Philippines - Community Based Resources Management Project

Document of The World Bank Report No: 17277-PH PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US50.0 MILLION EQUIVALENT TO THE REPUBLIC OF THE PHILIPPINES FOR A COMMUNITY-BASED RESOURCES MANAGEMENT PROJECT February 26, 1998 Rural Development and Natural Resources Sector Unit Philippines Country Management Unit East Asia and Pacific Region  CURRENCY EQUIVALENTS (As of November 17, 1997) Currency Unit = Peso US$1.00 = 34.05 pesos I peso = US$0.029 FISCAL YEAR Government: January I - December 31 IBRD: July I - June 30 ABBREVIATIONS AND ACRONYMS BLGF - Bureau of Local Govemment Finance CBRMO - Community Based Resource Management Office C-CBRMO - Central Community Based Resource Management Office COs - Community Organizers DA - Department of Agriculture DA-BFAR - Department of Agriculture - Bureau of Fisheries and Aquatic Resources DBM - Department of Budget and Management DENR - Department of Environment and Natural Resources DILG - Department of Interior and Local Government DOF - Department of Finance ERDB - Environmental Research and Development Bureau FISFAP - Financial Information System for Foreign Assisted Projects GOP - Government of the Philippines LGA - Local Government Academy LGU - Local Government Unit (provinces and municipalities) MDF - Municipal Development Fund MDPs - Municipal Development Projects NEDA - National Economic and Development Authority NGAs - National Government Agencies NGOs - Non-Government Organizations PSSD - Philippine Strategy for Sustainable Development SRA - Social Reform Agenda TRC - Technical Review Committee Vice President: Jean-Michel Severino Country Manager/Director: Vinay Bhargava Sector Manager/Director: Geoffrey Fox Task Team Leader/Task Manager: Frank Byamugisha  Philippines Community-Based Resources Management Project CONTENTS Page No. A. Project Development Objective ....................................................................2 1. Project development objective and key performance indicators ............................... 2 B. Strategic Context ....................................................................2 1. Sector-related CAS goal supported by the project ..................................................... 2 2. Main sector issues and Government strategy ............................................................. 3 3. Sector issues to be addressed by the project and strategic choices ............................ 3 C. Project Description Summary ....................................................................4 1. Project components ..............................................................4 2. Key policy and institutional reforms supported by the project .................................. 5 3. Benefits and target population ..............................................................5 4. Institutional and implementation arrangements .......................................................... 5 D. Project Rationale ....................................................................6 1. Project alternatives considered and reasons for rejection ........................6................. 6 2. Major related projects financed by the Bank and/or other development agencies ..... 8 3. Lessons learned and reflected in proposed project design .......................................... 9 4. Indications of borrower commitment and ownership ................................................. 9 5. Value added of Bank support in this project .............................................................. 9 E. Summary Project Analyses ....................................................................9 1. Economic ..............................................................9 2. Financial ......... 10 3. Technical ......... 10 4. Institutional ................................................................... 11 5. Social ................................................................... 11 6. Environmental assessment ................................................................... 12 7. Participatory approach ................................................................... 12 F. Sustainability and Risks ................................................................... 12 1. Sustainability ............................................................. 12 2. Critical risks .......... 14 3. Possible controversial aspects ............................................................. 14  Page No. G. Main Loan Conditions ......................... 15 1. Effectiveness conditions .................. 15 2. Other .................. 15 H. Readiness for Implementation ......................... 15 I. Compliance with Bank Policies ........................ 16 Annexes Annex la Project Design Summary Annex lb Performance Indicators Annex 2a Detailed Project Description Annex 2b Eligibility Criteria and Financing Arrangements Annex 2c Structure and Functions of MDF and its Proposed Reforms Annex 3. Estimated Project Costs Annex 4. Cost-Benefit Analysis Summary Annex 5. Financial Summary Annex 6. Procurement and Disbursement Arrangements Table A. . Project Costs by Procurement Arrangements Table B. Thresholds for Procurement Methods and Prior Review Table C. Allocation of Loan Proceeds Annex 7. Project Processing Budget and Schedule Annex 8. Documents in Project File Annex 9. Statement of Loans and Credits Annex 10. Country at a Glance Map IBRD 29354  Philippines Community-Based Resources Management Project Project Appraisal Document East Asia and Pacific Regional Office Philippines Country Management Unit Date: February 26, 1998 Task Team LeaderlTask Manager: Frank Byamugisha Country Manager/Director Vinay Bhargava Sector Manager/Director: Geoffrey Fox Project ID: Sector: Natural Resources Program Objective Category: Reduction of Poverty and PH-PE-34614 Management Environmental Degradation Lending Instrument: Specific Investment Loan Program of Targeted Intervention: [1 Yes [ ] No Project Financing Data [XI Loanr [I Credit [I Guarantee [ Other [Specify] For Loans/Credits/Others: Amount (US$m/SDRm): US $50.0 million Proposed Terms: [ Multicurrency [X] Single currency dollar Grace period (years): 5 [ Standard Variable [I Fixed [XI LIBOR-based Years to maturity: 20 Commitment fee: 0.75% Service charge: 0.0% Financing plan (US$m): Source Local Foreign Total Central Government 4.2 0.0 4.2 Local Government 7.3 0.4 7.7 Beneficiaries 5.1 0.6 5.7 IBRD 44.6 5.4 50.0 Total 61.1 6.4 67.5 Borrower: Republic of the Philippines Responsible agency(ies): Department of Finance Estimated disbursements (Bank FY/US$M): 1998 1999 2000 2001 2002 2003 2004 Annual 1.4 5.5 9.6 9.6 11.0 11.0 1.9 Cumulative 1.4 6.9 16.5 26.1 37.1 48.1 50.0 Project implementation period: April 1, 1998 to December 31, 2003. Expected effectiveness date: July 31,1998 Closing date: June 30, 2004 OSD PAD Form: July 30, 1997  Page 2 A: Project Development Objective 1. Project development objective and key performance indicators (see Annex 1): The main objective of the project is to reduce rural poverty and environmental degradation through support for locally generated and implemented natural resource management projects. This would be done through: (a) enhancing the capacity of low-income rural local govemment units (LGUs) and communities to plan, implement and sustain priority natural resource management projects; (b) strengthening central government systems to transfer finance (as financial intermediaries) and environmental technology, and improve the implementation of environmental policies; and (c) provision of resources to LGUs to finance natural resource management projects. Specific development objectives targeted by the project are: (a) improved management of upland and forestry resources indicated by a reduction in deforestation, increased vegetation cover and reduced soil erosion; (b) improved coastal and nearshore fisheries resources indicated by an expansion in mangroves and a reversal of the decline in catches of fisheries; and (c) improved infrastructure in support of management of upland, coastal and nearshore natural resources as indicated by improvemehts in rural roads, water supply andNanitation facilities, irrigation systems and other small scale infrastructure. Progress in the achievement of these development objectives will be assessed periodically, including at the mid-term review of the project and upon its completion. Implementation performance will also be tracked by the borrower using key indicators that reflect the main project's inputs and outputs. The main inputs are: (a) number of seconded and new staff; (b) use of TA and training resources; (c) financial support for research and other assistance (e.g., land stewardship); and (d) the volume of loans made in support of natural resources management subprojects. The expected project outputs are: (a) upland outputs including area reforested and stabilized and hectarage of perennial crops; (b) increase in coastal and nearshore outputs including fish sanctuaries, mangrove rehabilitation/expansion and reef management initiatives; (c) rural roads, potable water supply systems and other small scale infrastructure rehabilitated or built; (d) an operational rural financing window for LGUs; and (e) technical assistance and training outputs (measurable improvements in institutional capacities; type and number of training sessions; and number of people trained). Implementation performance would be tracked regularly and reported totheTechnical Review Corm-mitee (TRC) and the World Bank in semi-annual progress reports. At the end of the project and as part of the ICR, the borrower will undertake a final review which will evaluate the performance of the project and its intended impact of: (a) increasing income of at least 25 percent of beneficiary households; and (b) improving management of natural resources as measured by increases in areas with reforestation, vegetation cover, reefs, mangroves and other coastal resources. Details on project objectives, key development and implementation performance indicators and arrangements for their monitoring and supervision are contained in Annex 1. B: Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project (see Annex 1): CAS document number: Document No. 15362-PH Date of latest CAS discussion: April 4, 1996. A CAS update will be presented on March 24, 1998. The ultimate objective of CAS for the Philippines is to promote sustainable development and help achieve a more rapid reduction in poverty. Consistent with this ultimate objective, specific Bank intervention is guided by five objectives including support for sustainable management of natural resources and protecting the environment. A fundamental reversal of the degradation of upland and coastal areas will only occur as rural poverty is significantly diminished and alternative livelihood and employment opportunities are available for the rural poor. This would need to be coupled with a wider adoption of more sustainable farming techniques. The proposed project attempts to combine two elements that have been demonstrated to have great potential for effectively improving natural resource management and reducing poverty in rural Philippines: community-based resource management and decentralized financing, by the national  Page 3 government, of projects identified, prepared and implemented by local government units (LGUs; provinces and municipalities) and their beneficiary communities. Bank's involvement in the project has been guided by two principles: (a) comparative advantage; and (b) partnership with Government and other donors. The Bank has considerable experience in the Philippines in supporting community-based resource management projects, building on past projects. Similarly, it has accumulated experience over the last 13 years in providing resources to LGUs in urban areas, through the Municipal Development Fund (MDF). It will build on the experience of supporting urban LGUs through the MDF to extend support to rural areas (for details about the MDF, see Annex 2c). It should be noted that municipalities are government units that make up provinces, cover both rural and urban areas and are governed by elected officials. 2. Main sector issues and Government strategy: There are three key issues that pose a challenge to rural development: low growth of the rural economy; high levels of rural poverty; and degradation of natural resources. Agricultural growth decelerated from 5.8 percent per annum in 1970- 80 to 2.1 percent per annum in 1980-89 and 2.2 percent in 1990-94. The low growth in agriculture, coupled with limited employment opportunities in non-farm activities, have resulted in a high incidence of poverty--50 percent in rural areas (compared to 36 percent in 1994 for the country as a whole) where half of the country's population of 67.5 million live. Many of the rural people live in upland areas, largely dependent on low-input shifting agriculture, with a high incidence of severely degraded areas and the highest poverty incidence in the country. The Government of the Philippines (GOP) has targeted sustainable development and poverty alleviation as two key areas of focus of the administration. To achieve these objectives, the Philippine Strategy for Sustainable Development (PSSD) and the Social Reform Agenda (SRA) were adopted to address environmental protection and rehabilitation concerns and to focus on poverty reduction efforts. The proposed project constitutes one of the means to achieve the twin objectives of reducing poverty and the degradation of natural resources. 3. Sector issues to be addressed by the project and strategic choices: This project would focus on addressing the two inter-related issues of rural poverty and degradation of natural resources. The issue of low growth in the rural economy will not be addressed directly by the project; it would be targeted by subsequent operations. The proposed project would support the reduction of rural poverty and degradation of natural resources through: * promoting improved management of natural resources and providing a more secure livelihood for the rural poor; * providing financial and technical assistance to LGUs and beneficiary communities in the proper management of natural resources; and * strengthening the capacity of the Department of Finance to transfer resources to LGUs to finance community-based investments. Experiences acquired from the Central Visayas Regional Project (CVRP, Ln. 2360-PH) have clearly demonstrated that it is possible to simultaneously reduce poverty and degradation of natural resources (see Section D).  Page 4 C: Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3for a detailed cost breakdown): Component Categorv Cost Incl. % of Bank- % of Bank- Continaencies Total financing financing (US$M) (US$M) _ Subprojects in Natural Resources Management Physical 46.9 69.5 37.2 79.3 Subprojects, involving demand-driven natural resources management investments, would be financed, in the form of grants and loans, provided through a new rural window of the Municipal Development Fund (MDF) to the LGUs. Eligible subprojects would fall under three categories: (i) upland agriculture and forestry; (ii) coastal resources and nearshore fisheries; and (iii) small rural infrastructure and livelihood projects related to these natural resource investments. Grant assistance would be given to LGUs to support preparation of eligible subprojects. Planning and Implementation Support to LGUs Planning Institution 6.7 9.9 3.1 46.3 and implementation support for LGUs and their communities building (barangays) in the way of training provided by the Local Government Academy (LGA) of the Department of Interior and Local Government (DILG) and by Community Organizers (COs). Specific support would include costs of training including training materials, equipment and allowances, and payments to trainers. Initiating an MDF Rural Window and Project Institution 7.4 10.9 4.9 66.2 Management Support of a project management office - building and CBRMO - which will be incorporated into the MDF's rural project window after a transitional period of 3 years. This rural management window will channel funds to low income LGUs for financing rural development investments, including the CBRM project activities. Support would include: (i) equipment; (ii) salaries of contracted staff; (iii) incremental costs of staff seconded from other agencies; (iv) technical assistance; (iv) operating costs of the MDF rural window and CBRM central and satellite offices; and (v) MIS system. Environmental Technology Transfer and Policy Physical and 6.5 9.6 4.8 73.8 Implementation Department of Environment and Natural institution Resources (DENR) and Department of Agriculture (DA) building would be assisted to transfer natural resources management technology to LGUs and improve management of environmental policies, particularly policies of land tenure access and security. Specific activities would include: (i) survey and mapping for resource access and tenure certificates; (ii) technology training; (iii) technical assistance; (iv) policy studies to assist DENR and DA in developing improved land access and tenure instruments to enable communities to acquire long term leases of upland forest areas and coastal land; (v) technology packaging and dissemination; and (vi) protection of communaly owned natural resources. Total 67.5 100 50.0 74.1  Page 5 2. Key policy and institutional reforms supported by the project: The project supports implementation of two reform agendas of the Government: (i) the Philippines Strategy for Sustainable Development which is focused on environmental rehabilitation and protection of vulnerable areas including the uplands and coastal areas; and (ii) the Social Reform Agenda which aims to refocus the government's poverty reduction efforts. 3. Benefits and targetpopulation: Overall expected benefits include the sustainable enhancement of the environmental, social and productive conditions in selected areas of the Philippines through interventions initially confined to Regions V, VII, VIII and XIII. These regions contain some of the poorest provinces, such as Masbate (V with a rural poverty incidence of 83.4%), Agusan del Sur (XIII, 70.8%) and Sorsogon (V, 68.3%). Project investments will focus primarily on the uplands and coastal areas, where poverty incidence is highest. For instance, fishermen and forestry workers, at 76.7% and 82.6% respectively of the rural population, are among the poorest in rural Philippines. Besides, poverty incidence in the uplands is, at 61%, considerably higher than the rural average of 54% (data from: "Philippines Rural Growth and Poverty Alleviation: The Next Steps", World Bank, 1996). Another important benefit from the project is the establishment of an MDF rural window which would serve not only the proposed project but also other future projects in low income LGUs country-wide. Similarly, the institutional capacity built bottom up in development planning and implementation would serve not only the proposed project but all future development endeavors. It should be noted that, while the project would initially focus on four regions, its coverage would be extended to other regions, based on experience gained from the regions covered in the first round. Beneficiar Targeting: The total rural population in Regions V, VII, VIII and XIII is around 1.8 million families (or over 10 million people) of which around 0.9 million families have incomes below the poverty line. The project targets initially around 120 municipalities (40% of over 300 municipalities), with a total population of more than 700, 000 people. Virtually all of the LGUs are in the poorest classes of municipalities (Class IV, V, VI). Direct beneficiaries include (a) upland farmers, (b) fishermen and (c) other rural people that would benefit from the improvement of barangay roads and other infrastructure investments. The exact number of beneficiaries depends on the specific type of intervention, but assuming that around 175-280 target farmer and fisherman families benefit per sub-project, a total of around 27,300 families or 136,500 people are served directly. Barangay roads are eligible under the project, when they service at least 300 people per km and cost no more than US$ 10,000 per km. If we assume that around 30% of the project onlending would be allocated for improving barangay roads as part of the upland and/or coastal resources subprojects, a minimum of 300,000 people will benefit. Beside these benefiting families, environmental improvements will also serve indirect beneficiaries downstream. 4. Institutional and implementation arrangements (the rationale is explained in Section D below while details are in Annex 2 and the Operational Manual): About 70 percent of the project funds would be channeled to LGUs, through the MDF, as a mix of grants and loans to finance natural resources management subprojects, generated and implemented by the LGUs and their communities. The rest of the project funds would support: (i) the financial intermediation functions of the MDF; (ii) project management by the CBRM office (CBRMO); (iii) the transfer to LGUs of natural resources management technology by DENR and DA; and (iv) planning and implementation support to LGUs by DILG and NGOs. The project would be implemented largely by LGUs, with the Department of Finance (DOF) being the lead executing agency and the financial intermediary through the MDF. For the first three years of the project when the MDF will be undergoing restructuring, with support from the Bank-supported LOGOFIND Project, the project will be managed by a new central CBRM office (with satellite regional offices) which will be absorbed by a new rural window of the restructured MDF by the end of the third year of the project. In addition to undertaking project management, the CBRM office will be responsible also for promoting, appraising and supervising subprojects. The MDF would be responsible for the disbursement of project funds, channeled through it, and accounting for these funds. An ad hoc Technical Review  Page 6 Committee (TRC), chaired by a representative of DOF and composed of representatives of national agencies that make up the MDF Policy Governing Board (plus DENR and DA), would coordinate project activities and approve subprojects for funding through the MDF. Final approval of sub-grant/loan packages would be carried out by the chairman of the MDF Policy Governing Board, on the basis of delegated authority from the Board (see Annexes 2b and 2c for a detailed description of the structure of MDF and arrangements for approving subproject loan packages). MDF will make World Bank funds available to LGUs on the basis of a mix of loans and grants. The loan component will carry existing terms and conditions of MDF lending (to LGUs), which are satisfactory to the Bank, until a new MDF lending policy has been adopted, based on recommendations of a Bank-supported study currently underway (see Annex 2b for the details of the lending terms and conditions). While the MDF would retain the responsibilities for project disbursement and consolidation of all the accounts and expenses under the project, the CBRM office would be responsible for all the other project management responsibilities including project planning and monitoring, accounting and procurement, promotion and supervision. The participating LGUs and NGAs would carry out their own procurement and accounting for the funds they receive from the project. The CBRM office, headed by a Project Manager, would report to the Undersecretary of Finance, through a Senior Official of DOF to be designated as Program Director. The Local Government Academy (LGA) of DILG would be responsible for implementing the training for LGUs under the planning and implementation component while the DENR and DA would be responsible for implementing the component for assisting the transfer of natural resources management technology to LGUs and improving the management of environmental policies. The Borrower would ensure that a financial management system would be established and maintained, including records and accounts and the preparation of financial statements, all in accordance with accounting standards acceptable to the Bank, consistently applied, adequate to reflect the project's operations and financial condition, and to register separately the operations, resources and expenditures for and in connection with the carrying out of the project. Accordingly, separate accounts would be kept by all the agencies and LGUs participating in the project in accordance with sound accounting practices. The project accounts, together with the Special Account and Statements of Expenditures (SOEs) would be audited annually by independent auditors; the audit reports would be furnished to the Bank by the MDF within 6 months after the close of the Government's fiscal year. Technical assistance would be provided to build capacity necessary to achieve the required standards of financial management (see Annex 6). Monitoring of project execution will be undertaken by the CBRM office (and by the MDF after three years when it has been absorbed by it) which will provide the Bank with semi-annual progress reports not later than August 15 and February 15 of each year, with the first one submitted by August 15, 1998; it will be responsible also for contributing to the project's Implementation Completion Report within six months after the closing date of the loan. A mid-term review of the project would be jointly undertaken by the Borrower and the Bank by December 31 , 2000. It would focus on reviewing: (i) progress in building institutional capacity to prepare, appraise and implement subprojects; (ii) evolving demand from LGUs for project funds and whether any action is required to change lending terms and eligibility criteria; (iii) implementation performance and development impact of the project based on performance indicators; and (iv) any need for adjusting project design in light of the findings of the review. D: Project Rationale 1. Project alternatives considered and reasons for rejection: First, there was consideration for designing a follow-up project to the Bank-funded CVRP with a view to applying its approach of demonstrating and introducing appropriate technology for natural resources management. Such a project had been intended to cover one or perhaps two regions in which project funds would have been transferred to the LGUs as a grant. The targeted regions would have managed and implemented the project, drawing support, if needed, from national  Page 7 technical agencies, like DENR and DA. This was rejected on the ground that project design lacked in-built mechanisms of continuing, operating and maintaining project investments, upon completion of the project. After rejecting the project design alternative of a region-centered, grant-giving project, the current project design was adopted. The key features of focusing the project on natural resources management and, through that, reducing rural poverty and degradation of natural resources were retained, as poverty and degradation of natural resources are closely related. It is necessary to tackle poverty to achieve improved natural resources management. In fact, a recent OED audit of the CVRP (Philippines: Central Visayas Regional Project, forthcoming) found that the project was able to reduce degradation of natural resources while it also raised the incomes of project beneficiaries. The proposed project has adopted also the approach of involving local communities and governments in planning and implementing subprojects in the area of natural resources management. This is in line with the government's decentralization policy and was necessary to enhance project sustainability. Another important design feature of the proposed project is that it would extend financing to LGUs in the form of a mix of loans and grants, contrary to past practices where project funds for rural development were transferred to LGUs largely as grants. The MDF, which was established in 1984 as part of DOF to channel funding to LGUs, will be used to lend project funds to LGUs and to collect loan repayments. LGUs and their communities will be required to contribute equity to the project (for details about the MDF and the financing arrangements, see Annexes 2b and 2c). The rationale for providing funds to LGUs and communities at a significant cost is the need to ensure local commitment to project investments and, consequently, to the operation and maintenance of those investments. Any concerns that the cost of project funds could reduce the interest of LGUs in the project were addressed through a demand assessment exercise which was carried out as part of project preparation. Through the demand assessment exercise, it was established that there was adequate demand among LGUs to borrow project funds on the terms and conditions that have been proposed for the project. The LGUs have submitted written expressions of interest in participating in the project, and some of them have already submitted project proposals that are being processed. Nevertheless, the cost of project funds and their affordability by LGUs cannot be fully comprehended until during implementation. As a safeguard, the project has been designed in such a way that, should the cost of the project funds become too high for LGUs, the grant content would be carefully adjusted to reduce the gap between demand and supply of project funds. There is also a safeguard on potential defaults by LGUs: in the event some LGUs fail to raise funds to voluntarily repay project loans, their revenue transfers from the central government would be intercepted to meet their loan obligations, a practice that has been used in the past. Although the proposed project is basically a rural development project, it would be managed by DOF to ensure cohesive and effective management of the various aspects of the project: DOF would combine financial intermediation with other aspects of project management. But technical support for project implementation would be provided by the national technical agencies, under the coordination of a Technical Review Committee headed by DOF (see Section C, para. 4, for details about institutional arrangements).  Page 8 2. Major relatedprojectsfinanced by the Bank and/or other development agencies (complete4 ongoing andplanned): Sector issue Project Latest Supervision (Form 590) Ratings (Bank-fnance Droects onlv) Bank-financed Implementation Development Progress (IP) Objective (DO) * introduction of appropriate technology for Central Visayas Regional S S natural resources management Project (completed, ICR rating) * capacity improvement of a key national agency Environmental Sector S S (DENR) to provide services and technical Adjustment Loan (ENR- support to local government units (LGUs) and SECAL Ln. 3360-PH) strengthening the capacity of LGUs in natural resources management * supporting the establishment of the Municipal 1st, 2nd, and 3rd Municipal S S Development Fund (MDF) as a revolving fund Development Projects (Ln. providing urban municipalities with long term 2435-PH; Ln. 3146-PH; and development fmancing and strengthening of Ln. 3455-PH) -- MDP I and local technical and financial capabilities II completed (ICR rating) X this proposed project will support the Local Government Finance Not Applicable Not Applicable restructuring of the MDF into a multi-window and Development Project financing entity and the expansion of the (LOGOFIND, FY99) operations of its urban window from high to low income LGUs and to supporting environmental and social investments. IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)  Page 9 3. Lessons learned and reflected in the project design: The success of the three Municipal Development Projects (MDPs) in developing the MDF to support decentralized development financing of urban municipalities has been a source of motivation for the proposed project to support the opening of a rural window for financing the development initiatives of rural municipalities. While the MDPs have provided the framework for decentralized financing, the CVRP has provided valuable lessons for the transfer of appropriate technology for managing natural resources and for mobilising communities in planning and implementing natural resource management projects. A performance audit of CVRP by OED (draft March 24, 1997) concluded that the main lessons learned from it were that improving natural resources management is as much an institutional as a technical problem and that this must involve a dynamic process of change and development. The prerequisites identified were: (a) appropriate technologies; (b) an appropriate policy and legal framework; (c) adequate local decision making powers; and (d) beneficiaries must acquire the ability to operate within this framework by receiving, from the project, the required managerial and technical skills. Project design incorporates these lessons through: (i) decentralization of project planning, financing and implementation; (ii) the provision for explicit mechanisms of transfering technology and skills; and (iii) support for an appropriate legal and policy framework particularly for enhancing access of the rural people to land tenure and security. Another lesson from the CVRP which has influenced project design is the need to ensure funding to sustain project investments. This has been incorporated in the project by: (i) requiring from LGUs and beneficiary communities significant contributions of equity to project financing; and (ii) passing on funds to LGUs in the form of a mix of loans and grants as opposed to pure grants. 4. Indications of borrower commitment and ownership: The proposed project constitutes one of the means to achieve the GOP's twin goals of sustainable development and poverty alleviation. It fits into the Philippine Strategy for Sustainable Development and the Social Reform Agenda adopted to address environmental protection and rehabilitation concerns and to focus on poverty reduction efforts. The GOP has strong ownership of the project as indicated by: (a) a commitment to establish a rural MDF window for financing LGUs; (b) preparation of an operational manual setting out detailed criteria, procedures and conditions for LGUs' participation; (c) stated intentions of using the project as a pilot and model for future rural development projects; (d) submission of written requests from LGUs to participate in the project; and (e) development of a pipeline of subprojects before the project is appraised. S. Value added of Bank support in this project: Bank's involvement in the project has been guided by two principles: (a) comparative advantage; and (b) partnership with Government and other donors. The Bank has considerable experience in the Philippines in supporting community-based resource management projects, building on past projects. Similarly, it has accumulated experience in providing resources to LGUs in urban areas, through the MDF. It will build on the experience of supporting urban LGUs, through the MDF, to extend support to rural areas. E: Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (supported by Annex 4): Cost-Benefit Analysis: NPV=US$ 45.6 million; ERR= 28% Economic returns will result from the LGU subprojects. As these are demand driven and evolving over time, it is difficult to predict the exact rates of return at this stage. Besides, many of the benefits are intangible, stemming from long term environmental improvements in and outside the project areas, implying that rates of returns are necessarily conservative. The Econornic Rates of Return (ERR) for possible CBRM packages are based on farm models (see Project Files). The overall ERR for the project is estimated at 28%. Coastal subpackages have an estimated ERR of 23% and upland packages an ERR of 33%. The rates of return include expenses for community organizers and training as well as the overhead from supporting components (around 80% of the other components' total project costs). This was  Page 10 calculated on the basis of representative packages for the uplands (including microwatershed, agroforestry and tree plantation) and the coastal area (mangrove rehabilitation, marine sanctuaries, artificial reefs, etc.). The packages also include livelihood support through poultry and cattle production, mussel culture, miracle holes, etc. as well as small scale infrastructure (barangay roads and potable water supply systems) when undertaken as part of natural resources management. Sensitivity analysis: The estimated rate of return is relatively robust. The switching value (14%) is arrived at with a combined decrease in benefits and increase of investment costs of 25% (see Annex 4 for analysis). 2. Financial (see Annex 5): NPV= Not Applicable; FRR= 11-73 % (where defined for individual farm models) The overall financial rate of return (FRR) of the project's natural resources and income generation activities has been estimated at 11 to 73%, where defined. Analysis shows that the Net Incremental Income is high compared to Investment and Incremental Recurrent Costs (see Annex 4 for detailed analysis). Poor upland farmers and coastal fishermen are the prime beneficiaries of the project interventions. For instance, a fanner targeted for micro-watershed development could see his income more than double. Besides net income, the farmers and fishermen would benefit through improved training, better organization and greater linkages with the outside world. In all cases, except artificial reefs, the financial indicators are satisfactory. Artificial reefs, if selected have other benefits, such as creation of social group formation, that would also help the mangrove replantation and fish sanctuaries, and could therefore be acceptable, as long as measures are taken to combat overfishing. Fiscal impact: Under the Project, LGUs apply for sub-project funding through the MDF. The fiscal impact on the LGUs depend crucially on: (i) the grant/loan/equity mix; and (ii) the financing terms (duration, grace period, interest rate). Debt-service calculations, shown in Annex 4, suggest that the financial consequences for sub-projects can well be borne by the LGUs given their development fund allocations and given the other means that LGUs have of raising revenue and servicing the debt. Loan repayments by LGUs will be enhanced through at least three measures. First, building on the experiences gained through three Bank-funded MDP projects (which supported the development of the MDF), the Bureau of Local Government Finance (BLGF) has acquired adequate competence in assessing and judging the creditworthiness of LGUs. That competence would be applied by BLGF to weed out LGUs that are not creditworthy for borrowing from the proposed project. Second, a very tight appraisal criteria has been developed for selection of subprojects; this criteria would be applied by a cadre of staff to be hired from the ranks of those that have acquired experience from past projects. And third, in the event that some LGUs do not repay their loans on time, their IRA allocations (development budget allocations from the central government) would be intercepted, as has happened in the past, to meet those loan obligations. 3. Technical: The project is technically sound, given that: * the basic constraints to improved natural resources management and the current living conditions of the rural poor have been adequately diagnosed and widely recognized; and innovative and viable operational mechanisms have been selected to address the identified constraints; * proven packages of appropriate technologies are readily available to project beneficiaries; and * support services from appropriate agencies have been identified and will be further strengthened. The compliance of individual beneficiary subprojects with adequate technical and operational standards would be ensured by a combination of factors, including technical support in identification, preparation and implementation of  Page 1 1 proposals as well as the establishment of a comprehensive monitoring and evaluation system, based on physical and technical audit of a representative sample of approved subprojects. 4. Institutional: a. Executing agencies: Department of Finance (DOF) b. Project management: For the first three years, the project will be managed by a central CBRMO, with satellite offices in the regions, and implemented by LGUs. It will be coordinated by an ad hoc Technical Review Committee (TRC), that would report to the MDF Policy Governing Board. After three years, the project's management and coordination functions would be taken over by a restructured MDF whose restructuring is being supported under the Bank's LOGOFIND Project. CBRMO would then be incorporated into the restructured MDF. Project implementation would remain in the hands of the LGUs. The institutional arrangements underpinning the project are sound. Project design includes built-in mechanisms to ensure effective project management, coordination, implementation and sustainability. First, to ensure effective project management and the delivery of financial services to rural LGUs, the project supports the opening of a rural window of the MDF (with interim central and satellite CBRM offices), with local branches to bring services closer to the communities. Second, to ensure effective coordination of the national agencies involved in the project, an ad hoc Technical Review Committee (TRC) would be established to coordinate the project activities of these agencies and to operate as a clearing house for inter-agency problems. Third, to ensure that LGUs have the required technical know-how to implement the project, the project provides for a technical back-up from NGAs, particularly from DENR and DA. Fourth, to ensure ownership of the project by the LGUs and their communities, the project provides for LGUs to generate, plan and implement the subprojects as well as contribute significantly to their financing. Fifth, the project invests heavily in building the capacities of LGUs, through training and TA, in development planning and implementation to ensure institutional sustainability. TA and training will also be made available to strengthen LGUs in carrying out project procurement and accounting as they are particularly weak in carrying out these functions. Sixth, to ensure that communities develop the confidence for long term investment in sustainable management of natural resources, the project provides support to surveying and mapping plus other activities necessary for the provision of land tenure access and security, and supports institutional mechanisms of resolving claims of use rights over natural resources. 5. Social: The project targets the LGUs in the poorest classes of municipalities (Class IV, V, VI). The benefits will be distributed to all members of the households but the project will have a greater impact on women. It is widely accepted that the weight of poverty falls heavily on women; in poor households they often shoulder more of the workload than men, are less educated, and have less access to remunerative activities. The earlier CVRP project had demonstrated the increased access to resources for women This project will ensure that this access continues and will take additional steps to widen the scope of resources. Due to the demand-driven nature of the project and the planning at the barangay and/or sub-barangay level, beneficiaries are expected to be fully involved in taking charge of the development of their own community. The COs will also help to ensure that the voice of all groups will be represented in the community plans. Information from the social and economic profiles as well as gender analysis obtained for each participating community at the beginning of the sub-project will be used to help communities plan their projects so that all will benefit and no one group will be unfairly burdened. Extra attention in planning and implementation will be provided to communities with indigenous groups as set forth in the Guidelines contained in the Manual of Operations. The government department for indigenous affairs and the Office of the Southern Cultural Communities will be consulted and all efforts will be made to recruit and train COs from the same cultural groupings.  Page 12 It is not anticipated but should it occur, land acquisition, demolition of structures and displacement of persons would be kept to a minimum. Sub-project proposals that would require demolishing houses or acquiring productive land would be carefully reviewed and their adverse impacts minimized through alternative designs and/or alignments. Proposals that require more than minor expansion along rights of way would be reviewed carefully and the affected persons appropriately compensated according to the guidelines for compensation and/or asset acquisition incorporated in the Manual of Operations and a resettlement plan (where necessary) approved by the Bank. The guidelines conform to the requirement of OD 4.30 on Resettlement. 6. Environmental assessment: Environmental Category [I A [X] B [IC The project is expected to yield major positive and direct environmental benefits, particularly in: (a) improved management of upland and forestry resources indicated by a reduction in deforestation, increased vegetation cover and reduced soil erosion; (b) improved coastal and nearshore fisheries resources indicated by an expansion in mangroves and a reversal of the decline in catches of fisheries; and (c) improved infrastructure in support of management of upland, coastal and nearshore natural resources as indicated by improvements in rural roads, water supply and sanitation facilities, small irrigation systems and other small scale infrastructure. The project is also expected to create awareness while at the same time educating beneficiaries on the proper management of natural resources which would benefit the environment as well as provide a sustainable source of income. The environmental guidelines that would guide the screening of subprojects would be incorporated into the Manual of Operations which would be reviewed and cleared by the Bank prior to loan effectiveness. Incentives are built into the eligibility criteria for subprojects: beneficiaries will get a larger share of grant funding if their proposals contain more social and environmental activities. These principles are all clearly specified in the Manual of Operations. GOP has national and provincial legislation which apply to the project areas and provides adequate environmental safeguards which meet Bank requirements. 7. Participatory approach: Primary beneficiaries and other affected groups: The project framework is to promote community-based planning, implementation and management of natural resource subprojects which would have both short and long term gains. The emphasis at the beneficiary level, therefore, is to develop strong community action which would realize these gains. Community organizing for CBRM deals with the social preparation and community organizing processes which are necessary as soon as project requests from municipalities are provided with the green light to develop detailed project proposals. COs, who will be provided by municipalities, will be trained by the project to work with communities to identify their needs, priorities, strengths, opportunities and resources to prepare and implement viable subprojects. The communities are linked to municipalities through barangays which are the lowest administrative units of govemment. Community development plans, prepared with the assistance of COs, would be reviewed and endorsed by barangay councils; thereafter, they would be built into municipality plans and projects and then considered for financing under the project. The COs will be fully engaged in data collection and conduct of social profiles of the community, gender analysis, facilitation of participation and collective action, leadership identification and training, group formation and/or strengthening, and monitoring of project activities. The pool of COs would be drawn from existing (and qualified) municipal staff or hired by the municipalities from local NGOs. F: Sustainability and Risks 1. Sustainability: Project sustainability would be enhanced by at least three actions. First, as the LGUs would be borrowing funds to implement their projects and since they and the communities would be contributing equity to the subprojects, their sense of ownership is expected to be strong, thereby enhancing the chances of maintaining and sustaining the investments. This  Page 13 sense of ownership and commitment is further strengthened by the fact that the subprojects will be generated, planned and implemented by the beneficiary LGUs and communities. Second, the project would support the development of institutional and human resource capacity that would continue project operations after the project is completed. Third, project implementation will involve line agencies which should support the project operations once the project is completed.  Page 14 2. Critical Risks (reflecting assumptions in thefourth column of Annex 1): Risk Risk Rating Risk Minimization Measure From Outputs to Objective Major changes in weather that can affect the M Project support for improved natural sustainability of upland and coastal investments resources management increases the resilience of natural resource investments against adverse weather changes thereby enhancing agricultural and coastal productivity and reducing environmental degradation. Lack of LGU and beneficiary commitment to O&M M Financing from the MDF is conditioned on provision of equity by LGUs (and their communities) which increases their commitment to O&M. From Comnonents to Outputs Inadequate demand from LGUs for sub-loans for M Preliminary demand assessment was financing non-revenue generating subprojects made as part of project preparation, and sub-loan terms were refined to reflect this demand. In addition, LGUs submitted written expressions of interest to borrow project funds. As a safeguard, there is a commitment to further adjust the grant content of the financing package during project implementation if demand is found inadequate. Inadequate and untimely provision of counterpart funds M Project funding is already included in for the project FY98 national budget while funding from the MDF to LGUs is conditioned on up-front equity contribution from the LGUs. Changes in LGUs, related to changes in elected M Project supports capacity building at officials, every three years could reduce the capacity of LGU and community level, with TA and LGUs to implement the project training, to enhance institutional sustainability Overall Risk Rating M Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk) 3. Possible Controversial Aspects: Some LGUs might not like the idea of borrowing funds to finance non-revenue generating projects, like natural resources management subprojects, being proposed for support under the proposed project.  Page 15 G: Main Loan Conditions 1. Effectiveness Conditions: * establishment of the ad hoc TRC and CBRM Office, and designation of the Project Manager, Procurement Specialist and Project Accountant for the latter whose qualifications and experience are satisfactory to the Bank; * Execution of Memoranda of Agreement between DOF and participating national government agencies (DENR, DA and DILG) which shall include the work plan for 1998; and * adoption by TRC of a Manual of Operations that is acceptable to the Bank. 2. Other Conditions: * the MDF would approve only those subprojects that meet the eligibility criteria contained in the Manual of Operations that is satisfactory to the Bank; * no change would be made to the Manual of Operations without the Bank's approval; * an annual work plan for a training program, to be canied out by DILG and any other government agencies, would be provided to the Bank for its review by September 30 of each year beginning 1998; upon receiving and incorporating the comments from the Bank, the Borrower would implement the plan during January to December of the following year; * an annual work plan for implementing environmental technology activities by DENR and DA would be provided to the Bank for its review by September 30 of each year beginning 1998; upon receiving and incorporating the comments from the Bank, the Borrower would implement the plan during January to December of the following year; - audit reports of project accounts, the Special Account and Statements of Expenditures (SOEs) would be furnished to the Bank not later than six months after the close of the government's fiscal year; * submission of semi-annual progress reports (by February 15 and August 15 of each year, with the first one submitted by August 15, 1998) and necessary documentation for the mid-term review (December 31, 2000), the implementation completion report and the monitoring of implementation and development impact in accordance with key indicators agreed with the Bank;