconomic and structural reform. As the need for resource transfer from the Bank has receded and the prospect for adjustment lending has moved out of the base case (Section V), the Government is anxious not to lessen the intensity of the policy dialogue in areas where it values the Bank's analytical, technical, or project implementation assistance. In the context of the current CAS discussions, the range of issues for which the Government has requested the Bank's technical assistance is considerably larger than can be accommodated, forcing the need for selectivity. To better accommodate Government requests, the share of resources devoted to non-lending services has been raised over the past two years, a process that we anticipate would continue in the medium term. 61. With regard to lending/guarantees for project finance, the Government wishes to aim for annual borrowing averaging about US$500 million. It values the Bank Group's efforts to  -16- mobilize long-term private capital for infrastructure, and to package projects and coordinate concessional assistance particularly for projects where repayment based on cost recovery criteria alone is not feasible. At the same time, the central oversight agencies, cognizant of the devolution of responsibilities to LGUs, have become more cautious in approving external borrowing at market terms for projects in agriculture, the environment, human resources and poverty alleviation. Moreover, the Bank's lending terms are viewed as less favorable than those of other major official creditors--primarily Japan's Overseas Economic Cooperation Fund (OECF) and the Asian Development Bank (ADB). ADB's concessional assistance through the Asian Development Fund (ADF) has accounted for some 20 percent of its lending volume in recent years, but is expected to be phased out in 1996. V. Bank Group's Country Assistance Strategy 62. The Bank Group's ultimate objective in the Philippines is to promote sustainable development and help to achieve a more rapid reduction in poverty. In designing our assistance strategy, we have drawn on the lessons learnt since the last CAS on policy implementation and portfolio management, and have made a special effort to solicit the views of the Government and other donors. At the inception of the current CAS process, a series of workshops were held with government officials to clarify development strategies and the most productive areas for Bank focus. The Government has provided feedback on the document at several stages. The following five objectives, elaborated below, constitute the framework within which specific Bank interventions would be guided: * Supporting the Government's efforts to convert the current economic recovery into a period of sustained growth, which is vital for rapid poverty reduction; * Strengthening the capacity of the public sector to implement policies and projects; * Strengthening the country's infrastructure to enable growth. In addition to financing critical public investment, this involves improving the policy environment and using our guarantees and IFC's support to facilitate private investment in infrastructure where appropriate, adapting the regulatory framework to support such investment, supporting privatization initiatives through IFC advisory services and enhancing competition; * Assisting in the design and implementation of more effective and efficient mechanisms for poverty alleviation while upgrading the quality of social services available to the poor; and * Supporting sustainable management of natural resources and protecting the environment. 63. The Bank will utilize the full range of instruments at its disposal to pursue these objectives. The economic dialogue with the authorities will necessarily be wide ranging, given the Bank's ongoing role in combining economic and sector analysis, project financing and implementation assistance, and aid coordination through our chairmanship of the Consultative Group meetings. We will use both formal and informal channels to provide technical assistance and strengthen implementation capacity among our clients. As discussed, we are focusing heavily on supervision of projects under implementation--in FY96, supervision has been allocated nearly 40 percent of discretionary resources for the Philippines. The dollar value of the lending program  - 17- will be weighted towards infrastructure and energy; loans for poverty and enviromnental objectives will generally involve smaller IBRD funding levels, with greater emphasis on piloting programs stemming from our ESW. Bank funds to leverage concessional resources from other donors will continue to be utilized for social/environmental objectives to support the Government's preference for maximizing grant funding in these areas. 64. With tighter Bank budgets for the Philippines, increased emphasis on confirming the support of the central oversight agencies at the project concept stage will be sought so that significant resources on project development would not be utilized without the support of these agencies. An increased role of the implementing agencies in the preparation of projects is already being sought. A. Partnerships and Aid Coordination 65. The Bank's assistance program is closely coordinated with IFC and M1GA, is based on long-standing partnerships with a large number of government agencies in the Philippines, and has increasingly been enacted through cooperation with other major donors, NGOs, and the private sector. Over the past two years, we have substantially increased our interactions with the local and foreign private sector on issues ranging from capital market development to promoting investment in infrastructure. Our promising experience in supervising a GEF-financed project with the NGOs for the Integrated Protected Areas (NIPA), an association of local NGOs committed to environmental protection, has improved the scope for further such collaboration. To manage the expanding scope of our partnerships within the Philippines, we have recently recruited an external relations officer based in our field office. 66. The Bank coordinates closely with other multilaterals and bilaterals through consultations aimed at maintaining funding levels commensurate with macroeconomic needs, addressing critical issues of common concern, and maximiziig aid effectiveness. Coordination with major donors such as OECF, JEXIM, ADB and other major players including USAID, Australia and Germany occurs on a frequent basis. Coordination with the ADB in particular has served to enhance the complementarity of both institutions' programs by delineating areas of focus, while also fostering close cooperation through joint preparation of projects and strategies within selected areas. Recent Bank initiatives in donor coordination include: * A reorganized Consultative Group process, which is more client focused, involves active participation by a larger group of donors, and included a session oriented towards private sector investors at the recent meeting in Tokyo in December 1995. * Strengthened donor coordination through regular consultations in Manila led by our resident mission, which improved the quality of the discussions in the recent CG meeting in Tokyo and provides a vehicle for monitoring and follow-up. * Concessional cofinancing of Bank projects with bilateral and multilateral sources to improve lending terms and leverage our assistance, e.g. as with the recent Maternal Health Project.  - 18 - 67. The Bank maintains close liaison with the IMF on issues of macroeconomic policy and structural reform, in Washington as well as Manila. Our recent report on public sector management priorities has complemented the Fund's work on tax reform in clarifying the fiscal reform agenda. The IMF Board approved an EFF for the Philippines in June 1994 and endorsed its first review in September 1995. The Government has recently indicated that it does not intend to draw on IMF resources for the time being, officially placing the program under 'precautionary" status. B. Country Assistance Strategy Objectives (i) Maintain Sound Macroeconomic Policies 68. To ensure that rapid growth can become self-sustaining, the Philippines needs to maintain sound macroeconomic policies and place increased emphasis on implementing existing programs in a more forceful manner. It is clear that policy reforms must continue in a number of areas including tax reform, contingent liability management, improved resiliency to potentially volatile private capital flows, and more generally fostering an environment that is conducive to rising domestic savings. As international creditworthiness improves, the Government will have to monitor the impact of major investment programs and their implications for capital flows to ensure that these remain compatible with macroeconomic targets. 69. The IMF has worked closely with the Government on issues of tax reform, and legislation to simplify personal income taxes and broaden the corporate tax base is forthcoming. Most important for the revenue effort is to improve the Government's ability to monitor tax obligations and reduce tax evasion. The Bank will continue to assist in this effort primarily through implementation assistance to the ongoing tax computerization project, which will enhance the capacity for tax administration. 70. Rising private capital inflows reflect improving investor perceptions of the Philippine economy, but the open capital account also constitutes a source of potentially greater instability. We intend to examine the macroeconomic and financial sector means of strengthening the economy's resiliency to such flows. Building on the region's recent work on the emerging Asian bond market, we intend to examine options for deepening the capital market, which currently constrains access to term finance and therefore promotes over-reliance on foreign capital This is expected to involve, inter alia, reform of the legal, regulatory and tax structures, which currently inhibit institutional investors from investing in corporate debt instruments, and promotion of a more effective and credible bond rating capacity. In coordination with the IFC and other donors, the opportunities for more private participation in the management of contractual savings will be assessed, following up on our recent analysis of the Philippines social security system. Finally, the adequacy of foreign exchange regulations for banks and other financial institutions in the presence of the larger volume of capital flows will be assessed. Efforts to strengthen financial markets could form the basis for the Bank's financial involvement depending on the outcome of the technical assistance and policy response. 71. IFC's involvement in the area of capital markets closely complements the Bank role. IFC's broader strategy is to assist in the development of the long-term debt market with a view to  - 19- making more domestic finance available. It is pursuing back stop facilities to help financial intermediaries lengthen the maturity of their assets and reduce liquidity risk. It is exploring ways to enhance the housing finance sector through securitization of existing mortgages and establishment of a secondary mortgage market. And it is examining ways to support the development of the private contractual savings sector as well as the life insurance and mutual fund sectors. (ii) Strengthen Public Sector Implementation 72. The Bank's recent PER has highlighted several aspects of public sector management including: defining an appropriate role for the public sector as private participation in the economy grows; providing a framework for civil service reform that would improve quality while containing overall personnel expenditure; addressing issues of equity, implementation capacity, and the need for adequate incentives for local resource mobilization arising from the recent devolution; and reforming budgetary processes to improve coordination between development planning functions and program implementation and addressing biases against adequate maintenance. In the context of a collaborative PER preparation process, a number of these initiatives have been extensively discussed with the authorities. We intend to utilize institutional development funds (IDFs) to assist the Government in implementation in areas where further technical assistance would be beneficial; e.g. budget management and civil service reform. 73. By introducing local oversight and control, devolution can be a cost effective strategy for improving service quality. But the variation in implementation capacity and resources across LGUs calls for continued attention by the central authorities. A first step is to improve responsible financing channels; here we have utilized IDFs aimed at a) improving LGU access to private finance; and b) constructing effective means of channeling fiscal and ODA resources to LGUs to address the concerns stemming from extemalities and inequities (para. 24). In addition, the Bank will assist the Government in providing an appropriate framework for technical assistance, capacity building, and incentives through which LGUs can better devise and implement development programs. 74. Finally, as discussed in Section IV, we have intensified our implementation assistance with respect to ongoing Bank-financed projects. In the context of supervision, we are increasingly providing technical assistance whose scope extends beyond the objectives of the bank project itself. To strengthen borrower project implementation capacity, we are transferring execution responsibility of Japan's PHRD within two years (earlier for most sectors), accompanied by a program of technical assistance to implementing agencies to improve the capacity to manage such execution. (iii) Strengthen Infrastructure/Facilitate Private Sector Participation 75. Lack of adequate infrastructure is a major bottleneck to rapid growth; the capital requirements are indeed massive given past underinvestment and the prospect of continued rapid urbanization. The backlog of infrastructure needs is therefore well beyond the Government's capacity to finance through public investment alone. While private capital inflows have increased in recent years, the bulk of these have been in the form of portfolio and short-term flows. There  - 20 - remains a large gap between the investment requirements in infrastructure and the ability of the market to finance these. Country risk is still a factor in mobilizing term debt from abroad for large projects, and domestically, the volumes of local currency financing available for larger scale projects are limited. 76. The Philippines has been a pioneer in promoting private investment in power generation, and is using this experience to facilitate private participation in other sectors, primarily water, transport, and ports. But the obstacles are significant, posing difficult financial, regulatory, managerial as well as political challenges. Moreover, the extensive use of government guarantees for commercial risk is less justifiable in non-emergency situations, unlike the case of power in the early 1990s. As the use of government guarantees grows, a strong central capacity to rationalize the criteria for their use and ensure consistency with macroeconomic targets will therefore be needed. 77. The Bank Group's assistance strategy has been grounded in our ability to influence the nature and priority of the policy reforms needed to facilitate private participation, and in our ability to improve the quality and terms of the private capital that is mobilized. We are currently focused in the following areas. 78. Prvate Sector Infrastructure Initiative (PSII). In 1994, we initiated an innovative approach jointly with the Government to address a series of issues emerging from increasing private sector participation in infrastructure. IFC and ADB have become full partners in this effort, and there have been intensive discussions with private firms on various aspects of this initiative. Through this initiative, technical assistance is being provided for: (i) addressing cross- sectoral legal and regulatory issues relating to private participation in the areas of power, water supply, ports, toll roads and light rail transit; (ii) project facilitation and promotion, which identifies and develops projects suitable for private participation and develops mechanisms to promote greater competition among potential investors. Strengthening the capacity of the Government's BOT center is central to this effort; (iii) risk unbundling and mitigation, which develops a framework for allocating risks between public and private sector, and establishes criteria for granting and pricing government guarantees; and (iv) examining the options for developing a privately managed term financing facility whose objective would be to catalyze private funding for infrastructure and improve financing terms, particularly for small projects for which attracting private finance would otherwise be difficult. 79. Ongoing work through the PSII has already yielded improvements in managing private participation. A new policy framework for provision of government guarantees is being adopted, covering risks related toforce majeure, market volatility, foreign exchange, and price escalation. The Government is in the process of incorporating guarantee provisions into the capital budgeting and infrastructure planning process, and is working with us to develop sectoral risk templates, which would clarify the Government's exposure to a project. The recent passage of the amended BOT law provides transparent rules for private investment in infrastructure, clarifying the legal and regulatory environment. 80. Power. Successful resolution of the 1991-93 power crisis was made possible through accelerated private investment in new generation capacity. IFC was a major contributor to this  - 21 - effort. However, NPC's financing requirements still constitute a major burden on public finances, prompting the decision to restructure the corporation and privatize its generation capacity. The Bank has assisted in these efforts and will promote privatization through use of our guarantee if warranted. As the private sector assumes responsibility for power generation, the Bank would support investments in transmission, sub-transmission and distribution facilities to enable the full value of the new generation capacity to reach consumers. Reform of the power distribution sector to strengthen the financial viability of the electricity franchise holders is an essential first step to facilitate investment. Technical assistance for effective utilization of hydro capacity and the newly discovered gas deposits is also under consideration. Equalization of the fuel excise tax across public and private suppliers, and liberalized entry and pricing of gasoline will also be promoted to enhance competition. 81. Water. At the request of the Government, the Bank intends to strengthen its program of assistance to meet the intensifying water resources management challenge. In September 1995, an action plan was formulated jointly with the Government to address the issues of water resources management and protection and to deal with the immediate implementation issues arising from the recent Water Crisis Act. Strengthening the legal, regulatory and administrative capacity to support integrated water management and the prospect of increased private participation is a vital element of this program, and is being addressed initially through the Bank's forthcoming Water Resources Management Project, which establishes a policy and management framework in the water resources sector and provides for strengthening the National Water Resources Board (NWRB).2 82. The Bank Group is assisting the Government, in coordination with the ADB and other major donors, to formulate a strategy for the water supply and sanitation subsector that addresses the impending crisis in Metro Manila and other large cities, and provides options to create a viable organizational structure based on competitive allocation of public resources for the rest of the country. These efforts are supported by a number of technical assistance initiatives to improve efficiencies and facilitate private participation. IFC is assisting the Government with the privatization of most Metropolitan Waterworks and Sewerage System (MWSS) operations; the Bank will complete preparation of an ongoing project to improve sewerage in Manila (which is unlikely to be privatized in the short run), examine opportunities for facilitating privatization through our guarantees, and assess access and pricing issues for the poor in the aftermath of privatization. Bank lending and guarantees are in addition envisaged to rationalize management in the smaller water utilities and facilitate private participation. 83. Transport The Bank will continue to provide finance and technical assistance in areas such as highway construction, where investment needs remain large and the prospects for private participation are generally less favorable. We will also pursue the formulation of a road network management program, and, in cooperation with other donors, focus on traffic management issues 2 Envirnmental obj,ecives of this project are described in subsecton (v).  - 22 - arising from inadequately planned and coordinated projects in Metro Manila. A review of issues relating to private participation is under consideration. 84. Urbanizaioi,. The development of viable urban centers outside Manila is central to the Government's strategy of relieving congestion in the capital and promoting alternative destinations for rural migrants. Several such centers, including the economic processing zones, have the potential to attract further private investment, and have already contributed significantly to export growth. But infrastructure bottlenecks are increasingly apparent and environmental problems are also growing. Strengthening the development of urban infrastructure, particularly in established and emerging locations outside Manila--such as the proposed Bank project in Subic Bay--is therefore a priority. Through forthcoming technical assistance and a proposed project, we also intend to assist in the preparation and financing of an integrated urban and environmental development plan for a rapidly expanding region adjacent to Metro Manila. IFC is also considering an industrial estate project with Japanese interest outside Metro Manila. 85. Bank Group Guarantees. The Bank Group has been in active consultation with the Government on the appropriate use of guarantees; the emerging Government framework for monitoring and managing contingent liabilities (para. 79) will guide the use of Bank guarantees and related operations. The Bank Group has initiated a process of dialogue and debate about how to position guarantees and other equity finance within that framework. The basic principle being adopted is that the Bank's guarantee should add substantial value to the financing terms for the borrower and create access for the Philippines to new classes of investors. The provision of Bank guarantees would be contingent on adjustment and maintenance of appropriate sectoral policies, specifically tariffs and regulatory structures; hence their use in a given sector would be selective and expected to be phased out with successful results of private participation. 86. The Philippines joined MIGA in 1994. MIGA has issued coverage for a total of US$55 million for two projects (in the banking and power sectors) in FY95. MIGA has received applications for coverage for 24 additional projects accounting for a total of approximately USS1.4 billion in aggregate investment, primarily in the power, mining, and manufacturing sectors, and is processing US$50 million in coverage for another infrastructure project and expansion of a commercial banking operation. MIGA's country ceiling for the Philippines currently stands at US$175 million in guarantees. 87. The Bank and IFC have maintained strategies that are consistent and coordinated. The institutions cooperated closely on the recent Private Sector Assessment and Power Sector studies, coordinate in the PSII, and are coordinating their advice regarding privatization of NPC and MWSS. 88. IFC's strategy is aimed at overcoming the obstacles to investment funds mobilization. Despite the improvement in the Philippines' creditworthiness, lenders still seek various forms of credit enhancement or comfort through IFC presence in respect of their longer maturity loans in the country. This is also driven by provisioning rules and their effect on loan profitability, as well as by outright credit concerns.  - 23 - 89. In addition to its involvement in capital markets (para. 71), IFC's strategy is focused on three main areas:. privatization, infrastructure, and general manufacturing. In privatization, IFC is supporting the government's initiatives through advisory work in structuring the contractual arrangements between the private and public sector and in developing bankable projects that would attract both private strategic partners/investors and lenders. In infrastructure, IFC is pursuing projects in transport, water utilities, telecommunications and, on a more selective basis, in power. 90. In general manufacturing, IFC is looking at medium-sized firms with restricted access to financial markets as well as complex projects with larger sponsors requiring both finance and technical assistance. The revitalized construction industry has created a huge demand for cement and other construction materials. Following its review of the domestic cement market, IFC has received various inquiries on its possible participation in a number of potential projects. It is also considering involvement in steel mill projects. 91. lFC is likewise monitoring the developments in the mining and petrochemical sectors with a view to supporting viable private sector projects. The new form of mining concession agreement--the Financial and Technical Assistance Agreement (FTAA)--whereby the effective benefits to foreign partners would not necessarily be tied to ownership, has begun to attract serious interest from some international mining companies. In petrochemicals, the government has earmarked the sector as a priority, offering attractive incentives to potential investors. Accordingly, the petrochemical sector has witnessed a renewed interest on the part of foreign investors, with a number of new project proposals having been submitted lately. 92. FLAS is continuing to work with the Board of Investment (BOI) in the preparation of a new national investment promotion strategy, and in enhancing the ongoing restructuring and functional reorientation of the BOI into a predoninantly investment promotion agency. (iv) Alleviate Poverty/Upgrade Basic Social Services 93. The Bank's strategy for poverty reduction in the Philippines contains several elements. First, it recognizes the critical importance of sustained economic growth as a vehicle to lift substantial segments of the population out of poverty, emphasizing the importance of maintaining sound macroeconomic policies and encouraging competition to maximize job creation. Second, through dissemination of the recently issued Poverty Strategy report and follow-up activities, we aim to collaborate with the Government to strengthen the strategic framework for poverty alleviation and improve the effectiveness and efficiency of the resources allocated to poverty reduction. 94. Third, the Bank would assist the Government in designing and implementing programs of poverty alleviation in the 20 priority provinces for which the SRA provides special focus, and derive lessons for poverty alleviation elsewhere in the country. The objective would be to ensure that the various initiatives that are underway are embedded within a consistent overall framework and are effectively implemented. Moreover, the priority provinces are sufficiently varied in character to permit a valid testing ground for targeted programs, which if successful, could be expanded elsewhere in the country. In this context, and in view of the recent government decision  - 24 - to assume part or all the extemal liabilities of approved ODA financing targeted at the 20 priority provinces, the Bank would focus its lending for poverty alleviation towards these provinces. Successful pilot programs could then be adopted outside the 20 provinces. Bank lending targeted towards the 20 provinces could also be leveraged by cofinanced concessional credit targeted towards the poor in other provinces, in cases where the project design is applicable elsewhere. However, since the majority of the poor in the country live outside the priority provinces, Bank lending for poverty alleviation projects would not be limited to these provinces. 95. Rural Development Poverty in the Philippines is heavily concentrated in rural areas and has been exacerbated by inequitable access to rural infrastructure and services. Consistent with the recommendations of the Bank's recent poverty reduction strategy, our strategy for rural development emphasizes the provision of rural infrastructure, improving small farmer productivity, and the piloting of innovative approaches to community development. The following specific activities will be pursued: * Preparing a rural development strategy collaboratively with the Government to address the issues highlighted in para. 32. The focus of this effort will be to develop more effective means of participation of rural communities and LGUs in the design and implementation of rural development initiatives and assess the need for institutional reform. * Upgrading rural infrastructure and providing better access to key services to poor beneficiaries of agrarian reform through an Agrarian Reform and Communities Development project (possibly cofinanced with concessional credit), and a proposed Mindanao Rural Infrastructure project. * Increasing productivity and incomes of poor lowland farmers through the Water Resources Development project. * Implementing cost effective schemes for community development that primarily benefit poor upland farmers, and that promote environmentally sustainable farming techniques. In this context, we intend to apply for grant resources from the Bank's recently approved Micro-Finance Program for a pilot project that would be managed by NGOs, utilizing our experience with an ongoing NGO-managed/GEF-financed conservation project. 96. Human Resources Development While health status and educational attainment in the Philippines compares favorably with most other countries of similar per capita income, there are substantial variations in quality and access to such services, and notable deficiencies in infrastructure particularly in rural areas. Expansion of rural primary schools and health clinics would benefit the poor, and shifting public resources from higher level services to basic health and pfimary resources would meet both efficiency and equity objectives. Bank interventions have been primarily directed towards these objectives. We are promoting more effective resource use in basic education and redeployment of released resources to improve access of the poor to quality education through preparation of a Basic Education Improvement project and dissemination of the results of the PER and informal education studies. A proposed Teacher  - 25 - Development project would enhance training and adaptability of the labor pool through quality improvements in education, fostered by better trained teachers. 97. We intend to strengthen the health services available to vulnerable groups such as women and children and urban slum dwellers, following up on our study of early childhood development (ECD) with an ECD project (coordinated with ADB). In addition to targeting nutritional improvements among poor pre-schoolers, this project would free up women's time to facilitate entry into the labor market. The ongoing Maternal Health project, which developed from our Family Planning and Women in Development reports, provides for improved health services to lower maternal mortality and morbidity levels and address the high incidences of illnesses such as anemia and undernutrition. The ongoing Urban Health and Nutrition project and assessment of environmental health policy requirements specifically target health issues for the urban poor. 98. Our recent involvement with skills development at the upper end of the educational stratum has been limited to supervision of the Engineering and Science Education and Vocational Training projects. In response to interest within both government and the private sector, we intend to examine emerging skills constraints to the expansion of higher productivity/technology activity, and assess the appropriate role for public policy to foster growth in this area. (v) Support Sustainable Natural Resource Management/Protect the Environment 99. Green Environmental Issues. A fundamental reversal of the degradation of upland areas, forests, and ecosystems will only occur as rural poverty is significantly diminished and alternative employment opportunities are available for the rural poor. In the meantime, such rural environmental degradation can be addressed through wider adoption of more sustainable farming techniques coupled with better enforcement capability; both objectives are served by the structured involvement of rural communities, LGUs and local NGOs, and design of appropriate incentive structures. Guided by our recent sector work and the objectives of the 1991 environmental SECAL, the Bank's interventions are directed at: * Promoting sustainable upland farming systems through technical assistance to the Department of Natural Resources (DENR) and development of a Community Based Resource Management project. * Through supervision of the Environmental SECAL: curtailing illegal logging by strengthening monitoring and enforcement capacity and mobilizing community actions; strengthening community-based natural resource management programs; and promoting conservation of priority protected areas (financed by the GEF). * Strengthening the planning and implementation capacity of the NWRB and improving the efficiency of water use within ongoing irrigation schemes through the Water Resources Management project. 100. Brown Environmental Issues. Degradation of the urban environment has reached alarming levels. Effective urban environmental management will require that: (i) the right incentives and institutional framework is put in place for the private sector, local communities,  -26 - and NGOs to take an active role in such management; and (ii) the city and municipal governments are strengthened to integrate urban policies in the field of infrastructure, housing, location of industry and environment. The Bank is assisting the Government to create a framework that would encourage industry to prevent and reduce pollution, and over time, to internalize the cost of pollution abatement. The key elements of our strategy on environmental protection are as follows: * Strengthen monitoring and enforcement of environmental policies, possibly by creating a dedicated environmental management corporation, and provide it with supplementary funding from fees, fines, and charges. An institutional review and overall reform of the Department of Natural Resources (DENR) is under consideration. * Create financial incentives for industry to undertake abatement on its own initiative through the introduction of a pollution charge. A pilot program for pollution charge assessment, design and implementation is being initiated. * Facilitate transfer of know how on cost effective abatement technologies to industry through the creation of a clearing house for sector specific training activities and plant level advisory services on clean technology and waste minimization. * Provide technical assistance for the creation of a Brown Fund to involve local communities, the private sector and government in implementing urban environmental interventions and initiatives for effective environmental management. An environmental health study is currently being conducted by the Bank and is expected to provide an assessment of the impact of urban pollution on human health, policy implications, and the options for technical and financial assistance. C. Policy Dialogue and Lending (i) Non-Lending Services 101. The objectives of our non-lending services are to provide selective, in-depth assessments of policy issues where we have the comparative advantage and to promote change on the ground. These objectives are best served through a judicious mix of: comprehensive reports; quick turnaround policy notes to address pressing issues as they arise; and conferences, workshops, and other paperless vehicles for informning public debate. For the first category, further substantive work on the financial sector, rural development, education, and urban and environmental issues is in prospect. Substantive macroeconomic analysis and assessments would be prepared on average every two years, linked to the schedule of Consultative Group meetings. (Brief macroeconomic updates would be prepared for interim CG meetings.) 102. A larger proportion of ESW and TA resources will be devoted to work that does not necessarily lead to formal reports; the work associated with PSII and the water sector offers recent examples of effective dialogue supported by a series of technical notes that have accelerated reform without the production of lengthy reports. Recent examples of (demand driven) policy notes include lessons from the Mexican peso crisis and the economic contribution of overseas contract workers. Dissemination of ESW among key policymakers and stakeholders  -27 - within the Philippines is increasingly being emphasized. Finally, an effective component of our technical assistance has recently involved study tours for policymakers to examine the application of novel policy approaches in other developing countries--topics for recent such visits have included local government financing and pension reform. 103. In coordination with the Government, we will also devote increased effort into publicizing successful efforts of community development to facilitate replication of such efforts. Technical assistance through the use of IDFs and other channels to strengthen implementation capacity would be increasingly utilized. (ii) Lending Program 104. Base Case. A base case lending program averaging about US$500 million per annum of project financing during FY96-98 has been developed with the Filipino authorities. Such lending pre-supposes that the policy framework remains sound, the major elements of the base case economic scenario are attained, and efforts to improve the quality of implementation of Bank projects are sustained. Such lending would reduce the Bank's share of public debt service from 19 percent in 1994 to about 16 percent by 2000 under the base case economic scenario as net disbursements from the Bank turn negative in FY96. Preferred creditor debt service is projected to fall below 35 percent by 1997. Other indicators of Bank exposure are already well within the Bank's guidelines (Annex A6). 105. As sununaized in Annex A2, about two-thirds of the dollar value of lending under the base case would be directed towards infrastructure, energy, and finance, with the balance divided among interventions in poverty alleviation, rural development and environmental protection. Projects for which LGUs are unwilling to borrow at IBRD terms would have to be considered on a case-by-case basis between GOP and the Bank an--IDF supported study on financing LGU projects with environmental and/or social objectives (including where externalities could warrant central government action) is examining alternative criteria for financing and government involvement. For lending targeted towards these objectives, it will be important for the Bank to enlist a strong sponsor among the relevant line agencies that is willing to use its budget to support the project's aim. 106. High Case. With accelerated growth of output, exports, and private investment, and improved access to private financing, the need for Bank efforts to facilitate private participation would diminish. The focus of Bank lending would hence shift towards coping with rapid urbanization, environmental protection and human resource development. The volume of Bank lending would primarily be demand driven, but would not necessarily be higher than in the base case given the presumed improved access to private finance. The trigger for this case is substantial progress on tax and civil service reform, which results in fiscal improvement and facilitates the transition to a higher growth path with stable inflation. 107. Alternative Low Case Scenarios The nature of the adjustment of Bank lending in response to a deterioration of the economic situation would depend on the causes of the deterioration and the subsequent policy response. If the principal cause was policy lapses and the downturn was extended due to insufficient policy adjustment, Bank lending would be limnited to  -28 - US$200 million and focused primarily on human resource development, poverty alleviation objectives, and basic infrastructure. If, however, the deterioration was primarily generated by external shocks and an adequate policy response was forthcoming, Bank lending would not necessarily fall, and could increase temporarily to support the requirements of accelerated adjustment. In such a situation, fast disbursing lending from the Bank may be necessary in coordination with an upper tranche IMF program, assuming there was an adequate policy dialogue and reform program to support. 108. Financial Risks to the Bank The riskiness of the Bank's portfolio in the Philippines is manageable and has declined in recent years with the rapid expansion of exports. The prospect of negative net disbursements under the base case lending scenario further diminishes the Bank's future exposure. D. Evolving Role of the Field Office 109. The resident mission (RM) will continue to play an important role in contributing to the policy dialogue, assisting the borrower with project preparation, and liaising with key stakeholders within the Philippines. In addition, aided by the increased hiring of local professional staff, it will increase its emphasis on: * Supervision support. The RM has been given responsibility for overseeing local competitive bidding and pre-screening of procurement, audit and disbursement documentation, and will continue to lead the CPPR process. It will also assume full responsibility for supervising specific projects that are particularly participatory or require ongoing and intensive dialogue. * Donor Coordination. Past successful efforts at informal donor coordination in the field, with monthly consultations on special interest topics for improved aid coordination will be continued. The RM will strengthen coordination with the donor community (and continue such coordination with the Government) on preparations for the Consultative Group process, and will also bring NGOs into the process. * Improved Communications. The RM will devote increased effort to manage the in- country needs of improving communications and information regarding Bank activities. RM staffing has been increased to handle extemal relations, interaction with NGOs, and to promote stakeholder participation in Bank projects and activities. The RM will continue its close coordination with IFC's Field Office and the IMF Resident Office. E. CAS Success Criteria 110. Attachment 2 summarizes the intended scope of our interventions and includes progress milestones for major activities. Within this framework, we propose the following sumnary indicators for measuring the impact of the Bank's program: * Improvement in the quality of the Bank's active project portfolio.  -29 - * Improved access, financing terms, and quality of private investment in infastructure. Within such a scenario, the implementation of an improved administrative and regulatory framework for managing government guarantees (for which we are providing extensive technical assistance) that leads to a reduction in the accumulation of contingent liabilities as a share of private finance for infrastructure, would be an important success indicator. * Reaching agreement with the Government and satisfactory progress on implementation of a program of policy and institutional reforms for the country's water resources sector. * Influencing the Government's framework for alleviating poverty. More effective targeting of safety nets will be an important success indicator. Jointly articulating a rural development strategy that addresses issues of rural poverty and natural resources management would be an integral part of the overall strategy. * Reducing infant mortality and malnutrition rates among poor pre-schoolers are the major objectives for the Early Childhood Development project. Intermediate targets that can be assessed on an annual basis include the increase in: immunization coverage; share of poor children receiving micro nutrients; share of poor children enrolled in pre-school. D Operationalization of the jointly developed strategy to improve the quality of elementary education for the poor. A 25 percent improvement in achievement and completion rates is the medium-term objective; monitorable intermediate indicators are: better targeting of resources toward the neediest provinces and schools; and increased availability of basic inputs (especially books) in remote schools. It is recognized that the evolution of macroeconomic performance will be an important element in the success of the Bank Group's objectives in these areas. VI. Agenda for Board Consideration 111. The Board may wish to comment on the following topics: * The proposed adjustment in Bank resources from lending to non-lending in response to the shifting demand for Bank assistance. * The impact of decentralization on the Bank's ability to support certain poverty, social, and rural development projects. James D. Wolfensohn President Attachments Washington, D.C. February 15, 1996  I  Attachment I Page 1 of 2 Philippines: FY94 CAS Objectives and Experience Objectives Bank Assistance Program Outcomes Sound Macroeconomic Management - targets: gradual rise to 5% growth by 1996; - policy dialogue; CEM; policy notes - relative to targets/assumptions: faster export and rising fiscal revenue; declining budget and - collaborative PER focusing, inter alia, output growth; fiscal revenue targets exceeded current account deficits on budget management, civil service due to privatization; lower budget deficits; higher - address inflexibility of budget due to high reform, devolution, sectoral issues current account deficits; higher foreign investment personnel/interest costs - implementation assistance for - preliminary civil service reform initiated; deeper - protect essential capital investments Economic Integration Loan; Tax reforms under consideration Computerization - decline in public debt burden - collaboration with Govemment/IMF - essential investments protected through stable on growth oriented medium-term public investment shares programn Strengthen Infrastructure - expand/maintain infrastructure - Power sector study - easing of power bottlenecks - Two geothermal power projects - accelerated plans for reform in power, water - Subic Bay infrastructure - successful expansion of Subic Bay - Intensified dialogue on water - Implementation assistance for Bank projects Improve Private Business Environment - strengthen competition policy and regulatory - addressing nexus of issues on private - increased government focus on regulatory issues, system sector through PSII dialogue competitive bidding - attract FDI - strengthened Bank/IFC collaboration - policy framework for government guarantees e.g. Private Sector Assessment developed - guarantee (ECO) for NPC - improved financing terms for NPC - FIAS TA to BOI - reorientation of BOI towards investment promotion agency - increased FDI  Attachment I Page 2 of 2 Philippines: FY94 CAS Objectives and Experience Objectives Bank Assistance Program Outcomes Reduce Poverty Incidence and Income - preliminary evidence of lower poverty incidence Disparities with rising employment and productivity - Human resources - Women's health and safety project - increased government focus on programs for maternal health; WB, ADB, bilateral partnerships formed - Early childhood development report - national ECD program being developed and project development - Education quality improvement - increased focus within government on basic (informal ESW and project education for poor development) - Poverty strategy ESW - recent completion (dissemination ongoing) - Rural Development - Second Rural Finance Project - agricultural growth still lagging - high rural poverty remains major development issue Sustainable Development - consolidate progress on green issues - Environmental SECAL supervision - partnerships formed with local communities, NGOs; improving sensitivities to green issues - ongoing natural resource degradation due to employment, population pressures - initiate work on gray/brown issues - Environmental health study underway - urban pollution and congestion continue to rise - TA initiatives underway (see Attachment 2) Strengthen Policy/Project Implementation - PER ESW - provided input into civil service reform agenda - initiated TA through IDFs (e.g. for - improved performance on generic project COA) implementation issues (e.g. audit submissions, - more frequent (biannual) CPPRs Special Accounts) - continued procurement difficulties; disbursement I delays  Attachment 2 Page 1 of 3 Philippines: Policy Objectives and Country Assistance Strategy, FY96-98 OBJECTIVES ACTION/STRATEGY ESWITA LENDING PROGRESS MILESTONES L Maintain sound macroeconomic polices * Improve tax administration and collection * Maintain active policy dialogue * CEMs, financial sector * Maintain 6% average growhi report, policy notes with reduced inmtnsity of * Raise domestic savings; enhance capital * Accelerate tax computerization; * Supervise Tax downturns naikdt development strengthen * Broaden participation and Computerization * Raise tax revenue by 1.5% of resiliency to private capital flows; instruments for savings and Project GNP by 1998. rationalize contingent liability investment * TA on: deepening capital * Financial Markets * Raise public savings by 2.5% management market; contactua savings Strengthening of GNP refon; contingent liability Project * Establish active bond rating management