Philippines - Second Vocational Training Project

Documeint of The World Bank FOR OFFCIAL USE ONLY MICROFICHE COPY Report No. P- 5732-PH Type: (PM) BREDIE, J / X81216 / E9037/ ASTPH RqmmtN..P 5732-PH MEMORANDUM AND RECOQMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT OF SDR 26.4 MILLION TO THE REPUBLIC OF THE PHILIPPINES FOR A SECOND VOCATIONAL TRAINING PROJECT MAY 11, 1992 This document has a restricted distribution and may be used by redpienb only in the performance of tbhr official dutis. Its contnts may not otherwise be discosed without World Bank authorization.  DENLY 1QUM&LES (as of August 31, 1991) Currency Unit - Philippine Peso (P) US01.00 - P 28.00 a 1.00 - US$0.036 ABBREVIATIONS AND ACRONYMS DECS - Department of Education, Culture and Sports DOLE - Department of Labor and Employment ICB - International Competitive Bidding LCB - Local Competitive Bidding NGO - Non-Governmental Organization NNIS - National Manpower Information Syst3m NMYC - National Manpower and Youth Council OMSD - National Skills Training Center OSY - Out-of-School Youth PMTC - Provincial Manpower and Training Center PMU - Project Management Unit RMTC - Regional Manpower and Training Center FISCAL )MR January 1 to December 31 SHO L YEAR June - March  FOX OMCAL USE ONLY PHILIPPINE SECONQ VOCATIONAL TRAINING PROJECT Credit and Project S6mMary Borrower: Republic of the Philippines Amount: SDR 26.4 million (US$36.0 million equivalent) TemA: Standard, with 35 years' maturity. Financing Plan: Local Forein Total -US$ million ------ Government 5.8 - 5.8 IDA 21. TOTAL 26.815.0 Economic Rate of Return: Not applicable Staff An=raisal RLDort: Report No. 10221-PH IBRD No. 23477R This document has a restricted distribution and may be used by recipients only in the performance of their oflicial duties. Its contents may not otherwise be disclosed without World Bank authorization.  PHILIPPINE SECOND VOCATIONAL TRAINING PROJECT Table of Contents PasteN I. COUNTRY POLICIES AND BANK GROUP ASSISTANCE STATEGY A. Recent Economic Developments . . . . . . . . . . . . . . 1 B. Economic Reform and Development Issues The Medium-Term Agenda .... . . . . . . . . . . . . 3 C. Past Bank Group Assistance . . . . . . . . . . . . . . 5 D. Bank Group Assistance Strategy . . . . . . . . . . . . . 8 E. Status of Policy Dialogue, Aid Coordination and Cofinancing .... . . . . . . . . . . . . . . . 14 F. IFC and NIGA .... . . . . . . . . . . . . . . . . . 15 G. Coordination with IMF ................ . 16 R. Summary .... . . . . . . . . . . . . . . . . . . . . 16 TTI. ZIL1E~1I~PROJ .. . ... . ... . ... . ....... . . . . . . . . 16  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF IDA TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF THE PHILIPPINES FOR A SECO=D VOCATIONAL TRAINING PROJECT 1. I submit for your approval the following memorandum and recommendation on a proposed Development Credit to the Republic of the Philippines for SDR 26.4 million (the equivalent of US$36.0 million) on standard IDA terms with 35 years, maturity to help finance a Second Vocational Training Project. I. COUNTRY POLICIES AND BANK GROUP ASSISTANCE STRATEGY 2. The Cogtry Brief was distributed in January 1992. A Country Economic Report entitled: Public Sector Resource Mobilization and Expenditure anagemepL_(Report No. 10056-PH) was distributed on February 20, 1992. The Tranche Release Memorandum (R92-50) on the Debt Management Program (Loan 3149- PH), which was distributed on March 26, 1992, also contains additional information on the macroeconomy. A. Recent Economic Develonments 3. ftckgrgjmd. Although progress has been mixed and growth remains fragile, the Administration of President Corazon Aquino has managed to bring the country back onto a path of improved stability and economic growth, since it took power in 1986. During 1987-89, economic growth averaged 6 percent per annum and the external sector, notably exports, gained in strength and the fiscal position improved. However, in 1990-91 economic growth declined, due in part to a series of economic shocks (the Gulf Crisis) and natural disasters (July 1990 Earthquake and June 1991 Mt. Pinatubo volcanic eruption) and in part to tight fiscal and monetary policies required to reduce the current account deficit and inflation. These developments have been fully discussed in the documents cited above. 4. In September 1990, the IMF's Extended Fund facility (EFF) went off track and was replaced in February 1991 by a new Standby Arrangement. The 18- month Standby Arrangement embodied a new stabilization program aimed at strengthening fiscal balances and bringing the money supply under control. Under the Standby, the Government committed itself to: reducing the consolidated public sector deficit and lowering public borrowing; limiting the money supply; placing a ceiling on short-term external debt; eliminating the deficit in the Oil Price Stabilization Fund; and increasing international reserves. 5. Economic performance in 1991 was generally in compliance with the key targets established under the Standby Arrangement. The consolidated public sector deficit decreased from 5.5 percent of GNP in 1990 to 2.7 percent in 1991, base money growth was somewhat above the program path but neverthe- less slowed to 14X by year-end, and foreign exchange reserves increased substantially. However, these gains were achieved at the expense of higher real interest rates. Exceptional revenue measures, such as the temporary 9  -2- percent import levy, also undermined private investment which fell sharply. Coupled with cuts in fiscal spending, these developments resulted in negative GDP growth during 1991. In order to sustain fiscal improvement into 1992, the Government adopted new tax measures (para. 6), which enabled removal of the temporary import levy. In January-February 1992, it raised electricity rates of the National Power Corporation (NPC) in a two-step increase of 23 centavos per kwh. or equivalent to about a 20 percent increase (see also para. 7). 6. In February 1992 Congress approved several tax measures, including: (i) Simplified Net Income Tax for businesses and professionals; (ii) creation of a large taxpayers unit to improve tax compliance; (iii) establishment of final withholding on purely compensatory income; (iv) creation of special tax courts; and (v) increased penalties for tax evasion. As a result of the tax measures and assuming that actual outlays remain in accord with the agreed expenditure ceilings, the 1992 consolidated public sector deficit is expected to be in line with the 2.7 percent/GNP fiscal target set for 1992. The IMF Board reviewed performance under the Standby Arrangement on March 4, and authorized the Philippines to withdraw $80 million under the Arrangement. The Board also extended the Standby until the end of the year. 7. In May 1992, after the surplus in the Oil Price Stabilization Fund (OPSF) had been built up to more comfortable margins as a result of lower than anticipated world oil prices, the Government lowered diesel and bunker fuel prices and reduced electricity tariffs (by 5 centavos/kwh. or about 4 percent). Although the Bank's preliminary assessment is that the combination of these price changes will result in some net improvement to NPC's financial position, the opportunity to place NPC's finances on a solid medium-term footing, afforded by the decline in international oil prices, has been lost for the time being. The Bank continues to review the energy pricing and supply situation, as part of its supervision of the Energy Sector Loan (FY90' Also, the Bank's continuing involvement in the energy sector overall will provide a basis for dialogue and agree&tents with the new Govexment on future policy and program priorities. These would then be incorporated into the Bank's future lending (section D). Adjustment Effort in PersRective 8. Although the economy grew strongly in the 1970's (around 6.5X per year) the need for structural adjustment was evident by the end of the decade. By 1980, external debt had accumulated rapidly and the large in'estment requirements to generate growth had produced unsustainable current account deficits of over 8X of GNP. The public corporate sector was expanding rapidly into high risk, capital intensive projects. Foreign capital was being intermediated into private investments through public financial intermediaries without adequate supervision or assessment of project risk. And industrial sector growt:h was increasingly riding on construction in the non-traded goods sector, rather than on further manufacturing growth. These defects in the growth process were apparent in the failure to achieve a substantial transformarion in the structure of employment towards the formal wage earning sector, and in the absence of significant progress in reducing poverty. The identified problem, then, was to raise the efficiency of investment through tight demand management and through a medium-term adjustment program targeted  - 3 - at restructuring of the industrial sector, financial intermediation and energy pricing. 9. The Philippines has progressed significantly in implementing this adjustment program. Since 1983, and particularly since the change in Government in 1986, the authorities have made concerted efforts to correct a wide array of structural problems. Reforms in agricultural pricing and marketing, the financial sector, privatization, trade and tariff liberalization, direct and indirect taxes and investment incentives have since been undertaken, along with procedures to set priorities for public investments. Sugar and coconut monopolies have been disbanded, interest rates are now determined by market forces, the bias towards capital-intensity in investment incentives has been effectively removed, the Board of Investments has streamlined procedures and taken on a more promotional role, a VAT and improved income tax measures have been implemented reducing tax distortions, and trade reform pursued. Taken together, these measures have substantially opened the economy to competition and corrected major policy-induced internal distortions. The New Administration 10. National elections were held on May 11, 1992 and the President- elect and Cabinet will be sworn in on June 30. In addition to the Presidential election, elections were held for seats in the Senate, the House of Representatives and thousands of positions in provincial and local government. To aid the transition process, the National Economic Development Authority (NEDA) is preparing sectoral papers based on consultations with business groups, other government agencies, and academics as a means of aiding the transition process. These papers will be passed on to the new Government at the end of June to assist the incoming officials. Meanwhile, the Bank is rreparing a Basic Economic Report scheduled for early FY93, which would include pertinent suggestions for consideration by the new Government regarding the scope of economic policy in the medium term. An updated country assistance strategy, to be prepared in FY93, will reflect the outcome of discussions on the Basic Economic Reporc and understandings with the Government arising from the various transition briefs now under preparation in Manila, as well as in the Bank. The main economic and social develeg3ment issues underlying the likely policy agenda are summarized below. B. Economic Reform and Development Issues: The Medium-Term Agenda 11. The Government has spelled out its reform agenda in a medium-term program, The Phillppine Agenda for Sustained Growth and Develc,ment, which was presented to and endorsed by the Consultative Group at its mecting in July 1989. Progress reports on this agenda were presented to and endorsed by CG meetings in February 1991 and March 1992. Other pertinent documents include: The Philipnines Develooment Plan. 1989-93 and the Medium-Term Public Investment Program (4TPIP). 1990-94. These documents summarize the Government's development strategy and priority investments for each sector and the new Government is expected to broadly adopt a similar agenda. The current agenda encompasses the following four central themes:  -4- * maintaining the stabilizatior program on track, focussing upon improved revenue mobilization and continued reduction of inflation; * deepening the structural adjustment program in the areas of investment policy, trade policy, exchange rate management, and pursuit of external debt workout arrangements; * deepening the sectoral reform programs. especially in the areas of private sector development, continued reform of government corporations, and expansion of the Infrastructure base; and * alleviating poverty through human resource development, family planning, envir^nmental management and agrarian reform. 12. The first theme is aimed at basic macroeconomic equilibrium issues that will determine the ability of the Philippines economy to stabilize after many years of uneven progress. The Philippines prospects for growth depend upon the ability to foster a competitive economic structure that can weather external shocks and natural disasters and keep economic downturns short-lived. This involves formulating macroeconomic reforms that revolve around improved resource mobilization measures, increaaed competitiveness, reforming the financial sector, correcting price signals, removing trade distortions, and rationalizing the investment regime. The Government has made substantial progress in these areas, and consolidation and expansion of the reforms will be needed in the future. 13. The second and third themes (structural and sectoral) deal with economic issues over the longer term that will largely determine the ability of the Philippines to compete effectively with neighboring economies. Investor surveys have confirmed the urgent need for the Philippines to build up its infrastructure base, especially in electricity generation, transport, and water supply in order to facilitate the much-needed supply response. The Government needs to give more attention to the user side, i.e. seeing whether users of public infrastructure, be they firms, households, users of transport (buses, trucks and cars), consumers of electricity ((manufacturing firms and households) are receiving a service level that is appropriately priced and meets international standards. 14. The fourth theme will determine the Philippines ability to overcome basic sustainability questions, and nowhere is this more important than in the area of poverty alleviation. Poverty is found mainly in the rural areas, although it is growing in congested and deteriorating urban conditions. A recent update of poverty incidence showed that the proportion of households living below the national poverty line remained high (it dropped by only four percentage points, from 59 percent in 1985 to 55 percent in 1988, despite the economic recovery). Since then some reversion may even have occurred with lower mean per capita incomes and higher unemployment and underemployment. While these figures on poverty incidence are hih relative to other countries, this is largely the result of measurement issues, namely the high national poverty line used in the Philippines. Allowances for non-food expenditures and for non-cereals food consumption in the Philippines are far more generous than for other countries.  -5- 15. In the absence of sustained growth, effective poverty alleviation has proven to be quite intractable. Government strategy has focussed on rural projects complemented by initiatives in environment management, which have a significant poverty impact. These initiatives have included: rural infrastructure development; irrigation investment; agricultural research and revitalization of the national extension service; infrastructure and extension services for poor upland communities; rehabilitation o0 the rural credit system; and development of the small coconut farm subsector. One major initiative, the Comprehensive Agrarian Reform Program has not had the impact on poverty reduction that was envisaged by the Aquino Administration in part because of poor implementation. 16. Those wl.o h^ve escaped poverty have done so through higher levels of education and vocational training, obtaining formal sector wage jobs, diversifying into higher value added crops, and reducing dependency ratios in the household. Private and social rates of return to education remain satisfactory, at around 10, but concern is growing over the quality of education, as evidenced by inc-eased drop-out ratios. Numerous non-govern- mental organizations (NGOs) have emerged to tackle poverty, and, consequently, there has been relative success in improving non-income aspects of poverty. Infant mortality has been reduced to 50 per thousand and is below that of other countries with comparable income levels. Incidence of disease, such as malaria, has also declined. Overall, the new government will need to improve its capacity to deliver effective programs in education, health, family planning, and agrarian reform. This, together with a pro-growth policy stance, would provide a central attack on poverty. 17. Economic Indicators. If the new Government adopts a medium-term program that encompasses the main elements of the agenda suggested above, and if the economy is not buffeted by extreme shocks, the basic economic indicators shown in Attachment 1 are expected to exhibit steady improvement over the medium term, as economic growth is gradually restored. In order for this to occur, the Goverrment will need to deepen the sectoral reform program and it will need to be consistent and firm in policy formulation and implementation. C. Past afink Grou Assistance 18. Past Bank lending, especially in the last five years, has been aimed at assisting the Government to deal with the issues outlined above. As of March 31, 1992 the Philippines had received 133 Bank loans (of which two were on Third Window terms) amounting to $7,400 million and six IDA credits amounting to $171 million. After an interlude of nearly 12 years, the Philippines became eligible for IDA again in April 1991. An IDA credit of SDR 50 million ($66 million) was approved in June 1991 for the Environment and Natural Resources Sector Adjustment Program. IFC's total gross investments as of Decemiber 31, 1991 amounted to $769 million and investments hold by IFC (outstanding) totalled $296 million. The share of the Bank Group in public MLT debt disbursed and outstanding is currently about 15X, its share in public ILT debt service is about 26X, and the share of IBRD debt service to export is about 4.7X. These ratios are expected to decline to about 141, 251 and 4.41, respectively, by end-1992.  -6- 19. A retrospective of the last nine years shows that the Bank has financed projects in nearly all sectors of the economy, with particular emphasis on agriculture, infrastructure, energy, and industry (Table 1). Lending for SECALs, transportation, water supply and sewerage, and social sectors have grown in importance. Bank lending has experienced two cycles since the 1970s. It grew from an average of lesa than $100 million a year in the early seventies to about $420 million per annum in FYSO-84. It then decreased sharply in FY85 and FY86 because of the limited scope for policy- based or project lending amidst the political and. economic turmoil that accompanied the last few years of the Marcos Administration. Econonic recovery and reorientation of Government policies after March 1986 facilitated a return to a higher level of lending around $700 million per annum during the last three fiscal years. This has included lending for special initiatives/needs, such as the Earthquake Rehabilitation Loan ($125 Million, FY91) and the Environment and Natural Resources Sector Adjustment Loan ($158 Million IBRD/SDR 50 million IDA, FY91) and the Debt Management Loan ($200 Million, FY90). abte 1: DISTRtSUTION OF wac LWING BY SECTOR, FY84-92 (USS mitlios and percetae) PY84-86 FY87-89 FP90-92 Lector A!lwnt X Amt _X A=mout X Agriculture 250.0 43.3 45.0 3.4 168.0 7.4 (2) (1) (2) Industry/JFt 4.0 0.7 60.0 4.5 405.0 17.8 (1) (1) (4) Power/Energy - - 165.5 12.3 481.3 21.2 (2) (2) Transport 184.0 31.9 32.0 2.4 150.0 6.6 (2) (1) (1) Urban/vater Supply 139.7 24.2 160.0 11.9 233.0 10.3 (5) (2) (4) Education/Health - 70.1 5.2 285.0 12.5 * ~~~(1) (2) Environnent - - - - 224.0 9.9 (2) SALs/SECALs/Debt Reduction - 810.0 60.3 200.0 8.8 (3) (1) Etergency/Rehabilitation - - - 125.0 S.S (1) Total Anount 577.7 100.0 1342.6 100.0 2271.3 I 100.0 No. Projects 10 11 19 LA lot including proposed Second Vocational Training Project. 20. The balance between policy-based loans (Table 2) and investment loans has been appropriate, reflecting the state of economic reforms and the investment needs by sector. The specific objectives of these loans are summarized in Table 2. As shown in the Table, there has also been a planned sequencing of the policy loans, starting in 1980 with structural adjustment lending, and then moving on to the key sectors considered most conducive to the benefits of such reform, namely agriculture, energy, financial sector, and state economic enterprises. Debt management also became a central focus and remains so (see the Briefing Note on the planned Commercial Bank Debt  Restructuring Agreement, which 4as Uistributed to the Board on March 5, 1992 (SecM92-289)). Tablg 2: OANK GRWP ADJUSTNENT LENDING SINCE 1980 Loan Date Amount Policy Focus (S N SAL-I 1980 200 Tariff reform, begin removal of quantitative restrictions on Imports Improve export promotion. SAL-II 1983 302 Restructured iymestment Incentives, reduced sates and excise taxes on ipports. Agricultural 1984 150 Removal of price and other controls on Inputs agricultural outputs and inputs and break up of the Sugar and Cocenut mnotpolies. Ecanmic Recovery 1986 300 Reforms of public financial institutions, Loan trade restrictins, public invmestment, and tax system. Reforr Proqram t967 200 Restructured controls on public corporations, dovernnnt iuplemented progra of privatization and Corporations closure for over 200 corporations. Financial Sector 1989 ' 300 Reformed Centrat Bank regulation and control of private banks, improved legal system, ffipetition amo, banks, dpositor protection, interest rates. Debt anagement 1989 200 Supported buy back of US$1.33 billion of Program external debt at a cost of S66W million; improvement In debt management system. Environment and 1991 atW IS 135 Supported the management of natural resources Natural Resources 6 IDA and strengthening of protection of biological diversity. I/ Hybrid. 1 Second Trancb Release not wt approved. Portfolo Statu 21. The Bank has 37 projects under implementation with an undisbursed amount of around $2.2 billion (35 percent of the total amount of loans outstanding). Of the 37 projects only one was rated as having major problems, while the others were experiencing varying degrees of success in their implementation. Bank disbursements in FY91 were $359 million and the disbursement ratio was around 22 percent. In FY90, Btak disbursements to the Philippines amounted to $574 million and the disbursement ratio was a high 49 percent, partly on account of the Debt Management Loan. Considering only inmestment projects in FY91, the disbursement ratio remained satisfactory at 22 percent. This is in line with the Bank-wide average for such loans, despite the temporay difficulties experienced in the Philippines due to the lack of sufficient counterpart funds and the disruptions caused by natural  disasters. These issues have been addressed in the Bank's annual Country Implementation Reviews (CIRs) with the Philippine authorities. 22. In the Bank's portfolio work, it has become evident that there are a number of systemic issues of implementation affecting project success. These are poor institutional capacity, delays in obtaining agreement among and between various arms of the government, and lack of adequate counterpart funds. Institutional constraints stem from an under-paid and over-stretched civil service. The necessary fiscal restraints on expenditures during fiscal austerity, and the protracted process in getting Congressional approval on related bills has also added to delays. The combination of these issues has reduced the effectivness of certain programs, e.g. the Agrarian Reform Program, where weak institutional capacity at the local level and limitations in the Agrarian Reform Law have reduced the impact of the program. There is a need to strengthen the capacity of institutions across a broad range of government services in order to facilitate the design and implementation of cost-effective programs that do indeed reach the intended beneficiaries. D. Bank Gro Assitance-Straeg 23. Looking to the future, and depending upon the set of policies that emerges from the new Government, the B&ak Group's assistance strategy in the Philippines will continue to focus on key components within each of the four themes discussed in Section B, namely: (a) macroeconomic analysis and support for the economic reform program; (b) structural adjustment; (c) sectoral reforms; and (d) support for addressing issues of sustainability. (a) Macroocomic Analy&U 24. The close policy dialogue and the Bank's economic reports and adjustment loans have nlayed central roles in supporting the reform process. There are several areas in which the Bank plans to deepen its macroeconomic work, in conjunction with the IMF: (i) Tax Syjteg. The structure of taxes has undergone significant changes. Since 1986, elasticity and buoyancy measures of all major tax groups have been raised above unity, with more reliance on elastic categories such as income taxes and less reliance on fees and stamp taxes. The tax effort in the Philippines has risen from about 11 of GNP in 1986 and preceding years to about 14.5X in 1991. Although this level remains low in comparison to neighboring countries, it still represents a considerable advance. And when growth recovers and the recent measures to improve collection efficiency bear fruit, further gains will undoubtedly be recorded. A Tax Computerization project is planned for FY93. (ii) ftchange Rate Policy and SyItem. Until domestic savers obtain secure positive real interest rates and until realistic exchange rates become the norm, segments of the public will continue to save in foreign currencies rather than pesos. The Government's program for foreign exchange liberalization should  -9- encourage a return of savings from abroad and allow the Government to tap into a reservoir of national funds. Improved schemes for retention of foreign exchange have been recently implemented and further consolidation of these reforms is planned under the Economic Integration Loan, planned for FY93. (iii) Financial Condition of the Central Bank. The CBP has substantial foreign exchange liabilities and has more recently accumulated domestic liabilities to sterilize its financial losses. In additLon, in order to improve efficiency, a reduction in taxation on financial intermediation is needed. However, until the Central Bank is able to improve its balance sheet and income position, it will not be able to reduce reserve requirements. These issues are analyzed in the Bank's recent Capital Market Study (Report 10053-PH, February 24, 1992). Restructuring of the Central Bank's net assets and liability position would be a fundamental step towards more effective monetary policy implementation. (iv) kxznditure Manag2mwnt. Other sources of public deficits also need to be tackled. The Government Corporations, which had been such a drain on public finances in the past, have registered much improved financial balances. The Oil Price Stabilization Fund has reverted into surplus, and the Bank has had a close dialogue in design of a system of domestic oil prices that will better reflect the structure of international oil prices and domestic input and output prices, removing a major source of unpredictability from the consolidated public sector finances. The recent Economic Report served an important role in keeping the focus on prudent expenditure management and the need to achieve greater efficiencies in the state enterprise sector. (v) External Debt. The Bank Group's role has been particularly useful with respect to debt management and support on debt operations is likely to be critical to the task of re- establishing commercial creditworthiness. The recent agreement to restructure commercial bank medium and long-term external debt in a comprehensive manner represents a major step in the ongoing process to solve the Philippine debt problem. The first step in Bank assistance was taken in December 1989 with the approval of the Debt Management Loan, whose second tranche was recently released (Memorandum R92-50 of March 26, 1992). A new debt restructuring agreement (involving around $5 billion of commercial debt) has been reached between the Government and its creditor banks and, if completed successfully, would yield significant savings for the budget and balance of payments. It will also allow the Philippines to put behind it the debt issue and concentrate on strengthening economic performance with a degree of certainty over debt-related payments that has hitherto been missing. Furthermore, by easing the balance of payments constraint, the debt restructuring will allow the Government to proceed with programs to broaden and deepen the  - 10 - reform program. The Bank is planning to support the debt restructuring agreement with a new debt service reduction operation in FY93, in conjunction with an Economic Integration Loan (see below). (b) Structural Adiustment 25. The Bank is working on a possibi.e adjustment operation (Economic Integration Loan), which is designed to link more closely the domestic economy with the global economy through policy changes in investment, trade, foreign exchange management, transport deregulation, and energy pricing. With these reforms, the structural adjustment agenda aimed at reducing policy-induced distortions would be largely completed. (c) Sectoral Reforms 26. The Government has always attached high importance to grivate sector development (PSD), both philosophically and as a matter of stated policy. As a result, the presence of the private sector in various sectors of the economy is substantial, even dominant in many sectors. No formal and systematic stock-taking has been undertaken so far. The Bank together with IFC is undertaking a Private Sector Development study, which will assess private sector activities in the overall economy, identify and analyze constraints to private sector development, and make recommendations for their removal. Emphasis will be on selected manufacturing subsectors, and on the power and telecommunications sectors. 27. The Bank will continue to follow a multi-faceted approach designed to improve the regulatory and operating environment for the private sector. Critical to private sector performance will be continued movement by the new Government toward further economic deregulation. There has been major progress toward deregulation and simplification of procedures in many sectors, including agriculture, finance, trade, power generation and telecommunications within the frameworks established under a series of Bank-supported programs. However, there remains considerable scope for further action in the critical areas of transport (both road and maritime) and industry. 28. Good progress has been made in the area of privatization where the Government exceeded the targets set under the Reform of Government Corporations (GCs) Loan (SecK92-99 of January 23, 1992 regarding Release of the Third Tranche). The Government offered for sale 84 companies (target number 60) whose asset value represented 62 percent of total GC assets (compared to a target of 50 percent). Recently, the Government sold its majority stake in Philippine Airlines (PAL) and is in the final stages of putting up for sale the National Steel Corporation. With regard to public sector efficiency, systematic monitoring is being done in the case of some 30 public enterprises through use of a Performance Evaluation and Incentive System and the Bank intends to continue assisting in the review of these findings, as documented in the February 1992 Country Economic Report. 29. In order to provide the private sector with an environment conducive to investing in new plant and equipment and expanding or rehabilitating existing plants, the infrastructure bass (electricity, water  v 11 - supply, roads and telecommunications facilities) needs to be brought up to standard. Projects in geothermal energy development, expansion of water supply and improved systems for disposal of solid waste are planned. Again, the need to obtain efficiency improvements in the public sector will continue to guide the assistance strategy. Attention will be given to improving the level, content, and process for allocating public investment and expenditures. Studies undertaken under the Debt Management Loan will help to provide the analytical basis for future action on operations and maintenance expenditures. Regarding the financing of energy and infrastructure projects, the Bank will seek to support appropriate Build-Operate-and-Transfer (BOT) schemes for construction and operation by the private sector. The Philippines already has had successful experience with gas turbine power generation projects that were designed on a BOT basis. Congress passed the BOT legislation in July 1990, and the Government set up an Infrastructure Fund to allow the private sector access to ODA funds for BOT-type projects. In cases where BOT proposals are found to be viable, the Bank will seek to complement the financing through use of the Bank's Export Credit Enhanced Leverage (EXCEL) Program. (d) Sustainability Issues 30. The sustainability of economic growth and the improvement in social welfare in turn hinge upon progress in tackling key issues affecting the environment, human resource development, population, and poverty reduction. As the new Government attempts to put economic growth back on a sustainable basis, environmental issues will loom large, as they have done to date. As a follow-up to the 8nvironment and Natural Resources Sector Adjustment Program, other initiatives are planned to be undertaken, such as improvement of bio- diversity management and assistance to the national agencies in conducting environmental impact assessments. Support for the country's efforts to improve the management of national parks and protected areas will continue to be an area of collaboration, in conjunction with the GEF, and a second project in natural resource management is planned. The Bank plans to develop programs in conjunction with the Global Environment Facility (GEF), especially in the natural resource management area. Projects to reduce industrial pollution and improve solid waste management are also under consideration. 31. In the area of human resource- develogment, per capita expenditures on social services increased in the second half of the 1980s, as the Government moved to address the deteriorating social conditions that had been made worse by several years of turmoil. However, despite expanded access to education, the quality has fallen and the Bank has supported a re-orientation of elementary education and upgrading of science and engineering education in particular. There are also substantial unmet needs in vocational and technical training, as well as in informal training; improved skills are needed to support industrialization and technology transfer, and to strengthen the national technical capacity for environmental management. In health and nutrition, standards of service delivery have similarly declined, with a consequent rise in disease. The absolute numbers of persons lacking access to clean water and sanitation facilities have increased substantially over the last decade. In all these areas the absolute poor suffer a disproportionate share of the decline. The Bank strategy is to address the problems at two levels: by targeting Increased expenditures to critical areas (primary education, vocational training, urban health, nutrition, basic urban  - 12 - infrastructure), and by encouraging efficient use of the resources now allucated through rationalization and reorientation of policies. The Bank's human resource strategy will continue to involve major changes in the areas of health and education, and structured support of the large but inefficient, private sector role in service provision. A project in teacher training development is planned. 32. The current rate of gonulation growth (2.3 percent per annum) is straining the country's already over-burdened natural resource base and the Government's ability to mobilize adequate resources for the provision of social services. Vigorous implementation of a broad-ranging strategy is needed to provide family planning education and services, as well as improved maternal and child care across the country. The Government has taken initial steps in this direction and it needs to build more broad-based support among the key interest groups. Improving access of the poor to adequate curative care is also a key element in the poverty alleviation strategy. The Bank is preparing a Womens Health and Safe Motherhood project, together with bilateral donors. 33. Regarding the access of women to other services and economic opportunities, a Bank assessment on Women in Development (VID) in the Philippines was completed in 1989. While the indicators showed that women have reasonably good access to education, employment opportunities and services, the main areas identified for improving their condition involve maternal health and family planning services. In addition to the women health and family planning initiatives, the Bank Group will continue to include WID components in suitable projects aimed at improving the economic conditions of the urban and rural poor. 34. The Bank Group's strategy for 2overty alleviation in the Philippines is based on a Bank study of the poverty issue, which was distributed in October 1988 (Report No. 7144-PH). The proposed agenda has three main elements: sustainable rural development (incorporating both land reform and addressing the linkages between population, poverty and environmental degradation); family planning; and expanded, rationalized, social sector support. In all three areas there will be a need to involve and support private voluntary and non-governmental organizations: the Philippines is relatively well-endowed with such institutions, and government policy is conducive to their integration in service delivery. Implementation of a broad health strategy, recognizing benefits from family planning and a cleaner environment, should also provide further means of reducing poverty. 35. The Bank's efforts to support poverty alleviation will therefore need to be broad-based through self-standing projects, as well as through adopting specific targeting in appropriate projects. Special emphasis will be given to developing targeted safety nets, as experience to date in the Philippines has not been successful in devising concrete programs that embody clear and eas'ly managed safety net schemes. Projects in water supply and sewerage, especially in the smaller towns and covmunities, should have a significant impact on improving living conditions for the poor. The Government's PRO-POOR program comprising special line agency programs (infrastructure provision and social programs) targeted to the municipalities with the least resour