Philippines - From crisis to opportunity : country assistance review

W O R L D B A N K O P E R A T I O N S E V A L U A T I O N D E P A R T M E N T 19032 Philippines: From Crisis to Opportunity C O U N T R Y A S S I S TA N C E R E V I E W ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank LWUA Local Water Utilities Administration BOT Build-Operate-Transfer MIGA Multilateral Investment Guarantee Agency BSP Bangko Sentral ng Pilipina MWSS Metropolitan Waterworks and Sewerage CAS Country Assistance Strategy System CAR Country Assistance Review NGO Nongovernmental Organization CG Consultative Group NHMFC National Housing Mortgage Finance CODE Committee on Development Effectiveness Corporation DML Debt Management Loan NPC National Power Corporation EAP East Asia and Pacific OECF Overseas Economic Cooperation Fund EIL Economic Integration Loan O&M Operations and Maintenance ERL Economic Recovery Loan OED Operations Evaluation Department ESW Economic and Sector Work PER Public Expenditure Review FDI Foreign Direct Investment PFP Policy Framework Paper FIAS Foreign Investment Advisory Service PHRD Policy and Human Resources Development FSAL Financial Sector Adjustment Loan Fund FY Fiscal Year PIDS Philippine Institute of Development Studies GDP Gross Domestic Product QAG Quality Assistance Group GNP Gross National Product RGCL Reform of Government Corporations Loan GOCC Government-Owned and Controlled SME Small and Medium-Size Enterprise Corporations SRA Social Reform Agenda IFC International Finance Corporation TA Technical Assistance IFIs International Financial Institutions VAT Value-Added Tax IMF International Monetary Fund WID Women in Development LGU Local Government Unit WTO World Trade Organization W O R L D B A N K O P E R A T I O N S E V A L U A T I O N D E P A R T M E N T Philippines: From Crisis to Opportunity C O U N T R Y A S S I S TA N C E R E V I E W Gianni Zanini 1999 The World Bank Washington, D.C. Copyright © 1999 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing February 1999 The opinions expressed in this report do not necessarily represent the views of the World Bank or its member governments. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility whatsoever for any consequence of their use. The boundaries, colors, denominations, and other information shown on any map in this volume do not imply on the part of the World Bank Group any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries. The material in this publication is copyrighted. The World Bank encourages dissemination of its work and will normally grant permission promptly. 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Design: The Magazine Group/Jeff Kibler Photo credits: Shepard Sherbell: cover World Bank Photo Library: p. 2, p. 5, p. 28 Edwin Huffman: p. 18, p. 25 ISBN 0-8213-4294-0 Library of Congress Cataloging-in-Publication Data Zanini, Gianni, 1954– Philippines, from crisis to opportunity / [prepared by Gianni Zanini]. p. cm. — (Operations evaluation studies) At head of title: World Bank Operations Evaluation Department. Country assistance review. ISBN 0-8213-4294-0 1. Philippines—Economic policy. 2. Philippines—Economic conditions—1986 3. World Bank— Philippines. 4. Economic assistance—Philippines. I. World Bank. Operations Evaluation Dept. II. Title. III. Series: World Bank operations evaluation study. HC453.Z36 1999 338.9599—dc21 99-12535 CIP Printed on recycled paper.  Contents v Acknowledgments vii Foreword, Prefacio, Préface ix Executive Summary, Resumen, Résumé Analytique 1 1. A Tumultuous Development Decade 1 From Crisis to Peaceful Revolution 2 A Vigorous Beginning 3 Facing the Political Consequences of Reform 4 Policy Weaknesses and Exogenous Shocks 4 Consolidation and Revival of the Reforms 5 A Solid Basis for Continuing Reform 8 Targeted Poverty Alleviation 9 Weathering the Storm of the Asian Crisis 10 The Prospect Ahead 11 2. Assistance Strategy: Satisfactory, but Uneven and Below Potential 12 From Economic Recovery to Poverty Alleviation 12 Away from the Stop-Go Syndrome 13 Nurturing the Reforms for Public Sector Management and Private Sector Development 16 The Bank and OED Warned about Macroeconomic Weaknesses 17 Sectoral Assistance: An Uneven Performance 22 Instruments and Partnership 27 3. Toward a New Assistance Strategy: Moving to a Higher Plane 28 Strengthening Macroeconomic Policy and Public Sector Management 29 Supporting Private Sector Development and Basic Infrastructure 30 Boosting Rural Development and Poverty Reduction 31 Revisiting Human Development 31 Mobilizing Partnerships 33 Endnotes 35 Bibliography Boxes 9 1.1 Overshooting on the Way Up and on the Way Down 13 2.1 Experiences of FIAS and MIGA 14 2.2 IFC’s Roles and Strategies for Private Sector Development 17 2.3 Microcredit Lessons by the Asian Development Bank 23 2.4 Improved Quality at Entry of Bank Projects iii Philippines: From Crisis to Oppor tunity Figures 6 1.1 Rewarding Progress Since 1985: The Economy Has Recovered 7 1.2 Slow Progress Since 1985: Neighbors Made More Headway 22 2.1 Comparative OED Evaluation Findings by Fiscal Year of Approval 23 2.2 Ongoing Projects: Supervision Ratings Annex A 39 Table A.1: The Philippines at a Glance 42 Table A.2: Summary of Project Information: The Philippines 43 Table A.3: Completed and Evaluated Projects 47 Table A.4: Ongoing and Recently Completed Projects 48 Table A.5: List of Economic and Sector Work 49 Table A.6: Bank Senior Management Responsible for Philippines Since 1985 Annex B 50 The Philippines: From Crisis to Opportunity/Management Response Annex C 54 Report from CODE/Committee on Development Effectiveness iv Acknowledgments This Country Assistance Review benefited from com- Rodriguez (decentralization and SMEs), and Zia ments provided by Bangko Sentral ng Pilipina (BSP). Choudhri (PBDDR). Their kind cooperation and valuable assistance are Ponciano Intal (PIDS, Manila); Deena Khatkhate gratefully acknowledged. (Bank consultant); Donald Mathieson (IMF); Luis Lan- This report was prepared by Gianni Zanini (Task dau, Nicolas Mathieu, and Luis Ramirez (OEDCR) Manager). Major contributors and members of the mis- offered valuable comments on an early draft. Jacqueline sion included Per Bastoe (poverty, health, and educa- Jackson provided administrative assistance. tion, on secondment from the Norwegian government), This report was produced as part of OEDPK’s Yuen Loh Yee (agriculture and natural resource man- publication series by a team under the direction of agement, on secondment from the Asian Development Elizabeth Campbell-Pagé, consisting of Leo Demesmaker, Bank), Sonomi Tanaka (aid coordination, NGO partici- Caroline McEuen, Kathy Strauss, and Tsige Kagombe. pation, and gender issues), and Julius Gwyer (portfolio The design was by The Magazine Group. management, statistical annex, and general research assistance). Desk contributions were provided by Raj Director-General, Operations Evaluation Department: Robert Picciotto Chhikkara (financial sector), Gary Wells (quality at Director, Operations Evaluation Department: Elizabeth McAllister entry), Art Bruestle (water supply and sanitation), Jan Acting Manager, Country Evaluations De Weille (transport), David Greene (energy, health, and and Regional Relations: René Vandendries education projects), Ron Parker (environment), Edgard Task Manager: Gianni Zanini v  Foreword FOREWORD PREFACIO PRÉFACE FRANCAIS E S P A N O L E N G L I S H Country Assistance Reviews Los exámenes de la asistencia a Les Études sur l’assistance-pays (CARs) are evaluations that los países son evaluaciones que sont des évaluations dont l’unité take the country as the unit toman como unidad el país y se de compte est le pays. Ces études of account and concentrate concentran en la pertinencia, la servent essentiellement à mesurer on the relevance, efficacy, and eficacia y la eficiencia del la validité, l’efficacité et efficiency of the Bank’s over- programa de asistencia general l’efficience de l’ensemble du all program of assistance, as well del Banco, así como en su programme d’assistance de la Banque, as its sustainability and its impact sostenibilidad y sus efectos en el ainsi que sa viabilité et son impact sur on institutional development.1 desarrollo institucional.1 En el presente le renforcement institutionnel.1 This CAR examines World Bank examen de la asistencia a un país se La présente Étude examine l’aide assistance to the Philippines since analiza la asistencia que el Banco fournie par la Banque mondiale aux 1986, a turning point in the eco- Mundial ha prestado a Filipinas desde Philippines depuis 1986, année qui a nomic and social policy landscape 1986, año en que se produjeron marqué un tournant dans l’évolution of that country. The CAR is selec- cambios decisivos en el panorama de la de la politique économique et sociale tive as to time span, instruments, política económica y social de ese país. du pays. Elle porte sur une période, sectors, and issues covered. The El examen es selectivo por lo que se des instruments, des secteurs et des focus is on issues that remain rele- refiere al período, los instrumentos, los sujets bien précis, l’accent étant mis sur vant today for government and sectores y las cuestiones que abarca y les problèmes qui continuent de se Bank decisionmakers. se centra en aspectos que siguen siendo poser au gouvernement et aux The CAR is composed of this pertinentes hoy para los responsables décideurs de la Banque. Overview volume, which summa- de la adopción de decisiones del L’Étude se compose de la présente rizes the evidence and presents the Gobierno y del Banco. Vue d’ensemble, qui récapitule les faits key messages and recommenda- El examen de la asistencia al país et expose les principales conclusions et tions, and a Main Report, which está compuesto por el presente recommandations, ainsi que d’un provides supporting analyses, and Panorama general, en el que se Rapport principal contenant des is available from OED upon resumen los hechos y se presentan las analyses explicatives, qui peut être request. ideas y las recomendaciones obtenu sur demande auprès du The overview synthesizes OED fundamentales, y un informe principal Département de l’évaluation des and Bank reports, including Perfor- en el que figuran análisis de base y que opérations (OED). mance Audit and Implementation está a disposición de los interesados en Cette vue d’ensemble décrit Completion Reports, Country el Departamento de Evaluación de brièvement les rapports de l’OED et de Assistance Program/Strategy Operaciones. la Banque, y compris les Rapports Papers, Country Briefs, Country En el Panorama general se d’évaluation rétrospective et les Economic Memoranda, sector resumen los informes del Rapports de fin d’exécution, les reports, Country Risk Assessments, Departamento de Evaluación de Programmes d’assistance au pays et les management briefs for the Annual Operaciones y del Banco, incluidos los Documents de stratégie, les Fiches- Meetings and high-level field visits, informes de evaluación ex post y de pays, les Mémorandums économiques, and project and general country ejecución de los proyectos, los les rapports sectoriels, les Évaluations files. The overview is also based on documentos de estrategia y de du risque-pays, les Notes de gestion interviews with current and past programas de asistencia, las sinopsis préparées en vue des Assemblées Filipino officials, including those at sobre el país, los memorandos annuelles et des missions de haut the secretary level; academics and económicos, los informes sectoriales, niveau dans le pays, ainsi que les private sector representatives; for- las evaluaciones de riesgos, las sinopsis dossiers sur les projets et sur le pays en eign donor representatives; and sobre la gestión para las reuniones général. Elle se fonde également sur les Bank, International Finance Corpo- anuales y para las visitas de alto nivel entretiens qui ont eu lieu entre avril et ration (IFC), and International al país y la documentación general décembre 1997 avec des responsables Monetary Fund (IMF) staff, con- sobre el proyecto y sobre el país. El du gouvernement actuel et des ducted between April and Decem- Panorama general también se basa en gouvernements précédents, vii Philippines: From Crisis to Oppor tunity ber 1997. The Bank Resident las entrevistas que entre abril y dont certains ministres, des FRANCAIS E S P A N O L E N G L I S H Mission provided excellent diciembre de 1997 se représentants des milieux facilities and staff assistance mantuvieron con funcionarios universitaires et du secteur privé, for logistics and substantive filipinos en activo y con sus des représentants des bailleurs de issues during the CAR mis- predecesores, incluidos fonds étrangers, ainsi que des sion in June 1997, including funcionarios con nivel de membres du personnel de la two roundtable discussions secretario; representantes de Banque, de la Société financière with Filipino officials involved in medios académicos y del sector internationale (SFI) et du Fonds decentralization issues and NGO privado; representantes de los donantes monétaire international (FMI). La representatives. extranjeros, y personal del Banco, de la Mission résidente de la Banque aux Corporación Financiera Internacional Philippines a mis des installations 1. The first CARs published in the (CFI) y del Fondo Monetario d’excellente qualité à la disposition de series are for Ghana (1995), Zambia Internacional (FMI). La Misión l’équipe de l’Étude lors de sa mission (1996), Argentina (1996), Morocco Residente del Banco facilitó unas de juin 1997 et lui a fourni un appui (1997), Poland (1997), Côte d’Ivoire instalaciones y una asistencia de logistique et une aide sur les questions (1997), and Mozambique (1997). personal excelentes para cuestiones de fonds, notamment en organisant logísticas y sustantivas durante la deux tables rondes avec des misión del examen de la asistencia al responsables philippins s’occupant des país de junio de 1997, incluidos dos questions de décentralisation et de debates de mesa redonda con représentation des ONG. funcionarios filipinos dedicados a cuestiones de descentralización y con 1. Les premières Études publiées dans representantes de organizaciones no cette série portaient sur les pays suiv- gubernamentales. ants: Ghana (1995), Zambie (1996), Argentine (1996), Maroc (1997), 1. Los primeros exámenes de la asisten- Pologne (1997), Côte-d’ivoire (1997), cia a los países publicados en esta serie et Mozambique (1997). son los correspondientes a Ghana (1995), Zambia (1996), Argentina (1996), Marruecos (1997), Polonia (1997), Côte d’Ivoire (1997), y Mozambique (1997). Robert Picciotto Director-General, Operations Evaluation Department viii  Executive Summary EXECUTIVE SUMMARY RESUMEN RÉSUMÉ ANALYTIQUE FRANCAIS E S P A N O L E N G L I S H This Country Assistance El presente examen de la La présente analyse est la Review (CAR) is the eighth asistencia a un país es el octavo huitième d’une nouvelle série of the new country-focused de los nuevos estudios centrados d’études destinées à évaluer la studies that evaluate the rele- en países cuyo objeto es evaluar validité, l’efficacité et l’efficience vance, efficacy, and efficiency la pertinencia, eficacia y de l’ensemble de l’aide fournie of the Bank’s overall program eficiencia del programa general par la Banque à un pays donné, of assistance, as well as its sustain- de asistencia del Banco, así como su ainsi que la viabilité de ce programme ability and impact on institutional sostenibilidad y sus efectos en el d’aide et son impact sur le development. The objectives are to desarrollo institucional. Los objetivos renforcement institutionnel. Ces études establish accountability, derive del examen son determinar ont pour but de renforcer la prise de lessons of experience, and provide responsabilidades, aprender de la responsabilités, de tirer les leçons de ce recommendations for action. After experiencia adquirida y hacer qui a déjà été fait et de formuler des discussion with the government, a recomendaciones para la acción. Un recommandations. Une fois qu’il aura revised report will be distributed informe revisado se distribuirá sin été examiné par le gouvernement, ce without restriction. This CAR con- restricciones después de las rapport sera révisé et fera l’objet d’une centrates on Bank assistance since deliberaciones con el Gobierno. El large diffusion. La présente Étude 1986, which marks the turning presente examen se concentra en la analyse l’aide fournie par la Banque point in the country’s economic asistencia prestada por el Banco a aux Philippines depuis 1986, année and social policy frameworks. partir de 1986, año en que se qui a marqué un tournant dans Since 1986 the Aquino and produjeron cambios decisivos en el l’évolution de la politique économique Ramos administrations have marco de la política económica y social et sociale du pays. secured many of the conditions that del país. C’est à partir de cette date que les have characterized the development Desde ese año, los gobiernos de gouvernements Aquino et Ramos ont path trod by the East Asian miracle Aquino y Ramos han establecido mis en place un grand nombre des economies—macroeconomic stabil- muchas de las condiciones conditions qui ont caractérisé le ity and flexibility, absence of major características del camino hacia el développement miracle des économies price distortions, an educated work desarrollo que han seguido las est-asiatiques—souplesse et stabilité force, and export orientation. The economías del milagro de Asia macroéconomique, distorsions limitées Philippines can today boast of more oriental—flexibilidad y estabilidad des prix, main-d’œuvre instruite, openness to foreign investment, less macroeconómica, ausencia de grandes orientation vers l’exportation. Les government involvement in the cor- distorsiones de los precios, una Philippines peuvent aujourd’hui se porate sector, and a stronger bank- población activa instruida y una targuer d’être plus ouvertes aux ing system. economía orientada hacia la investissements étrangers, d’avoir Despite the political turmoil, exportación. Actualmente puede réduit le rôle de l’État dans le secteur natural calamities, and external afirmarse que en Filipinas hay más des entreprises et d’avoir renforcé leur shocks that beset the country until apertura a la inversión extranjera, système bancaire. the early 1990s, the incidence and menos intervención estatal en el sector En dépit des troubles politiques, intensity of poverty have been sub- empresarial y un sistema bancario más des catastrophes naturelles et des stantially reduced since 1985. The sólido. chocs extérieurs qu’a connus le pays share of the population living A pesar de los trastornos políticos, depuis le début des années 90, la below the international poverty las catástrofes naturales y las prévalence et l’intensité de la pauvreté line dropped by 7 percentage conmociones debidas a causas externas ont sensiblement diminué depuis 1985. points, to below 26 percent. The que afectaron al país hasta comienzos Le pourcentage de la population key indicators of health and educa- del decenio de 1990, la incidencia y la vivant en-dessous du seuil tion point to substantial progress. intensidad de la pobreza han international de pauvreté a baissé de In education and gender equity, the disminuido sustancialmente desde 7 points et est maintenant inférieur à Philippines is ahead of most neigh- 1985. El porcentaje de población que 26%. Les indicateurs clés en matière boring countries. Gross national vive por debajo del umbral de santé et d’éducation témoignent des ix Philippines: From Crisis to Oppor tunity product (GNP) per capita internacional de pobreza se ha progrès substantiels qui ont été FRANCAIS E S P A N O L E N G L I S H more than doubled, to reducido siete puntos accomplis. En ce qui concerne US$1,190 in 1996. Although porcentuales y es ahora inferior l’équité dans le domaine de la modest compared with the al 26%. Los indicadores parité hommes-femmes ou de East Asian tigers, gross fundamentales de salud y l’éducation, les Philippines sont domestic product (GDP) educación señalan progresos en avance sur la plupart de leurs growth since the early 1990s considerables. En cuestiones de voisins. Le produit national brut reached above 5 percent in 1996 educación y de igualdad entre los (PNB) par habitant a plus que doublé and again in 1997, despite the fall- géneros, Filipinas es un país más pour atteindre 1 190 dollars en 1996. out from the Asian financial crisis. avanzado que la mayoría de sus Bien que modeste au regard de celle Price and exchange rate stability vecinos. El producto nacional bruto des tigres est-asiatiques, la croissance have been accompanied by rising (PNB) ha registrado un crecimiento du produit intérieur brut (PIB) a money demand, reflecting financial superior al doble de su valor anterior y dépassé les 5%, une première fois en deepening. The engine for eco- en 1996 alcanzó los US$1.190. Si bien 1996, puis de nouveau en 1997, et ce, nomic growth has been private modesto en comparación con el de los malgré les retombées de la crise investment, which increased by 6 tigres del Asia oriental, el crecimiento financière en Asie. La stabilité des prix percentage points to above 20 per- del producto interno bruto (PIB) desde et des taux de change s’est cent of GDP. According to business principios del decenio de 1990 fue accompagnée d’une demande surveys, today’s institutional envi- superior al 5% en 1996 y también en croissante de monnaie, laquelle ronment in the Philippines com- 1997, a pesar de los efectos negativos témoigne de la diversification des pares favorably with that of other de la crisis financiera de Asia. A la circuits financiers. Le moteur de la middle-income countries. estabilidad de los precios y de los tipos croissance économique reste These positive features not- de cambio se ha unido una demanda l’investissement privé, qui a gagné withstanding, judged by some criti- monetaria creciente, lo que indica que 6 points pour représenter plus de 20% cal factors for economic and social se ha producido una intensificación du PIB. D’après des enquêtes réalisées development, the Philippines still financiera. El motor del crecimiento auprès de chefs d’entreprise, fares below the norm for the East económico ha sido la inversión l’environnement institutionnel Asia region: the country has lower privada, que ha aumentado seis puntos philippin soutient aujourd’hui national savings and investment, porcentuales hasta alcanzar un valor favorablement la comparaison avec higher import duties, more rapid superior al 20% del PIB. Según las celui d’autres pays à revenu population growth, inadequate encuestas de coyuntura, el entorno intermédiaire. infrastructure, an inefficient institucional actual de Filipinas es Malgré ces progrès, les Philippines bureaucracy and judicial system, mejor que el de otros países de ingreso se situent encore en-deçà de la norme widespread corruption, and general mediano. en Asie de l’Est, si on en juge par insecurity. Some social develop- Pese a esos aspectos positivos, si el certains facteurs d’une importance ment indicators such as incidence país se evalúa sobre la base de otros critique pour le développement of communicable diseases and factores fundamentales para el socio-économique: ainsi, les taux access by the poor to educational desarrollo económico y social, sus d’épargne et d’investissement intérieurs services have regressed in recent resultados siguen siendo inferiores a la sont plus faibles que dans l’ensemble years. norma en la región de Asia oriental: el de la région, et les droits sur les On the whole, however, the volumen de ahorro y de inversión importations, plus élevés; la croissance country’s strengths outweigh its nacional es menor, los aranceles son démographique est plus forte; les fragile elements. Despite the finan- más altos, el crecimiento de la équipements d’infrastructure sont cial turmoil that has engulfed the población es mayor, la infraestructura inadéquats; la fonction publique et le region, the economy is showing es inadecuada, el funcionariado y el système judiciaire sont inefficaces; la more resilience and maintaining sistema judicial son ineficientes, la corruption est répandue; et il règne un momentum more effectively than corrupción está muy extendida y la climat général d’insécurité. Certains its neighbors. The government is inseguridad es un mal generalizado. En indicateurs du développement social, committed to completing and deep- los últimos años se han producido comme l’incidence des maladies x  Executive Summary ening the reform agenda. regresiones en algunos transmissibles et l’accès des FRANCAIS E S P A N O L E N G L I S H During the past dozen indicadores del desarrollo social, pauvres aux services d’éducation, years, the Bank assistance como la incidencia de las ont même régressé ces dernières strategy has moved from eco- enfermedades transmisibles y el années. nomic recovery to poverty acceso de las personas pobres a Dans l’ensemble, les atouts alleviation, in line with gov- los servicios de educación. l’emportent toutefois sur les ernment and Bank priorities. No obstante, en conjunto, handicaps. Malgré la tourmente But this shift started only in the los aspectos positivos superan las financière qui s’est abattue sur la mid-1990s with new operations in deficiencias del país. A pesar de los région, l’économie philippine se révèle support of elementary education trastornos financieros que ha sufrido la davantage capable de résister et de and agrarian reform. Bank assis- región, la economía de Filipinas está conserver son élan que ses voisines. Le tance has been both relevant and dando muestras de mayor resistencia y gouvernement est résolu à mener à satisfactory at the macro level, and está manteniendo su impulso más bien et à approfondir le programme de in private sector (including small eficazmente que las de los países réformes. and medium-size enterprises, vecinos. El Gobierno ha adoptado el Au cours des douze dernières SMEs) development, financial sec- compromiso de finalizar y profundizar années, la Banque a recentré sa tor strengthening, and municipal el programa de reformas. stratégie d’assistance—jusque-là axée development. But its relevance and En los últimos 12 años, la sur le redressement économique—sur efficacy in other sectors has been estrategia de asistencia del Banco ha la lutte contre la pauvreté, uneven. Assistance results have pasado de centrarse en la recuperación conformément aux priorités arrêtées ranged from relevant and margin- económica a hacerlo en el alivio de la par le gouvernement philippin et la ally satisfactory in some sectors pobreza, en consonancia con las Banque. Ce recentrage s’est amorcé au (water and sanitation, and trans- prioridades del Gobierno y del Banco. milieu des années 90 avec le lancement port) to barely relevant or unsatis- Pero este cambio no empezó a de nouvelles opérations à l’appui de factory in others (health, educa- producirse hasta mediados del decenio l’enseignement élémentaire et de la tion, agriculture, energy, and de 1990, con nuevas operaciones de réforme agraire. L’aide de la Banque a decentralization). apoyo a la educación primaria y a la été judicieuse et satisfaisante tant du Bank projects have performed reforma agraria. La asistencia del point de vue macroéconomique qu’en relatively well. Ratings for com- Banco ha sido pertinente y satisfactoria ce qui concerne le développement du pleted projects are almost at par en los planos de la macroeconomía, el secteur privé (y compris les petites et with the East Asia and Pacific desarrollo del sector privado (incluidas moyennes entreprises, PME), le Region (EAP) for outcome and sus- las empresas pequeñas y medianas), el renforcement du secteur financier et le tainability, and even better for fortalecimiento del sector financiero y développement municipal. Elle l’a été institutional development impact. el desarrollo de los municipios. Sin moins dans d’autres secteurs. Ainsi, si At completion, all adjustment loans embargo, su pertinencia y eficacia han son action a été utile et relativement (US$1.4 billion) since the mid-1980s sido desiguales en otros sectores. Los satisfaisante dans certains domaines have received a satisfactory outcome resultados de la asistencia han variado (eau et assainissement, transports), elle and likely sustainability ratings. All entre pertinentes y marginalmente s’est révélée inadaptée, voire but one received a substantial insti- satisfactorios en algunos sectores totalement inutile, dans d’autres tutional development rating. For (abastecimiento de agua y saneamiento (santé, éducation, agriculture, énergie investment lending (US$4.2 bil- y transporte) y poco pertinentes o et décentralisation). lion), the picture is also positive. insatisfactorios en otros (salud, Les projets de la Banque ont But Bank performance in identifi- educación, agricultura, energía y donné d’assez bons résultats. Les cation, appraisal, and supervision descentralización). projets terminés ont reçu une notation remains below the EAP average. Los resultados de los proyectos pratiquement identique à celle The current portfolio of 23 del Banco han sido relativamente d’opérations réalisées dans d’autres projects ($2.2 billion) appears to be buenos. Las calificaciones de los pays de la région Asie de l’Est et performing even better, with satis- proyectos terminados son casi Pacifique (EAP) s’agissant des résultats factory ratings above 90 percent, in equivalentes a las de la región de Asia et de la viabilité, voire meilleure pour xi Philippines: From Crisis to Oppor tunity line with EAP averages. In oriental y el Pacífico en cuanto a ce qui est de l’impact du projet FRANCAIS E S P A N O L E N G L I S H early February 1998, there resultados y sostenibilidad e sur le renforcement were but four problem pro- incluso mejores por lo que se institutionnel. Les résultats de jects, according to the Quality refiere a los efectos en el tous les prêts d’ajustement Assurance Group (QAG). The desarrollo institucional. Desde (1,4 milliard de dollars) qui ont most common causes of poor mediados del decenio de 1980 été menés à bien depuis le milieu performance were problems todos los préstamos de ajuste des années 80 ont été jugés associated with project manage- (US$1.400 millones) han obtenido satisfaisants, et leur viabilité, probable. ment and procurement. The overall calificaciones satisfactorias en cuanto a Dans tous les cas sauf un, le cost of Bank assistance has been sus resultados y su probable renforcement institutionnel a été jugé slightly above comparators’ ranges sostenibilidad. Todos menos uno han substantiel. Pour ce qui est des prêts because of the higher cost of super- recibido una buena calificación en d’investissement (4,2 milliards de vision. relación con el desarrollo institucional. dollars), le bilan est également positif. In structural adjustment, the Por lo que se refiere a los préstamos Mais la performance de la Banque du Bank aimed to enhance the ability para proyectos de inversión (US$4.200 point de vue de l’identification, de of the public sector to maintain millones) el panorama también es l’évaluation et de la supervision des macroeconomic stability and its positivo. Pero los resultados del Banco projets aux Philippines reste inférieure efficiency and to improve the en la identificación, la evaluación à la moyenne pour la région Asie de enabling environment for private inicial y la supervisión siguen siendo l’Est et Pacifique. Le portefeuille sector development. The Bank led inferiores a la media de la región de actuel, qui compte 23 projets (2,2 in the formulation and implemen- Asia oriental y el Pacífico. milliards de dollars) semble encore tation of reforms in public sector Los 23 proyectos de la cartera plus performant, à en croire les management, trade and capital actual (US$2.200 millones) parecen appréciations positives qui dépassent account liberalization, internal estar dando resultados aún mejores: les 90% et rejoignent donc les competition, private sector partici- más del 90% se han calificado moyennes pour la région. Au début de pation in infrastructure, and finan- satisfactoriamente, un porcentaje février 1998, on ne dénombrait que cial sector strengthening. It sup- acorde con la media de la región. quatre projets à problèmes selon le ported the reform process with a Según el Grupo de garantía de calidad, Groupe de contrôle de la qualité. Les wealth of high-quality economic a principios de febrero de 1998 sólo résultats décevants s’expliquent le plus and sector work (ESW); effective había cuatro proyectos problemáticos. souvent par des problèmes liés à la and, on the whole, harmonious Las causas más comunes de los gestion des projets et à la passation des policy dialogue; good aid coordina- resultados deficientes eran problemas marchés. Le coût global de l’assistance tion; relevant and efficacious relacionados con las adquisiciones y la de la Banque dépasse légèrement les quick-disbursing adjustment loans; gestión de los proyectos. El costo fourchettes établies pour des projets and judiciously reinforced global de la asistencia del Banco ha comparables en raison du coût plus covenants under investment pro- sido algo superior a los de los países élevé de la supervision. jects. The strong intellectual contri- utilizados en la comparación, debido a En matière d’ajustement bution of the Bank’s ESW, however, unos costos de supervisión más altos. structurel, la Banque s’efforce de was reduced by inadequate partici- En la esfera del ajuste estructural, rendre le secteur public mieux à pation and in-country dissemina- el objetivo del Banco era fortalecer la même de maintenir la stabilité tion, poor timing, and insensitivity capacidad del sector público para macroéconomiques et d’être efficace et to the concerns of government offi- mantener la estabilidad de créer des conditions plus favorables cials and Bank resident staff. macroeconómica y su propia eficiencia au développement du secteur privé. La The institutional and economic y mejorar el entorno favorable para el Banque a joué un rôle moteur dans la reforms introduced with the sup- desarrollo del sector privado. El Banco formulation et la mise en œuvre des port of the Bank since the mid- promovió la formulación y aplicación réformes visant la gestion du secteur 1980s, including those that de reformas en la gestión del sector public, la libéralisation du commerce restructured the central bank and público, la liberalización del comercio et des opérations en capital, la strengthened the financial sector, y de las cuentas de capital, la concurrence interne, l’ouverture du xii  Executive Summary enabled the country to resist competencia interna, la secteur des infrastructures aux FRANCAIS E S P A N O L E N G L I S H the contagion from the still participación del sector privado opérateurs privés et le unfolding East Asian crisis. en la infraestructura y el renforcement du secteur The economy would have fortalecimiento del sector financier. Elle a appuyé le been even more resilient if the financiero. El Banco prestó processus de réforme en réalisant authorities had heeded the apoyo al proceso de reforma de nombreuses analyses Bank’s early warnings of the mediante abundantes estudios économiques et sectorielles de increasingly risky exposure to económicos y sectoriales de alta qualité; en entretenant avec les volatile short-term capital flows. calidad; un diálogo sobre políticas pouvoirs publics un dialogue véritable Reform fatigue of the government eficaz y, en general, armonioso; una et, dans l’ensemble, harmonieux sur slowed institutional and policy coordinación adecuada de la ayuda; les mesures à prendre; en assurant une reforms. préstamos de ajuste de rápido bonne coordination de l’aide; en To help the economy reach its desembolso pertinentes y eficaces, y accordant des prêts d’ajustement à growth potential, fortify its estipulaciones prudentemente décaissement rapide adaptés et resilience to domestic and global reforzadas en el marco de los efficaces; et en renforçant exigencies, and reduce poverty proyectos de inversión. Sin embargo, la judicieusement les dispositions more quickly, the government must importante contribución intelectual del contractuelles des projets pursue and deepen its reform Banco en forma de estudios d’investissement. Les analyses agenda. While expanding its liber- económicos y sectoriales quedó économiques et sectorielles de la alized environment—a valuable limitada por la insuficiencia de la Banque auraient cependant présenté distinction from its neighbors—the participación y de la difusión en el encore plus d’intérêt si elles avaient été country must apply the lessons of país, la inoportunidad y la falta de plus participatives et mieux diffusées the East Asian miracle as well as of sensibilidad ante las preocupaciones de sur le territoire, s’il n’y avait pas eu de the most recent East Asian crisis. los funcionarios estatales y del problèmes de calendrier et si elles Investment levels must be increased personal residente del Banco. avaient davantage pris en compte les and sustained with less volatile Las reformas institucionales y préoccupations des responsables sources of financing. Poverty must económicas que desde mediados del gouvernementaux et du personnel de be targeted squarely, beyond the decenio de 1980 se han ido la mission résidente. trickle-down benefits from acceler- introduciendo con el apoyo del Banco, Les réformes institutionnelles et ated, broad-based growth. Imple- incluidas las de reestructuración del économique introduites avec l’appui de mentation capacity must be banco central y de fortalecimiento del la Banque depuis le milieu des improved. The challenge ahead is sector financiero, prepararon al país années 80, notamment celles qui ont fivefold: (i) strengthen economic para resistir el contagio de la crisis de abouti à la restructuration de la management; (ii) expand private Asia oriental, que todavía sigue banque centrale et au renforcement du sector and infrastructure extendiéndose. La resistencia de la secteur financier, ont permis au pays development; (iii) accelerate rural economía habría sido aún mayor si las de résister à la crise qui continue de development and attack poverty autoridades hubieran atendido las sévir dans la région. Il aurait pu mieux aggressively; (iv) revisit human primeras advertencias del Banco sobre résister encore si les autorités avaient development; and (v) mobilize la exposición cada vez más arriesgada tenu compte des mises en garde que partnerships. a corrientes muy inestables de capital a leur avait déjà adressées la Banque sur Supporting the government in corto plazo. La fatiga reformista del la vulnérabilité croissante de pursuing this medium-term agenda Gobierno frenó la aplicación de las l’économie face à la volatilité des flux should be the central feature of the reformas institucionales y normativas. de capitaux à court terme. Sous l’effet Bank’s assistance strategy. The Para contribuir a que la economía d’une certaine lassitude, le Bank should move quickly beyond alcance su potencial de crecimiento, gouvernement a ralenti le rythme des the immediate needs for emergency para aumentar su capacidad de réformes institutionnelles et des assistance to ease the current liq- resistencia frente a situaciones de politiques publiques. S’il veut aider uidity constraint. This should emergencia a nivel nacional y mundial l’économie à réaliser son potentiel de encompass support for a final y para reducir la pobreza con mayor croissance, à mieux résister aux xiii Philippines: From Crisis to Oppor tunity phase of reforms in banking rapidez, el Gobierno debe aplicar contraintes nationales et FRANCAIS E S P A N O L E N G L I S H supervision and regulation, y profundizar su programa de mondiales et à réduire plus including failure resolution. reformas. El país, al mismo rapidement la pauvreté, le Beyond this, a new compact is tiempo que amplía su entorno gouvernement philippin doit needed among the govern- liberalizado—un aspecto que lo poursuivre et approfondir son ment, the nongovernmental distingue favorablemente de sus programme de réformes. Tout en organizations (NGOs), the vecinos—debe tener en cuenta las libéralisant davantage Bank, and the rest of the donor experiencias derivadas del milagro de l’économie, ce en quoi il se community to mobilize and use Asia oriental, así como las de la distinguerait de bien de ses voisins, le external assistance effectively. This reciente crisis de esa región. Hay que pays doit appliquer non seulement les will require avoidance of wasteful aumentar los niveles de inversión y leçons du miracle est-asiatique, mais competition among donors. The mantenerlos con fuentes de aussi celles de la crise qui vient de compact should support a strong financiación menos inestables. La frapper la région. Il faut relever les medium-term development pro- pobreza debe combatirse de forma niveaux d’investissement et les financer gram, backed by long-term sources directa, más allá de los efectos avec des capitaux moins instables. Il of foreign savings. Such an effort, beneficiosos que vaya produciendo un faut cibler directement la pauvreté et which could take the form of a crecimiento acelerado de base amplia. pas seulement compter sur les joint Country Assistance Strategy Hay que mejorar la capacidad de retombées d’une croissance générale (CAS) with all major donors by aplicación. El desafío para el futuro accélérée. La capacité de mise en 1999, could help the Philippines consistirá en el logro de cinco oeuvre doit être améliorée. Les défis race ahead in social and economic objetivos: i) fortalecer la gestión que doit relever le pays sont au progress. económica; ii) aumentar el desarrollo nombre de cinq. Il lui faut: i) renforcer For its part, the Bank should del sector privado y de la la gestion économique; ii) promouvoir increase the selectivity of its infraestructura; iii) acelerar el le secteur privé et développer les nonlending assistance to improve desarrollo rural y luchar enérgicamente infrastructures; iii) accélérer le the depth of its analysis and to contra la pobreza; iv) ocuparse développement rural et s’attaquer increase participation. Lending nuevamente del desarrollo humano, y énergiquement à la pauvreté; assistance should be well coordi- v) movilizar las asociaciones. iv) repenser la valorisation des nated with other donors, and larger La característica central de la ressources humaines; et v) mobiliser les in scale to support the unfinished estrategia de asistencia del Banco partenariats. reform agenda and the additional debería ser el apoyo al Gobierno en la La stratégie d’assistance de la investment needs through quick- aplicación de ese programa de Banque devrait avant tout viser à aider disbursing operations, financial mediano plazo. Para aliviar los le gouvernement philippin à poursuivre intermediary loans, sector invest- problemas de liquidez actuales es ce programme à moyen terme. L’aide ment loans, guarantees, and new necesario que la actuación del Banco d’urgence fournie par la Banque pour adaptable lending instruments. transcienda con rapidez la esfera de las répondre aux besoins immédiats necesidades inmediatas de asistencia de devrait rapidement céder la place à une emergencia. Su actuación debe abarcar assistance destinée à atténuer les el apoyo a una fase final de reformas contraintes de liquidités actuelles. Il de la supervisión y la reglamentación s’agit d’appuyer la phase finale de la bancarias, incluidas soluciones para los réforme de la surveillance et de la casos de quiebra. Además, es necesario réglementation des banques, y compris un nuevo pacto entre el Gobierno, las le règlement des faillites. À partir de là, organizaciones no gubernamentales il faudrait en arriver à une nouvelle (ONG), el Banco y el resto de la convention entre le gouvernement comunidad de donantes para movilizar philippin, les organisations non y emplear la asistencia exterior de un gouvernementales (ONG), la Banque et modo eficaz. Para ello habrá que evitar les autres bailleurs de fonds pour la competencia antieconómica entre mobiliser et utiliser plus efficacement xiv  Executive Summary donantes. El pacto debe prestar l’assistance extérieure, ce qui FRANCAIS E S P A N O L apoyo a un firme programa de permettrait d’éviter le gaspillage desarrollo a mediano plazo, causé par la concurrence entre respaldado por fuentes de ahorro donateurs. Cette convention externo a largo plazo. Una devrait étayer un solide iniciativa de ese tipo, quizá en programme de développement à forma de estrategia conjunta de moyen terme financé par des asistencia al país para 1999 en la que apports à long terme d’épargne participaran todos los donantes étrangère. Un tel effort, qui pourrait principales, podría contribuir a que prendre dès 1999 la forme d’une Filipinas registrase un rápido progreso Stratégie d’assistance au pays (SAP) económico y social. commune à tous les principaux El Banco, por su parte, debe donateurs, pourrait contribuer à mejorar la selectividad de su asistencia accélérer le progrès économique et no financiera para aumentar la social aux Philippines. profundidad de sus análisis y ampliar Pour sa part, la Banque devrait se la participación. La asistencia crediticia montrer plus sélective dans ses debe estar bien coordinada con los opérations d’aide hors prêt. Elle demás donantes y alcanzar un mayor pourrait ainsi approfondir ses analyses volumen para respaldar el programa et suivre une approche plus inacabado de reformas y las participative. Son assistance sous necesidades adicionales de inversión forme de prêts devrait être bien mediante operaciones de rápido coordonnée avec les autres donateurs desembolso, préstamos a et mobiliser davantage de ressources intermediarios financieros, préstamos pour financer les réformes restant à para inversiones sectoriales, garantías y mettre en oeuvre et les besoins nuevos instrumentos de crédito d’investissement supplémentaires, que adaptables. ce soit par le biais d’opérations à décaissement rapide, de prêts aux intermédiaires financiers, de prêts d’investissements sectoriels, de garanties et de nouveaux instruments de prêts évolutifs. xv  1 A Tumultuous Development Decade T he Philippines has made solid economic and social progress since 1985—the last year of the economic recession coinciding with the end of the Marcos era. The succeeding Aquino and Ramos administrations have been committed to structural reform intended to trigger rapid, broad-based, sustained economic growth and social development. The Bank has provided a comprehensive package of intellectual, structural, and sectoral assistance to support those reforms, and has helped nurture country ownership of the reform program. The country has shown its ability to deal with a high incidence of communicable diseases. The poor domestic, natural, and external crises. This resilience, have limited access to social services, and the quality of commitment to reform, and the strengthened democra- those services has declined. tic institutions give grounds for hope that the Philippines will accelerate economic and social progress and emerge From Crisis to Peaceful Revolution as a strong economic contender in the region. So far, A legacy of economic dependence on U.S. trade, capital, reforms have yielded substantial results. Key economic and aid, coupled with the concentration of wealth, land, and social indicators have improved, including poverty and power in a few hundred families undermined the incidence, GNP per capita, GDP growth, life expectancy, promise of political independence in 1946. Against a and secondary and tertiary school enrollment. However, background of inefficient administration, corruption, the government and the Bank must work closely and violence, President Marcos declared martial law in together to secure both high, sustained economic growth 1972. He proceeded to repress the political opposition, and rapid poverty alleviation. to centralize further an already overcentralized govern- The constraints include, most notably, low levels of ment, and to rely heavily on an interventionist public national savings and investment, high import duties, sector to achieve economic development. Investment high population growth, a seriously strained infrastruc- rates of around 30 percent of GNP and savings rates of ture, an inefficient bureaucracy and judicial system, and about 27 percent did induce rapid economic growth, but 1 Philippines: From Crisis to Oppor tunity and to improve export and investment incentives. How- ever, the ruling elite’s reluctance to loosen its control over the economy, political unrest, expansionary demand policies, a worldwide debt crisis, and the struc- tural inability of the economy to adjust quickly to the severe external shocks of the post-1979 period (higher oil prices, an international recession, and declining export prices) precipitated a dramatic loss of investor confidence, a foreign debt moratorium, and a severe recession. Amid armed insurgencies, military defections, mounting international pressure, and a people power revolution, a fractious anti-Marcos coalition led by Corazon Aquino won the February 1986 elections. The new democratic regime inherited a divided and traumatized country in deep economic crisis. Per capita output had fallen to the early 1970s levels. About 32 percent of Filipino families subsisted on incomes below the poverty line. Foreign debt service was placing a heavy burden on the limited resources the government could muster. The economy remained highly protected, with a strong anti-export bias. Private investment bot- tomed-out during 1985–87 at less than 14 percent of GDP. A bloated public sector contributed heavily to the fiscal deficit and to external debt. Local governments had collapsed in many parts of the country. A Vigorous Beginning The Aquino administration immediately launched a series of macroeconomic and structural reforms under its 1987–89 Economic Recovery Program. This sought to accelerate growth and alleviate poverty by (i) enhanc- ing economic efficiency, (ii) reducing government inter- vention in productive activities in favor of private sector participation, and (iii) focusing more heavily on anti- poverty and employment-generating efforts, particularly in rural areas, and accelerating agricultural production and exports. The program called for reducing special privileges, tax exemptions, and subsidies. In 1986 the government implemented a major reform to simplify the overall tax structure, reduce its distortions in the incentive framework produced ineffi- burden on the poor, and improve collection perfor- ciencies (mainly in highly protected sectors) and slow mance. In 1988 it introduced a value-added tax to sub- growth in employment. Cronyism and an inward-look- stitute for a series of sales and excise taxes that had ing development strategy perpetuated high poverty rates distorted production incentives. The administration also and inequality. moved (although more slowly) to liberalize trade. By the By the early 1980s, the economy, heavily dependent end of the 1980s, it had liberalized copra and coconut on imports and foreign capital, had ground to a halt. oil exports and removed import restrictions on a variety The Marcos administration had pursued some policy of products, including wheat, fertilizer, pesticides, tex- adjustments to liberalize trade and the financial sector, tiles, chemicals, and paper products. In 1991 it intro- 2  A Tu m u l t u o u s D e v e l o p m e n t D e c a d e duced a new tariff code, reducing the dispersion and the provisions for alternative power-generating capacity and number of tariff bands and lowering overall protection the numerous legal suits that slowed down the privati- in stages, with the aim of bringing the import-weighted zation drive. Other limited resources had to be diverted tariff rate to 14 percent by 1995. It also removed quan- for relief operations following a string of natural disas- titative restrictions from all nonagricultural commodi- ters, including typhoons, a powerful 1990 earthquake, ties except petroleum and coal products. and a major 1991 volcanic eruption. The removal of At the same time, it began tackling the problems of many senior and middle-level officials, coupled with a the public enterprise sector—including heavy financial massive reorganization of the bureaucracy and layoffs losses, duplicative functions among state-owned firms, following the abolishment of some departments and interlocking directorates with conflicts of interest, agencies, had reduced implementation capacity. Finally, monopolistic practices, hidden subsidies, and displace- the administration’s effectiveness was undermined by ment of private investment. The government embarked weaknesses in communicating to the public about—and on the privatization of state-owned banks and 132 rallying broad support for—the goals and scope of the nonfinancial corporations, while improving the opera- reforms and by the lack of an institutional mechanism tions of those remaining in the public sector. The priva- for the executive and legislative branches to resolve their tization program proceeded slowly at the outset, mainly differences on policy reforms and spending programs. because of the institutional safeguards on the disposition Despite these obstacles, by the early 1990s the of public assets. Aquino administration’s reforms had rendered the econ- The new administration moved quickly to restruc- omy among the most deregulated in the region. By 1992 ture the two main government-owned banks and bring the bias toward capital-intensity in investment incentives them under closer supervision. By end-1988, both banks had been removed: the remaining problems (notably in were showing profits for the first time in several years, tax collection, privatization, transport, agricultural and one of these had been partially privatized. The gov- trade, energy and oil, and capital markets) now became ernment also privatized three other commercial banks. a matter of improving institutions and speeding imple- By 1989 the few remaining regulated interest rates had mentation. In a notable break with the past, the private become market-determined. business sector and nongovernmental organizations In agriculture the Aquino administration had elimi- (NGOs) became active in public affairs, and major nated or reduced taxes on fertilizer and pesticides, dis- decentralization legislation was passed in 1991. mantled the monopolies in sugar and coconut trading, Given these policy changes, the economic recovery and initiated subsector institutional reforms by 1988. It was broadly based, with gross national product (GNP), also adopted new initiatives in land reform to accelerate gross domestic product (GDP), and the principal sectors the transfer of land titles in rice and corn growing areas growing steadily. Through 1989, consumption and and to expand the land reform program. In 1990 Con- investment grew strongly and inflation was kept at sin- gress passed legislation to address the mounting power- gle-digit levels. Macroeconomic management in the generation crisis, allowing the testing of model early years of the Aquino administration was character- innovative build-operate-transfer (BOT) schemes. ized by a prudent fiscal stance, conservative monetary Meanwhile, the government reconstituted a Department growth, and responsible actions to reduce external debt. of Energy and made progress in depoliticizing energy (This was in strong contrast to the option of unilateral price setting. Legislation passed in 1991 liberalized the selective debt repudiation that had been under discus- environment for foreign investment. sion).1 The country’s achievements were impressive, and the growth and adjustment performance of the Philip- Facing the Political Consequences of Reform pines ranked near the top among highly indebted coun- Many of President Aquino’s early policies alienated key tries. While not as high as in some East Asian countries, interest groups and generated strong resistance. Much of growth had been relatively stable compared with that of the administration’s energy was devoted to investigating Argentina, Brazil, and Mexico—all of which had experi- the sources of wealth of the former president and his enced negative growth episodes. The Philippines’ fiscal associates, a goal that had some serious negative side adjustment had been deeper and more consistent, its effects, such as the closure of a 600 MW nuclear plant inflation lower and less volatile, and its external debt (a victory of the anti-nuclear lobby) without adequate reduction more rapid. 3 Philippines: From Crisis to Oppor tunity Policy Weaknesses and Exogenous Shocks economic tightening, political instability, and exogenous Inadequacies in design and slippages in implementation shocks was a decline in GDP of 1 percent in 1991, stag- of reforms seriously undermined stabilization in 1990, nation in 1992, and a parallel slow-down of exports. derailing the program agreed with the IMF and acceler- In 1989 President Aquino expressed to Bank staff ating inflation during 1990–91. The agreed macroeco- her wish not to be known merely as the “president who nomic framework during 1986–89 did not call for a real restored democracy,” but to leave a legacy of substantial devaluation, which could have stimulated export-ori- improvements in the quality of life of her people. This ented private investment. Nor did it address the worsen- she did, despite the persistent efforts of dissidents in the ing financial situation of the central bank, which military and the political opposition to take advantage compromised the conduct of monetary and exchange of the population’s discomfort with the social costs of rate policy, making trade reform more difficult. Tax adjustment and stabilization. Compared with 1985, reform did not yield the expected revenue increases: tax poverty incidence was 4 percent lower in 1991, social administration remained weak, while the shift to a value indicators were measurably higher, GDP was 26 percent added tax (VAT, more complex than the sales tax it higher in 1992, and solid foundations had been laid for replaced) was too hasty and resulted in a revenue loss. higher achievements in the future. Adjustment to higher energy prices was delayed, and growing energy subsidies, uncompensated by the low- Consolidation and Revival of the Reforms yielding tax reform, added to the consolidated fiscal In mid-1992 the country’s political landscape was still deficit (which increased from 4.2 percent of GDP in 1989 fractured. The government was battling insurgent forces to 5.5 percent in 1990) and crowded-out development- from the extreme left and right and from secessionist oriented public expenditures. Fiscal imbalances and a groups in Mindanao. Natural calamities, persistent rigid exchange rate policy led to deterioration of the cur- power outages, recession, and criminality had become rent account deficit from 3.4 to 6.3 percent of GDP. the most pressing concerns of the electorate. General Fiscal constraints on spending and institutional Fidel Ramos, who had been instrumental in the defense weaknesses retarded public investment—to 5–6 percent of the Aquino government against military coups, won of GDP—and Operations and Maintenance (O&M) the May 1992 elections by campaigning as a nontradi- expenditures in priority social and economic sectors tional politician and gathering support among grass- were scaled back to their real 1982 levels. Infrastructure roots organizations. bottlenecks worsened, particularly in power, transport, The tone for the new administration was set by and other utilities, further discouraging private invest- “Philippines 2000,” a long-term vision that saw the ment. A series of exogenous shocks compounded the cri- Philippines entering the twenty-first century among the sis—several attempted coups (including a violent one in ranks of the high-performing, newly industrializing 1989), terms-of-trade losses, worldwide interest rate countries. Economic prosperity, social equity, and polit- increases (partly a result of the Gulf crisis), major power ical stability were the goals. Improved quality of life for shortages, an unprecedented succession of typhoons, a every Filipino, enhanced global competitiveness, and a powerful earthquake, and a major volcanic eruption. more participatory approach characterized the vision. Under these conditions, the government had no The new administration recognized the need for a stable choice but to accept what many technicians in govern- and liberalized economic environment, for openness and ment and at the Bank thought was an unduly restrictive integration in the world economy, for private sector ini- program with the IMF, which was concerned about the tiative in achieving and sustaining high growth rates, probability of renewed slippages in the period leading and for government innovation to complement, facili- up to the mid-1992 elections. Once it recommitted itself tate, and ensure a level playing field for private sector to macroeconomic discipline, however, the government initiatives. The country’s rich human resources were to succeeded in stabilizing the economy. It reduced the fis- be drawn into the development mainstream by employ- cal deficit—to 1.7 percent of GDP by 1992—in excess of ment-generating economic growth, increased invest- program targets, although it had to accommodate major ments in human capital, and varied venues for unforeseen expenditures for disaster relief. The external broad-based participation in planning and executing current account deficit fell from 6.1 percent of GDP in government programs. Agrarian reform remained part 1990 to 1.6 percent by 1992. However, the cost of macro- of the agenda. To deal with the short-term dislocations 4  A Tu m u l t u o u s D e v e l o p m e n t D e c a d e expected to arise from structural adjustment, safety nets ments in the macroeconomic structure of the fiscal were to be put in place for vulnerable groups. accounts (chiefly through skillful external debt manage- With broad support among the military, little debt to ment, but also through lower subsidies and a higher the traditional elites, and skillful political alliances, Presi- reliance on indirect revenues). The government com- dent Ramos engineered a smooth administrative transi- pleted a Brady-type debt restructuring agreement with its tion, opened peace initiatives with urban insurgents and creditor banks in December 1992. Medium- and long- Moslem separatists, and embarked on a bold economic term commercial bank debt of US$4.5 billion was reform agenda in strong partnership with key legislative restructured, generating savings of around $1.5 billion and civic leaders (some of whom are now presidential and gross interest savings of around $1.8 billion over the candidates). The administration acted to dismantle long- following five years. The government continued tax entrenched monopolies and cartels, as well as to prosecute reform (including the expansion of VAT in 1996), raising serious tax evaders, bring NGOs and their agendas into tax revenues from 15.3 percent in 1993 to an estimated the mainstream, and even oppose the Catholic Church on 16.6 percent in 1997. Following a prolonged debate, population policies. Poverty reduction through economic Congress finally approved a new comprehensive tax growth and social development indeed became the Ramos reform at end-1997, aimed primarily at rationalizing the administration’s top operational priority. tax system, assuring its buoyancy, lowering (still ram- pant) tax evasion, and reducing current tax exemptions. A Solid Basis for Continuing Reform In the financial sector, by 1993 the administration had President Ramos succeeded in rallying a popular consen- adopted new institutional arrangements to strengthen bank sus behind his vision and in deepening the reforms. The supervision and the regulatory framework, to reduce inter- government made incremental (but substantial) improve- mediation costs, and to introduce depositor protection. It 5 Philippines: From Crisis to Oppor tunity successfully restructured and recapitalized the central The country made further substantial progress in bank, a major source of quasi-fiscal losses. Its successor is trade liberalization (a highly contentious issue). In 1992 now a strong independent institution. The administration the foreign exchange market was fully deregulated for also accelerated and completed the privatization process. both current and capital transactions. By 1997 most Both the Development Bank of the Philippines and the quantitative restrictions had been lifted, with the impor- National Power Corporation are slated for privatization tant exception of rice. The share of regulated import within the next few years. The still outstanding issue of items to the total number of tariff code lines decreased how public corporations should be regulated is the subject from 32 percent in 1985 to less than 3 percent in 1996. of a Bank study under preparation. Domestic marketing and imports of petroleum products FIGURE 1.1: REWARDING PROGRESS SINCE 1985—THE ECONOMY HAS RECOVERED Positive Growth and Contained Inflation (Although Uneven Performance) Until the Early 1990s Percent 50 45 Marcos Aquino Ramos administration administration administration 40 35 30 Average inflation, consumer prices 25 (annual %) 20 15 10 5 0 -5 Average GDP growth (annual %) -10 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 Year Income per Capita Has More than Doubled Since 1985, Social Indicators Have Improved, and Economic and Social Development Income Per Capita Has More Than Doubled Since 1985, Social Indicators Have Remain above the Regional Average Improved, And Economic And Social Development Remains Above Regional Average Life expectancy Life expectancy Philippines 1995 Philippines 1995 GNP Gross GNP Gross per secondary per secondary capita enrollment capita enrollment Philippines 1985 East Asia 1995 Access to safe water Access to safe water Note: The diamonds show four key indicators in the country for 1995 (in gray) compared with either its own 1985 levels or those of its neighbors for 1995. Source: 1997 World Development Indicators, World Bank. 6  A Tu m u l t u o u s D e v e l o p m e n t D e c a d e FIGURE 1.2: SLOW PROGRESS SINCE 1985—NEIGHBORS MADE MORE HEADWAY National Savings, Although on the Rise, Remain Lowest within ASEAN Region Gross National Savings (% of GNP) 40 35.4 34.8 35.5 35 1986–90 31.5 32.3 1991–95 30.2 30.8 30 30 27 1996 25 20.3 19.6 20 18.2 15 10 5 0 Philippines Indonesia Malaysia Thailand Economic Growth Performance Was Lowest within ASEAN Region Real GDP Growth (%) 12 10.4 10 1985–90 9.5 1991–95 8.7 8.4 7.8 8.1 8 1996 7.1 7.1 6.7 6 5.6 4.8 4 2.3 2 0 Philippines Indonesia Malaysia Thailand Poverty Reduction Was Substantial, but Short of East Asia’s Record Head Count Index (%) 40 37.3 35 32.4 32.2 1985 30 1995 25.5 25 21.2 20 15 11.4 10.8 10 10 5 1 1 0 Philippines Indonesia Malaysia Thailand East Asia Source: World Bank and IMF staff estimates. 7 Philippines: From Crisis to Oppor tunity were fully liberalized in February 1997, but the Supreme robust expansion of foreign direct investment, which Court struck the oil deregulation law down at end-1997, almost tripled between 1991 and 1996 (it increased more on the grounds that it did not provide a level playing than tenfold between 1986 and 1996), and of exports, field for newcomers. Congress passed a new oil deregu- which had increased fivefold since 1985 and were still lation law in February 1998. racing ahead at an annual rate of around 23 percent dur- With the power emergency successfully ended by ing 1997. End-year inflation was reduced to 6.1 percent 1994, the Ramos administration rationalized the BOT by 1997 (since the mid-1980s, inflation had not passed schemes by introducing competitive bidding and 11 percent) and domestic and external debts to 58 and extended the BOT approach to the roads, water and 48 percent of GNP by 1996 (from their peak of 85 per- sanitation sectors, and other infrastructure projects. The cent and 62 percent in 1993), respectively. By 1994 the Philippines’ BOT schemes have pioneered new forms of improvement in the external accounts was such that the private sector involvement in infrastructure. Philippines did not require further exceptional financing from rescheduling of official debt. Total debt service due Targeted Poverty Alleviation as a share of exports was reduced from above 24 percent The government’s social reform agenda (SRA), launched in 1992 to below 18 percent for the medium-term. In the in September 1994, coordinates various interventions. It first half of 1997, it stood at 11 percent. includes measures for access to and provision of health, Private perceptions of economic management, insti- nutrition, education, and shelter services for targeted tutions, and prospects improved in parallel with the lib- groups. Twenty provinces, some with the highest inci- eralization of foreign investment and the trade and dence of poverty, have been identified under the SRA for capital accounts, the smooth 1992 political transition, special focus in poverty alleviation programs. the Ramos government’s strengthening of law and order, President Ramos and his key legislative allies deep- and its quick resolution of the inherited power crisis ened the reform agenda at a time when the economy through the BOT schemes. The Brady agreement, along enjoyed political stability and there was a worldwide with macroeconomic stability and rising foreign surge of international capital to emerging markets. exchange reserves, improved creditworthiness suffi- Reaping the benefits of stabilization and structural ciently to allow the government and some large Filipino adjustment, macroeconomic outcomes strengthened companies to reenter international capital markets. The substantially until mid-1997. In a much improved November 1993 price of the Philippines’ new money enabling environment for private sector development, bonds on the secondary market was 88 cents to the dol- the economy has responded with continued poverty lar, up from 50 cents in 1991, and well above the invest- reduction (another 3 percent between 1991 and 1995), ment-grade threshold of 70 cents. accelerating growth, low inflation, and a strong cur- With the improvement in policies and institutions rency though mid-1997. during the last dozen years, the country has now secured Public sector deficits were rapidly reduced, once most of the conditions that have characterized the suc- again beyond the targets agreed with the IMF, in the cessful development path trod by its East Asian neigh- context of the June 1994 three-year Extended Financing bors—stable but flexible macroeconomic policies, Facility. The national government deficit shifted to a sur- absence of major price distortions, an educated work plus in 1994, which was maintained through 1997, in force, an export-oriented production structure, more spite of the slow-down in growth caused by the currency openness to foreign investment, limited government crisis. Displaying similar progress, the consolidated pub- direct and indirect involvement in the corporate sector, lic sector deficit was kept below 1 percent of GNP. Out- and a strong banking system. These achievements give put growth resumed in 1993, boosted by exports and many analysts hope that the Philippines will continue to private investment, and accelerated in the following strengthen its policy framework and move up the devel- years, reaching 5.7 percent in 1996. Private investment opmental ladder. rose to above 21 percent of GDP, compared with less than 15 percent during 1985–88. Returning flight capi- Weathering the Storm of the Asian Crisis tal and other foreign exchange inflows nurtured reserve Although the country has made substantial progress in levels to record highs (until mid-1997). four key dimensions of human development—income, The economic recovery was characterized by a poverty, life expectancy, and educational achievement— 8  A Tu m u l t u o u s D e v e l o p m e n t D e c a d e over the past dozen years, progress has been slower than for other East Asian countries. In economic and social BOX 1.1: OVERSHOOTING ON THE WAY UP AND development, the Philippines still fares below the norm ON THE WAY DOWN for the East Asia region. The country has regressed in recent study by damentals as measured some dimensions of social development, such as the inci- dence of communicable diseases and access by the poor to educational services of acceptable quality. It retains rela- A senior managers of a Washing- ton-based think-tank by standard variables such as economic growth, inflation, and tively low national savings (around 18–20 percent of grouping major interna- debt ratios. Overall, GNP), low investment (22–24 percent of GNP), higher tional banks that invest more than half the import duties (19 percent), higher population growth (2.2 in emerging markets decline of spreads was percent), inadequate infrastructure, an inefficient bureau- examined the trends in attributable to rising cracy and judicial system, corruption, and insecurity. the spreads between global capital supply A combination of a severe, unexpected external market yields on emerg- rather than improved shock—the loss of investor confidence in the sustain- ing markets securities borrowing-country fun- ability of economic growth, corporate profitability, and and the yields of U.S. damentals. The implica- the soundness of the region’s banking system—and Treasuries (the bench- tion of their findings, underlying, unaddressed structural weaknesses under- mark for safety). It together with current mined the recent trend of accelerating growth, much as found that the spreads levels of the spreads, is other policy weaknesses and exogenous shocks under- accepted by interna- that spreads overshot mined economic performance during 1990–91. tional investors up to once again in the third East Asian economies, and the Philippines among mid-1997 had narrowed trimester, but this time them, certainly enjoyed too good a ride in the interna- more than could be on the way up, at least tional financial markets. Careless investment created explained by either the for the two South Asian bubbles in the real estate, capital, and foreign exchange periodic upgrading by countries included in the markets. But in the second quarter of 1997, interna- rating agencies or the econometric sample of tional investors awakened to the risks involved, discov- improved economic fun- 20 countries. ered structural economic weaknesses, and began revising their investment strategies. Because of two of its weak Source: Cline and Barnes, Spreads and Risk in Emerging Market Lending, IMF, Washington, DC, November 1997. fundamentals—low and stagnant national savings and an appreciated real exchange rate—the Philippines was relying heavily on foreign savings to finance the large exchange rate, while preventing excessive monetary and growing gap between private investment and sav- expansion. However, the real effective exchange rate ings and the smaller (and shrinking) gap in the public continued to appreciate through mid-1997 (by 38 per- sector. Rising dependence on short-term foreign capital cent since 1990). inflows and loss of competitiveness left the country The strengthening of the peso imparted an increasing exposed to the contagion of the Asian financial crisis. bias toward higher growth in sectors mainly producing The foreign exchange exposure of banks and some nontradables, such as utilities and construction, holding of their prime borrowers—already a cause of concern back the potential expansion of tradable goods produc- for the regulatory authorities—had grown sharply. A tion, especially in the subsectors most heavily based on sharp rise in short-term capital flows was partly mis- unskilled labor, such as textiles. Imports had risen much classified in the balance of payments accounts under faster than exports and the mounting trade deficit had workers’ remittances because of the component chan- reached 13 percent of GNP in 1996. This pattern of neled through (peso conversions of) foreign currency growth was both unhealthy and unsustainable. deposit units. The loss of competitiveness had its roots The Philippines has weathered the storm better than in the labor market, which experienced stagnant labor its neighbors, an achievement of its young economic productivity, and the high level of capital flows, which recovery and short-lived asset bubble relative to the put downward pressure on the peso/dollar exchange other Asian countries, its committed government, and rate. Monetary policy had to contend with the new con- limited moral hazard with respect to private investors cern of limiting the market-driven rise of the nominal and banks. The banking sector was in a strong position 9 Philippines: From Crisis to Oppor tunity with good asset quality, competent management, and a ago. To be sure, the currency crisis is likely to cause a relatively small exposure to a property sector with low temporary slowdown in economic growth, with some vacancy rates, the result, over the last decade, of open- pain for highly leveraged enterprises (and their workers) ing up the financial sector to increased foreign competi- highly dependent on domestic demand. It is also possible tion, rationalizing financial institutions, improving the that a few (likely small) financial institutions with weak regulatory environment, and the short span and limited loan portfolios and large short-term exposures in foreign scope of the economic boom. currency will face bankruptcy or consolidation. The fall- In early December 1997, and in stark contrast to the out on the real economy, however, is likely to be con- downgrading of ratings for Korea, Indonesia, and Thai- tained. Unhedged exposure to foreign liabilities by the land, Moody once again upgraded the Philippines’ debt. corporate and banking sectors, accompanied by the sus- This was an important signal of improved confidence in pected imprudent lending, was built up from only 1994 the country’s economic fundamentals, and in the ade- to early 1997 and, thus, did not rise to crippling levels. quacy of the response by the government to the currency The government has repeatedly scaled back its growth crisis (and its renewed commitment to macroeconomic projections for the current year to around 1.0–1.5 per- discipline, openness, and liberalization). But to under- cent (as of September 1998) because of the continuing score that the crisis is not over, or perhaps as another turmoil in global financial markets, the deepening Japan- illustration of two-way overshooting, S&P has just ese recession, and an El Niño drought that has severely downgraded the Philippines’ long-term currency rating affected agricultural output. Nonetheless, the latest pro- from stable to negative. jection remains well above the short-term growth Fiscal balance was achieved for 1997 through a prospects of neighboring countries. series of measures to boost tax collections and to limit Over the medium term, growth is expected to benefit current and capital expenditures. Both the extent of cur- from the country’s improved competitive position derived rency depreciation (about 37 percent in foreign currency from depreciation of the real exchange rate. The tradable terms) and the correction in the stock market (about 40 sectors will receive a boost. The export orientation of percent) remain less than in the other countries affected future investment will be reinforced. Paradoxically, the by the financial storm. No systemic problems have bursting of the bubble in the asset markets and the real emerged in the banking and corporate sectors (although exchange depreciation provides an opportunity to put nonperforming loans rose from 4 percent at end-Sep- long-term growth on a more sustainable policy footing. tember to 5 percent reported by end-December), but the The authorities have received a strong reminder of the peso depreciation, brought about by the negative effect need to strengthen the financial sector, address the critical on domestic absorption, caused GDP growth rate for need to boost national savings, and correct the perverse 1997 (at around 5.1 percent) to fall short of early pro- tax and reserve incentives that favor dollar intermedia- jections (approaching 7 percent). tion by banks through foreign currency deposits. If, as expected, the authorities will act on these signals, specu- The Prospect Ahead lative capital flows will be discouraged in favor of longer- Despite the 1997 currency crisis and its ripple effects, the term portfolio and direct investments, and the banking Philippines’ economy is stronger now than it was a year sector will emerge strengthened and wiser. 10  2 Assistance Strategy: Satisfactory, but Uneven and Below Potential D espite exogenous shocks, the Bank’s assistance strategy over the past dozen years has been relevant and efficacious, although uneven and below potential. Throughout the period, the Bank’s goals, concerns, and views were largely in tune with those of gov- ernment and mainstream academia. The Bank reassessed its strategy regularly to optimize its response to the fast-changing political and economic environment, and often undertook retro- spective self-evaluation. Economic recovery was the focus of Bank assistance in the late 1980s. In the 1990s, however, poverty alleviation became the in the sector, and the supervisory institutions have been central part of the country assistance strategy, in line strengthened. The institutional environment and public with the evolution of Bankwide priorities. The Bank has expenditure management have benefited from Bank- proved flexible enough to work effectively under some- supported ESW, aid coordination, and lending opera- times trying political circumstances. Bank projects per- tions. By nurturing broad public and institutional formed well. The current portfolio is at par with that of support for and ownership of the reforms, Bank assis- the East Asia and Pacific (EAP) Region. tance helped solidify their gains and strengthen their sus- Bank support for government policy reform helped tainability. However, Bank assistance has only a mixed usher in fundamental changes following the economic record in social sector and infrastructure development and political crisis of the mid-1980s. Untenable financial because of institutional and policy constraints. imbalances have been rectified, the country’s external In the three years up to end-1997, with surging pri- creditworthiness has been restored, growth has acceler- vate capital inflows and a more confident national eco- ated, and poverty has been reduced. The incentive nomic stewardship, the Bank’s leverage and importance framework has been strengthened, and the private sector to the Philippines’ economic development has decreased. has increasingly become the engine for export-led The pace of policy reforms has become increasingly dic- growth. Fundamentals in the banking sector have tated by internal political factors. The Bank has become improved—the state has curtailed its direct involvement more open with civil society in sharing information and 11 Philippines: From Crisis to Oppor tunity with its partners. In parallel, the Bank’s policy dialogue family planning to reduce the high level of population has become more focused and its ESW and lending pro- growth, and human resource development. The Bank grams have become more responsive and selective. recommended that increased expenditures be directed to Lower lending commitments and disbursements, primary education, vocational training, urban health, and the winding-down of adjustment lending, however, nutrition, and urban infrastructure, and that the effi- represent a missed opportunity in the shape of an unfin- ciency of public and private expenditures be enhanced ished reform agenda, low national savings, and inade- by rationalizing and reorienting sectoral policies. quate public investment. Both the government and the Bank should search for avenues to enhance the scale, rel- Away from the Stop-Go Syndrome evance, and impact of Bank operations. In 1993, with signs of an economic recovery under way, the Bank recognized that the country had the opportu- From Economic Recovery to Poverty Alleviation nity to break out of its stop-go growth cycles, and In 1986 the primary objective of Bank assistance was to shifted its focus from stabilization and structural reform support economic recovery. This entailed improving issues to consolidating gains, attracting private invest- public resource management to maintain macreconomic ment, and addressing emerging supply constraints in discipline and renewing private sector confidence. A sec- infrastructure. It called for a corresponding shift from ondary objective was to improve the monitoring efforts adjustment lending to project lending, given the high and institutional framework for addressing poverty, par- levels of foreign exchange reserves and the availability of ticularly in rural areas. The Bank’s objectives in social market solutions to its balance of payments problems. development were to strengthen the government’s polit- New lending was to focus on infrastructure, such as ical and resource commitments to population programs, power, roads, water supply, and sanitation; on family and to strengthen the institutional capacity of relevant planning and urban health; and on quality schooling agencies in the field. and training. In 1994, under the Private Sector Infra- As economic recovery and structural adjustment structure Initiative, the Bank began to address questions unfolded in the 1990s, Bank strategy became more bal- (including legal, regulatory, promotional, competitive, anced. The Bank lifted its sights to long-term growth risk-unbundling, and mitigation issues) emerging from issues such as capital market development and natural increasing private sector participation in infrastructure. resource management. Reflecting the renewed internal In 1995 and 1996, the Bank reaffirmed these same prominence of its poverty alleviation mission, the strat- broad objectives, although its concerns about macroeco- egy in 1990 called for a two-pronged approach—a nomic management shifted, appropriately, to issues of reform program that would sustain economic growth, contingent liability management in the budget, deepening particularly with private sector initiatives, and a broad- domestic capital markets, improving resiliency to poten- based effort to support poverty alleviation. To support tially volatile private capital flows, and generally foster- economic growth, the Bank was to provide technical ing an environment conducive to rising domestic savings. advice and lending support to reinforce IMF efforts in The Bank also intended to provide support for the gov- macroeconomic management, especially in public ernment’s social reform agenda (SRA), launched in Sep- investment monitoring and structural change. It sought tember 1994 to provide health, nutrition, education, and to improve the enabling environment for the private sec- shelter to targeted groups. The Bank recognized that tor with similar instruments through advice on—and growth needed to be supplemented with effectively tar- lending for—reforms in the incentive framework for for- geted poverty alleviation measures. The shares of public eign investment, the regulatory framework for private investment in health, education, and agriculture were sector activity, export development and diversification, expected to increase sharply through 1998. With the ongoing deregulation (especially in transport and indus- increasing responsibilities assumed by local governments, try), basic infrastructure investment, and ongoing finan- the Bank came to pay closer attention to devolution and cial sector reform (particularly to develop the market for decentralization issues and agreed to assist in designing long-term finance). and implementing pilot programs of poverty alleviation In pursuit of poverty alleviation, Bank assistance in the selected priority provinces. sought to target three main elements—rural develop- Over time, the Bank’s attention touched virtually ment (particularly infrastructure and credit facilities), every area critical to long-term growth, including civil 12  A s s i s t a n c e S t r a t e g y : S a t i s f a c t o r y, b u t U n e v e n a n d B e l o w Po t e n t i a l service reform (a subject of the 1995 Public Expenditure These provided an appropriate continuum of lending Review), housing finance, and social security reforms support for the policy reform process that began under (beginning in 1996). With a substantially deregulated President Marcos and deepened under Presidents labor market, the only area of critical institutional weak- Aquino and Ramos. The Bank also supported structural ness not on the Bank’s radar screen during the past ten reforms with a large body of ESW and covenant work years seems to have been reform of the judicial system. under other investment projects. Bank assistance covered all critical areas in public Nurturing the Reforms for Public Sector Management sector management, trade and capital account liberal- and Private Sector Development ization, internal competition, private sector participa- tion in infrastructure, and financial sector strengthening. A Comprehensive and Effective Package The EIL extended and deepened the sequence of eco- The last quick-disbursing, policy-based Bank project, nomic reforms, as in the process of tariff reform and the Economic Integration Loan (EIL) in 1992–95, import liberalization that had been included in earlier brought to an end an extended cycle of Bank support for Bank operations—Structural Adjustment Loans I and II, structural adjustment in the Philippines. Since March the Agriculture Sector/Inputs Loan, and the Economic 1987, the government has borrowed $1.2 billion to fund Recovery Loan (ERL, which also supported a major tax five major operations with complementary objectives. reform). Similarly, while the government’s financial BOX 2.1: EXPERIENCES OF FIAS AND MIGA T he Foreign Invest- ment Advisory Service (FIAS), a joint agency of the Inter- national Finance Corpo- Plan (FY96) and assis- tance with refining the regulations for BOT pro- jects (FY97). Currently FIAS is preparing to of guarantees in the Philippines for a maxi- mum outstanding liability of US$60 million in the banking and power sec- prospective investors in the Philippines are unclear, but perceived political risk, economic instability, and the avail- ration (IFC) and the undertake a review (cofi- tors (Internationale Ned- ability of cheaper cover- World Bank, has been nanced by AusAID) of the erlanden Bank, N.V., and age elsewhere could be active in the Philippines impediments to foreign Magma Netherlands, explanatory factors. for almost ten years, com- direct investment (FDI) in B.V.) have been issued. MIGA’s outstanding lia- pleting a range of projects Mindanao. The project MIGA has over 20 pre- bilities are far from past relating to both the policy will also examine the liminary applications out- or current per-country environment and promo- existing capacity of the standing for guarantee in coverage ceilings. How- tion strategies. In 1988 it provincial governments to the oil and gas, mining, ever, this is not out of line prepared a study of how carry out effective invest- and power sectors, total- with other countries, policy and institutional ment promotion activities. ing US$1.8 billion in pro- being about 25 percent change could stimulate Multilateral Invest- posed investment. The and 80 percent of MIGA’s investment in agribusi- ment Guarantee Agency Region has not requested exposure to Pakistan ness. FIAS also helped the (MIGA) staff have visited any substantial input ($160 million) and central bank to review its the country regularly, from MIGA in past Indonesia ($76 million), debt-to-equity swap pro- about once a year. In spite Country Assistance respectively. The recent gram in 1989. The most of these promotional Strategies (CASs), eco- currency crisis may well recent projects completed activities, there has been nomic work, or policy bring more applications were advice on the formu- low demand for MIGA’s dialogue. The reasons for to MIGA from all over lation of a National services from the Philip- the low demand for the East Asia region, Investment Promotion pines. Only two contracts MIGA services from including the Philippines. Source: FIAS and MIGA. 13 Philippines: From Crisis to Oppor tunity institutions were restructured under the ERL, financial for improving the functioning of corporations that would restructuring of the central bank was supported by con- remain in the public sector. Conditionality in this area ditionality added to the second tranche of the Financial was extended further by the EIL. The Debt Management Sector Adjustment Loan (FSAL, 1989–92), and concur- Loan (DML, 1990–92) supported a first-phase debt and rently by the EIL. debt-service reduction agreement with commercial banks The Reform of Government Corporations Loan (the first such operation supported by the Bank). The sec- (RGCL, 1988–92) supported the government privatization ond and final stage of the commercial bank debt reduction program, focusing on the critical institutional arrange- program, completed in December 1992, was considered a ments necessary for the sale or divestiture of government- key part of the EIL. This project was important in owned corporations and the adoption of a framework reestablishing international confidence in the Philippines. BOX 2.2: IFC’S ROLES AND STRATEGIES FOR PRIVATE SECTOR DEVELOPMENT T he IFC has been active in the Philippines for three and a half decades, and its operations have In the 1970s, because of easier access to foreign currency credits for Philippine businesses, and later because of the needs. The IFC helped to finance All Asia Capital, which has since become the second-largest non- bank finance company in equity investments in four medium-size companies under this program. The growing electricity crisis raised new challenges. inevitably reflected the increasing role of govern- the Philippines. The turning point came changing business environ- ment, the IFC’s operations In the second half of with the introduction of ment. It has supported the went through a change in the decade, a set of new BOT contracts for the development of the finan- emphasis from financing policies provided an construction of new cial sector; facilitated and the expansions of large improved environment for power plants. The IFC encouraged the entry of established companies, development of the pri- made the pioneering other investors, especially such as the dominant tele- vate sector, which was, investment in Hopewell in private infrastructure; phone and electricity util- however, still constrained Energy (Phil.) for the and demonstrated, through ity, to investing in by lack of access to for- country’s first indepen- the success of projects in medium-size enterprises eign capital. The IFC pro- dent private power pro- which it has made invest- such as mining, chemicals, vided funding to several ject. IFC financial ments, profitable new and agribusiness. To facil- agribusinesses, to manu- participation provided business opportunities itate investments in the facturing projects, and to sponsors and other in- for project sponsors. region, the IFC estab- two major hotel projects. stitutions with the Since 1963 the IFC has lished the regional office It resumed lending to the required comfort to make approved US$1.84 billion for East Asia and the telephone utility and to significant long-term in financing, including Pacific, one of the first the reprivatized Meralco, commitments. US$1.0 billion for its own field offices in Manila, in again to fund their With improved politi- account, for 79 invest- 1977. In the early 1980s foreign-currency-denomi- cal stability and a more ments in the Philippines the adverse economic situ- nated capital expendi- favorable macroeconomic with a total project cost ation seriously affected tures. To help small and environment after 1992, of US$8.4 billion. The many firms. During this medium enterprises, IFC the economy moved to a IFC’s current committed period, projects were held made an equity invest- faster growth track. The and disbursed portfolio back, and the IFC tried to ment in a venture capital IFC provided funding for contains 20 projects with reach out to companies fund, provided a credit additional power pro- IFC financing of US$266 with smaller and more line to All Asia Capital, jects—in all, helping to million. immediate financing and separately made finance over 2,200 MW Source: IFC. 14  A s s i s t a n c e S t r a t e g y : S a t i s f a c t o r y, b u t U n e v e n a n d B e l o w Po t e n t i a l Against heavy odds, the Aquino administration discipline in 1991, the Bank continued its support with made substantial progress in structural adjustment. Its tranche releases from the three ongoing adjustment efforts were supported by four major Bank loans—the operations (FSAL, RGCL, and DML). A new opera- ERL ($300 million), the RGCL ($200 million), the DML tion—the EIL ($200 million)—sought to complete the ($200 million), and the FSAL ($300 million). These original reform agenda by assuring sustained improve- loans yielded mixed and gradual results. Their true value ments in macroeconomic management and the environ- was in getting the structural reform ball rolling, which ment for private investment. Its specific objectives were yielded substantial results once political and fiscal sta- to strengthen the finances of the central bank, set appro- bility became increasingly secure after 1991–92. priate energy pricing policies, continue to deepen trade After the Philippines returned to macroeconomic liberalization, promote liberalization in the transport of additional capacity in increased confidence of zation of Metropolitan fund industry. Given the the Philippines. These investors in the Philip- Waterworks and Sewerage recent increase in interest early projects helped the pines, as well as the liber- System (MWSS), Asia’s rates and the decline in country address the prob- alization of the financial largest water sector priva- equity markets, the IFC is lem of power shortages, sector, made it easier for tization, which has also working with estab- and had an important established companies to already delivered private lished companies to help demonstration effect and gain access to funds on sector efficiencies in the them increase access and provided a model for fur- both domestic and inter- form of significantly diversify their sources of ther investments in power national markets. This lower prices. Over the long-term funds. The IFC and other infrastructure reduced the need for IFC next few years, water sup- is looking to help finance projects, using the BOT funding for established ply will be upgraded and health care and education and related contractual companies, and its invest- extended to cover 3.5 mil- in the Philippines, using arrangements. The IFC ments declined signifi- lion previously unserved its recent experience in also provided funding for cantly in FY95 and FY96. residents of Metro other countries in the the expansion of cement The IFC refocused its Manila. The estimated region. In addition, it has and oil refining capacities, strategy to emphasize US$7 billion cost of these initiated and helped in needed for the growing regional development, improvements will now arranging funds for stud- economy. In addition, IFC SMEs, complex infra- be funded by private ies on microcredit and invested in several venture structure projects requir- investors. SMEs, along with sector capital funds to help small ing longer-term funding, Following the cur- studies on tourism and and medium enterprises and privatization services. rency crisis, the IFC plans fisheries, focused on the (SMEs) in the construc- In FY97, the IFC invested to focus even more on the less-developed southern tion materials and infra- in a newly licensed tele- financial sector. It is look- islands. These and other structure sectors and phone company, a ship- ing for ways to support studies by FIAS will help provided start-up capital ping line, and a greenfield further deepening and the overall development for companies in emerg- petrochemical project and strengthening of the of the private sector and ing fields such as semicon- arranged a long-term financial sector by help- further help IFC to for- ductors and computer credit line aimed at infra- ing to establish a new mulate its own strategy software. structure projects for a credit-rating agency and for how best to support For about three years local bank. The IFC also through investments in the private sector and until the regional currency provided advisory services leasing, housing finance, development in the crisis in mid-1997, the for the successful privati- factoring, and the mutual Philippines. 15 Philippines: From Crisis to Oppor tunity sector, open the economy to foreign investment, com- national competitiveness (including factors brought plete the government’s’ privatization program, and lib- about by the appreciating real exchange rate). The 1996 eralize the foreign currency market. Financial Sector Assessment mission highlighted the The EIL was highly successful. The loan achieved or risks to the financial sector, including those from rising exceeded all its immediate targets and its broader devel- exposure to real estate, the stock market, and foreign opment goals. The government restructured the central exchange. The government heeded only some of these bank and brought the Oil Price Stabilization Fund into recommendations, postponing action on others until surplus, correcting a key source of the persistent fiscal after “exiting” from the IMF program. All this was deficit in previous years. It made impressive gains in lib- partly a matter of complacency and partly a matter of eralizing the foreign exchange regime. It recognized the “reform fatigue” among politicians. hitherto informal liberalized entry and fare-setting prac- All concerned knew that excessive capital inflows tices in the transport sector. New legislation opened can become destabilizing, and the Philippines had direct most sectors to foreign ownership, increasing foreign experience of that as a consequence of the Mexican crisis investment considerably. The government reduced the in the first half of the 1990s. Here too, the government debt of commercial banks and its debt services (helping only partially heeded the full lessons from the crisis—pre- external creditworthiness), privatized more than 100 sented to the government by the Bank in a June 1995 government corporations, reduced import tariffs, elimi- informal policy note. The Bank had indeed warned that nated most quantitative restrictions (with the nagging a sudden shift in investor sentiment could quickly drain exception of agricultural products), and promoted a the Philippines’ $6–7 billion reserves and cautioned that more competitive environment. Notwithstanding delays early market signals should be monitored closely. in the privatization and energy-pricing initiatives and The Bank did recommend that tight fiscal and finan- final compromises about agricultural quantitative cial management be maintained; that foreign exchange restrictions, the Bank has supported substantial eco- reserves not be squandered to resist a market-driven nomic strengthening and has helped the government to exchange rate adjustment, except for intervention to establish a track record of sound macroeconomic man- smooth excessive day-to-day volatility; that the govern- agement since 1992. ment not experiment by issuing debt linked to or denominated in foreign currency (which it did, with var- The Bank and OED Warned about Macroeconomic ious bond issues that established a benchmark and facil- Weaknesses itated private sector access to the international capital Up until the end of 1996, international investors had markets; see Statistical Annex Table 5.1); and that the rushed to shower the Southeast Asian economies with government consider a temporary capital inflow tax that huge and mounting capital flows; they then rushed out, would penalize short-term flows (as in Brazil) to avoid pulling along domestic investors. But the IMF, the Bank, the risk of overdependence on private short-term capital and OED did not neglect to alert the authorities to the in financing the current account (no action was taken to risks imposed by the country’s weaknesses in the face of discourage short-term capital inflows); that the authori- this volatile investment environment. They issued ties monitor, supervise, and keep under control the repeated warnings, beginning in 1994—including one by foreign exchange exposure of the government, govern- the Bank’s Regional vice-president in 1995—about the ment-owned and controlled corporations (GOCCs), and low level of domestic savings, the appreciating real financial institutions; and that government undertake exchange rate and rising trade deficit, and the mounting more aggressive intervention to buy foreign exchange to exposure to short-term capital inflows. avoid upward pressure on the peso not justified by eco- The June 1995 OED audit of the Debt Management nomic fundamentals, balanced by a tighter fiscal policy Loan had warned that encouraging large short-term to preserve monetary targets and to affect the current capital inflows was not a good objective. Evidence was account directly (instead, the real exchange rate was already visible that the increased capital inflows of the allowed to appreciate by 17 percent between 1994 and 1990s had brought about some complacency about seri- July 1997). ous macroeconomic problems. In the 1994 Country However, all analysts within and outside the Bank Economic Memorandum, the Bank analyzed the prob- were caught by surprise in mid-1997 by the extent of the lems of low investment and savings levels, and of inter- crisis of confidence that led to the rapid depreciation of 16  A s s i s t a n c e S t r a t e g y : S a t i s f a c t o r y, b u t U n e v e n a n d B e l o w Po t e n t i a l the peso. Indeed, the strong yet short-lived macroeco- these, 5 are engaged in derivative trading, and 17 may nomic expansion of the mid-1990s, the rapid progress also invest in and underwrite equities. Three specialized toward a more market-oriented economy, the good government financial institutions remain, the Develop- export performance, and the large net capital inflows ment Bank of the Philippines, the Land Bank, Al long dampened fears that the (recognized) macroeco- Amanah Bank, in addition to the National Housing nomic weaknesses posed a serious risk to growth and Mortgage Finance Corporation. currency stability in the short run. The growth and shift in configuration of the bank- ing sector shows the effectiveness of government policy Sectoral Assistance: An Uneven Performance reform in opening up the sector, and of the Bank’s pack- Strengthening the Financial Sector. At the end of 1986, age of assistance, designed to build on the significant the Philippines had 29 commercial banks. Four were deregulation implemented during the 1980s. The Bank foreign-owned, one was government-owned, and the provided its support with an appropriate mix of policy- remainder were generally small and family-controlled based sectoral adjustment and investment operations, indigenous banks with high operational costs. As of Sep- well-grounded in prior ESW. Most of this was under- tember 1997, there were 52 commercial banks—all but taken with the endorsement of the government, and the 3 privately owned, and 17 under foreign ownership. Of Bank endeavored to ensure, especially in the 1990s, that BOX 2.3: MICROCREDIT LESSONS BY THE ASIAN DEVELOPMENT BANK T he Asian Devel- opment Bank (ADB) approved a US$8 million loan for microcredit in 1988. This used by the Grameen Bank, “has enjoyed an astonishing 86 percent repayment rate, which, when late payment is In contrast, the World Bank approved a US$15 million loan for microlending in 1989. The project closed one commercial banks nor the individual borrowers were much interested in the new associations. Commercial banks did was the first microcredit counted, soars to 99 per- year ahead of time in not consider the associa- program aimed at provid- cent.” One-quarter of the 1993, and 90 percent of tions attractive clients. ing credit to cottage enter- program’s independent the loan was canceled. Only 39 associations prises in rural areas. The entrepreneurs—most of The loan was retailed by were established, and the loan was disbursed them under the poverty commercial banks number of members per through the Department line—have graduated to through the Development association had to be of Trade and Industry’s become bankable SMEs. Bank of the Philippines. reduced from 60 to 40 to network of NGOs: 312 The ADB is not only using The project aimed at sub- make smaller associations NGOs participated in dis- credit to reduce poverty, stituting collateral eligible for the loan. The bursing loans to 21,000 but it is also helping “to through mutual guarantee 1996 OED audit of the sub-borrowers, who gen- build a middle class so associations that grouped project found that “the erated 46,000 jobs at important to Asia’s grow- potential borrowers and main lesson of the project around US$200 each. The ing economies.” A second provided guarantees for is that an untested loan was disbursed 15 loan for US$31 million loans made to their mem- approach for lending to months in advance, and it has already been dis- bers. Individual contribu- microenterprises should was rated as successful. bursed, and, as of 1996, tions of US$400 to the not be adopted on a According to the the NGO II loan had association made mem- national scale without ADB, the program, generated 190,000 jobs bers eligible for a loan of first trying a pilot opera- despite its lack of empha- among 100,000 up to US$3,600. tion . . . to test the feasi- sis on group lending as microenterprises. However, neither the bility of the scheme.” Source: Asian Business (December 1996) and OED Précis No. 135 (January 1997). 17 Philippines: From Crisis to Oppor tunity all major stakeholders retained ownership of ESW-based relatively healthy. Reforms supported by the FSAL reform. One notable exception—an example of the enabled the strengthened central bank and the Philip- sometimes testing relationship between the Bank and the pines’ financial system to cope effectively with the after- government—was the 1996 Financial Sector Assessment shocks of the Mexican crisis in 1994 and 1995 and with study. Despite a solid review of urgent financial issues the recent and more severe Asian crisis. In retrospect, the and concrete, relevant policy recommendations, Bank FSAL may be considered one of the most successful of staff undertook the assessment over the objections of the Bank’s financial sector operations. With the Bank, both the central bank’s governor and the Bank resident the government deserves considerable credit for its representative about its timing and modalities. This dis- strong commitment, decisive action, and exemplary agreement led to a distancing of the Bank from active leadership. involvement in banking sector reform. But financial deepening and strengthening in the Nevertheless, the overall effect of the Bank’s assis- Philippines still has some way to go. Its broad money-to- tance to the financial sector has been highly satisfactory. GNP ratio of 52 percent in 1996 is still low in compar- Domestic financial markets have become considerably ison with Malaysia (at 95 percent) and Thailand (at 81 stronger, deeper, and more deregulated since the wrench- percent). And the sector still suffers from weaknesses in ing crisis of the mid-1980s. The ratio of broad money the regulatory and supervisory regime—the absence of (inclusive of foreign currency deposits) to GNP has since risk-weighted capital adequacy and of prudential regu- more than doubled, while loan portfolios have remained lations, and a lag in supervisors’ technical ability to 18  A s s i s t a n c e S t r a t e g y : S a t i s f a c t o r y, b u t U n e v e n a n d B e l o w Po t e n t i a l assess with rigor the recently introduced, complex finan- ment’s preference for concessionary donor financing. cial derivatives. The banking secrecy laws, personal lia- Only one project has been completed, and it has not yet bility of supervisory officials, and cumbersome been evaluated. Consequently, it is not possible to assess legal/judicial procedures constrain enforcement. the impact of the Bank’s assistance on health indicators. Modest Assistance to SMEs. Between 1976 and On the positive side, the Bank has pushed successfully for 1992, the Bank provided US$180 million to finance efforts to control malaria and tuberculosis. On the nega- SMEs through four consecutive lines of credit. The ADB tive side, broad input indicators—such as O&M expen- contributed US$100 million to the last line of credit. All ditures and public investment in the sector—have four lines of credit were retailed as subloans to eligible remained minuscule (and inadequate), as in the preceding SMEs. Over that period, the Bank financed almost 15 years. With the added leverage of structural adjust- 2,600 subprojects, which generated around 64,000 jobs. ment lending, the Bank could certainly have done more Besides channeling credit to SMEs, the Bank also sup- in health, especially in pushing for a change in resource ported a number of nonlending activities affecting allocation and in policies related to hospital utilization. SMEs, directly and indirectly, such as the overall policy A 1991 Bank study, New Directions in the Philip- dialogue with the government, SME-specific economic pines Family Planning Program, contributed to the gov- and sector work, and direct technical assistance to ernment’s substitution of a new “health” rationale for SMEs. family planning in place of the old and ineffective “pop- The Bank’s SME strategy had two major objectives. ulation growth reduction” approach. It also provided an First, the Bank sought to increase the availability of appropriate agenda, focused on reproductive health, for long-term funds to SMEs directly through the participa- Bank lending for family planning. This agenda was tion of financial institutions. Second, the Bank sought to indeed reflected in the Women’s Health and Safety pro- generate jobs (especially outside Manila), which would ject (1995), but the government’s advocacy, leadership, ultimately reduce poverty. Cumulatively, the SME pro- and institutions remain too weak for the family planning jects were an effective credit allocation program, but program to have substantial influence against the strong modest in job-generating capacity. These projects opposition by the Catholic Church. yielded satisfactory outcome ratings in the increased Bank Assistance in Education: A Mixed Impact. availability of long-term funds (market rates were Although the Bank has supported textbook production, obtained) and creation of jobs, but made only a small in-service teacher training, and the development of sub- dent in the aggregate unemployment picture and in ject curricula, overall project performance and institu- reducing poverty. tional achievements have been disappointing. The Poor Result-Orientation of Social Sector Projects. reallocation and expansion of budgetary expenditures in The Bank’s strategy to alleviate poverty did not translate favor of the education sector has also been unsuccessful. into concrete action on the ground in the social sectors And although enrollment rates have increased, the qual- until recently. In general, supervision missions have ity of education and access to services for students from focused on disbursing funds and obtaining compliance poor families have not improved. with specific loan covenants. Until recently, relatively lit- The Bank’s current emphasis on the quality of ele- tle attention was devoted to actual accomplishments in mentary education and its accessibility to students from the field. The Bank’s subsector-specific lending has poor families serves its poverty alleviation objectives yielded contrasting results—progress on key indicators well. Its secondary emphasis on improving vocational of social development, but regression in some areas. and technical training to meet the needs of an expanding Bank Assistance for Health: No Measurable Impact. economy appears less justified. Little evidence is avail- The recorded improvements in health indicators and the able that the Bank has identified the market failures that (modest) reduction of the population growth rate to the would justify government involvement. The quality of mid-1990s cannot be credited to Bank activities. Since these projects at entry is highly unsatisfactory. the late 1980s, the Bank has stepped-up its direct lending The most recent loan, the Third Elementary Edu- support for priority areas (reproductive health, primary cation project, addresses areas of weakness with a care, and disease control) and has been the main coordi- high-risk, high-reward approach. It seeks to replace nator of donors in the sector. But its lending assistance the centralized educational system with a decentral- has remained modest, mainly because of the govern- ized mechanism, involving greater participation by 19 Philippines: From Crisis to Oppor tunity stakeholders, including parents’ associations, local National Irrigation Authority, which the Bank had helped communities, and NGOs. It specifically targets poor build into one of the most effective irrigation institutions provinces and disadvantaged children and is introduc- in the developing countries in the 1970s and early 1980s, ing the use of in-service training and grant mecha- had deteriorated by the late 1980s. So far, there has been nisms to promote school-based improvements in no effort to support product diversification strategies, management and innovative approaches to education. except for some indirect support through the rural credit The project intends to improve institutional capacity projects. The Bank’s reform efforts in the sector, which so that the relevant agencies can effectively implement had a good start in the mid-1980s, have failed to prevent their strategy. Coverage is limited to the 20 provinces serious backsliding in trade liberalization. targeted by the Social Reform Agenda (SRA), plus 6 On the positive side, Bank assistance for irrigation other poor provinces. Supervision ratings indicate that helped the Philippines achieve self-sufficiency in rice pro- project start-up has proceeded well—but caution is duction. The areas with irrigation systems financed warranted, given the ambition of the effort and sector under the Bank’s programs have the lowest incidence of experience. rural poverty. In agricultural education and technology Adequate Attention to Gender. Improvements in transfer, the Bank helped finance the development of a gender equality in public policy have been made during renowned international center for agricultural education. the past dozen years. Women’s legal status, although The Bank also helped capitalize on the green revolution. already high by international standards, improved fur- Yet growth in the sector remains disappointing. ther. But problems in reproductive health (high total fer- Poverty in rural areas has declined slowly, and less so tility, maternal mortality, and morbidity rates) and the than in urban areas. Institutional capacity among sec- labor market (gender gap in labor force participation toral agencies remains weak at both the national and the rate, wages, and unemployment rate) have persisted. local government levels. After more than three decades The Bank’s focus on the reproductive health issue of lending and policy advice, there is no sign that the appears warranted. Consultation and communication sector is on the road to sustained recovery. However, a with government agencies, women’s NGOs, and donors recent study, Promoting Equitable Rural Growth with gender-related programs need to be intensified. (1997), outlines a new comprehensive strategy for rural Limited Impact for Bank Assistance in Many Other development. Sectors. Government policy reform, expenditures, and In environmental management, the adoption of the Bank support for the basics of the economy—agricul- Philippine Strategy for Sustainable Development in ture, natural resource management, energy, transport, 1989 has not yet addressed the factors that threaten and water and sanitation—have yielded little in the way environmental sustainability. The Bank’s pioneering of substantive outcomes. The government and the Bank environmental work in the Philippines laid the founda- can claim success only in two sectors—water and sani- tions for a program of donor support for environmental tation and municipal development—but even these are reform, with extensive NGO participation. The Central qualified successes. A variety of problems have thwarted Visayas Regional project innovations related to upland more effective and supportive development throughout tenure were important catalysts for the adoption of the the core economic sectors—a dearth of institutional 25-year lease under the Social Forestry Program that capacity, project implementation delays, unresolved pol- became a centerpiece of the Aquino administration’s icy issues, and poorly timed Bank support. The Bank environmental policy. The Bank has adequately inte- certainly overestimated the development learning curve grated environmental management concerns in its strat- of the new Aquino administration. Most development egy and has correctly diagnosed the conditions that programs in the late 1980s were plagued with budgetary would allay resource degradation and ease serious envi- and procurement problems. ronmental stress. However, it has not moved forcefully In agriculture, the Bank’s track record of assistance is beyond that stage. Its project work is rated as satisfac- less than satisfactory.1 In the implementation of its strat- tory, because it has pushed the government in the right egy, the Bank’s priorities included fostering agricultural environmental direction—at least to an abiding aware- growth, but without adequate emphasis for the equity ness of its slowly deteriorating environment. But that dimensions of such growth, or for land reform or the tar- effort has taken a long time, and has not yet yielded sub- geting of projects to assure rapid poverty reduction. The stantive results. 20  A s s i s t a n c e S t r a t e g y : S a t i s f a c t o r y, b u t U n e v e n a n d B e l o w Po t e n t i a l In energy, Bank assistance since 1986 has not been after the May presidential elections, as passage is successful, although performance of all but one com- expected of the Omnibus Bill, which would allow the pleted Bank project has been rated as satisfactory. For privatization of NPC and would complete the regulatory the Energy Sector Loan approved in 1990, however, a framework for private participation, including tariff set- draft OED audit is proposing to rate outcome as mar- ting. Supervision ratings depicted all five projects in the ginally unsatisfactory, sustainability as uncertain, and Bank’s active portfolio during 1997 as satisfactory per- institutional development impact as modest. The gov- formers, but caution is warranted: all were rated unsat- ernment, its own National Power Corporation (NPC), isfactory for quality at entry, and one (the Rural and the Bank all failed to anticipate the disastrous impli- Electrification project) is now suffering from serious cations for power supplies of the mothballing of the implementation delays. half-completed 600 MW nuclear power plant and the In water and sanitation, the Bank has extended 10 lack of planning and alternative investment. Moreover, loans totaling US$540 million since the late 1970s. Con- Bank input into the design and implementation of the cluding in the early 1980s that the Local Water Utilities government’s BOT initiative, which effectively solved Administration (LWUA) was not a suitable borrower, the severe power shortages of the early 1990s by 1994, yet wishing to support the sector and development in was minimal. At best the Bank was unenthusiastic, at provincial areas, the Bank made loans to the Metropol- worst it opposed the program out of concern for its high itan Waterworks and Sewerage System (MWSS), serving direct cost. In neither case did the Bank adequately Manila, and a nationwide sector loan in 1990 for water appreciate the high cost of inaction.2 The IFC, however, supply and sanitation, relying on three government made a pioneering investment in the first arrangement, departments and local governments as implementing thus offering its partners the comfort to make long-term agencies. commitments and providing a model for subsequent The Bank’s completed lending operations for water arrangements (see Box 2.3). Compared with the early supply and sanitation have had mixed results and are 1990s, consumers today are undoubtedly better-served, rated as only marginally satisfactory. Under the projects, but transmission bottlenecks persist, and the quasi-gov- some physical targets were met (for example, distribu- ernmental distribution sector (which has unacceptably tion extensions), others (service coverage and reduction high technical and nontechnical losses) continues to suf- of unaccounted-for water) were not. Projects were fer from underinvestment. invariably completed several years behind schedule The Bank’s efforts at restructuring NPC since 1991 because of delays in procurement, poorly performing have not yielded sustained results. The Bank has lent contractors, and shortages of local funds. Despite signif- nearly a billion dollars to a noncreditworthy NPC over icant accomplishments, which kept the Philippines the past decade, but NPC’s estimated 1997 internal ahead of most other Southeast Asian countries (except cash-generation was still negative, in contravention of Malaysia), some 35 percent of the 28 million residents in loan covenants. The recent peso depreciation, unaccom- large urban areas do not have piped water, and most panied by adequate tariff adjustments, has further have no satisfactory way of disposing of waste; the situ- increased NPC’s losses. Because of NPC’s continuing ation in rural areas is worse. But the Bank’s substantial financial troubles, several large, recently commissioned, efforts at policy review in the 1990s, its decision to forgo and privately financed power plants will sit idle for long substantial lending opportunities rather than channel periods, pending completion of the transmission lines funds though an unreformed LWUA, and its recent (Bank-financed) by NPC. Other Bank-financed plants approach in the sector—bottom-up planning and local affected by lack of transmission lines are expected to government participation—may help improve the port- resume production after March 31. folio’s performance. The Bank has highlighted the right issues in the sec- In municipal development, several lending opera- tor dialogue, particularly those relating to energy pric- tions in urban infrastructure have adapted to the reality ing, power sector restructuring, and oil sector of local governments and have become useful tools in deregulation. In 1992 the Bank extended a Policy and decentralization efforts. Since the mid-1980s, municipal Human Resources Development Fund (PHRD) grant for development loans have become effective mechanisms to technical assistance to support NPC’s preparation for finance local programs and open the doors of credit- privatization. This should yield positive results soon worthy local governments to the domestic credit mar- 21 Philippines: From Crisis to Oppor tunity kets through the Municipal Development Fund (a fourth Instruments and Partnership line of credit is in the pipeline). However, in decentralization policy, analytical work High-Quality Economic and Sector Work, to provide in-depth advice to the country was not com- but with Missteps pleted as planned and achieved only partial results. The The Bank’s diagnosis of the Philippines’ ills has been Bank started planning an analysis of local government correct and based on solid economic and sector work finance in June 1988. But the resulting study, Fiscal (ESW)—at both the macro and the sectoral levels. The Decentralization, was released in early 1993, when most government has valued the Bank’s intellectual contribu- of the key issues had already been settled and parliament tions, embodied in consistently high-quality reports cov- had already adopted final changes to the local govern- ering all key areas. Country economic memorandums ment code. The government has preferred to tap other and public expenditure reviews, drawing from many donors for analytical work in recent years. However, a other internal and external studies and policy papers, 1996 Bank policy note and two 1994–97 studies have contributed to developing the broad reform financed with IDF grants helped prepare a policy frame- agenda. Informal policy notes, summarizing the Bank’s work for financing local investments that has been views on specific issues or drawing lessons from the adopted by the donor community. We should note that Bank’s worldwide experience, have facilitated policy consideration of long-standing Bank recommendations dialogue. The donor community has also benefited from regarding the introduction of equalization criteria in the this work. allocation of national revenues and of incentives for But problems with dissemination and timing have local revenue mobilization have been postponed until limited ESW effectiveness and impact. Key middle and after the coming elections. senior managers in government, parliamentary commit- In transport, the Bank’s strategy has been ambitious tee chairmen, business leaders, former cabinet members, and has focused on the removal of three constraints— and prominent intellectuals are frequently unaware of financial, institutional, and policy—with mixed results. the content (and sometimes even of the existence) of The Bank has supported deregulation, private sector nonsensitive Bank reports (for example, the 1994 Public participation, institution-building, and higher O&M Expenditure Review, a very expensive report, had only a expenditures. Lending operations have focused on the modest impact on the allocation of expenditures). In key road subsector. From 1985 to the present, seven some cases, the country arrived at strategic or legal deci- transport projects—including one structural adjustment sions before the Bank was able to complete work on its operation with a substantial transport reform compo- reports (as in the case of the Bank’s 1993 Fiscal Decen- nent—were under implementation (five were completed tralization Study). Similarly, the 1996 A Strategy to and two are ongoing). The Maritime Improvement project, which has been under preparation since 1992, FIGURE 2.1: COMPARATIVE OED EVALUATION was canceled in 1997 because of disagreement with the FINDINGS BY FISCAL YEAR OF APPROVAL government on its policy content. Coordination with (US$ MILLION) other donors—in project and sector work—was good. Percent The deregulation that the Economic Integration 100 Loan supported was largely an acceptance and legaliza- 94 85 92 78 81 tion of existing conditions. And the impressive initial 80 63 60 gains made in private involvement in the road and port 60 52 subsectors have been rolled back. For instance, private 40 41 sector participation in road maintenance increased from 20 10 percent in 1984 to 70 percent in 1994, but was then forced down to 50 percent through political interfer- 0 Satisfactory Likely sustainability Substantial ence. The most important objective of Bank assistance, outcome institutional maintenance of the road system, has been undermined development by insufficient budgetary allocations (about 0.2–0.3 per- Philippines cent of GNP in recent years for the transport and com- East Asia and Pacific Region munications sectors). Bankwide 22  A s s i s t a n c e S t r a t e g y : S a t i s f a c t o r y, b u t U n e v e n a n d B e l o w Po t e n t i a l Fight Poverty proved poorly timed, given the extensive work already conducted under the umbrella of a presi- BOX 2.4: IMPROVED QUALITY AT ENTRY OF BANK dential commission in preparation for a poverty sum- PROJECTS mit.3 The 1996 Financial Sector Assessment failed to review of the highly unsatisfactory, account adequately for the sensitivities of the authori- ties. The Bank fell short in providing adequate technical and policy reform analysis in an area critical for the A quality at entry of all 33 pro- jects approved during largely because of the weakness of the imple- menting agencies and social and economic reform agenda—the judicial sys- FY90–97 shows a major the consequent risks. tem’s institutional weaknesses—and in exploring gender improvement over time, Many other projects discrimination issues in the labor market. which places the Philip- were too dependent on pines’ close to the goal the financial and institu- Sound Project Lending Performance of a 100 percent satis- tional support of gov- In the twelve years from FY86 to FY97, the total annual factory quality at entry. ernment, with direct cost of delivering the Philippines’ country pro- The review was con- inadequate contingency gram (lending and nonlending services) has ranged ducted independently planning or risk analy- between US$5.5 million and US$7.6 million (in constant and without the hind- sis. Thus, for example, FY97 dollars), FY97 being the lowest cost, and FY91 sight benefit of supervi- three of the four educa- the highest. Total costs in staff time have ranged sion or completion tion projects were between 31 and 34 staffyears. In the same period, the evaluations, following judged unsatisfactory or Bank approved 49 projects to the Philippines, totaling the standard criteria highly unsatisfactory for nearly US$5.7 billion. Of this amount, about 74 percent used by the 1996 ECON quality at entry, mainly (US$4.2 billion as of February 1998) has been dis- III study of projects because their success bursed. About 25 percent of commitments (US$1.4 bil- Bankwide. depended on a high level lion) have gone to adjustment lending, and 75 percent A striking finding of of government participa- (US$4.2 billion) to investment lending. Adjustment lend- the review is that all the tion/coordination and ing was concentrated in the 1987–93 period. It was energy projects were donor cofinancing. halted after FY93. found unsatisfactory or Overall Relevance and Efficacy. Bank assistance has been both relevant and satisfactory at the macro level, and in private sector development (including SME lend- ing), financial sector strengthening, and municipal devel- opment, using a variety of instruments—adjustment loans and policy dialogue, specific investment loans for financial intermediaries and local infrastructure, aid FIGURE 2.2: ONGOING PROJECTS: SUPERVISION coordination, and technical assistance. The Bank effec- RATINGS (AS OF OCTOBER 17, 1998) tively deployed the investment resources of the IFC and FIAS. In addition, the Bank and the IMF developed a Percent robust, cooperative relationship. 100 Relevance and efficacy in other sectors has been 95 uneven, despite good project-specific outcomes. Infra- 90 88 89 structure, the quality of education, and bureaucratic 86 87 quality have not kept up with the needs of a rapidly 84 84 85 recovering economy in an integrated global market- 80 place. Bank assistance did not focus on assuring access 75 by the poor to educational services until recently, and Satisfactory Satisfactory was limited in health and family planning. In the power development implementation objectives progress sector, it was only partially helpful in coping with the Philippines crisis of 1990–92 and resolving the institutional and East Asia and Pacific Region financial weaknesses of the public generation and trans- Bankwide mission utility. The performance of the agriculture sec- 23 Philippines: From Crisis to Oppor tunity tor and the welfare of the poor remain negatively tion progress. These figures compared well with 93 and affected by high protective barriers on food products. 90 percent, respectively, for the East Asia and Pacific Bank assistance fell short in supporting the government’s Region. agrarian reform until very recently. Thus, assistance over More recent portfolio performance indicators (as of the years 1986–97 ranged from relevant and marginally February 2, 1998) indicated a slight weakening of the satisfactory in some sectors (water and sanitation and Philippines’ relative performance: 16 percent of commit- transport) to poorly relevant or unsatisfactory in others ments were at risk, compared with 13 percent for the (health, education, agriculture, and energy).4 These sub- region and 22 percent Bankwide, according to the par ratings are attributed to various shortcomings of the Bank’s Quality Assurance Group (QAG). Two pro- institutional and policy environment, but also to the jects—the Highway Management project and the Urban timing, design, or implementation of the Bank’s lending Health and Nutrition project—carried an unsatisfactory and nonlending interventions. supervision rating for both development objectives and Project-Specific Efficacy, Sustainability, and Institu- implementation progress. Two other projects—the tional Development. The Bank’s lending has improved Manila 2nd Sewerage project and the Rural Electrifica- considerably compared with its pre-1986 performance; it tion project—were experiencing serious implementation is now almost at par with EAP regional standards. About delays. The most common reasons for poor performance 92 percent of approved and completed projects (by value) were project management and procurement problems. received a satisfactory (or better) outcome rating, which is Finally, the realism of supervision ratings among task substantially higher than performance Bankwide (78 per- managers had improved greatly, yielding small discon- cent) and in the South Asia Region (72 percent), and only nect ratios between supervision and completion ratings.5 slightly lower than the performance of the EAP region (94 Efficiency. The overall cost of Bank assistance is percent). The Philippines’ ranking for likely sustainability within comparators’ ranges. Other efficiency indicators is equally high, at 81 percent; its ratings for the institu- appear within reasonable bounds. Both the total admin- tional development impact of projects were higher (60 istrative budget and ESW resources declined appropri- percent) than the EAP standard (52 percent). ately, in parallel with the decline in lending commitments All five adjustment operations approved since FY86 and the improvements in the country’s economic and have earned satisfactory outcomes and likely sustain- social performance. ability ratings (a 100 percent success rate), and four had The average cost of an ESW product over the ten- a substantial institutional development impact (the Debt year period FY88–97 has been lower than in the EAP Management Program Loan had a negligible institu- region, but significantly higher than in most other com- tional development (ID) impact because of the nature of parators except Indonesia. Although the average cost of the operation). For investment projects, the percentages lending per project is lower than the regional average of satisfactory outcomes, likely sustainability, and sub- and other comparators, the cost grew by 27 percent in stantial institutional development for investment pro- staffweeks and 33 percent in direct dollar costs from jects have also risen substantially since 1985, to 87 FY85 to FY97. A large part of this increase can be percent, 68 percent, and 43 percent respectively. Among attributed to the increase in dropped projects. This the completed investment projects approved in the reflects important shifting government attitudes—first 1990s, unsatisfactory outcomes were recorded in energy, welcoming the Bank’s intellectual and planning contri- education, and microfinance operations. butions, but then resorting to cheaper sources of financ- Recent Project Portfolio. The Philippines had a ing among the donors. By FY97 the lending portfolio healthy project portfolio through 1997. It was (and under supervision had shrunk by 44 percent since FY85 remains to date) the third-largest in the EAP Region, (with 50 projects) to 28 active projects. However, the after China and Indonesia, both in total commitments cost of supervision increased, in line with the general ($2,212 million) and in the number of projects (23). Its trend in EAP and the Bank, reflecting the growing performance was in line with EAP averages, which were importance attached to portfolio management from better than those of any other region. Among the pro- FY94 onward. Projects in the Philippines had only a jects under implementation as of October 1997, 93 per- slightly higher cost of supervision, on average, than did cent (by value) received a satisfactory rating for EAP projects overall, but costs were significantly higher development objectives and 91 percent for implementa- than in Malaysia and Thailand. The highest average cost 24  A s s i s t a n c e S t r a t e g y : S a t i s f a c t o r y, b u t U n e v e n a n d B e l o w Po t e n t i a l of lending completion per project was in human resource development (more than 140 staffweeks), and the least in multisector lending (around 40 staffweeks). The completion costs in agriculture and public sector management were also among the highest. Good Aid Coordination The Bank has been active in coordinating and building consensus among donors and in the government through regular dialogues at both formal levels, by chairing Con- sultative Group (CG) meetings, and informal levels, and by arranging Manila-based working group meetings with other donors. The Bank supported the government’s efforts to improve its own capacity and to assume an increasingly assertive position in aid coordination. Regu- lar policy dialogue and the CG process helped the gov- ernment to address the concerns of donors and to prioritize aid and budgetary allocations. Bank ESW and lending operations helped the government provide the donor community with clear policy frameworks to build ment’s reforms may have been delayed. and coordinate their own strategies. And Bank project CG meetings have also provided an open forum for preparation facilities helped the government prepare coordinating policy advice and different donor activities well-designed projects, and then tap the cheapest avail- in the Philippines, monitoring progress in policy reforms able financing sources. The government has increasingly and program/project implementation, providing oppor- assumed responsibility for program-level coordination tunities and a clear agenda for many informal meetings and preparation for donor meetings. around different topics, creating an opening for the gov- The Bank has done a good job in helping to coordi- ernment to take more leadership in aid coordination, nate external assistance. It has recently pioneered efforts and providing an opportunity for broader constituencies to add project copreparation activities to its cofinancing to air their views. arrangements. Cofinancing has been effectively used. The government has been able to obtain additional con- The Bank and NGO Partnership: A Maturing cessional resources that individual donors would have Relationship found difficult to channel through their own project The presence of a strong and diverse NGO community, pipelines. And donors have been able to commit and dis- a supportive government, and the knowledge and expe- burse their available aid funds much more quickly, with- rience of donor agencies has created a favorable envi- out compromising project quality. ronment for stakeholder participation. The Bank has The high priority placed on aid coordination by the effectively promoted NGO participation at different lev- Bank is evident in the high percentage of staffyears and els of Bank operations, especially since the early 1990s. budget spent on related activities against the total. Both The increased openness of the Bank, particularly of the in cost and time, the Philippines exceeds both the EAP resident mission, over the past few years has been well average and the Bankwide average by a large degree all received. through this period: this is largely explained by the high Project work done in the Philippines in the last three frequency of CG and other donors’ meetings. The Bank to five years has focused increasingly on ethnic minorities has used these resources well, consolidating its leader- among the poor, and on participatory strategies with ship in shaping the structural reforms and the public active community involvement. This is reflected in some investment program. Overall, the Bank’s emphasis on of the targeting for the social sector projects and in natural donor coordination was highly relevant and effective, resource management. For example, the Conservation of because it fostered essential harmony among the major Priority Protected Areas Project, which covers a combina- donors in the policy arena, without which the govern- tion of protection of biodiversity, natural resource man- 25 Philippines: From Crisis to Oppor tunity agement, and community-based resource management, rized about US$500 million in annual lending to the involves NGOs directly and focuses on the legalization of Aquino administration, in the four-year period ancestral domainal lands of indigenous peoples. FY86–89, the Bank fell 25 percent short of its lending Yet many NGOs remain skeptical about the Bank’s plans. Lack of budgetary resources to process an ade- conversion to participation. Some of their skepticism is quate pipeline of projects on the part of the Bank was merely a practical matter. For instance, although NGOs the main reason for the shortfall. tend to see the Bank’s consulting and procurement Lending commitments increased sharply to almost requirements as a sign of mistrust or imposition, this per- US$1,877 billion in FY90–91, as the Bank stepped-up ception usually fades as they become more familiar with its quick-disbursing balance of payments support and the operational environment of the Bank. But some of advanced several operations in the pipeline. These were, their skepticism stems from their resentment at being however, scaled back again, to between US$430 million treated as less than full “partners.” A few NGOs believe and US$628 million in the next three years (FY92–94). that their interest in policy formulation is deliberately This time, the reason was attributed to poor absorptive played down by both the government and the Bank in capacity by borrowing agencies, manifested by imple- favor of the “contractors” or the consultancy role. Some mentation problems in ongoing projects and delays in interpersonal mistrust is the result of occasional arro- the preparation of new projects. During these years the gance by Bank headquarters staff. Bank could have shifted back to adjustment lending to The Bank has generally been responsive to the needs nurture policy reform. The policy debates within the of NGOs involved in projects. It has also learned lessons country during the second half of the 1980s became that it has integrated effectively into new project designs much more contentious because of the negative resource in irrigation, rural finance, health, and education. But it transfer to the donor community. The pace of imple- appears to be more interested in capacity-using than mentation of reforms might have been faster with more capacity-building, unlike other donors. The Bank does vigorous Bank involvement and less stringency. not track the status or number of NGO participants in Borrowing by the government from the Bank since Bank-funded projects after the completion of their 1994 has been consistently lower than the amounts the involvement. And local representatives of donors work- Bank was willing to make available, and less than what ing in NGO capacity-building activities have noted that was appropriate to support the investment needs of a the Bank does not risk working with NGOs in the for- fast-recovering economy. During the most recent three- mative stage, but takes the less risky route of selecting year period, FY95–97, commitments have averaged those with records of working well with other donors. US$252 million a year. A decision in 1993 on the part of the government to limit further public borrowing from Unfulfilled Development Lending Potential abroad (and, in consequence, from the Bank) appears to The Bank was not nimble at the outset of the Aquino be the main reason for these low lending levels. The administration, although it did release the undisbursed Bank had obtained Board endorsement for an annual portion of its earlier Agriculture Sector/Inputs Loan to lending program of around US$500 million. jump-start agricultural production. Reflecting the The total net resource flow out of the country and lagged effect of the previous slow-down in commit- to the Bank was US$2.7 billion during the period ments, loan disbursements in 1986 bottomed-out at 1986–97, and was projected (December 1997) at US$168 million and remained below US$300 million US$536 million for 1998, and to rise in subsequent in 1987 and 1988. Bank staff believed that ensuring a years. Such a large net negative resource flow at this positive net flow of resources from the Bank was not early stage of the Philippines’ development raises ques- just desirable, but necessary to support continued tions about the wisdom of phasing-out adjustment lend- growth and developing policy dialogue with govern- ing in the mid-1990s, with an agenda of structural ment. And although senior management had autho- reform still incomplete.6 26  3 Toward a New Country Assistance Strategy: Moving to a Higher Plane J ust as the Philippines has emerged stronger from the economic and social disarray that pre- vailed before 1986, it is likely to surmount the challenge posed by the current regional cri- sis. The resilience of the country and its people—tested repeatedly by domestic, natural, and global exigencies—augurs well for deeper and more rapid economic and social advancement in the wake of the Asian crisis. Its fallout provides an opportunity for policy and institutional reforms to fuel the economy’s renewed competitiveness. The Philippines has the key factors to move up the developmental ladder—political stability; levels must be increased and sustained with less volatile broad consensus; government commitment; support sources of financing. The country must shift the compo- from the donor community; an educated, skilled, hard- sition of foreign savings by tapping external sources of working, and English-speaking population; and now a long-term funds to reduce the economy’s dependence on 12-year record of good economic management. These future short-term capital flows. Poverty must be targeted positive conditions must now be mobilized to help the directly, through broad-based programs beyond the country gather momentum and make the leap needed to trickle-down benefits from accelerated growth. Remain- join the newly industrialized countries. ing policy and institutional constraints in the social sec- To help the economy reach its growth potential, for- tors, in agriculture, in natural resource management, and tify its capacity to withstand domestic and global exi- in infrastructure must be eased or removed. Implemen- gencies, and reduce poverty, the Bank should focus its tation capacity must be improved. assistance on helping the government pursue and deepen A new compact is needed among the government, its unfinished reform agenda. While expanding its liber- the NGOs, the Bank, and the donor community to alized environment—a valuable distinction from its mobilize and use external assistance effectively. It should neighbors—the country will need to apply the lessons of support a strong medium-term development program, the East Asian miracle, as well as of those painfully backed by long-term sources of foreign savings and min- drawn from the most recent East Asian crisis. Investment imal competition among donors. Such an effort could 27 Philippines: From Crisis to Oppor tunity help the Philippines race ahead in social and economic could well take the form of an economic recovery loan, progress during the next administration. The Bank conditioned on the country entering a precautionary should increase the selectivity of its nonlending assis- stand-by arrangement with the IMF, actions already tance to improve the depth of its analysis and to increase taken, and the government’s commitment to a compre- participation. Lending assistance should be selective, in hensive medium-term reform program. If used to coordination with other donors, but also greater to sup- increase the depleted official reserves, instead of for port the unfinished reform agenda and the additional additional expenditures, the loan would directly reduce investment needs through a diversified set of instru- government refinancing requirements in the domestic ments—quick-disbursing operations, financial interme- capital market. This would lower market interest rates, diary loans, sector investment loans, guarantees, and reducing the severity of the economic slowdown for new adaptable lending instruments. An expansion of 1998. However, the Bank should move quickly beyond budgetary resources allocated to the Philippines will be such emergency assistance to intensify support—begin- required to support such enlarged assistance. ning this year—for the reforms necessary to correct the macroeconomic weaknesses that have constrained high Strengthening Macroeconomic Policy and Public Sector growth and left the economy vulnerable to downturns. Management In the financial sector, Bank assistance should aim at In the very short term, the Bank should stand ready to strengthening the banking sector and the capital market offer, depending on the severity of the capital outflow so as to increase private sector savings, channel domes- and on the need for fair burden-sharing, emergency tic and foreign savings more efficiently into investment, lending assistance to help ease the current liquidity and minimize the impacts of future financial crises, shortage manifested in very high real interest rates. This domestic or global. A combination of action-oriented 28  To w a r d a N e w C o u n t r y A s s i s t a n c e S t r a t e g y : M o v i n g t o a H i g h e r P l a n e technical assistance and adjustment lending would be opportunity to go further in reducing import tariffs, appropriate. The Bank could extend an adjustment loan especially on food products. In addition to boosting pro- with a technical assistance component to address the ductivity as comparative advantage is allowed to oper- weaknesses remaining in the legal, regulatory, and ate, poor consumers (now heavily taxed by protection supervisory regimes and in failure resolution for finan- on food) would benefit from such liberalization. The cial institutions. This loan could also support the cor- Bank could support such a move with adjustment lend- rection of the distorted incentives that favor dollar over ing to help the government initiate the reform and pro- peso intermediation by the banking system, as well as vide a safety net for the poor and disadvantaged and other measures to manage future short-term capital compensatory measures for the displaced. flows. A technical assistance loan for housing finance reform, currently under preparation, might be Supporting Private Sector Development and Basic expanded. Technical assistance by the Bank and IFC Infrastructure advisory services is also required to draw up an action In addition to supporting reforms to improve the effi- plan for deepening the undeveloped bond market and ciency of the bureaucracies, the Bank Group should do for pension reform. With the country’s demographics more to help the private sector contribute to the solution posing only a very distant threat to fiscal discipline, pen- of the problem of inadequate infrastructure. The Private sion reform may not appear an urgent priority. How- Sector Infrastructure Initiative has already laid out the ever, it is one of the few instruments available to boost required elements to support a strategy of expanding private savings. A capital market adjustment loan can private sector participation, but technical assistance is then support the implementation of the agreed reforms. needed to complete the regulatory framework (for In public expenditure management, a combination example, in the guidelines regarding government guar- of regular public expenditure reviews, jointly conducted antees and the treatment of unsolicited proposals) gov- with the government, and adjustment lending is recom- erning private participation. A renewed Bank Group mended to help restructure expenditures in favor of strategy is needed to lay out clearly the contributions of higher public investment and maintenance expenditures the Bank, IFC, and Multilateral Investment Guarantee (in infrastructures and the social services) and to imple- Agency (MIGA) in support of private sector develop- ment civil service reform. This operation could also sup- ment, along the lines suggested in the 1994 Private Sec- port the introduction of equalization considerations in tor Assessment report. This is particularly important in allocations across regions—and all units of local gov- light of the slow progress in expanding private activities ernments—and of incentives to strengthen the raising of in key sectors—particularly energy transmission, road local revenues. Other institutional measures to improve and maritime transport, and water and sanitation the efficiency of the bureaucracy (such as the recently beyond Manila. adopted Anti-Corruption Initiative) and of public In the right macroeconomic and institutional envi- expenditure management (such as multiyear budgeting ronment, which is expected to remain in force in the and rolling public investment programs) could also be Philippines, the Bank can reinforce progress by supple- supported by a combination of grants and technical menting the supply of private (mostly short- and assistance. For sectors with appropriate policies and medium-term) credit with long-term funds. Thus, the institutions already in place, regular public expenditure Bank should re-insert financial intermediary loans, reviews should open the door to sectoral investment and including to SMEs, in its instrument menu. These loans adaptable program loans with low conditionalities. The can also support and extend financial sector reforms. Bank should embark on an in-depth study of the judicial With regard to microcredit, possibly the most direct and system and its options for reform in support of the coun- beneficial intervention for poverty alleviation in the try’s economic development efforts and for serving the medium term, the Bank should draw on experience, poor and vulnerable, followed by lending support to design an attractively simple vehicle, and offer funds for comprehensive judicial reform in the medium term. onlending to microenterprises. Here, the Bank could Considering the initial conditions, much progress replicate other successful models with minimal study has already been achieved in openness, especially and processing costs, while studying and piloting inno- through trade liberalization, except for agricultural vations and improvements separately. To avoid limited products. The recent depreciation of the peso offers the use of technical assistance, a demand-driven and pri- 29 Philippines: From Crisis to Oppor tunity vate-sector-oriented approach could be adopted in the nent (such as training provided by the Local Govern- design of technical assistance components. ment Academy). A participatory strategy is urgently In power, NPC urgently needs financial assistance needed to assist local governments to cope with one of before privatization. The Bank can help by linking the fastest urbanization rates in the world and its infra- future lending in the sector to congressional passage of structure, social, and environmental implications. legislation to allow NPC’s privatization and to complete Assistance to the transport sector falls in the same the regulatory framework for private participation. In category. The Bank should continue to be active in trans- light of the poor quality-at-entry ratings, the Bank port, given the sector’s important strategic place, the should intensify supervision of the entire portfolio in the existing institutional weaknesses of the sector, the need power sector. The Bank Group’s goal for the short term for public investment, and the Bank’s considerable expe- should be to privatize virtually every dimension of the rience in transport. But the Bank should adopt a partic- power sector and to put it on a sound commercial foot- ipatory approach to the preparation of a detailed policy ing under a depoliticized regulatory framework. Once reform discussion paper and subsequent assistance strat- these conditions are in place, the IFC could do more to egy paper, including explicit discussion of phasing of meet the sector’s investment needs, and the Bank could individual reforms and an assessment of the losses and shift its resources to support other infrastructure areas modalities for compensating the losers. Its sector work that are less financially attractive to private investors should focus—and Bank sector lending should be contin- (and where the need for public investment remains sub- gent—on the government addressing the five key remain- stantial). In the meantime, intensified supervision (and ing areas for reform: (i) privatizing road maintenance possibly restructuring of some parts of the portfolio) activities; (ii) establishing a Road Fund, a National Road will be needed to mitigate poor quality at entry. Authority, and other related changes; (iii) introducing For water supply and sanitation, the Bank Group autonomy and increased private sector involvement in should intensify its assistance to develop a sound regu- the port system and in the maritime sector in general; (iv) latory framework and to quickly accomplish privatiza- strengthening managerial and staff capacity in the trans- tion outside Manila to demonstrate the process and port sector, including the context of devolution to the present a model. This could go beyond current technical provinces; and (v) encouraging competition. assistance proposals and policy notes, and include Bank guarantees and IFC advisory services and financial Boosting Rural Development and Poverty Reduction resources. A new Bank strategy should incorporate the In the past few years, the Bank has made a determined findings of ADB’s ongoing sector work and of the Bank effort to address more directly the situation of the rural study on institutional reforms of government-owned poor. Recently approved projects in water resource man- and controlled corporations (which includes the Local agement and agrarian community development are evi- Water Utilities Administration, LWUA), and explicitly dence of the Bank’s renewed determination to adopt a address the issue of future support for LWUA. The more forceful strategy to reduce rural poverty. The World Bank, the ADB, and the government should recent Bank study, Promoting Equitable Rural Growth decide a joint donor policy for LWUA. (1997), outlines a new comprehensive strategy for rural The Bank remains a large lender in this sector. Only development, which is well timed to inform the planned a limited number of local government units and water participatory process to arrive at a new sector develop- districts may be suited for private sector participation ment strategy endorsed by the government, and subse- (these being the larger systems, which hold promise for quently to an agreed Bank assistance strategy. financial viability and progressive administration), but Through synergy with a trade adjustment loan and most will require a public sector approach for the next associated sector lending, the Bank should support 5–7 years. As the same principle applies to other infra- import tariff reductions for corn and other cereals, the structure sectors, and given the Bank success with grad- removal of the rice monopoly and promotion of rice uating the beneficiaries of past loans for Municipal exports, and increased private sector participation in Development to the capital market, the Bank could con- production, marketing, and distribution of agricultural tinue, and indeed scale-up, its lending to include all non- products and inputs. The Bank should provide technical creditworthy local government units. Such lending could assistance (or undertake a joint study of public expendi- include an expansion of the capacity-building compo- tures with the government and other major donors) to 30  To w a r d a N e w C o u n t r y A s s i s t a n c e S t r a t e g y : M o v i n g t o a H i g h e r P l a n e develop shared priorities for domestic and external Bank could consider dropping new lending initiatives in resources expended in the sector. Areas that require these sectors and allowing government and other donor more attention and resources in both the government’s resources to fill the void. expenditure program and in the Bank’s own lending and However, the Bank can and should continue to ana- nonlending assistance are rural infrastructure and asso- lyze policy and institutional constraints in all areas of ciated O&M, post-harvest facilities, and research and health, family planning, education, and social protection extension services. and advise the government on future reforms and effec- Special efforts should be made to target assistance to tive interventions. Supervision of the existing portfolio the poor and to the regions where the poor live, and to ought to be expanded from narrow project-related con- involve the NGOs, local community organizations, and cerns to adequate monitoring and analysis of sector the beneficiaries in the review of ongoing projects and in developments. Other donors’ knowledge and sector the formulation and design of new ones (not only in work should be effectively absorbed. Future public their implementation). Two recently approved projects expenditure reviews can then integrate, supplement, and (the Water Resources Development project and the analyze this information. It would be useful for the Bank Agrarian Reform Community Development project) to pull together the experiences in developing countries were designed in this direction. The Bank should expand regarding the social returns to government investments its support for land reform, which is crucial for a more in providing family planning, primary health care ser- equitable distribution of assets. Beyond technical assis- vices, and improved quality of primary education in tance to its beneficiaries, temporary budgetary support poor areas to make the argument for higher investment to help the government quickly complete its final phase (and higher external long-term borrowing) for these of land reform will help reestablish certainty for the purposes. remaining landowners and revitalize private investment With respect to gender, it would require little effort in the sector. to consult and better communicate with the agencies of Finally, in environmental protection and natural government and women’s groups on Bank gender stud- resources management, the government lacks sufficient ies and project-related activities. To this end, a modest domestic resources (both human and local counterpart extension to explore gender discrimination in the study funding) to manage the recent surge in external funding of the Philippine labor market contained in the most assistance and to devise efficient ways to transfer some recent economic report is recommended. of these externally funded projects to the local govern- Should the Bank wish to remain an active lender in ments. The Bank could provide technical assistance to these sectors, it might look for an opportunity to lend for help strengthen the institutional capacities of the rele- family planning, primary health care, and disease control vant agencies in investment planning, project design and with sector-type operations financing or cofinancing a implementation, and to promote community-based time-slice of an agreed expenditure program. In educa- approaches to protect the environment and improve the tion, the Bank should seek lending opportunities in pri- management of natural resources. mary education and limit its involvement with vocational and tertiary education to an advisory capacity.1 Revisiting Human Development Given the Bank’s limited and risky portfolio of ongoing Mobilizing Partnerships projects in such critical sectors for poverty alleviation as The Bank’s ability to successfully deliver this refocused health, population planning, and education, the Bank program of assistance would be enhanced by deepening ought to give intense and immediate attention to super- its relationships with NGOs and civil society and vision for all the ongoing projects and, failing a quick enhancing their participation in the preparation of Bank turnaround, to the restructuring of the Urban Health strategy, ESW, and projects. The Bank should dissemi- and Nutrition project. The government’s reluctance to nate its policy views, strategy, and ESW outside govern- borrow externally (especially from the Bank) in these ment (albeit with its consent) to influence debate in civil sectors has led to a series of projects that have been society and parliament. While doing so, it should respect dropped after considerable energy had been spent in and support the strategies and priorities finally adopted their preparation. Given the expected continuing avail- by the country through its own consultative and demo- ability of softer money within the donor community, the cratic process. 31 Philippines: From Crisis to Oppor tunity The Bank should help the Philippines maximize would be a joint strategy and a clearer delineation of long-term sources for required foreign savings through responsibilities, especially at the lending level, among its own lending, continued aid coordination, and donors. The process of preparing a joint CAS for all the enhanced aid mobilization. It should also work to major donors would help the government to enlarge its achieve better results on the ground at the sectoral level. aid coordination efforts and leverage external assistance Regular public expenditure reviews would be very valu- for maximum impact on the ground. The Bank has able to donors in this respect. But the Bank should estab- already piloted such an approach with its external assis- lish a new compact among the government, the Bank, tance to Mindanao during the past two years. It is now and the donors. Although aid coordination by the Bank time to scale-up such good partnership experience, was praised by donors and government alike, there is building on the successes of the past. The process could much friendly (but wasteful) competition, especially in begin with a broad agreement on a document akin to a lending to the social sectors, and little reciprocal concern Policy Framework Paper and matrix of medium-term about other donors’ results. reforms and sectoral development strategies, and could A more promising approach than each agency’s pro- end with a matrix of each donor’s proposed contribu- ceeding with bilateral strategy discussions (or the project- tion. A truly participatory CAS covering all external specific multidonor copreparation/cofinancing route) assistance should be the Bank’s goal by 1999.2 32 ENDNOTES Chapter 1 the past year in both absolute and relative terms, mainly because 1. In addition to their association with the failed Marcos of the effects of the financial crisis. Only 84 percent of projects regime, the net negative transfer of resources by the World Bank under supervision are rated satisfactory, down from 93 percent. was another strong source of antipathy for the International Three projects now carry an unsatisfactory rating for both devel- Financial Institutions in the late 1980s. opment objectives and implementation progress (the Transmission Grid Reinforcement project, the Urban Health and Nutrition pro- ject, and the Women’s Health and Safety project). A fourth project Chapter 2 is deemed potentially at risk by QAG (the Second Subic Bay pro- 1. The Region disagrees with the conclusion that the Bank’s ject). The country’s portfolio performance, which continues to assistance has been ineffective and unsatisfactory. The results have trail that of the region (86 percent), has recently fallen below the been mixed, according to the Region, partly because of the nature Bankwide average (88 percent). of the interventions (some well-intentioned projects were poorly 6. In their comments to this report, BSP stressed that the net designed), but mostly because of the vulnerability of the opera- negative transfers during 1986–96 took place when the productiv- tions to the depth of the crisis in the 1980s. ity of capital was high, while net positive transfers from the Bank 2. The Region believes such a statement does not do justice took place during 1975–84, when the productivity of capital was to the efforts of the Bank’s sectoral specialists. It reports that, comparatively low. BSP expressed want of a single, quantifiable while there were concerns in the energy team that the terms of the estimate of the value of World Bank assistance to the country, one first BOT project were skewed too much in favor of Hopewell, that would weigh appropriately the negative impact of the Bank’s and there was a danger that the government would end up paying direct financial contribution to growth with its (presumably posi- for power it could not use, this was not a view shared by all. tive) indirect contributions to policy and institutional reforms, Through their contacts with investment bankers and BOT propo- overall donors’ aid levels, and international confidence. nents, staff had helped create a more favorable climate for their involvement; the Bank had organized a roundtable on BOT oppor- Chapter 3 tunities (in power and other sectors), it had generally been sup- 1. The Region disagrees with OED’s recommendations to portive of the government’s efforts, and most of its policy leave lending to others in the social sectors, as it believes that there dialogue, including that on pricing, was crucial for setting the is a lending role for the Bank, including in the reform of the voca- right foundations for the BOT operations. tional and higher education sectors, if the government were to take 3. The Bank objects to such characterization, as much of the some difficult decisions. analysis and discussion of the poverty report took place before the 2. The Region notes that discussions with the major donors summit. in the context of the upcoming CAS preparation are planned, but 4. The Region disagrees with such characterization of Bank that a joint CAS does not appear feasible, given other donors’ con- assistance in the health, education, agriculture, and energy sectors. straints and the substantial additional costs involved—especially 5. 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Washington, DC: World Bank, 1990c. —— Philippines: Promoting Equitable Rural Growth. —— World Development Report 1992: Development and Draft Report No. 15782-PH. Washington, DC: Environment. Washington, DC: World Bank, 1992. World Bank, 1997. —— Philippines: Irrigated Agriculture Sector Review. Report No. 9848-PH. Vols. I and II. Washington, DC: World Bank, 1992b. 37 annex A TABLE A.1: THE PHILIPPINES AT A GLANCE LOWER- EAST MIDDLE- PHILIPPINES ASIA INCOME Poverty and Social Indicators DEVELOPMENT DIAMOND* Population mid-1996 (millions) 71.9 1,726 1,125 Life expectancy GNP per capita 1996 (US$) 1,160 890 1,750 GNP 1996 (US$ billions) 83.3 1,542 1,967 Average annual growth, 1990–96 GNP Gross per primary Population (percent) 2.3 1.3 1.4 capita enrollment Labor force (percent) 2.7 1.3 1.8 Most recent estimate (latest year available since 1989) Poverty: headcount index (percent of population) 54 .. .. Access to safe water Urban population (percent of Philippines total population) 55 31 56 Life expectancy at birth (years) 66 68 67 Lower-middle-income group Infant mortality (per 1,000 live births) 37 40 41 Child malnutrition (percent of children under 5) 30 .. .. Access to safe water (percent of population) 85 49 78 Illiteracy (percent of population age 15+) 5 17 .. Gross primary enrollment (percent of school-age population) 116 117 104 Male .. 120 105 Female .. 116 101 Key Economic Ratios and Long-term Trends 1975 1985 1995 1996 ECONOMIC RATIOS* GDP (US$ billions) 15.0 30.7 74.2 83.8 Gross domestic investment/GDP 30.9 15.3 22.2 24.2 Openness of economy Exports of goods and services/GDP 21.0 24.0 36.4 42.0 Gross domestic savings/GDP 24.8 17.4 14.4 14.4 Gross national savings/GDP 26.6 15.9 18.3 19.0 Current account balance/GDP -6.2 -0.1 -4.4 -4.5 Interest payments/GDP 0.8 3.1 2.6 2.1 Savings Investment Total debt/GDP 27.8 86.6 53.2 49.2 Total debt service/exports 14.4 32.0 16.8 14.2 Present value of debt/GDP .. .. .. 46.1 Present value of debt/exports .. .. .. 95.0 Indebtedness 1975–85 1986–96 1995 1996 1997–05 Philippines (average annual growth) Lower-middle-income group GDP 3.0 3.1 4.8 5.7 5.5 GNP per capita 0.3 1.3 2.6 4.5 3.5 Exports of goods and services 7.6 8.8 12.0 20.3 10.5 * The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete. Note: Data for 1996 are preliminary estimates. (table continued on following page) 39 Philippines: From Crisis to Oppor tunity TABLE A.1: THE PHILIPPINES AT A GLANCE (CONTINUED) Structure of the Economy 1975 1985 1995 1996 GROWTH RATES OF OUTPUT AND INVESTMENT (%) (percent of GDP) 20 Agriculture 30.3 24.6 21.6 21.4 GDP Industry 34.6 35.1 32.1 31.7 10 Manufacturing 25.7 25.2 23.0 22.6 0 Services 35.0 40.4 46.3 46.9 -10 Private consumption 64.5 75.0 74.2 73.9 GDI -20 General government consumption 10.7 7.6 11.4 11.7 Imports of goods and services 27.1 21.9 44.2 51.7 -30 91 92 93 94 95 96 1975–85 1986–96 1995 1996 GROWTH RATES OF EXPORTS AND IMPORTS (%) (average annual growth) 30 Agriculture 2.2 1.8 0.8 3.0 Industry 2.6 3.2 7.0 6.3 20 Imports Manufacturing 1.8 3.1 6.8 5.6 10 Services 3.8 3.8 5.0 6.5 Exports Private consumption 3.3 3.9 8.5 5.3 0 General government consumption 0.4 4.2 5.4 5.2 Gross domestic investment -0.4 6.7 3.0 15.6 -10 91 92 93 94 95 96 Imports of goods and services 3.9 12.0 16.0 21.1 Gross national product 2.7 3.8 5.0 6.9 Prices and Government Finance 1975 1985 1995 1996 INFLATION (%) Domestic prices (percent change) 20 Consumer prices 6.8 23.1 8.1 8.4 CPI Implicit GDP deflator 9.3 17.6 7.5 9.0 15 10 GDP def. Government finance (percent of GDP) Current revenue .. 12.1 18.8 19.5 5 Current budget balance .. 2.4 3.4 3.1 Overall surplus/deficit .. .. -1.4 -0.4 0 91 92 93 94 95 96 Trade 1975 1985 1995 1996 EXPORT AND IMPORT LEVELS (MILL. US$) (US$ millions) 40,000 Total exports (fob) .. 4,629 16,720 19,809 Exports Coconut oil .. 347 826 571 30,000 Imports Sugar .. 185 66 136 Total imports (cif) .. 5,111 26,391 31,885 20,000 Food .. 256 1,204 1,578 Fuel and energy .. 1,452 2,461 3,008 10,000 Capital goods .. 769 8,029 10,472 0 90 91 92 93 94 95 96 Export price index (1987=100) .. 81 124 124 Import price index (1987=100) .. 63 128 137 Terms of trade (1987=100) .. 127 97 90 * The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete. Note: Data for 1996 are preliminary estimates. 40  Annex TABLE A.1: THE PHILIPPINES AT A GLANCE (CONTINUED) Balance of Payments 1975 1985 1995 1996 (US$ millions) CURRENT ACCOUNT BALANCE TO GDP RATIO (%) Exports of goods and services 3,000 6,864 21,978 28,708 90 91 92 93 94 95 96 Imports of goods and services 4,116 5,961 33,314 42,254 0 Resource balance -1,116 903 -11,336 -13,546 -1 -2 Net income -126 -1,317 7,157 9,185 Net current transfers 318 379 882 589 -3 -4 Current account balance, -5 before official capital transfers -923 -35 -3,297 -3,772 -6 -7 Financing items (net) 912 867 3,928 7,879 Changes in net reserves 11 -832 -631 -4,107 Memo: Reserves including gold (US$ millions) 1,458 1,098 7,755 11,717 Conversion rate (local/US$) 7.2 18.6 25.7 26.2 External Debt and Resource Flows 1975 1985 1995 1996 COMPOSITION OF TOTAL DEBT, 1996 (MILL. US$) (US$ millions) Total debt outstanding and disbursed 4,171 26,637 39,446 41,214 IBRD IBRD 238 2,421 5,002 4,666 Short-term 4666 IDA IDA 17 84 183 193 7969 193 IMF Total debt service 457 2,534 5,337 5,778 Other 405 multilateral IBRD 26 285 789 766 3079 IDA 0 1 3 3 Private Bilateral 12817 12085 Composition of net resource flows Official grants 72 139 276 246 Official creditors 185 360 -626 -310 Private creditors 348 796 1,141 1,859 Foreign direct investment 98 12 1,478 1,408 Portfolio equity 0 0 1,961 1,333 World Bank program Commitments 114 104 168 528 Disbursements 94 276 402 457 Principal repayments 12 110 415 426 Net flows 82 166 -13 31 Interest payments 14 176 377 343 Net transfers 68 -10 -390 -312 * The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete. Note: Data for 1996 are preliminary estimates. 41 Philippines: From Crisis to Oppor tunity TABLE A.2: SUMMARY OF PROJECT INFORMATION: THE PHILIPPINES TOTAL APPROVED PROJECTS a TOTAL APPROVED PROJECTS, BY PERIOD (FY) Number Percent Value ($m) Percent Period Number Percent Value ($m) Percent Adjustment loans 9 6 2,076.3 20 1958–80 73 49 2,512.1 25 Nonadjustment loans 140 94 8,082.0 80 1981–85 26 17 1,925.8 19 Total 149 100 10,158.3 100 1986–89 13 9 1,493.6 15 1990–98* 37 25 4,226.8 42 OED OUTCOME RATINGS TOTAL 149 100 10,158.3 100 Number Percent Value ($m) Percent Satisfactory outcome OED SATISFACTORY OUTCOME RATINGS BY PERIOD b Adjustment loans 6 75 1,350.0 73 Loans % Value % Nonadjustment loans 79 76 3,610.0 80 Rated Satisfact. ($m) Satisfact. Total 85 76 4,960.0 78 1958–80 Unsatisfactory outcome Adjustment loans 6 75 1,350.0 73 Adjustment loans 2 25 502.0 27 Adjustment loans 0 0.0 Nonadjustment loans 25 24 924.5 20 Nonadjustment loans 65 74 2,211.9 72 Total 27 24 1,426.7 22 Period total 65 74 2,211.9 72 TOTAL RATED 112 6,386.7 1981–85 Adjustment loans 3 33 652.2 23 OED SUSTAINABILITY RATINGS Nonadjustment loans 22 77 689.2 86 Number Percent Value ($m) Percent Period total 25 72 1,341.4 55 Likely sustainability 1986–89 Adjustment loans 5 83 1,200.0 89 Adjustment loans 3 100 800.0 100 Nonadjustment loans 36 57 2,253.5 67 Nonadjustment loans 8 100 509.4 100 Total likely sustainability 41 59 3,453.5 73 Period total 11 100 1,309.4 100 Uncertain sustainability 1990–97 Adjustment loans 1 17 150.0 11 Adjustment loans 2 100 400.0 100 Nonadjustment loans 16 25 544.7 16 Nonadjustment loans 9 67 1,124.0 81 Total uncertain Period total 11 73 1,524.0 86 sustainability 17 25 694.7 15 All: 1958–97 Unlikely sustainability Adjustment loans 8 75 1,852.2 73 Adjustment loans 0 0 0.0 0 Nonadjustment loans 104 76 4,534.5 80 Nonadjustment loans 11 17 554.1 17 TOTAL RATED 112 76 6,386.7 78 Total unlikely sustainability 11 16 554.1 12 ARPP RATINGS OF ONGOING PROJECTS TOTAL RATED 69 100 4,702.3 100 Number Percent Value ($m) Percent Development objectives OED INSTITUTIONAL DEVELOPMENT RATINGS Satisfactory 22 96 2,062.4 93 Number Percent Value ($m) Percent Unsatisfactory 1 4 150.0 7 Substantial ID TOTAL 23 100 2,212.4 100 Adjustment loans 4 67 1,000.0 74 Nonadjustment loans 21 36 1,194.4 39 Implementation progress Satisfactory 21 91 2,005.4 91 Total substantial ID 25 38 2,194.4 49 Unsatisfactory 2 9 207.0 9 Moderate ID TOTAL 23 100 2,212.4 100 Adjustment loans 1 17 150.0 11 Nonadjustment loans 25 42 1,328.8 43 DISCONNECT FOR PHILIPPINES Total moderate ID 26 40 1,478.8 33 Number of ARPP % OED % Net disc. at Negligible ID projects Sat. Sat. exitc Adjustment loans 1 17 200.0 15 Nonadjustment loans 13 22 561.0 18 99 92 76 16% Total negligible ID 14 22 761.0 17 TOTAL RATED 65 100 4,434.7 100 Note: Includes projects evaluated through October 6, 1997. a. Through December 1997. b. Based on FY of Board approval. c. Based on projects evaluated by OED through October 6, 1997. The disconnect is the difference between the share of projects rated satisfactory during the last supervision year and the share of projects rated satisfactory after completion. Thus it is an indication of the optimism in supervision ratings. Source: OIS, FDB. 42  TABLE A.3: COMPLETED AND EVALUATED PROJECTS (THROUGH OCTOBER 6, 1997) NET LATEST LATEST LATEST OUT- INVESTMENT/ COMMIT. APPROVAL REPORT REPORT REPORT EVALUATION OED PROJECT NAME COME 1 SUST 2 INST 3 ADJUSTMENT (US$M) DATE TYPE NUMBER DATE YEAR ID Agriculture (38) Second rural credit S I 12.5 27-May-69 PAR 01277 18-Aug-76 1976 L0607 Upper Pampanga River irrigation S I 33.9 12-Aug-69 PAR 03063 30-Jun-80 1980 L0637 Rice processing and storage S I 14.3 26-Jan-71 PAR 04554 15-Jun-83 1983 L0720 Livestock development S I 7.5 04-May-72 PAR 02128 30-Jun-78 1978 L0823 Fisheries credit S I 11.6 15-May-73 PAR 04222 13-Dec-82 1982 L0891 Aurora – Penaranda irrigation S I 18.9 30-Apr-74 PAR 04555 16-Jun-83 1983 L0984 Third rural credit S I 22.0 11-Jun-74 PAR 02784 27-Dec-79 1979 L1010 Tarlac irrigation systems improvement S I 17.0 17-Dec-74 PAR 05969 12-Dec-85 1985 L1080 Rural development S I 25.0 08-Apr-75 PAR 05978 18-Dec-85 1985 L1102 Magat River multipurpose S Lik Napl I 42.0 22-Jul-75 PAR 07923 30-Jun-89 1989 L1154 Second livestock development S I 20.5 16-Mar-76 PAR 04753 21-Oct-83 1983 L1225 Chico River irrigation U Unc Napl I 50.0 23-Mar-76 PAR 07923 30-Jun-89 1989 L1227 Second grain processing S I 11.5 25-May-76 PCR 05448 06-Feb-85 1985 L1269 Second fisheries S I 12.0 25-May-76 PAR 04222 13-Dec-82 1982 L1270 Jalaur irrigation S I 14.9 01-Feb-77 PAR 05969 12-Dec-85 1985 L1367 Fourth rural credit S I 36.5 05-Apr-77 PCR 06016 31-Dec-85 1985 L1399 National irrigation systems improvement U Lik Sub I 38.2 03-May-77 PAR 10669 22-May-92 1990 L1414 Rural development II (land settlement) U Unc Neg I 13.0 17-May-77 PCR 10175 16-Dec-91 1991 L1421 Smallholder tree farming and forestry U I 4.2 22-Dec-77 PAR 07585 31-Dec-88 1988 L1506 Second national systems improvement U Lik Sub I 48.7 28-Feb-78 PAR 10669 22-May-92 1989 L1526 First rural infrastructure S Unc Neg I 21.5 11-Apr-78 PAR 07936 30-Jun-89 1989 C0790 Magat River multipurpose, stage two S Lik Napl I 149.6 11-May-78 PAR 07923 30-Jun-89 1989 L1567 National extension U I 20.0 07-Nov-78 PAR 07286 13-Jun-88 1988 L1626 Second Magat River multipurpose, stage two S Lik Napl I 26.1 12-Dec-78 PAR 07923 30-Jun-89 1989 L1639 Small farmer development land bank U Unc Mod I 15.7 21-Dec-78 PCR 10349 21-Feb-92 1992 L1646 Samar Island rural development U Unl Mod I 27.0 04-Dec-79 PCR 09208 21-Dec-90 1990 L1772 Medium-scale irrigation U Unl Sub I 33.0 13-Mar-80 PCR 11511 30-Dec-92 1992 L1809 Rainfed agricultural development (ILOILO) S Lik Mod I 5.3 20-Mar-80 PAR 07949 30-Jun-89 1989 L1815 Watershed management and erosion control U Unl Mod I 32.8 08-Jul-80 PAR 16408 27-Mar-97 1991 L1890 Third livestock and fisheries credit S Unc Mod I 23.5 15-Jul-80 PCR 07871 28-Jun-89 1989 L1894 Agricultural support services U Unc Mod I 19.9 14-Jul-81 PAR 15223 29-Dec-95 1992 L2040 National fisheries development U Unl Neg I 1.9 25-May-82 PCR 09891 16-Sep-91 1991 L2156 Communal irrigation development S Lik Sub I 38.1 08-Jun-82 PCR 11512 29-Dec-92 1992 L2173 Central Visayas regional development S Lik Mod I 22.1 06-Dec-83 PAR 16661 10-Jun-97 1993 L2360 Agricultural sector/inputs S Unc Mod A 150.0 04-Sep-84 PAR 10314 10-Feb-92 1990 L2469 Agricultural credit S Lik Mod I 100.0 06-Jun-85 PAR 10969 28-Jul-92 1991 L2570 Irrigation operations support S Lik Sub I 23.5 02-Jun-88 PCR 13826 29-Dec-94 1994 L2948 Annex Rural finance S Lik Mod I 150.0 21-Jun-91 PCR 15233 31-Jan-96 1996 L3356 43 (table continued on following page) 44 Philippines: From Crisis to Oppor tunity TABLE A.3: COMPLETED AND EVALUATED PROJECTS (THROUGH OCTOBER 6, 1997) (CONTINUED) NET LATEST LATEST LATEST OUT- INVESTMENT/ COMMIT. APPROVAL REPORT REPORT REPORT EVALUATION OED PROJECT NAME COME 1 SUST 2 INST 3 ADJUSTMENT (US$M) DATE TYPE NUMBER DATE YEAR ID Education (9) Agricultural education S I 5.9 13-Oct-64 PAR 00820 30-Jul-75 1975 L0393 Second education S I 12.7 12-Dec-72 PAR 04162 01-Nov-82 1982 C0349 Third education S I 24.7 16-Mar-76 PAR 06279 27-Jun-86 1986 L1224 Fourth education S I 24.9 01-Mar-77 PAR 06348 17-Jul-86 1986 L1374 Educational radio technical assistance S I 1.2 21-Mar-78 PCR 05004 23-Mar-84 1984 LS008 Fishery training U Unl Neg I 35.1 18-Dec-79 PAR 08788 25-Jun-90 1990 L1786 Elementary education sector loan S Lik Sub I 80.0 30-Jun-81 PAR 12632 29-Dec-93 1991 L2030 Vocational training S Lik Sub I 14.9 21-Sep-82 PAR 13062 17-May-94 1992 L2200 Second elementary education U Unl Neg I 175.0 03-Jul-90 EVM 1997 L3244 Electric Power and Other Energy (9) Fourth power S I 12.0 04-Apr-67 PAR 00980 16-Jan-76 1976 L0491 Fifth power S I 31.8 21-Mar-72 PCR 04388 16-Mar-83 1983 L0809 Sixth power S I 60.5 02-Jul-74 PCR 04847 22-Dec-83 1983 L1034 Seventh power S Lik Mod I 58.0 14-Jun-77 PAR 08574 20-Apr-90 1990 L1460 Rural electrification S I 60.0 04-Apr-78 PAR 05732 24-Jun-85 1985 L1547 Geothermal exploration S Lik Sub I 8.2 30-Sep-82 PAR 09667 21-Jun-91 1990 L2203 Bacon-Manito geothermal power S Lik Sub I 93.6 23-Jun-88 EVM 1996 L2969 Manila power distribution S Lik Mod I 59.8 08-Jun-89 EVM 1997 L3084 Energy Sector4 S Lik Sub I 370.6 01-Feb-90 EVM 1997 L3163 Finance (11) Third development corporation S I 23.7 01-Jul-69 PAR 01576 29-Apr-77 1977 L0630 Industrial investment and smallholder tree-farmers U I 49.6 11-Jun-74 PAR 05744 28-Jun-85 1985 L0998 Fourth development corporation S Lik Sub I 29.8 05-Nov-74 PAR 08781 21-Jun-90 1983 L1052 Second industrial investment credit U I 75.0 16-Dec-75 PAR 05744 28-Jun-85 1985 L1190 Fifth development corporation S Unc Sub I 29.3 31-Jan-78 PAR 08781 21-Jun-90 1989 L1514 Investment systems organization S I 14.5 27-Apr-78 PCR 06006 27-Dec-85 1985 L1555 Third industrial investment credit U Unl Neg I 71.2 18-May-78 PAR 08781 21-Jun-90 1990 L1572 Industrial finance S Lik Sub I 44.6 07-May-81 PAR 08781 21-Jun-90 1990 L1984 Financial sector adjustment S Lik Sub A 300.0 04-May-89 PAR 15834 28-Jun-96 1995 L3049 Industrial investment credit S Lik Mod I 65.0 05-Oct-89 PCR 12127 30-Jun-93 1993 L3123 Cottage enterprise finance U Unl Neg I 1.5 26-Mar-91 PAR 15834 28-Jun-96 1995 L3312 Industry (6) Small and medium industries development S I 30.0 27-May-75 PAR 03969 16-Jun-82 1982 L1120 Second small and medium industries development S Lik Sub I 24.9 12-Jun-79 PAR 08781 21-Jun-90 1989 L1727 Textile sector restructuring U Unl Mod I 15.4 20-Apr-82 PCR 08107 06-Oct-89 1989 L2127 Third small and medium industries development S Lik Mod I 63.2 03-Jun-82 PAR 08781 21-Jun-90 1990 L2169  TABLE A.3: COMPLETED AND EVALUATED PROJECTS (THROUGH OCTOBER 6, 1997) (CONTINUED) NET LATEST LATEST LATEST OUT- INVESTMENT/ COMMIT. APPROVAL REPORT REPORT REPORT EVALUATION OED PROJECT NAME COME 1 SUST 2 INST 3 ADJUSTMENT (US$M) DATE TYPE NUMBER DATE YEAR ID Fourth small and medium industrial development S Lik Neg I 60.0 25-Apr-89 PCR 14055 15-Mar-95 1995 L3038 Industrial restructuring S Lik Sub I 175.0 08-Jan-91 EVM 1996 L3287 Mining (1) Coal exploration S Unc Sub I 6.6 15-Jun-82 PAR 09667 21-Jun-91 1987 L2181 Multisector (6) Structural adjustment loan U A 200.0 16-Sep-80 PAR 05813 31-Jul-85 1985 L1903 Second structural adjustment loan U A 302.3 26-Apr-83 PAR 05813 31-Jul-85 1985 L2266 Economic recovery program S Lik Sub A 300.0 17-Mar-87 PAR 10866 30-Jun-92 1992 L2787 Debt management program S Lik Neg A 200.0 21-Dec-89 PAR 14811 30-Jun-95 1993 L3149 Earthquake reconstruction S Unc Mod I 109.3 09-Oct-90 EVM 1997 L3263 Economic integration S Lik Sub A 200.0 10-Dec-92 EVM 1996 L3539 Oil and Gas (2) Petroleum exploration promotion S Lik Sub I 7.8 30-Sep-82 PAR 09667 21-Jun-91 1990 L2201 Petroleum exploration promotion S Lik Sub I 7.3 30-Sep-82 PAR 09667 21-Jun-91 1990 L2202 Population, Health, and Nutrition (2) Population U I 23.3 02-Jul-74 PAR 05544 19-Mar-85 1985 L1035 Second population U Unc Neg I 32.2 05-Jun-79 PAR 09380 15-Feb-91 1991 C0923 Public Sector Management (2) Economic recovery technical assistance NRAT Unc Neg I 0.0 17-Mar-87 PAR 10866 30-Jun-92 1992 L2788 Program for government corporation S Lik Sub A 200.0 15-Jun-88 PAR 15614 13-May-96 1993 L2956 Telecommunications (1) Telecommunications technical assistance S Lik Mod I 4.0 19-Feb-85 PCR 09609 31-May-91 1991 L2495 Transportation (11) Highway S I 8.0 06-Apr-71 PAR 02449 02-Apr-79 1979 L0731 Second port S I 6.0 16-Oct-73 PAR 05698 07-Jun-85 1985 L0939 Second highway S I 68.0 04-Dec-73 PAR 04757 25-Oct-83 1983 L0950 Shipping S I 19.4 15-Oct-74 PAR 04910 31-Jan-84 1984 L1048 Third highway S I 95.0 23-Dec-76 PAR 07316 30-Jun-88 1988 L1353 Fourth highway S Lik Mod I 99.6 06-Mar-79 PCR 08053 07-Sep-89 1989 L1661 Third port S I 66.9 27-May-80 PCR 07570 31-Dec-88 1988 L1855 Rural roads improvement U Unc Mod I 50.2 29-May-80 PCR 09522 15-Apr-91 1991 L1860 Fifth highway S Lik Neg I 90.9 17-May-84 EVM 15503 08-Apr-96 1995 L2418 Second rural roads improvement S Unc Mod I 81.9 10-Jun-86 EVM 1996 L2716 Annex Provincial ports S Lik Neg I 30.1 26-May-87 PCR 14712 26-Jun-95 1995 L2823 45 (table continued on following page) 46 Philippines: From Crisis to Oppor tunity TABLE A.3: COMPLETED AND EVALUATED PROJECTS (THROUGH OCTOBER 6, 1997) (CONTINUED) NET LATEST LATEST LATEST OUT- INVESTMENT/ COMMIT. APPROVAL REPORT REPORT REPORT EVALUATION OED PROJECT NAME COME 1 SUST 2 INST 3 ADJUSTMENT (US$M) DATE TYPE NUMBER DATE YEAR ID Urban Development (8) Manila urban development S I 39.3 27-May-76 PAR 07092 19-Jan-88 1986 L1272 Second urban development S I 30.5 21-Dec-78 PAR 07092 19-Jan-88 1988 L1647 Third urban development S Lik Mod I 67.1 25-Mar-80 PCR 07897 30-Jun-89 1989 L1821 Urban engineering S I 7.3 08-Dec-81 PCR 07009 16-Nov-87 1987 L2067 Regional cities development S Unl Mod I 35.9 31-Mar-83 PAR 14780 30-Jun-95 1995 L2257 Municipal development S Lik Sub I 35.8 05-Jun-84 PAR 16800 27-Jun-97 1995 L2435 Housing sector S Unl Mod I 125.3 24-Jun-88 PCR 15810 25-Jun-96 1996 L2974 Second municipal development S Lik Sub I 40.0 14-Dec-89 PAR 16800 27-Jun-97 1997 L3146 Water Supply and Sanitation (7) Provincial cities water supply S I 21.8 03-May-77 PAR 06422 29-Sep-86 1986 L1415 Second Manila water supply S I 88.0 25-Jul-78 PCR 07153 04-Mar-88 1988 L1615 Second provincial cities water supply U Unc Mod I 25.0 29-May-79 PCR 08937 27-Jul-90 1990 C0920 Manila sewerage and sanitation S Lik Sub I 44.5 20-Mar-80 PAR 13204 24-Jun-94 1990 L1814 Rural water supply and sanitation U Unc Neg I 28.9 19-Oct-82 PCR 10225 17-Dec-91 1991 L2206 Metropolitan Manila water distribution S Lik Mod I 35.3 03-Apr-86 PCR 14293 11-Apr-95 1995 L2676 Angat water supply optimal U Unc Mod I 37.6 05-Oct-89 EVM 1997 L3124 1. Outcome ratings: S = satisfactory, U = unsatisfactory. 2. Sustainability ratings: Lik = likely, Unc = uncertain, Unl = unlikely, Nrat = not rated. 3. Institutional Development Impact ratings: Sub = substantial, Mod = modest, Neg = negligible, Napl = not applicable. 4. A recent but not yet finalized OED audit is proposing to downgrade all the project completion ratings.  TABLE A.4: ONGOING AND RECENTLY COMPLETED PROJECTS LATEST LATEST QUALITY DEVELOPMENT IMPLE- ASSURANCE OBJECTIVES MENTATION GROUP (QAG) OED INVESTMENT SUPER- PROGRESS RISK QUALITY OR BOARD VISION SUPERVISION RATING AT ENTRY ADJUSTMENT APPROVAL EFFECTIVENESS CLOSING PROJECT NAME STATUS RATING RATING (2/26/98) RATING OPERATION DATE DATE DATE Agriculture (7) Coconut farms development Active S S Nonrisky Satisfactory I 5/24/90 11/14/90 6/30/98 Second communal irrigation Active S S Nonrisky Unsatisfactory I 10/4/90 1/11/91 12/31/98 Environment and natural resource management Active S S Nonrisky Unsatisfactory A 6/25/91 10/10/91 12/31/98 Second irrigation operational support Active S S Nonrisky Satisfactory I 5/20/93 10/15/93 6/30/99 Second rural finance Active S S Nonrisky Satisfactory I 9/14/95 4/23/96 6/30/02 Water resources development Active S S Nonrisky Highly satisfactory I 11/26/96 3/20/97 12/31/02 Agrarian reform communication Active S S Nonrisky Satisfactory I 11/26/96 4/8/97 12/31/03 Education (3) Engineering and science Active S S Nonrisky Highly unsatisfactory I 1/28/92 6/3/92 6/30/98 Second vocational training Active S S Nonrisky Highly unsatisfactory I 6/18/92 12/11/92 12/31/98 Third elementary education Active S S Nonrisky Highly satisfactory I 11/26/96 7/2/97 6/30/04 Electric Power and Energy (5) Rural electricification Active S U Actual Unsatisfactory I 2/25/92 10/22/92 4/30/98 Power transmission and rehabilitation Completed S S Unsatisfactory I 6/22/93 12/6/93 12/31/97 Leyte Cebu geothermal Active S S Nonrisky Unsatisfactory I 2/3/94 7/18/94 6/30/98 Leyte Luzon geothermal Active S S Nonrisky Highly unsatisfactory I 6/7/94 3/1/95 6/30/99 Trans Grid reinforcement Active S S Nonrisky Unsatisfactory I 4/4/96 11/12/96 12/31/00 Industry (1) Second Subic Bay Active n.a. n.a. Nonrisky Satisfactory I 11/26/96 10/15/97 12/31/00 Population, Health, and Nutrition (3) Health development Completed S S I 6/22/89 1/10/90 12/31/97 Urban health and nutrition Active U U Actual Satisfactory I 6/8/93 4/7/94 12/31/00 Womens’ health and safety Active S S Nonrisky Satisfactory I 3/9/95 7/27/95 12/31/01 Public Sector Management (1) Tax computerization Active S S Nonrisky Highly satisfactory I 5/11/93 12/1/93 6/30/99 Telecommunications (1) Telephone system expansion Completed S S Highly satisfactory I n.a. n.a. 12/31/98 Transportation (2) Highway management Active U U Actual Satisfactory I 12/20/91 6/1/92 6/30/99 Subic Bay freeport Active HS S Nonrisky Satisfactory I 6/2/94 8/17/94 6/30/99 Urban Development (1) Third municipal development Active S S Nonrisky Satisfactory I 3/31/92 8/3/92 6/30/99 Water Supply and Sanitation (3) Water, sewerage, and sanitation Completed S S Satisfactory I 6/28/90 1/15/91 12/31/97 Second Manila sewerage Active S U Actual Highly satisfactory I 5/21/96 n.a. 12/31/01 Water district development Active n.a. n.a. Nonrisky Satisfactory I 9/9/97 n.a. 6/30/03 Annex Note: For definition of abbreviations, see Table 3. 47 n.a. = Not available. Philippines: From Crisis to Oppor tunity TABLE A.5: LIST OF ECONOMIC AND SECTOR WORK (ESW) ECONOMIC OR REPORT TITLE SECTOR REPORT DATE REPORT # Agriculture (8) Sugarlands diversification study SR 05/30/86 6042 Agricultural sector memorandum SR 06/01/86 6250 Agriculture: its present condition and future needs SR 02/01/87 6613 Agrarian reform issues: an assessment of the proposal for an accelerated land reform program SR 05/01/87 6779 Agricultural sector strategy review SR 10/01/87 6819 Forestry, fisheries, and agricultural resource management study (FFARM study) SR 01/01/89 7388 Irrigated agriculture sector review SR 04/01/92 9848 Promoting equitable rural growth SR 05/30/97 15782 Education (3) Education sector study – Philippines SR 12/01/88 7473 Vocational training for operatives and craftsmen SR 01/24/90 8259 Education financing and social equity: a reform agenda SR 06/11/96 15898 Electric Power and Other Energy (3) Energy sector study SR 09/01/88 7269 Rural electrification sector study: an integrated program to revitalize the sector SR 11/01/89 8016 Power sector study: structural framework for the power sector SR 11/30/94 13313 Environment (1) Environmental sector study toward improved environmental policies and management SR 12/08/93 11852 Finance (3) Financial sector study SR 08/01/88 7177 Regional financial sector report: lessons of financial liberalization in Asia: a comparative study SR 11/23/88 7512 Capital market study ER 02/01/92 10053 Industry (2) Issues and policies in the industrial sector SR 07/01/87 6706 Private sector assessment (PSA) SR 07/12/94 11853 Mining (1) Mining sector review SR 10/01/87 6898 Multisector (8) A framework for economic recovery ER 11/01/86 6350 Toward sustaining the economic recovery: country economic memorandum ER 01/30/89 7438 Country economic memorandum: issues in adjustment and competitiveness ER 10/01/90 8933 An opening for sustained growth ER 04/01/93 11061 Infrastructure assessment study – Philippines SR 06/01/93 11944 Recent macroeconomic developments and reform efforts ER 06/30/94 13109 Strengthening economic resiliency ER 11/08/96 15985 Managing global integration SR 11/17/97 17024 Population, Health, and Nutrition (2) New directions in the Philippines family planning program SR 10/01/91 9579 Devolution and health services: managing risks and opportunities SR 05/23/94 12343 Poverty (2) The challenge of poverty ER 10/01/88 7144 A strategy to fight poverty SR 11/13/95 14933 Public Sector Management (6) Key issues in the nonfinancial public corporate sector: a special economic report ER 06/01/86 6338 Selected issues in public resource management ER 04/01/88 6887 Country economic report: public sector resource mobilization and expenditure management ER 02/01/92 10056 Fiscal decentralization study SR 01/01/93 10716 Public expenditure management for sustained and equitable growth SR 09/05/95 14680 An agenda for the reform of the social security institutions SR 09/29/95 13400 Transportation (1) Transport sector review SR 03/31/88 7098 Note: Reports include only formal ESW outputs. 48  Annex TABLE A.6: BANK SENIOR MANAGEMENT RESPONSIBLE FOR PHILIPPINES SINCE 1985 FISCAL DEPARTMENT OR FISCAL DEPARTMENT OR YEAR VICE PRESIDENT COUNTRY DIRECTOR YEAR VICE PRESIDENT COUNTRY DIRECTOR 1985 Attila Karaossmanoglu Gautam Kaji 1992 Gautam Kaji Callisto Madavo 1986 Attila Karaossmanoglu Gautam Kaji 1993 Gautam Kaji Callisto Madavo 1987 Attila Karaossmanoglu Gautam Kaji 1994 Gautam Kaji Callisto Madavo 1988 Attila Karaossmanoglu Gautam Kaji 1995 Russell Cheetham Callisto Madavo 1989 Attila Karaossmanoglu Gautam Kaji 1996 Russell Cheetham Callisto Madavo1 1990 Attila Karaossmanoglu Gautam Kaji 1997 Russell Cheetham Javad Khalilzadeh-Shirazi 1991 Attila Karaossmanoglu Gautam Kaji 1998 Jean-Michel Severino Vinay K. Bhargava Note: There was a change in the organizational structure of the Bank in FY88 when the vice presidencies for East Asia and South Asia were merged. In FY93 this arrangement ended when the two regions were again split into separate vice presidencies. 1. Division Chiefs act as Director in last three months of the year. 49 Philippines: From Crisis to Oppor tunity ANNEX B: THE PHILIPPINES: FROM CRISIS TO OPPORTUNITY/MANAGEMENT RESPONSE Major OED Recommendations Management Response Strengthening Economic Management ESW, policy advice, technical assistance, and This is largely consistent with the CAS Progress resumed adjustment lending are recommended for: Report submitted to the Board on 3/3/98 for discus- (i) emergency assistance to help ease the current liq- sion on 3/24/98, which proposes (i) adjustment uidity crunch; (ii) strengthening the banking sector lending as well as lines of credit that would, among (legal, regulatory, and supervisory regimes and fail- other things, address liquidity constraints; (ii) more ure resolution), and the capital markets (manage- emphasis on the banking sector through adjustment ment of short-term capital flows, housing finance, and TA operations, covering both the banking and and pension reform); (iii) restructuring expenditures nonbanking financial sector, as well as a PHRD in favor of higher public investment and mainte- grant for financial sector training and TA; and (iii) nance expenditures, implementing civil service public sector reform and expenditure management reform, and improving local government finance; in the context of upcoming adjustment lending, in and (iv) further reduction in import tariffs. For sec- addition to intensive work on local government tors with appropriate policy and institutional finance in ongoing projects and others under prepa- frameworks, the seal of approval of regular Public ration. The policy dialogue with the government Expenditure Reviews (PERs) should open the door has included discussions on a tariff reduction strat- to sectoral investment loans and adaptable program egy. Instead of regular PERs, we are pursuing sec- loans with low conditionalities. A study and subse- toral program reviews in view of their greater quent support for judicial system reform are also cost-effectiveness and receptivity by the client. recommended. Adaptable program loans are already under prepa- ration in the urban, rural, and transport sectors. The government has so far not approached the Bank for support for judicial system reform, but we would respond positively to any request from the new administration. 50  Annex Expanding Private Sector and Infrastructure Development The Bank could resume financial intermediary This is a useful suggestion in the current circum- loans. Learning from others’ experience, the Bank stances. As the CAS Progress Report indicates, we could resume microcredit with simple financial are looking into the possibility for new financial products, supported by market-oriented technical intermediary operations; a preparation mission is assistance. currently in the field. Intensified technical assistance is needed to com- We agree that continued technical assistance for plete regulatory reform for private participation in further regulatory reforms and privatization is all infrastructure sectors. Bank Group support— needed. This is part of our sectoral policy dialogue, including conditional sectoral lending—is necessary investment projects, and the subject of planned sec- to achieve privatization quickly in NPC, water sup- tor work on government-owned corporations. We ply and sanitation, and transport. are coordinating closely with ADB to avoid overlap. The Bank could scale-up its successful lending for Agreed and already in line with our current assis- Municipal Development, including capacity build- tance strategy, which focuses on lending to and ing. capacity building of local government units (LGUs), including municipal governments, with increasing emphasis on poorer and smaller LGUs. Specific operations are under preparation. 51 Philippines: From Crisis to Oppor tunity Accelerating Rural Development and Poverty Reduction An agreed new sector development and assistance Agreed. The rural development strategy was com- strategy targeting the rural poor is required along pleted in 1997 and widely discussed with all stake- the lines of recent Bank ESW for rural develop- holders. This is the basis for the Bank’s current ment. preparation of a Sector Assistance Strategy Note, which will include plans for an expansion of activi- ties in the rural development sector. Our current approach focuses on assistance to ben- The Bank could expand its support for land reform eficiaries through ongoing projects. Direct bud- beyond assistance to the beneficiaries by including getary support would likely be in support of the direct budgetary support for the completion of the high costs of land acquisition (estimated at over final phase of land reform. US$1 billion) and cannot be financed by the Bank [OP 12.00, para. 2(b)]. Currently not requested or foreseen. These issues With adjustment and sector lending, the Bank are currently largely subject of discussions with the could support tariff reductions for cereals, remove World Trade Organization (WTO) and ADB in the the rice monopoly, promote rice exports, and fos- context of an ADB sector reform loan. In the inter- ter private participation in production, marketing, est of focus and selectivity of the Bank’s strategy and distribution. and effective donor coordination, we are addressing these issues through our ongoing policy dialogue. Revisiting Human Development The continued availability of softer money from This would be premature. The Bank has been one other donors and their interest in lending to social of the largest funding agencies in the education sec- sectors could justify the Bank’s stepping aside as tor and there is continued interest in Bank lending. lender, while keeping its important analytical and In the health sector, our more limited lending is advisory role. demand driven, with cofinancing to achieve more concessional terms. Should the Bank remain an active lender in the sec- The Bank can be more effective (i) in the health sec- tor, family planning and primary health are priori- tor by providing support not only to FP and pri- ties. In education, the Bank should limit its mary care, but to reorienting delivery and financing involvement with vocational and tertiary education of all public health services in the decentralized to an advisory role. government structure and building capacity at the local level and (ii) in education, by maintaining the primary education focus, but exploring support in other subsectors to promote reforms regarding sub- sidies and private sector involvement. 52  Annex Mobilizing Partnerships Enhance participation of NGOs and civil society Agreed. We are planning to discuss Country and in the Bank’s strategy; its wide dissemination is Sectoral Assistance Strategy Notes, prepared to recommended. build up to the FY99 CAS, with stakeholders in each sector. The resident mission has a strong out- Successful aid coordination by the Bank could be reach program to promote participation in all taken to a higher plane to maximize long-term aspects of our work, including dialogue, ESW, and sources of foreign savings and to achieve better lending. results on the ground at the sectoral level. A truly participatory CAS covering all major donors should A participatory CAS is already planned, involving be the Bank’s goal by 1999. stakeholders. The preparation will also take full account of other donors’ activities. A joint donor CAS will, however, not be possible under current conditions: such an effort would first require gov- ernment leadership, high-level commitment in other donor agencies, and additional resources for the Philippines program. 53 Philippines: From Crisis to Oppor tunity ANNEX C: REPORT FROM CODE/COMMITTEE ON DEVELOPMENT EFFECTIVENESS The Philippines: Country Assistance Review (CAR) recommendations in the CAR have been incorporated On March 11, 1998, the Committee on Development into the program of lending and nonlending activities Effectiveness (CODE) reviewed a report prepared by the for the Philippines, as reflected in the CAS Progress Operations Evaluation Department (OED) entitled The Report. Others will feed into the sector strategy notes Philippines: Country Assistance Review (CAR) that are being prepared as background for the full CAS (SecM98-165), together with a draft management scheduled for next year. Several specific issues relevant response prepared by the Philippines Headquarters Unit to the Board discussion of the CAS Progress Report were (EACPQ). The Committee welcomed the opportunity to raised during the Committee’s discussion and are high- discuss the CAR in advance of the Board review of the lighted below. Philippines CAS Progress Report and commended OED for the effort to produce a very good and useful docu- Bank Group Role in Specific Sectors ment in a timely manner. In particular, the Committee The Committee asked for clarification of OED’s finding commended OED for ensuring that the observations that the continued availability of softer money from about the Philippines were made in a regional context. other donors and their interest in lending to social sec- The Committee noted that, due to the severe time con- tors could justify the Bank’s stepping aside as lender in straint, OED has not been able to obtain the country’s these sectors. In OED’s view, since the government official comments on the CAR. It looks forward to the prefers not to borrow from the Bank for soft sectors, the CAR’s being finalized after further discussions with the Bank should respond by focusing lending on other sec- Government and the Region. tors such as infrastructure, while continuing to provide The Committee appreciated the historical perspec- analytical and advisory services in the social sectors. tive provided in the CAR and welcomed the finding that OED also offered the opinion that the Bank’s overall during the past 12 years, Bank assistance has been both performance would have been better had it concentrated relevant and satisfactory at the macro level, and in some lending in fewer sectors. The Committee noted manage- areas of private sector (including SME) development, ment’s response that to retreat from the social sectors financial sector strengthening, and municipal develop- would be premature. The Bank has been one of the ment, but noted with concern that its relevance and effi- largest funding agencies in the education sector, and cacy have been uneven in other sectors such as water there is continued interest in Bank lending in this area. and sanitation, transport, health, education, agriculture, In the health sector, the Bank’s more limited lending is and energy. The Committee also noted that the assis- demand driven, usually with cofinancing to achieve tance strategy has moved effectively from economic more concessional terms. recovery to poverty alleviation in line with government The Committee was interested in the Bank’s activi- and Bank priorities, but that the shift is not yet com- ties in and lessons learned from experience in the finan- plete. The CAR recommends that to help the economy cial sector. OED reported that the overall impact of the reach its growth potential, fortify its resilience to domes- Bank’s assistance to the financial sector has been satis- tic and global exigencies, and reduce poverty faster, the factory. But the financial deepening and strengthening in government must pursue and deepen its unfinished the Philippines has some way to go. The sector still suf- reform agenda. fers from weaknesses in the regulatory and supervisory The challenge for the government is fivefold: regime. Therefore, OED recommends that ESW, policy strengthen economic management; expand private sec- advice, technical assistance, and adjustment lending be tor and infrastructure development; accelerate rural used to strengthen further the banking sector. The Com- development and attack poverty aggressively; revisit mittee was satisfied that the CAS Progress Report pro- human development; and mobilize partnerships. The poses more emphasis on the banking sector through CAR recommends that supporting the government in adjustment and technical assistance (TA) operations, pursuing this medium-term agenda should be the central covering both the banking and nonbanking financial tenet of the Bank’s assistance strategy. The Committee sector, as well as a PHRD grant for financial sector welcomed management’s assertion that several of the training and TA. 54  Annex Dissemination of ESW to review and pass judgment on a document that explic- The Committee was concerned about the finding that itly includes the assistance strategies of donors. Instead, even though the Bank’s diagnosis of the Philippines’ ills the Committee agreed with management that a partici- has been correct, based on solid ESW, the problems with patory CAS involving stakeholders should be prepared, dissemination and time have limited the effectiveness and that the preparation should take full account of and impact of ESW. Key middle and senior managers in donors’ activities. government, parliamentary committee chairmen, busi- The Committee raised the issue of the Bank’s com- ness leaders, former cabinet members, and prominent parative advantage vis-a-vis the Asian Development intellectuals are frequently unaware of the content and, Bank (ADB), and wanted to know how decisions were sometimes, of the existence of nonsensitive Bank made about where the Bank focuses its activities. It reports. The Committee took note of the response that noted the response that the decentralization of manage- with the decentralization of management to the Philip- ment to the resident mission has contributed signifi- pines, a greater effort is being made to disseminate ESW cantly to better coordination between the ADB and the information, including the establishment of a public Bank. To avoid overlap, consultation at the Regional information center. Vice President and project levels was now the norm. Partnerships, Aid Coordination, and a Joint CAS Negative Net Transfers In order to deepen reform and achieve sustainable The Committee noted the high level of total net resource poverty reduction, OED suggests that a new compact flows out of the Philippines to the Bank (US$2.7 billion among the government, the NGOs, the Bank, and the from 1986 to 1997). It also noted OED’s view that a rest of the donor community is needed to mobilize and large negative resource flow at this still early stage of the use external assistance effectively. The Committee wel- Philippines’ development raises the question of the wis- comed the finding that the Bank has played a key role in dom of phasing out adjustment lending in the coordinating and building consensus among donors and mid–1990s, with an agenda of structural reform still the government through regular dialogues. But even incomplete. OED further pointed out that public infra- more important, the Bank supported the government’s structure investment is a severe constraint to growth. efforts to improve its own capacity and to assume an The opinion was expressed by the Committee that the increasingly assertive role in aid coordination. However, question of whether adjustment lending should be even with a high level of aid coordination in evidence, resumed or not should be based on the reform effort and OED found that there is much friendly but ultimately commitment of the government, and not on a desire to wasteful competition, especially in lending to the social reverse the net outflow of capital from the Philippines to sectors, and little reciprocal concern about other donors’ the Bank. results. The Committee was not supportive of the rec- ommendation that the Bank should aim for a joint CAS Leonard Good covering all major donors by 1999. The view was Vice Chairman expressed that it would not be appropriate for the Board CODE 55 OPERATIONS EVALUATION DEPARTMENT PUBLICATIONS The Operations Evaluation Department (OED), an inde- The World Bank InfoShop serves walk-in customers pendent evaluation unit reporting to the World Bank’s only. The InfoShop is located at: executive directors, rates the development impact and performance of all the Bank’s completed lending opera- 701 18th Street, NW tions. Results and recommendations are reported to the Washington, DC 20433, USA executive directors and fed back into the design and implementation of new policies and projects. In addition All other customers must place their orders through to the individual operations and country assistance pro- their local distributors. grams, OED evaluates the Bank’s policies and processes. 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E-mail: pic@worldbank.org Fax number: (202) 522-1500 Telephone number: (202) 458-5454 57 OED Study Series Nongovernmental Organizations in World Bank–Supported Projects (1999) Evaluation and Development: The Institutional Dimension (1998) 1997 Annual Review of Development Effectiveness (1998) India: The Dairy Revolution (1998) The World Bank’s Experience with Post-Conflict Reconstruction (1998) Financial Sector Reform: A Review of World Bank Assistance (1998) Rebuilding the Mozambique Economy: Assessment of a Development Partnership (1998) Mainstreaming Gender in World Bank Lending: An Update (1997) Agricultural Extension and Research: Achievements and Problems in National Systems (1997) Fiscal Management in Adjustment Lending (1997) Reforming Agriculture: The World Bank Goes to Market (1997) Paddy Irrigation and Water Management in Southeast Asia (1997) Poland Country Assistance Review: Partnership in a Transition Economy (1997) 1995 Evaluation Results (1997) Zambia Country Assistance Review: Turning an Economy Around (1997) The Aga Khan Rural Support Program: A Third Evaluation (1996) Lending for Electric Power in Sub-Saharan Africa (1996) Industrial Restructuring: World Bank Experience, Future Challenges (1996) Social Dimensions of Adjustment: World Bank Experience, 1980–93 (1996) 1994 Evaluation Results (1996) Ghana Country Assistance Review: A Study in Development Effectiveness (1995) Evaluation and Development: Proceedings of the 1994 World Bank Conference (1995) Developing Industrial Technology: Lessons for Policy and Practice (1995) The World Bank and Irrigation (1995) 1993 Evaluation Results (1995) Structural and Sectoral Adjustment: World Bank Experience, 1980–82 (1995) Gender Issues in World Bank Lending (1995) The World Bank’s Role in Human Resource Development in Sub-Saharan Africa: Education, Training, and Technical Assistance (1994) 1992 Evaluation Results (1994) New Lessons from Old Projects: The Workings of Rural Development in Northeast Brazil (1993; contains summaries in French, Portuguese and Spanish) World Bank Approaches to the Environment in Brazil (1993; contains summaries in French, Portuguese, and Spanish) Rapid Appraisal Methods (1993) Trade Policy Reforms Under Adjustment Programs (1992) World Bank Support for Industrialization in Korea, India, and Indonesia (1992) Population and the World Bank: Implications from Eight Case Studies (1992) The Aga Khan Rural Support Program in Pakistan: Second Interim Evaluation (1990)