Philippines - Third Municipal Development Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No: 22213-PH IMPLEMENTATION COMPLETION REPORT (CPL-34550; SCL-3455A) ONA LOAN IN THE AMOUNT OF US$68 MILLION EQUIVALENT TO THE REPUBLIC OF THE PIHLIPPINES FOR A THIRD MUNICIPAL DEVELOPMENT PROJECT June 28, 2001 Urban Development Sector Unit East Asia and Pacific Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents mnay not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (Exchange Rate Effective December 31, 2000) Currency Unit = Peso (PhP) PhPI = USS 0.02 US$ 1 = 49.9 METRIC SYSTEM FISCAL YEAR January I December 31 ABBREVIATIONS AND ACRONYMS BLGF Bureau of Local Government Finance BOT Build-Operate-Transfer (also BOO, BTO-- different forms of private sector participation) CAS Country Assistance Strategy CDS City Development Strategy COA Commission on Audit CPO Central Project Office DBM Department of Budget and Management DlLG Department of the Interior and Local Govemment DOF Department of Finance DPWH Department of Public Works and Highways EIRR Economic Internal Rate of Retum FIRR Financial Internal Rate of Return GOP Government of the Philippines IDF Institutional Development Fund IRA Internal Revenue Allotment LGA Local Government Academy LGC Local Government Code LGU Local Government Unit LLA Local Loans Account LOGOFIND Local Government Unit Finance and Infrastructure Development Project (Ln. 4446) MDF(O) Municipal Development Fund (Office) MDFGB Municipal Development Fund Goveming Board MDP Municipal Development Project MTP Municipal Training Program PHRD Population and Human Resource Development Grant (of Japan) PGB Policy Governing Board PSA Project Support Account PSC Project Steering Committee RPTA Real Property Tax Administration RPTU Real Property Tax Unit SPAR Subproject Appraisal Report Vice President: Mr. Jemal ud-din Kassum, EAPVP Country Manager/Director: Mr. Vinay Bhargava, EACPF Sector Manager/Director: Mr. Keshav Varmna, EASUR Task Team Leader/Task Manager: Mr. Toru Hashimoto, EASUR  IMPLEMENTATION COMPLETION REPORT PHILIPPINES: THIRD MUNICIPAL DEVELOPMENT PROJECT CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 4 5. Major Factors Affecting Implementation and Outcome 9 6. Sustainability 11 7. Bank and Borrower Performance 12 8. Lessons Learned 16 9. Partner Comments 17 10. Additional Information 17 Annex 1. Key Performance Indicators/Log Frame Matrix 24 Annex 2. Project Costs and Financing 27 Annex 3. Economic Costs and Benefits 31 Annex 4. Bank Inputs 32 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 34 Annex 6. Ratings of Bank and Borrower Performance 35 Annex 7. List of Supporting Documents 36   Project ID: P004592 Project Name: Third Municipal Development Project Team Leader. Thomas L. Zearley TL Unit: EASUR ICR Type: Core ICR Report Date: June 28, 2001 1. Project Data Name: Third Municipal Development Project L/C/TF Number: CPL-34550; SCL-3455A CountryiDepartment: PHILIPPINES Region: East Asia and Pacific Region Sector/subsector: UM - Urban Management KEY DATES Original Revised/Actual PCD: 04/24/1990 Effective: 08/03/1992 Appraisal: 06/13/1991 MTR: Approval: 03/31/1992 Closing: 06/30/1999 12/31/2000 Borrower/lmplementing Agency: GOP/DPWH Other Partners: STAFF Current At Appraisal Vice President: Jemal ud-din Kassum Attila Karaosmanoglu Country Manager: Vinay K. Bhargava Callisto Madavo Sector Manager: Keshav Varma Jeffrey Gutman Team Leader at 1CR: Thomas Zearley Yoshine Uchimura ICR Primary Author: Lito League; Toru Hashimoto 2. Principal Performance Ratings (HS=Highly Satisfactory, S-Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, NI=Negligible) Outcome: S Sustainability: L Institutional Development Impact: SU Bank Performance: S BorrowerPerformance: S QAG (if available) ICR Quality at Entry: S Project at Risk at Any Time: Yes The OAG had not been esrablished at the tinme of project preparation, so a rating is not available.  3. Assessment of Development Objective and Design, and of Quality at Entry 3.] Original Objective. Background. The Third Municipal Development Project (MDP III) was designed to assist cities and municipalities in the Philippines to address existing deficiencies and improve priority infrastructure, services and facilities for their residents by strengthening the National Government's institutional framework for assisting local governments, including their planning and management capabilities. It was the third in a series of Bank-assisted projects to promote local government development and improve local government access to credit financing. Based on the success of the first two MDPs, MDP III was to support the further evolution of the system applied in the previous MDPs, which adopts a demand-driven, bottom-up approach to determining participants. Objectives: The principal objectives of the loan were to assist Philippine cities and municipalities in expanding and upgrading their infrastructure, services and facilities by: (a) strengthening the National Govenmment's institutional framework for assisting local governments; (b) strengthening the local governments' investment planning, financing and implementation capacity; (c) strengthening the local government's maintenance capacity; and, (d) improving local fiscal performance. The objectives were clearly defined and generally consistent with the Bank's evolving strategy for the urban/local government sector in the Philippines. The project was generally responsive to the borrower's circumstances and priorities, as it coincided with the passage of the Local Government Code (LGC) of 1991 in which many national government functions were devolved to the Local Government Units (LGUs). In this regard, the project provided the much needed support for LGUs in upgrading infrastructure facilities, capacities, and revenue-generating programs. The project was consistent and responsive to the Government's decentralization program by targeting assistance to LGUs. By adopting a bottom-up, demand-driven approach, the project's objectives were realistic because LGUs were given the responsibility of selecting projects that they could complete within the context of their technical and financial capabilities, as well as the project's implementation period. The project's design adopted the approach of the two previous MDPs and, therefore, did not involve any major project risks. The potential project risks identified in the Staff Appraisal Report (SAR) included: (a) acceptability of moving toward market rates for municipal lending; (b) technical and managerial limitations of the local governments; (c) project office's capability to handle a larger number of cities/municipalities than in the past; and (d) political uncertainty surrounding the upcoming (1992) presidential elections. The project was not designed with perfonnance indicators such as those included in current docurnentation, nor was it retrofitted with indicators when the logframe tool was introduced in the late 1990s, because it was felt the project's closing date was too soon to make a significant difference. 3.2 Revised Objective: n.a. 3.3 Original Components: The objectives above were to be achieved through a series of physical investments by the Department of Public Works and Highways (DPWH) and LGUs, local resource mobilization efforts for Real Property Tax Administration (RPTA) and technical assistance to the main national implementing agencies such as DPWH, and Department of Finance (DoF). The project was a continuation and expansion of the approach developed under MDP I and MDP II and consisted of: - 2 -  (a) Subprojects. Subprojects included basic infrastructure (installation of communal faucets; construction of wells; construction of communal sanitation facilities; construction and rehabilitation of drainage canals and pipes; and improvement of existing alleys, footpaths and local roads); public facilities (construction and rehabilitation of public markets, slaughterhouses and motorpools) and equipment (provision of road and drainage maintenance equipment; utility vehicles and computers for record management). These subprojects were divided into local component-funded projects, which refer to projects that are implemented and maintained by the LGU, and the national component-funded projects, which include projects that are implemented and maintained by the DPWH; (b) Maintenance Program: Improved rnaintenance planning and implementation in selected pilot cities and municipalities; (c) Real Property Tax Administration: Assistance to LGUs to improve the preparation of tax maps, to improve real property tax records management, to increase real property tax collection and to computerize the management of real property information; (d) Municipal Training Program: Training of local officials in, among others, municipal planning, fiscal management, contract management and environmental assessment; and (e) Technical Assistance: for (i) a study of institutional options for further lending to local governments; and (ii) an environmental sanitation and solid waste study. The project components were aptly designed to address the needs of LGUs as well as strengthening the capacity of national government agencies in assisting them. By adopting a bottom-up, demand-driven approach, the reasonableness of achieving the project objectives within the implementation period was assured. In addition, the combination of project components was appropriate to ensuring that LGUs had access to the necessary technical and financial assistance to achieve the project's objectives. The experience of the implementing agencies with the previous MDPs improved their capacity in dealing with the problems that arose during implementation of MDP3. In particular, the Central Project Office (CPO) was instrumental in ensuring smooth vertical and horizontal coordination during implementation. The project design incorporated key lessons leamed in the previous urban sector projects in the Philippines. More specifically it aimed at: (a) introducing approaches to optimize limited local resources; (b) strengthening LGU capacity to plan investments, implement projects, operate and maintain services, and institute proper pricing policies to ensure cost recovery; and (c) providing LGUs essential access to financial and technical resources for basic municipal services. 3.4 Revised Components: The Technical Assistance component was dropped from the project when funding was made available through a grant from the Japanese Govermment. The Municipal Lending Study was undertaken through an IDF Grant, while the Urban Environmental Solid Waste Management Study was completed through a PHRD Grant. This component was dropped after the project became effective, and the loan funds of US$1.3 million were reallocated in 1998 to fund the consultancy and training requirements of other project components. 3.5 Quality at Entry: Overall. quality at entrv is rated satisfactorv. The project was consistent with the Bank's CAS objectives of strengthening municipal management and increasing the level of resources available to local governments through improved access to loan financing. At the same time, it also supported the Government's priorities and decentralization policies with the timely passage of the Local Govermment Code of 1991. Overall, the project's design, incorporating a participatory, demand-driven selection - 3 -  process, was instrumental in its successful implementation. The combination of the project's components-namely subproject selection, project-related training and strengthening real property tax collection-was suited to meet its objectives. The design appropriately addressed the needs of LGUs for upgrading infrastructure facilities, technical capacities of LGUs, and improving municipal management through improved resource mobilization and fiscal management, investment planning, project irnplementation and maintenance operations. The assumptions with regard to potential risks to project implementation were reasonable and were appropriately identified at appraisal. The project components were evaluated as having minimal environmental impacts at appraisal. Specifically, the subprojects component, which includes the construction of infrastructure facilities, met the Bank's standards for environmental and social concerns and therefore complied with the Bank's safeguard policies. Risk Assessment. The project risks with regard to generic assumptions about external risks to the project were very reasonable and had a negligible impact on the project. The Asian financial crisis of 1997 and its impacts on the project and the country as a whole could not have been forecast at appraisal. Project specific risks were also identified early on at appraisal and had limited impacts on the project. Specifically, the reorganization following the local and national elections held in 1995 and 1998 caused implementation delays due to changes in priorities, delay in assigning signatories, and submission of incomplete documentation. It was during this period (June 1995 to June 1996) that the project was rated unsatisfactory. 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: The overall project outcome is rated satisfactorv. The project successfully achieved its physical objectives of assisting LGUs to provide basic municipal infrastructure, services and facilities. In particular, revenue-generating projects, such as public markets, have in most cases, expanded the revenue base of LGUs and provided income-generating opportunities for residents, in addition to improved facilities. Based on sample calculations, the project has satisfactory economic (EIRRs) and financial rates of return (FIRSs). Sample economic and financial rates of return calculated for four projects reveal EIRRs between 10-29%, as against the EIRR of 15% established at appraisal. (See details in annex 3.) The project has sustained the achievements of previous MDPs in attaining institutional development objectives. It successfully continued the development and strengthening of national support mechanisms for financial and technical assistance to LGUs. The institutional development impact on participating LGUs as in previous MDPs has been substantial. LGUs gained both knowledge and hands-on experience in various aspects of municipal management and development such as project planning and preparation, development and capital investment planning, detailed engineering design, procurement and contract supervision, implementation supervision, financial management, resource mobilization, environmental management and operation of municipal services and enterprises, that can be applied to future capital investment and municipal service operations. The skills acquired by the participants were not only useful as they related to the project, but also set the foundations for improved municipal governance and LGU performance. The training component highlighted the gaps in the technical capacity of the country's LGUs and brought to fore the importance of extending financial as well as technical assistance in improving local govemrnment performance. More than anything, the project emphasized the need for LGUs to re-evaluate their management styles to adapt to the needs of rapidly urbanizing centers in light of the govemment's decentralization policies. In addition to upgrading their skills, the project successfully established national support - 4 -  mechanisms for financial and technical assistance to LGUs. The MDF has established itself as a long-term credit window for eligible LGUs. Although this objective has not yet been fully achieved, the groundwork has been laid for its originally envisaged function as a revolving fund facility for LGUs. The CPO became a capable technical agency to support LGUs in municipal infrastructure planning and provisions. The project also achieved its financial objectives. The real property tax component enabled the significant expansion of the tax bases in rapidly urbanizing LGUs and emerging urban centers and provided a basis for increasing locally generated resources. The project also substantially achieved the national fiscal objective of shifting gradually from grant financing to loan financing for capital investment projects undertaken by LGUs. The maintenance component of the project, however, did not substantially achieve its objective of strengthening the local govenmment's maintenance capacity, as exhibited by the diminishing support it generated as the project progressed. While the project's design was intended to institutionalize the importance of maintenance in LGU development, it failed to take into account the ability of LGUs to provide increasing equity over the implementation period, and therefore was not able to sustain LGU participation in the project. The project partially achieved its sector policy objectives and public sector management objectives. The separation of national support functions among three agencies, namely the CPO (technical intermediary), Bureau of Local Government Finance/Municipal Development Fund (financial intermediary) and LGAIMTP (capacity building) created some constraints in overall project implementation. Furthermore, the project design of the MDP III provided little incentive for LGUs to extend coverage of non-revenue generating infrastructure in social and environmental sectors, especially to the lower income communities. 4.2 Outputs by components: Subproject Component The project substantially achieved and, in some participating LGUs, exceeded its physical objectives. A total of 75 LGUs spread throughout 11 regions benefited from the subproject component of the MDP Ill. As in the previous MDPs, the majority of the sub-projects included revenue-generating facilities such as the construction and rehabilitation/expansion of public markets (56 units) and slaughterhouses (six units). Other subprojects included transport terminals, water supply systems, a municipal port, school buildings, health centers, traffic management systems, roads and bridges, and shore protection facilities which were classified as local components, while other national level subprojects included roads and bridges, drainage and flood control systems, shore protection and water supply systems. The public markets had the most visible benefits by providing more sanitary and hygienic facilities, better circulation and ventilation, increased market capacity to meet the demand for stalls, and improved mobility, comfort and convenience for both users and stall owners. Moreover, public markets triggered the development of adjacent areas into commercial spaces resulting in increased real property values and subsequently real property tax collections. Through the subprojects component, MDP satisfactorily achieved its objective of assisting LGUs in the provision of priority infrastructure facilities and services for their respective constituents. More importantly, the projects had significant impacts on the fiscal and political autonomy of LGUs. Through the construction of revenue-generating projects, participating LGUs increased their fiscal autonomy through improved local revenue collections. This improved their access to further MDF funds, and other loans and grants. Politically, more autonomy gives municipalities a greater role in decentralized decision-making, and therefore supports the goals of the Local Government Code. - 5 -  Maintenance Program The maintenance program component was implemented in eight project centers (municipalities of Bauan, Pulilan and Los Banos and the cities of San Fernando (La Union), San Jose, Dipolog, Butuan and Tagum) as targeted in the SAR. These subprojects undertaken under this component included the rehabilitation of drainage systems, dredging of rivers and creeks, fabrication of canal and concrete covers, rehabilitation of municipal grading equipment, street lighting, electrical facilities, and market facilities among others. Over the four-year implementation period of this component, the participating LGUs assumed an increasing share in the cost-sharing scheme with the national government. During the first year, the government assumed 70% of the funding requirements, followed by 50% and 30% in the second and third years respectively, after which the local government assumed full funding for the project. The objective of the graduated investment scheme was to instill the ethic of maintenance and to develop technical skills. Participating LGUs were selected from those who were willing to comrnmit the necessary resources to improve their maintenance performance and had satisfactorily completed projects under MDP I. The project only partially achieved its objective of strengthening the maintenance capacity of LGUs through the implementation of the maintenance component. The primary reason was the inability of interested LGUs to provide the required counterpart funds as a pre-requisite for participation in the project. At the same time, participating LGUs experienced difficulties in meeting the equity contributions, in spite of the graduated cost-sharing scheme with the lending agency. During implementation, the participation of the LGUs diminished as their share in the costs increased. This experience points to a design issue which may not have been the most appropriate means for achieving the intended objectives. Aside from not providing appropriate incentives for participants to finish the four-year program, the component did not include a system for penalizing participants for not providing the scheduled counterpart funds. Municipal Training Program (MTP) Between 1993 and 2000, the MTP component conducted 219 training courses with 9,169 participants from 74 participating LGUs, exceeding the appraisal estimate of 156 training courses. About 87% of the participants included technical staff, while the remaining 11.89% were elected officials including mayors, vice mayors and councilors. The range of courses conducted by the Local Government Academy were directed towards improving and strengthening the management, technical, and financial capabilities of local government staff of its project centers, particularly as they relate to the planning, implementation and management of local infrastructure projects. Over a seven year period, the courses were conducted in a classroom setting coupled with project site visits in various locations by in-house staff of the MTP-LGA and contract trainers. The most successful innovation thus far, the MTP component, was developed and implemented as training cum technical assistance, utilizing a tested pool of experts and consultants in the various fields of local governance. Conducted in 1999, a survey of 27 out of the 36 project centers revealed that the objectives of the component were satisfactorily achieved as shown in the improved performance of technical staff and local government units, particularly in the aspects of financial management and project implementation. The linkage between specific aspects of the sub-project implementation and operations, such as municipal finance and revenue administration, construction supervision, contract management and procurement, and public enterprise administration further enhanced the "on-the-job" training aspect of the sub-projects and enhanced the demand for and relevance of the training. In particular, a number of LGUs have already revised and implemented their Local Revenue Code as the first step in improving local fiscal performance. At the same time, another positive outcome of this project is the institutionalization of teamwork within the LGU, which was the approach adopted in the conduct of the training courses and the promotion of - 6 -  inter-LGU cooperation where LGUs shared their newly acquired skills and experiences with other LGUs. The inclusion of elected officials and career employees in the training courses institutionalized the need for cooperation and coordination among the different departments in the LGU. The experience with the training program under this project brings to fore the need to examine other modes of delivering the training courses to ensure the sustainability of the experience and knowledge learned. MTP, in sustaining the gains of MDP III, has started to develop a wide range of training methodology innovations that will suit the requirements of first to sixth-class LGUs. On the whole, all the training programs of the Municipal Training Program at the Local Government Academy (MTP-LGA) consistently and continuously sustained the gains of local autonomy. Particularly with the conduct of local elections every three years and the corresponding reorganization of the local staff, there is a need to ensure that the gains of the project are carried over through subsequent administrations. Real Property Tax Adniinistration (RPTA) The RPTA component of MDP III is a continuation of the same program implemented under MDPs I and II. The objective of the program was to enhance real property tax administration in LGUs through the improvement of real property tax records management and the computerization of real property data. The program was implemented in 13 regions encompassing 427 LGUs and covering more than 6.645M real property tax units (RPTU), exceeding the targets of 233 LGUs and 3.3 M RPTUs respectively. The component satisfactorily achieved its objectives, particularly in terms of exceeding the targeted number of LGUs and RPTUs. Records show that total assessed values in participating LGUs increased from PhP61.385B before project implementation, to PhP139.lB in CY 2000. This represents an increase of 128%. Moreover, collectibles and actual collections, when compared with pre-implementation and post-implementation figures, reveal an increase of 75% and 63% respectively for LGUs that implemented tax mapping, records conversion and tax collection, and an increase of 46% and 31% respectively for LGUs that conducted data conversion activities. It should be noted, however, that the growth may have also resulted from the reclassification of properties from rural to urban uses, thereby increasing the number of properties and value of the land, discovery of undeclared property units, and collection of delinquencies. Therefore, there is a need to further look into more detailed indicators, particularly in the longer-term improvement of fiscal performance of LGUs. Technical Assistance About US$1.3M was allocated to conduct studies on municipal lending and urban enviromnent solid waste management. The Municipal Lending Institution study was a review of the current status of municipal lending in the country and identified options for institutionalizing it. The urban environmental study deemed to review the legal framework governing solid waste operations in order to formulate measures for strengthening policy guidance, supervision, technical assistance to local governments, and training of local officials at the national level. This component was eventually dropped from the project when funding to conduct the studies was made available through a grant from the Japanese Government. The Municipal Lending Study was undertaken through an Institutional Development Fund (IDF) Grant, while the Urban Environmental Solid Waste Management Study was completed through a Japanese Population and Human Resources Development (PHRD) Grant. This component was dropped after effectiveness, and in 1998 the loan funds were reallocated to fund the consultancy and training requirements of other components. Other Achievements -7 -  The project only partially achieved its sector policy objectives and public sector management objectives. In particular, the project design provided little incentive for LGUs to extend coverage of non-revenue generating infrastructure in social and environmental sectors to the lower income communities. In addition,_ due to the perceived potential cost recovery risks, few public goods type infrastructure were financed in MDP III. The MDP 11I did not completely achieve the objective of evolving the MDF as a self-sustaining financial intermediary as envisaged in the SAR. Under the MDP III, the MDF began operating as a special revolving fund through the operationalization of the Local Loans Account (LLA) account to finance part of the loan. At closing, it was estimated that about 27% of the project was funded from second generation funds. 4.3 Net Present Value/Economic rate of return: Sample EIRR and FIRR for four revenue-generating projects were calculated. These include two public markets, one integrated terminal and one slaughterhouse. Of the four projects, three had EIRRs ranging between 14% to 29%, a figure which is higher than the 14% opportunity cost of capital in the Philippines. This is however slightly lower that the 15% EIRR targeted at appraisal. (See annex 3 for more details.) 4.4 Financial rate of return: On the other hand, two of the four projects sampled showed FRRs ranging between 22% to 26%. Due to low occupancy rates, one public market had an EIRR and FRR below 14%. Its performance is expected to improve in the next few years when the market attains 100% occupancy of market stalls. Annex 3 shows the detailed cost benefit analysis for the four project centers. 4.5 Institutional development impact: The institutional development impact of the subproject component was substantial, particularly in the aspect of providing "on-the-job" training for participating LGUs. The combination of going through the subproject selection process, as well as the participation in the training programs conducted established a good training ground for fostering LGU autonomy in project preparation and irnplementation, as well as mobilizing local financial resources. The CPO of the DPWH established itself as a capable project implementation agency at the national level and acted as an effective technical intermediary in assisting LGUs in the preparation of subproject proposals and their subsequent implementation. The MTP provided the needed training in project-related skills, such as municipal finance and revenue administration, construction supervision, contract management and procurement, public market administration, etc., which were aptly applied in a hands-on manner in the subprojects. The institutional development impact of the maintenance component, however, was modest unlike the other components, because it was not able to effectively inculcate the need to invest in the maintenance of infrastructure facilities as intended. Instead of encouraging LGUs to raise revenues to fund maintenance projects, participating LGUs drew funds from their Intemal Revenue Allocation (IRA) to provide counterpart funding, thereby defeating the purpose. Furthermore, the project's design did not provide appropriate incentives, as well as penalties for participating LGUs to sustain the four-year program. Had it been successful in doing so, it should have been able to sustain LGU participation until project completion. But as it were, participating LGUs were not able to provide the required equity for the project towards the latter part. The MT? program's institutional development impact was also substantial in that participants acquired the skills necessary to effectively carry out the project, from sub-project preparation to implementation. Moreover, the training programs set the foundation for improved municipal govemance and highlighted the need to expand technical capacity at the local level with respect to empowering LGUs in - 8 -  light of the government's decentralization policies and the country's rapid urbanization. Through tax mapping, records conversion/management and improved tax collection, the project's RPTA component contributed to improving the participating LGUs fiscal performance and management. As the LGUs primary source of revenue generation, the RPTA component effectively promoted institutional development at the local level where it was needed most. 5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agency: The Bank's delays in approving pro forna contract docurnents and in approving the policies for determining the loanable amounts to LGUs set back project start-up by almost two years. Although the project was approved in March 1992 and became effective the following August, actual releases began only in the first quarter of 1994 when the documents were finally approved. The contract docunents, which consisted of the sub-project and sub-loan agreements, and the bid documents for consultancy and civil works, underwent a series of reviews and revisions by a succession of Bank officers from 1992 to late 1994. It should be noted, however, that during the review period (1993-1994), the Bank was in the process of revising its Standard Bidding Documents for consultancy and civil works contracts for all Bank-assisted projects, which at least partly explains the reasons for these delays. Assuming the pro-forma documents were approved earlier, the project still would not have been able to meet the original target closing date, as other problems also hampered project implementation as discussed below. Political changes following the local and national elections also caused substantive delays to the project's implementation schedule. Changes in administration resulted in a shift in priorities in some participating LGUs, and in some cases led to their dropping out of the project. This was particularly true for 10 LGUs which experienced changes in the composition of their local councils following the 1995 and 1998 elections. As stipulated in the sub-loan agreement, participating LGUs had to secure a Council Resolution indicating their commitment to the project. But because of the lack of support from the Council, these 10 mayors were not able to secure a resolution from the board and were, therefore, forced to cease participation. Natural disasters such as typhoons, earthquakes, and volcanic eruptions interfered with the implementation of sub-projects. In particular, the eruption of Mt. Pinatubo and the succeeding economic difficulties that followed, required changes in the scope and costing for the three pilot centers (Bauan, Tanauan and Panabo) as these were prepared prior to the eruption. In addition, regular weather disturbances, particularly typhoons during the monsoon season, adversely affected project progress. Upon such occasions, some subprojects experienced work stoppages either due to the adverse weather conditions or to delays in the delivery of construction materials. However, none of the subprojects were damaged by these natural disasters. The Asian Financial Crisis of 1997/98. The onset of the crisis saw the rapid devaluation of the Philippine peso from the appraisal exchange rate of P24 to the dollar to P44 to the dollar in March 1998. Because of this, there was a need for additional peso counterpart or budgetary requirements for 1999 and 2000, thereby necessitating expansion of the project's coverage. The additional funds could accommodate seven more project centers, but they had physical completion dates beyond the original completion/loan closing dates. The loan closing therefore was extended by 18 months to accommodate the additional LGUs. -9  5.2 Factors generally subject to government control: Cash/fund flow due to ceilings on loanable amount and the government's reimbursement procedures. The cash flow problem was a two-pronged issue concerning the loanable amounts LGUs were allowed to borrow according to the LGC, and the reimbursement procedures of the national govermment. These cash flow issues had already been identified in MDP II as the project suffered a similar fate. The government's policy on loanable amounts for LGUs emerged as an issue in early 1994. The Department of Finance (DoF) recognized the need to revise the formulas to determine the borrowing capacity of LGUs, following the passage of the LGC, which stipulated a limit to the LGUs debt service capacity. (The provisions required that the annual debt service of LGUs should not exceed the estimated revenue of the LGU in the current fiscal year.) The Policy Governing Board (PGB) approved the revised formula after one year in 1995. As a result, the sub-loan proposals of seven LGUs had to be revised according to the new formula, which subsequently dictated a revision in their investment proposals due to the reduction in their allowable sub-loans, not to mention necessitating changes in project scope and costs. Fund releases following the Government's reimbursement procedures were also constrained by the GOP monthly cash disbursement ceiling requirements. The National Government had monthly disbursement ceilings for each of its agencies and for the entire government as a whole. Because of this provision, in addition to the fact that the MDF sub-loans were included as on-budget items, fund flows to LGUs were constrained as the concemed agencies often exceeded their cash disbursement ceilings. Non-reimbursement of LGUs eventually led to project implementation delays. Budgetary controls. Budget constraints presented a major cause of implementation delays, the primary reason being that foreign assistance funds are included as part of a national agency's budget, in this case the DoF, and therefore, are subject to budgetary ceilings set by the annual appropriations. As such, subloan releases were constrained by the ceilings, which more often than not exceeded the department's annual budget. Subsequently, these issues resulted in the delay of release of funds for ongoing projects and the deferment of those which had previously been scheduled. These combined factors substantially affected the pace of implementation and level of disbursement of the project. To address these issues, the implementing agency, through the DoF and the Department of Budget Management (DBM), removed the MDF subloans from the budget lines of the DoF and put them in the queue for unprogrammed funds. With regard to the cash flow issues, MDF tapped the PSA funds to provide bridge financing while replenishment requests were processed. Local government reform The passage of the Local Government Code in 1991 presented an increased number of opportunities for LGUs to direct their development, as well as raise much needed revenues. The passage of this law had both positive and negative impacts on the project. Specifically, the substantial increase of the IRA under the LGC made the LGU's less dependent on locally generated revenues. It also had the effect of downgrading the significance of RPTA in the municipal finance system and provided a disincentive for RPTA component expansion. Self-selection process. Given the demand-driven, bottom-up approach, LGUs had positive incentives to select priority sub-projects, and to manage their implementation effectively. The project had built-in public consultation mechanisms to secure positive support by affected vendors and beneficiary patronage for most of the new facilities. 5.3 Factors generally subject to implementing agency control: Proiect management. At the national level, project implementation was effectively carried out by the CPO. Most of the participating LGUs cited the timely and appropriate technical support from the - 10-  CPO as the single most important reason for timely subproject completion. As the project framework was replicated from MDPs I and II, the staff of the CPO and BLGF were able to deepen their understanding of the Barnc's procurement guidelines and disbursement procedures. The CPO was very proactive in its role as the implementing agency and in most cases implemented timely solutions to issues hampering project implementation. On the other hand, at the local level, problems such as the weak technical capabilities at the LGU level to manage and supervise civil works contracts, unfamiliarity of LGU officials with Bank Procurement Guidelines, delays related to land acquisition, inappropriate feasibility studies and detailed engineering designs by consultants, and delays in completion of documentation for liquidations of loan releases figure among the factors that adversely affected project implementation. 5.4 Costs andfinancing: Overall, the total financing requirements amounted to PHP3,480 M, which is slightly below the appraisal estimate of PHP3,983 M. Total Bank financing amounted to PhP2,199 rmillion or 63% of the total project financing cost of PhP3,480 million. (Details are indicated in Annex 2.) Despite the cancellation of various components, the reallocation of funds from the maintenance program to the other components, and the peso devaluation, the appraisal estimate was not met because: (a) the approved subloan estimate was not fully utilized by LGU's due to cost-savings during bidding; and (b) three subproject centers (Dipolog City, Cagayan de Oro City and Bislig) did not complete their respective subprojects by closing resulting in cancellation. The project's original closing date was June 30, 1999; the final closing was December 31, 2000. The causes for implementation delays are elaborated upon in the preceding paragraphs. As indicated in the financing by component, this project was an effort towards strengthening LGU development from both the national and local levels through the provision of funds at various levels. Specifically, the creation and strengthening of MDF supports the Bank, as well as the govenmuent's shift towards improving access to LGU funds. While the project did not completely achieve the objective of evolving MDF as a self-sustaining financial intermediary as envisioned in the SAR, it set the stage for the unit's functioning as one through the use of second generation funds under MDF to finance part of the loan. As of Loan closing, it was estimated that about 27% of the project was funded from MDF funds. 6. Sustainability 6.1 Rationale for sustainability rating: Overall project sustainability and sustainability of the sub-projects are likely. All the participating LGUs maintain local ordinances to impose appropriate public market and slaughterhouse fees. The newly created municipal facilities are generating sufficient revenues for operations and maintenance. There is a need for a perfornance evaluation mechanism to provide an incentive framework to encourage LGUs to improve maintenance, revenue mobilization and service delivery and overall local govemance. Sustainabilitv of the MDP institutions. namely the MDF and the CPO is likely. The GOP's comrnmitment to overall decentralization and national out-reach support programs remains high. High demand for MDF financing has resulted in a large number of LGUs receiving sub-loans, with a consequent substantial increase in MDF's accumulated repayments of interest and principals (second generation fund). The MDF started to function as a revolving fund under the MDP III with 30% of the sub-loans coming from this second-generation fund. The MDF has also experienced relative success as a long-term municipal finance mechanism. At project closing, the MDF sub-loan collection rate was 100%. Of this total, 98% of collections camne through normal LGU sub-loan repayments of principal and interest due. The remaining 2% of collections have been obtained through the application of the Internal Revenue Allotment intercept. -1 1-  The CPO has continuously upgraded the skills of its staff and established itself as a capable technical intermediary for LGU capital investment planning and execution. Under the MDP III, the CPO and BLGF staff in charge of the MDF have begun to work more closely. The BLGF/MDF staff are getting more involved with the CPO's appraisal activities, and both the BLGF/MDF and the CPO staff are cooperating to determine loanable amounts to sub-projects and to monitor the financial performance of LGUs. A key question that remains to be answered is how to retain qualified staff in the public sector. The MDP III project staff of the CPO were hired on a co-tenninus bases with the project and less than half the MDP III staff are still retained in the CPO. 6.2 Transition arrangement to regular operations: The participating LGUs started the operation and maintenance of the assets created in the project according to the respective sub-loan agreements. The main conditionalities of the sub-loan agreements which have direct implications on future operations are: (a) full repayment of the sub-loan; (b) maintaining local ordinance on market and slaughterhouse fee structures; and (c) sustaining the LGU Maintenance Trust Fund. Most of the LGUs had some experience in operating and maintaining similar assets in the past. The basic institutional framework already exists, staff are mostly on board and generally familiar with their roles and functions. MTP has continually upgraded its training courses to meet the needs of the participating LGUs. MTP-LGA has already identified the need to conduct orientation seminars for the Local Government Unit Finance and Development Project (LOGOFIND, Ln. 4446). The unit has also proposed to provide non-project related training, such as strategic planning, environmental planning and management, development planning, resource mobilization, financial management and others in an effort to sustain the gains experienced from this project. The technical training conducted under the RPTA program can now be continued with the development of the CDRom/compendium on BLGF Fiscal Reference Tools, which can now be accessed by LGUs. In addition, the MTP, Ateneo University and RMA conduct training sessions for newly appointed Local Treasurers, incumbent Provincial/City Treasurers and selected BLGF staff, ensuring that the RPTA program would continue to improve the quality of service, data, and most importantly, enhance LGU revenue sources. Adequate operation and maintenance of the assets created in the project need to be monitored during the follow-up projects with the MDF. Performance evaluation. The implementing agency and their partners are in the process of developing performance indicators to evaluate the subsequent impacts of the project. These, however, have yet to be finalized. Under the RPTA program, annual reports will be compiled to measure: (a) real property tax collections; (b) real property tax collectible; (c) expenditures through RPTA program; and (d) recurrent expenditures of the assessor's office and land tax division. Bank follow-up. The GOP envisaged undertaking further strengthening of MDP institutions under LOGOFIND. To improve the efficiency and effectiveness of the MDF operations, GOP has consolidated its financial and technical functions into the MDFO which is a separate unit in the DOF. GOP also intends to strengthen the policies and institutional capacity of the MDFO overtime to carry out its new responsibilities. Currently, MDFO focuses its attention more on the resource-poor LGUs and encourages local social and environmental projects. 7. Bank and Borrower Performance - 12 -  Bank 7.1 Lending. The Bank's performance in identification was satisfactory. The concept and design of the MDP III effectively incorporated the innovative institutional framework devised in the MDP I, and the lessons learned from the previous urban sector projects. As in the MDP II, & I the Bank designed a simple and focused project with a limited number of components unlike the early urban sector projects. It relied on the innovative "bottom-up" demand-driven approach, which induced strong local participation and project ownership. The design of the project was consistent with the Government and the Bank strategies to strengthen the financial autonomy of LGUs and to improve their capacity for managing urban growth. The Bank's performance in project preparation was satisfactory. In preparation the Bank provided ample guidance to the borrower in all major aspects of the project: technical, financial, economic, institutional. The Bank made sure that the relevant safeguard policies were adhered to which, for MDP III meant only environmental assessment. Two preparation missions were conducted with an economist, a financial expert and an engineer represented. The personnel in the mission were very familiar with the results of the first two MDPs, and successfully incorporated that experience and lessons learned into MDP HiI. The Bank's performance in appraisal was satisfactory. The Bank's appraisal team had a well rounded skill mix consisting of an economist, a financial analyst, and an engineer. With the solid background gained during the implementation of the two previous MDPs, the appraisal team was familar with the lessons from those projects and successfully incorporated them into MDP m. In addition, the team's experience enabled it to correctly assess the strong commitment of the government, implementing agencies and beneficiaries. The tean's experience also allowed a correct appraisal of the agencies' procurement, financial and institutional capacities. As discussed in the Assessment section above, the project design was relatively simple and straight-forward, and the project's risks were few. Compliance with the Bank's environmental safeguards, notably on environmental assesment, was assured upstream through close supervision of subproject designs to avoid and mitigate any potential harmful impact, and downstream through review of the borrower's assessment of possible environmental impact and mitigation plans. This project was appraised before the advent of the logframe and performance indicators relative to the project's development objectives, so no indicators such as those currently used were incorporated in the monitoring and evaluation aspects. As discussed earlier, a few of the incentives built into the project were inadequate. Incentives for LGUs to choose subprojects that had public benefits (health clinics) and not just economic benefits (markets) were lacking. Also, the incentive for LGUs to continue to participate in the maintenance component were either not strong enough or were inappropriate. On the whole however, the incentives for the LGUs to sustain the project's benefits are in place. 7.2 Supervision: The Bank's perfonrance in supervision is rated satisfactory. The Bank provided sound advice and guidance throughout implementation. Early on, it gave appropriate guidance on the procedures to be followed for the procurement of civil works. The Bank closely monitored and provided extensive comments on the quality and contents of Sub-Project Appraisal Report (SPARs) in order to accelerate the sub-project approval process and enhance the sub-project quality. Through close dialogue, the Bank helped the CPO improve staff skills and streamline the sub-project preparation process. The Bank recommended a more "impact-oriented" approach to the RPTA component. Subsequently, the BLGF started monitoring progress in terms of actual revenue yield materialized through the RPTA and revised the LGU selection criteria so that assistance would receive premiums. The Bank regularly monitored - 13-  compliance with Loan covenants. However, it had difficulty in ensuring compliance with financial covenants due mainly to lack of appropriate municipal accounting and national monitoring systems. This issue is being addressed under the follow-on project, LOGOFIND. The Bank's supervision plan scheduled two missions a year with approximately four specialists represented. In practice, fornal supervision missions were generally conducted twice a year, and informal exchanges took place during intervening periods. The Bank's missions were generally staffed with three skills, including an urban planner, financial analyst and procurement specialist. Less well represented was municipal engineering, although subproject construction quality does not appear to have suffered for lack of regular visits by an engineer. Regular contact between the Bank and the borrower's implementing agencies ensured that implementation issues that arose during the course of the project were immediately identified and addressed jointly. Recommendations were recorded in mission aide memoires. Project reporting was done at regular intervals, and project ratings adequately reflected the project's status. The Bank office in Manila was instrumental in its continual support of the CPO, BLGF, MDFO and MTP staff, in reviewing project implementation progress and in addressing issues in advance to avoid problems in project implementation. Late in implementation, the actual task management of the project was decentralized to the Manila office. One aspect of Bank supervision that could have been improved was the timeliness of approval of pro-forma contracts. As mentioned in the Major Factors section, the Bank's protracted review of pro-forma contracts caused major implementation delays. From the time the project became effective in August 1992, almost two years had passed before the first Notice to Proceed was issued in July 1994. This confirms the need for completed procurement documents for the first year's activities, which is now a standard requirement under the project readiness filter. No significant deviations from Bank policy were seen during implementation except that project cost savings due to the dropped technical assistance component and due to the Peso devaluation were reallocated to other components rather than cancelled. These additional funds were well directed toward activities that expanded the project's capacity to achieve its development objectives. 7.3 Overall Bankperformance: Overall, the Bank's performance in all aspects of the project from identification, through preparation, appraisal and supervision, is considered satisfactory for the reasons discussed above. The Bank, the GOP and the executing agencies worked well together. Although the task manager changed three times from the time of project identification to the time of completion, the Bank continued to provide effective guidance with smooth transitions. Close interaction between the Bank and the implementing agencies ensured that implementation issues were immediately identified and jointly addressed. Borrower 7.4 Preparation: The borrower's performance in project preparation was satisfactory. The Govemment took initiatives to combine elements from the Metro Manila Infrastructure, Utilities and Engineering Program from the Third Urban Project and the institutional framework developed under the previous MDPs. The project scope covered essentially the same types of sub-projects as MDP II such as non-revenue generating infrastructure, including roads, drainage, water supply systems, health centers, school buildings and communal sanitation facilities; and revenue-generating projects such as public markets and slaughterhouses. - 14 -  7.5 Government implementation performance: The GOP was able to maintain an appropriate multi-agency institutional framework for project implementation. The DPWH was the lead agency for the project and chaired the Project Steering Commnittee (PSC). The PSC provided policy guidance and coordination arnong the various project agencies. The CPO, under the DPWH, appraised and evaluated sub-projects for financing, provided technical assistance, monitored project implementation and acted as liaison with the Bank. The MDF was set up under the DoF as the principal mechanism responsible for channeling long-term credit to LGUs, and was supervised by the DoF's Bureau of Local Government Finance (BLGF). The Municipal Development Fund Office (MDFO) was organized in 1998 to assume admninistration of the MDF from BLGF. The MDFO has a full time Executive Director and is supervised directly by a DoF Undersecretary. The BLGF also successfully supervised and administered the RPTA component. LGUs were the executing agencies and were responsible for the identification, preparation and implementation of the sub-projects. This ensured that LGUs would select projects they considered a priority. However, this often led to LGUs to select revenue-generating projects instead of maintenance and non-revenue-generating infrastructure projects. Despite some delays during project start-up, the subsequent implementation of MDP III proceeded smoothly. Much of this success can be attributed to the CPO, which was able to anticipate potential problems and address these accordingly. In particular, the highly competent CPO staff provided timely technical assistance to LGUs, particularly in the preparation of feasibility studies that were critical for subloans. Many participating LGUs cited the instrumental role of CPO in facilitating the project's implementation. These proactive measures included: (a) strengthening technical capacities within its ranks to supervise sub-project implementation and assisting PLOs in streamlined operations; (b) establishing a contract review commnittee within the CPO; (c) monitoring and assisting PLOs in procurement of civil works and services in accordance with Bank procedures; and (d) continuously streamnlining the sub-project preparation process. Some of GOP's more noteworthy actions included: (a) the CPO initiated regular monthly PGB meetings to approve loan applications; and (b) the MDFO was created to assume administration of the MDF and strengthen the MDFO as a government development institution. The Borrower complied with most legal covenants in a timely fashion except for the recurrent delays in submitting project audit reports and the separate audit on SOEs and special accounts. As a parallel effort under MDP EII, the Bank started to provide assistance to the Government that will assist the Comrnission on Audit (COA) to strengthen its capability to perform its constitutional mandate. 7.6 Implementing Agency: The performance of the LGUs on the whole was satisfactory. A large number of LGUs experienced extensive difficulties in the preparation of the SPARs and feasibility studies because many did not have the technical capacity to prepare such documentation. With the invaluable assistance of the CPO, most of the participating LGUs complied with project requirements for documentation and provision of LGU equity. The quality of works constructed is satisfactory with sound rates of return. Quite a number of them experienced some reimbursement delays due to the submission of incomplete documents. In addition, some LGUs were not able to provide their local counterpart funds, thereby necessitating some delays, and in some cases, cessation of project activities. 7.7 Overall Borrower performance: The overall Borrower performance is rated satisfactory in both preparation and implementation for - 15-  the reasons discussed above. 8. Lessons Learned The experience with MDP III, as with the previous MDPs, highlight a number of lessons that may be applied to future urban projects in the Philippines and elsewhere. The following is a summary of the project-specific lessons that were revealed in the preparation of this ICR. For a more detailed discussion of the lessons leamed from this experience, see section 10 on additional information or the ICR Mission's aide-memoire. The demand-driven. "bottom-up" proiect structure proved to be a most effective and efficient means of harnessing LGU participation. Through this process, LGUs were able to select the size and complexity of projects that were most suited to their technical and fiscal capacities. Smaller sub-projects and shorter time frames reduce the financial burden on LGUs and the risk that they will not meet their revenue targets. The project structure not only encourages competition among LGUs for limited funds, but more importantly, it fosters a greater sense of ownership of the project and of commitment to achieve higher performance. As part of LGU overall improvement, technical assistance provided through MDP operations helped municipalities become more entrepreneurial, think more about fiscal adjustment, value their staff more highly, interact more closely with private companies and the local communities, and be more environmentally conscious. The presence of national support mechanisms is instrumental to achieving proiect success. The intermediary roles of CPO, BLGF and MDFO were instrumental in the smooth vertical implementation of the project. Given the substantial role that national institutions play in project implementation, it is very important that they remain continually responsive to the needs of LGUs. The MDFO, as the key financial intermediaiy for LGUs, should play a key role in the overall LGU development program. As such, it must be given a corporate institutional identity and culture; institutional autonomy and decentralized decision making; and sufficient resources to operate as an efficient and effective LGU financing and development institution. In support of the MDFO's activities, expanding the capacities of the other MDP institutions through the hiring of private consultancy firms would also be conducive to project success. Private consultancy firms, with their expertise, could assist LGUs in the preparation of feasibility studies, detailed engineering and construction supervision, assist MDF processes and appraise LGU applications and sub-loan releases, and provide capacity building services to both MDFO and LGUs. Limited availability of funds at the local level points toward the need for comprehensive revenue enhancement and mobilization for LGUs. Although the RPTA component succeeded in providing a buoyant own-generated tax bases for the participating LGUs, its accomplishment was undennined by the passage of the Local Governnent Code, particularly with the annual release of the IRA. Future Bank projects should assist LGUs in exploring a wider range of revenue enhancement and mobilization of funds through user charges, business licensing and private sector participation through exaction, development impact fees, management contracts, franchises, concessions (including BOT, BTO, BOO, etc.) and others. Grants should be targeted to induce LGUs to consider investments in areas they do not traditionally address such as social and environmental proiects. The experience of MDP III indicates that LGUs have little incentive to borrow for non-revenue generating infrastructure. The provision of these infrastructure services tends to be sub-optimal from an economic point of view, as there is a disparity between costs to individuals and costs to society as a whole. The limited success of the maintenance program reveals that investments in these types of infrastructure may be more attractive if they are tied to an incentive plan to ensure continued participation in the program. - 16 -  In conclusion, the experience with MDP III and the Bank's other urban projects in the Philippines reinforces the Bank's new strategy, which focuses on developing a more comprehensive and integrated approach to urban development. LGUs must have a long term vision and development strategy for their respective cities/municipalities to better define their priorities and optimize resources. The lack of technical capacity at the local level, particularly with respect to strategic planning and network analysis was a consistent issue in the MDP projects. As such, there is great difficulty in planning for national projects, which are intended to encompass a wider range of beneficiaries. At the same time, maximization of capital investment is also limited due to the short-term solutions to the problems being addressed. The Bank's recent success with the City Development Strategy (CDS) supports the finding that a long-term vision is more effective when it is backed with a development strategy. As shown by the country's success in this program, CDS incorporates a city's long-term vision, strategy for achieving this vision, and an investment plan that prioritizes needs with fiscal capacities and investment requirements. This ensures that projects provide the most benefit to the community, and conform to the priorities identified by them. The participatory nature of CDS formulation ensures that it reflects the vision of as wide a constituency as possible, thereby fostering ownership of a vision and continuity of policies beyond the terms of local chief executives. The Philippine CDS experience has been cited as among the most successful in the world. It has brought to the fore the need to broaden the perspective of local chief executiveslurban managers to encompass more medium and long term development plans as opposed to short-term solutions presented by project-specific assistance programs. More than fostering the importance of long-term planning, CDS promotes the understanding of cities/municipalities as economic space rather than merely govemable space, thereby encouraging innovative thinking in local governance. 9. Partner Comments (a) Borrower/implementing agency: Partner Comments.doc (b) Cofinanciers: (c) Other partners (NGOs/private sector): 10. Additional Information Lessons Learned from the Proiect - Expanded Version 1. Local political commitment is essential to ensuring proiect success and sustainability. The substantial impact of MDP III was largely based on strong local commitment exhibited by the LGUs, such as adhering to their obligations and imposing required institutional and fiscal reformns. Through the bottom-up, demand driven approach, the commitment to the project was inculcated as LGU participants were given the responsibility for project identification, preparation, financing and implementation and thus ensuring the project's sustainability. 2. The MDFO must be made more responsive to the needs of LGUs. For MDP III, the processing time for LGU sub-loan applications on average takes more than a year. Procurement, pre-construction and construction take more than two years. These add up to more than three years and far longer than the three-year term of LGU officials. The MDFO must cut the review process and speed up approval of - 17 -  sub-loan applications to enable LGUs to complete more projects within the three-year term. The MDFO must be transformed into a development and financing institution rather than simply a unit of the DoF. It continues to operate as a small govemment unit impeded by a centralized decision making system, and bogged down by bureaucratic and a highly personalized operations process. There is an urgent need for the MDFO to play a central role in the overall LGU development program. It must be given a corporate institutional identity and culture; institutional autonomy and decentralized decision making; and sufficient resources to operate as an efficient and effective LGU financing and development institution. 3. Improved fiscal perforrance goes hand-in-hand with management strengthenin . As part of the overall improvement, technical assistance provided through MDP operations helped municipalities become more entrepreneurial, think more about fiscal adjustment, value their staff more highly, interact more closely with private companies and the local communities, and be more environmentally conscious. 4. By providing a menu of sub-projects to choose from, LGUs were able to select the size and complexity of projects that were most suited to their technical and fiscal capacities. Smaller sub-projects and shorter time frames reduce the financial burden on LGUs and the risk that they will not meet their revenue targets. LGUs should be presented with a range of investment options consistent with their development visions and strategies rather than specific or individual sectoral projects to ensure the greatest impact and sustainability. In addition, the short three-year term of local officials necessitate a speedy processing of sub-loan applications and equally fast proiect implementation. This could be facilitated by the expansion of the capacity of MDP institutions such as the MDFO, CPO and MTP through the hiring of private consultancy firms. Private consultancy firms could assist LGUs in the preparation of feasibility studies, detailed engineering and construction supervision, assist MDF processes and appraise LGU applications and sub-loan releases, and provide capacity building services to both MDFO and LGUs. Projects should be packaged and designed to be completed in 3-year cycles that coincide with the 3-year term of local officials; this would foster ownership and commitment and avoid any political repercussions on the project. 5. Small projects lead to bigger ones. In light of the conservative nature of LGUs, the participants opted to undertake rather simple, low risk, revenue-generating projects such as public markets. After these are successfully implemented, they tend to enhance their creditworthiness with a stronger financial base, and expand their investments to non-revenue generating public-goods type infrastructure projects (e.g. drainage and sanitation). By starting small, participating LGUs gain more confidence and experience and move towards more challenging projects. 6. Capacity building for LGUs should go beyond the traditional classroom training mode utilized in MDP II. Capacity building programs for LGUS must encompass a full range of knowledge enhancement and action leaming modalities such as on the job training and technical assistance; distance learning; computer based information networks among others. The capacity building programs must be made available to LGUs as needed, when needed. Thus, there is a need to expand the scope and modalities of capacity building programs for LGU to address varied needs of LGUs. Lessons learned from workin2 with LGUs which mav be applied to future urban Rrojects in the Philippines 7. LGUs must have a long term vision and development strategy for their respective cities/municipalities to better define their priorities and optimize resources. The lack of technical capacity at the local level, particularly with respect to strategic planning and network analysis was a consistent issue in the MDP projects. As such, there is great difficulty in planning for national projects which are intended - 18-  to encompass a wider range of beneficiaries. At the same time, maximization of capital investment is also limited due to the short-term vision of the problems to be addressed. 8. The Bank's recent success with the City Development Strategy (CDS) Project supports the finding that a long-term vision is more effective when it is backed-up with a development strategy. A CDS incorporates a city's long-term vision, strategy for achieving this vision, and an investment plan that prioritizes needs with fiscal capacities and investment requirements. This ensures that projects provide the most benefit to the community, and conform to the priorities identified by them. The participatory nature of CDS formulation ensures that it reflects/embodies the vision of as wide a constituency as possible, thereby fostering ownership of a vision and continuity of policies beyond the terms of local chief executives. The Philippine CDS experience has been cited as among the most successful in the world. It has brought to fore the need to broaden the perspective of local chief executives/urban managers to encompass more long and medium-term development plans as opposed to short-term solutions presented by project-specific assistance programs. More than fostering the importance of long-terrn planning, CDS promotes the understanding of cities/municipalities as economic space rather than merely governable space, thereby encouraging innovative thinking in local governance. 9. Need for development strategies to coordinate national level investments in inter-municipal infrastructure. Due to the lack of technical expertise and limited financial resources, municipal investment in infrastructure has been limited to minor projects. At the same time, the contribution of national government agencies, such as the DPWH, have been limited to ad-hoc projects that fail to maximize potential benefits to the LGU and surrounding municipalities. The presence of development strategies are effective in identify,ing large-scale infrastructure projects that individual LGUs cannot undertake on their own. In this respect, national agencies are better able to coordinate inter-municipal investments that support the development initiatives of a larger number of municipalities as a whole. 10. Bank assistance to LGUs must be on a longer-term basis. This is to ensure sustained development of the municipalities and cities through a multi-year investment and capacity building plan tied to institutional and resource improvement conditions. In the Bank's experience, it has been found that project-focused interventions do not necessarily result in long-term development. More than anything, they basically fill service gaps that would have limited impacts on the development of the city/municipality. On average, the three MDPs have had at least one project in more than 150 LGUs that have participated and the program and there is a need to provide more long-terrn support to individual cities and towns. Just as LGUs need to formulate their long-term strategies, so should the Bank consider extending assistance beyond the limited support of project specific interventions. Therefore, there is a need for the Bank to consider providing longer-term support. As exhibited by the MDPs and the CDS, these projects set the foundation for successive intervention programs that need to be addressed on a more comprehensive scale. The Bank is in a unique position to channel needed support to LGUs to continue the gains of previous projects. Specifically, the Bank should consider more long-term support arrangements in providing (a) investments, (b) technical assistance, and (c) broker for other technical assistance and investments from other intemational aid agencies. 12. Need to adapt Bank's assistance strategv to address the evolving role of the LGU. The Bank's experience in working with local govenmment units brings to light the changing role of the LGU in national economic development. Particularly in the Philippines, which is included among the fastest urbanizing countries in the world, there is an urgent need to strengthen capacities and fiscal performance of LGUs. Local government units in the Philippines have an advantage over their counterparts with the enactment of the Local Govenmnent Code, which provided them with a myriad of opportunities to promote local economic development. However, as revealed by this and previous MDPs, the lack of technical capacity as - 19 -  well as access to funds have limited the ability of LGUs to take advantage of these opportunities. It has therefore come to light for the need to contextualize the Bank's assistance strategy in light of these changes. Assistance at the local level should be cover both infrastructure and non-infrastructure requirements including support to capacity building, institutional development and knowledge enhancement in the full range of LGU functions and needs. Thus, the assistance should be multidisciplinary as well as integrated. 13. Need to re-evaluate current policies regarding the role and function of LGUs. The LGU institutional structure was established 50 years ago. There is a need to modify, reorganize and reengineer the LGU structure to enable them to respond more efficiently and effectively to changing demands for improved govemance to bring about equity and growth to their respective constituencies. The LGU role is expanding from the traditional service provider to a broker of growth and managers of development. However, the local institutions and operating systems are not suited to the current needs. There are no units in the LGUs which can handle new functions such as environmental management, economic development and business promotion, information technology and networking among others . These are handled by ad hoc units under the Office of the Mayor if at all. 14. The wide range of investments needed at the local level necessitates effective resource mobilization programs. LGUs are at the forefront of directing urban development and providing needed services. While the LGU has the ability to generate its own funds, these are not maximized. Previous MDPs have concentrated too much on real property tax administration.. While real property tax is a major source of locally generated revenues, it is just a part of a range of local resource mobilization modalities. Thus, there is need to expand the scope of succeeding resource mobilization programs to include other components such as business taxes, licenses, user charges, permits and fees. Moreover, there is a need to focus on improving collection of existing taxes, which can be enormous considering the current low collection rates for local taxes. Furthermore, there is a need to highlight other options for improving resource mobilization such as various modes of private -public partnerships such as build-operate and transfer scheme and joint ventures; and various forms of credit financing including bond flotation among others. The LGC has opened up a wide range of opportunities for access to funding and mobilizing resources. Future Bank assistance should therefore be focused on maximizing these opportunities. 15. Rationalize LGU financing framework. Along with stepping up resource mobilization efforts at the local level, there is a need to open up windows for LGU financing from the national govemrnment, government financial institutions (GFIs), and even the private sector. In the context of promoting local economic development, there is a need to detemine the roles that various financial institutions can take. The policy on grants to LGUs must be reviewed and possibly revised to encompass sectors which are equally vital to LGUs such as the brown environmental concerns including solid waste management, sanitation and sewerage, water and air quality management. Moreover, national govermment agencies role in local development should be defined more clearly. 16. There is a need to provide LGUs and communities the means to address non-infrastructure related problems. This include among others the increasing incidence of street children, homelessness, drug abuse, street violence, peace and order and such other social problems which tend to erode the social fabric of cities and towns particularly the more urbanized areas. Thus a mechanism for addressing these types of problems need to be formulated to enable LGUs to cope and mitigate such problems in a more decisive way. 17. Need to expand assistance programs to include focus on economic growth and management of development. Most of the LGU projects focus on providing LGUs the means to address current infrastructure and service gaps. However, there is also the need to support their efforts to spur economic - 20 -  growth and eventually to manage development. As such the package of assistance should enable LGUs the means to access financing, technical assistance and capacity building to address these. 18. Need to address poverty alleviation at the local level. Poverty is a pervasive issue among all LGUs. Ironically LGUs, who are in the best position to address the problem, seldom if ever formulate programs to stem it. The core of the problem lies in the fact that many LGUs are not cognizant of the true problem, and if they are, they do not have the resources to solve it. Future Bank assistance programs should therefore be targeted at fostering awareness of the issues, developing effective programs for addressing it, and providing the needed technical and financial assistance to implement them. 19. Active participation of the community in development. There is a need to provide conmmunities with access to financing, technical assistance and capacity to enable them to address specific community problems, including community-upgrading initiatives that may alleviate and reduce poverty more significantly. Moreover, there is a need to develop new mechanisms, which will enable communities to access financing, technical assistance and capacity building more directly. Previous Bank programs have been directed at establishing physical and institutional reforms in national and local governments. While they have been successful in providing the needed infrastructure to carry out these reforms, they fail to address the problems rooted in the social fabric that translate themselves into the LGUs physical and institutional problems. 20. Need to strengthen capacitv-building at LGU level. The Philippines has more than 1,500 cities and municipalities, each of which has its own unique capacities. While some have exhibited the capacity to raise themselves above the others, a large number of them do not have the capacity to undertake the responsibilities and duties that the Local Government Code has bestowed upon them. In order to maximize the LGUs advantageous position for addressing the country's core economic and social problems, there is a need to provide technical assistance to improve the overall administration and management of LGUs towards promoting national economic development. 21. E-govemance. Electronic governance or e-govemance is now an emerging trend among local government units all over the world. Its application has proven to be instrumental in improving access to information, knowledge sharing, and promoting efficiency and transparency in government procedures. Future Bank urban projects should enable LGUs to improve capacity though the provision of both hardware and software support for information technology. -21 -  Annex 1. Key Performance Indicators/Log Frame Matrix Indicator 1992 1993 1994 1995 1996 1997 1998 Municipal Lending No. of Cumulative 15 25 35 50 78 78 78 Sub-Loan Approvals Cumulative 270 468 685 1,045 1,782 1,782 1,782 Sub-Loan Commitments (PhP M) Cumulative 18 285 570 873 1,319 1,586 1,782 Sub-loan Releases (PhP M) l Real Property Tax Administration Cumulative 837 1,503 1,984 2,090 3,340 Completed Real Property Tax Units (No.#) _ Municipal Training Program r Cumulative 42 84 120 156 Courses Conducted (No. #) Total Participants 2,620 5,240 7,140 9,040 Actual/Latest Estimates Indicator 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Municipal Lending I No. of 7 17 27 45 46 65 75 74 Cumulative Sub-Loan Approvals Cumulative 229 460 630 1,103 1,122 1,565 1,722 Sub-Loan Commitments (PhP M) Cumulative 29 142 353 567 853 1,148 1,581 1,669 Sub-loan Releases (PhP M) Real Property Ta Administration _ Cumulative 1,004 1,812 2,786 3,548 4,736 5,564 6,471 6,645 Completed Real Property Tax Units (No.#) Municipal Training Program _ Cumulative _ 7 21 44 70 106 130 166 219 Courses Conducted (No. Total 290 915 2,078 3,550 4,959 5,954 7,440 9,169 Participants - 22 -  Output Indicators (By Component) Subprojects and Maintenance Program Output Indicators Appraisal | ActualLatest Estimate 1. Amount of Project Cost PhP 2.244 million PhP 2,731 million a. Subloans PhPl,722.5 million PhP 1,669 million b_ Grant PhP 815.7 million PhP 790 million c. Equity PhP 272 million 2. Number of LGUs participating 78 74 3. Project Components a. Local 1. Rehab and construction of markets 50 units 56 units 2. Construction of slaughterhouses and 6 units 6 units procurement of equipment 3. Construction of transport terminal 4 units 5 units 4. Rehab of water supply system 4 LGUs 4 LGUs 5. Construction local ports 2 units I unit 6. Construction of school building 3 units 4 units 7. Construction of health center 0 units I unit 8. Traffic management system I unit I unit 9. Construction and improvement of 10 kms 11.8 kms roads IO. Shore protection improvement - 0 km 0.195 km b. National 1. Construction and improvement of 55 kms 96 kms roads 2. Improvement of drainage system 55 kms 52 kms 3. Flood control improvement 30 kms 3 kms 4. Shore protection improvement O km 4 kms 5. Improvement of water supply system 8 LGUs 10 LGUs Maintenance Program |Indicator Projects in SAR Actual/Latest Estimate I Maintenance Program Participation 8 project centers 8 project centers Real Property Tax Administration (RPTA) Indicator Projects in SAR Actual/Latest Estimate Number of successful applications 233 427 Increase in number of RPUs 3.30M 6.645 M Expansion of area assessed by assessor PhP 61.385B or 40% PhP139.153B or 127%b Increase in tax collection PhP 486.633B or 40(/o PhP739.399 or 52% Decrease in cost to collection ratio 1:0.75 1:0.495 = 0.5 Number of staff trained in RPTA 1,398 2,562 (capacity building) - 23 -  Annex 2. Project Costs and Financing Project Cost by Component (in US$ million e uivalent) Appraisal Actual/Latest Percentage of Estimate Estimate Appraisal Project Cost By Component US$ million US$ million Subprojects 69.80 77.50 111 Maintenance 8.10 2.90 36 Real Properly Tax Administration 12.00 10.70 89 Municipal Training 2.40 3.30 137 Technical Assistance 6.80 5.20 76 Total Baseline Cost 99.10 99.60 Price Contingencies 14.60 Total Project Costs 113.70 99.60 Total Financing Required 113.70 99.60 -24 -  Project Costs by Procurement Arrangements (Appraisal Estimate) (US$M equivalent) a/ Expenditure Procurement Method Categories v__________ ICB NCB Other NBF Total 1. Subprojects 1.1 Works 77.1 77.1 _______________ __ (43.9) _ (43.9) 1.2 Goods 4.2 4.2 (2.5) (2.5) 1.3 Services 0.6 b/ 0.6 (0.3) (0.3) 2. Maintenance 2.1 Works 5.9 2.0c/ 7.9 ________________ (2.0) (0.6) (2.6) 2.2 Materials 1.9d/ 1.9 ________________ ________________ ~~~(0.6) (0.6) 3. RPTA Services 13.5e/ 13.5 (9.5) (9.5) 4. Consulting Services 4.1 Implementation 4.4b/ 4.4 (4.4) (4.4) 4.2 Municipal 2.7b/ 2.7 Training (2.7) (2.7) 4.3 Studies 1.3b/ 1.3 (1.3) (1.3) TOTALS 87.2 26.4 113.7 (48.4) (19.6) (68.0) a/ All amounts include contingencies. Numbers in brackets are the respective arounts financed by the Bank. b/ Services to be procured in accordance with the World Bank Guidelines for the Use of Consultants, August 1981. c/ Force account d/ Required for force account e! Additional personnel required for the RPTA would be hired by the local government as contractual staff for the duration of the RPTA program using their own procedures for hiring such labor. - 25 -  Project Costs by Procurement Arrangements, Actual/Latest Estimate (US$million equivalent) Expenditure Procurement Method Categeries ICB NCB Other NBF Total 1. Subpiojects 1.1 Works 73.7 73.7 ._______________ (43.2) (43.2) 1.2 Goods 0.1 0.1 (0.1) (0.1) 1.3 Services 3.7 3.7 (2.4) _ (2.4) 2. Maintenance 2.1 Works 1.2 1.7 2.9 (0.7) (0.8) (1.5) 2.2 Materials 3. RPTA Services 10.7 10.7 (7.2) (7.2) 4. Consulting Services 4.1 Implementation 5.2 5.2 (5.2) (5.2) 4.2 Municipal 3.3 3.3 Training (3.3) (3.3) 4.3 Studies TOTALS 97.9 1.7 99.6 ______________________________ _ =(62.1) (0.8) (62.9) A total of US$5,649,563.93 was cancelled from the Loan following the completion of disbursements. - 26 -  Project Financing by Compo ent (PhP Million) - Appraisal Estimate Component ___ Subprojects Total LGU DPWH MDF Bank Loan Shares National 848 424 424 50% Local 1,980 198 594 1,188 60% Maintenance 350 236 114 33% Program. RPTA 438 132 307 70% Municipal 90 90 100% Training Project Implementation . Consultancies DPWH 119 119 100% DOF 16 16 100% DILG 13 13 100% Technical Assistance Institutional 17 17 100% Study Environmental 21 21 100% Study TOTAL 3,983 565 424 594 2,309 59% _ _ 100% 15% 11% 15% 59% _ Project Financing by Component (PhP Million) - Actual Estimates Component I 1 1 i Subprojects Total LGU DPWH MDF Bank Loan Loan Shares National 790 331 459 58% Local 1,941 272 508 1,161 60% Maintenance 105 48 r 57 54.2% RPTA 366 122 _ 244 66.7% Municipal 96 96 100% Training | Project Implementation _ _ _ Consultancies DPWH 164 _ 164 100% DOF 4 4 100% DILG 14 1 4 100% Technical Assistance* _ ____. Institutional Study Environmental Study I I I TOTAL 3,480 442 331 508 2,199 6% 100% 0 13% 9.5% 14.5% 63% * Completed thnugh a PHRD Grant - 27 -  Annex 3. Economic Costs and Benefits Project Economic Analysis Financial Analysis Net Present Value IncJDec. Remarks Center Actual/App L ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~r. I ~~~~App. Est. App. Est. App. Est. 1. Tagum 21% 23% 17% 22% 6.71 24.76 Increase High City collection (Public efficiency; Market) introduce new scheme in collection 2. San Jose 21% 10% 17% 8% 70.37 -9.48 Decrease Low de occupancy Buenavista rate (Public Market) . 3. Surigao 33% 29% 29% 26% 31.33 24.07 Decrease Due to 65% City occupancy (Integrated rate of Terminal) commercial stalls; terminal fee collection rate is 100%. 4. San Jose 22% 14% 16% 13% 3.040 0.042 Decrease Estimated City number of (Slaughterho animals use) slaughtered =______________________ _ _________ __________ ___________ ___________ is no t m et. Starts of Operations for each project center: 1. April 1997 2. December 1997 3. February 1999 4. February 1999 - 28 -  Annex 4. Bank Inputs (a) Missions: Stage of Project Cycle No. of Persons and Specialty Performance Rating (e.g. 2 Economists, I FMS, etc.) Implementation Development Month/Year Count Specialty Progress Objective Identification/Preparation 06/1990 1 1 Economist 10/1990 2 1 Economist, 1 Engineer 2/1991 3 1 Economist, I Financial Analyst, 1 Engineer Appraisal/Negotiation 07/1991 3 1 Economist, I Financial Analyst, I Engineer 02/1992 4 1 Economist, 1 Counsel, I Disbursement Officer, 1 Operations Assistant Supervision 08/1992 2 1 Municipal Engineer, I HS HS Economist 12/1992 3 1 Financial Analyst, 1 Engineer, S S I Economist 8/1993 4 1 Financial Analyst, 1 Engineer, S S 2 Economists 4/1994 2 1 Urban Financial Analyst, I S S Economist 7/1994 2 2 Financial Analysts S S 02/1995 3 2 Urban Planners, I Financial U S Analyst 12/1995 2 2 Urban Planners U S 05/1996 3 2 Urban Planners, I Financial S S Analyst 05/1997 2 1 Urban Planner, 1 Financial S S Analyst 02/1998 3 1 Urban Planner, I Engineer, I S S Financial Analyst 10/1998 2 1 Urban Planner, 1 Procurement S S Specialist 03/1999 2 1 Urban Planner, I Financial S S Analyst 05/1999 2 1 Urban Planner, I Procurement S S Specialist 12/1999 3 2 Urban Planners, 1 Procurement S S Specialist 04/2000 3 2 Urban Planners, I Procurement S S Specialist - 29 -  ICR 04/2001 3 1 Urban Planner, I S S Operations officer, I consultant (b) Staff Stage of Project Cycle Actual/Latest Estimate No. Staff weeks US$ ('000) Identification/Preparation 14.5 56,125 Appraisal/Negotiation 34.5 138,750 Supervision 236.3 698,917 ICR 13.3 52,337 Total 298.6 946,129 Costs incurred before the introduction of SAP in 2000 were adjusted upward by 25% to reflect full costs. - 30 -  Annex 5. Ratings for Achievement of Objectives/Outputs of Components (H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable) Rating D Macro policies C H CSUOM O N * NA O Sector Policies O H *SUOM O N O NA O Physical O H *SUOM O N O NA O Financial O H * SU O M O N C NA O Institutional Development C H * SU O M 0 N 0 NA O Environmental C H O SU * M O N O NA Social Z Poverty Reduction 0 H 0 SU * M 0 N 0 NA O Gender O H OSUOM O N * NA O Other (Please specify) 0 H 0 SU 0 M 0 N 0 NA 0 Private sector development 0 H 0 SU 0 M 0 N 0 NA 0 Public sector management 0 H 0 SU 0 M 0 N 0 NA OOther (Please specify) O H SU O M O N * NA - 31 -  Annex 6. Ratings of Bank and Borrower Performance (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory) 6.1 Bank performance Rating 2 Lending OHS *S OU OHU F Supervision OHS OS OU OHU Z Overall OHS OS O U O HU 6-2 Borrower performance Rating Z Preparation OHS OS O U O HU Z Government implementation performance O HS O S 0 U 0 HU Z Implementation agency performance OHS OS 0 U O HU 7 Overall OHS OS O U O HU - 32 -  Annex 7. List of Supporting Documents 1. ICR Mission's Aide-Memoire 2. Borrower's ICR @3 Borrowers ICR.doc - 33 -  PARTNER' S COMMENTS (File from icon on p. 17) REPUBi.C OF THE *iULIPPNES Y L HWpARTMENT OF PUBLIC WOXKS AND HIGHWAYS PRIE3IUIEp It PROGRM FOU PSEAMAL UMIRPAL IN$MATRUCTUREf, _ UT3L.t^ MAIPltIMAMtlF o NIENO CIRINI 0E> OPLNT - M90A , PlL PrwM 4 IDF - OIM (WORLD siAN- - 958I6FD IT UICIPPA bFV(LOPMENT PR4JIECT5) MR- VINAY BHARGAVA Ctiom y Dirwo:r RviNeni Msanila. Phitl#nos Itkar Mr, Ihurx"va; SUtBJE : Commrnri an n th3 Bankd' Paf Verxiao on tw IC