Philippines - Local Government Finance and Development Project

Document of The World Bank ReportNo: 18971-PH PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US$100.0 MILLION TO THE REPUBLIC OF THE PHILIPPINES FOR A LOCAL GOVERNMENT FINANCE AND DEVELOPMENT PROJECT February 19, 1999 Urban Development Sector Unit Philippines Country Management Unit East Asia and Pacific Region  CURRENCY EQUIVALENTS (Exchange Rate Effective As of November 1998) Currency Unit = Peso Peso 40.0= US$ 1.0 US$ 0.25 = 1.00 Peso FISCAL YEAR Government: January 1 - December 31 IBRD: July 1 - June 30 ABBREVIATIONS AND ACRONYMS ADB - Asian Development Bank BLGF - Bureau of Local Government CPO - Central Project Office CBRM - Community Based Resource Management Project DBM - Department of Budget and Management DENR - Department of Environment and National Resources DILG - Department of Interior and Local Governrnent DOF - Department of Finance DPWH - Department of Public Works and Highways GFI - Govermnent Financial Institution GOP - Government of the Philippines ICC - Investment Coordinating Committee LGA - Local Govermnent Academy LGU - Local Government Unit LOGOFIND - Local Government Finance and Development Project MDF - Municipal Development Fund MDFO - Municipal Development Fund Office MDFO-PGB - MDFO Policy Governing Board MDPs - Municipal Development Projects MTP - Municipal Training Program NEDA - National Economic & Development Authority ODA - Official Development Assistance RPTA - Real Property Tax Administration SA - Special Account USAID - US Agency for International Development Vice President: Jean-Michel Severino Country Manager/Director: Vinay K. Bhargava Sector Manager/Director: Keshav Varma Task Team Leader/Task Manager: Thomas L. Zearley  PHILIPPINES LOCAL GOVERNMENT FINANCE & DEVELOPMENT (LOGOFND) PROJECT CONTENTS Page A. Project Development Objective 1. Project development objective 2 2. Key performance indicators 2 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 2 2. Main sector issues and Government strategy 2 3. Sector issues to be addressed by the project and strategic choices 4 C. Project Description Summary 1. Project components 5 2. Key policy and institutional reforms supported by the project 5 3. Benefits and target population 5 4. Institutional and implementation arrangements 6 D. Project Rationale 1. Project alternatives considered and reasons for rejection 8 2. Major related projects fnanced by the Bank and other development agencies 8 3. Lessons learned and reflected in proposed project design 8 4. Indications of borrower commitment and ownership 9 5. Value added of Bank support in this project 9 E. Summary Project Analyses 1. Economic 9 2. Financial 10 3. Technical 10 4. Institutional 11 5. Social 11 6. Environmental assessment 12 7. Participatory approach 13 F. Sustainability and Risks 1. Sustainability 13 2. Critical risks 14 3. Possible controversial aspects 15 -111  G. Main Loan conditions 1. Effectiveness conditions 15 2. Other 15 H. Readiness for Implementation 16 I. Compliance with Bank Policies 16 Annexes Annex 1: Project Design Summary 17 Annex 2: Detailed Project Description 21 Annex 3: Estimated Project Costs 40 Annex 4: Cost Benefit Analysis Summary 41 Annex 5: Financial Summary 43 Annex 6: Procurement and Disbursement Arrangements 45 Annex 7: Project Processing Schedule 53 Annex 8: Documents in Project File 54 Annex 9: Statement of Loans and Credits 55 Annex 10: Country at a Glance 57 MAP(S) -IV-  PH1LIPPINES Local Government Finance & Development Project (LOGOFIND) Project Appraisal Document East Asia and Pacific Region Urban Development Sector Unit Date: February 19, 1999 Team Leader: Thomas L. Zearley Country Manager/Director: Vinay K. Bhargava Sector Manager/Director: Keshav Varma Project ID: 48588 Sector(s): UY - Other Urban Development Lending Instrument: Specific Investment Loan (SIL) Theme(s): Poverty Targeted Intervention: No Project Financing Data 3 Loan O Credit D Grant O Guarantee Fl Other (Specify) For Loans/Credits/Others: Amount (US$m) US $100.0 Proposed Terms: a To be defined E Multicurrency 1 Single currency Ea Standard Variable a Fixed 1 LIBOR-based Grace period (years): 5 Years to maturity: 20 Commitment fee: 0.75% Service charge 0.00% Front end fee on Bank loan 1.00% --'Nk"W .ftwT b ..v-M't-4: Government 22.3 11.4 33.7 IBRD 62.2 37.8 100.0 IDA 0.0 0.0 0.0 Total: 84.5 49.2 133.7 Borrower: Republic of the Philippines Guarantor: Responsible agency: Departnent of Finance and Participating Local Government Units (LGUs) Implementing agency(ies): Estimated disbursements ( Bank FY/US$M): . - : . t . t 0 t ] 0 _ .1 J m - IW I> N6()5 - -20 Annual 3.8 10.1 14.8 21.9 22.2 16.8 10.4 Cumulative 3.8 13.9 28.7 50.6r 72.8 89.6 100.0 Project implementation period: 7 years Expected effectiveness date: 06/30/99 Expected closing date: 06/30/2006 OCS PAD Form: October 9,1998  A: Project Development Objective 1. Project development objective: (see Annex 1) The main project objective is to assist participating Local Government Units (LGUs) in expanding and upgrading their basic infrastructure, services and facilities and in strengthening their capacities in municipal governance, investment planning, revenue generation, and project development and implementation. It would also enhance capabilities at the national level to provide technical support and long-term financing to local governments through the Municipal Development Fund (MDF). Implementation performance will be tracked using key indicators that reflect the project's main inputs and outputs. The main inputs are: (a) volume of MDF loans and grants provided to LGUs for subprojects; (b) use of technical assistance and training resources; and (c) number of new and contracted staff involved in project implementation. The expected project outputs are: (a) the construction or rehabilitation of public markets, slaughterhouses, transportation terminals, local school building, health centers and other small-scale infrastructure; (b) a reorganized MDF, with its existing operations strengthened and streamlined and consolidated within a single institutional structure and transitioning toward its integration into an existing or new financial institution; (c) technical assistance and training outputs (measurable improvements in institutional capacities, types and numbers of training sessions, number of local officials trained); and (d) an operational, fiscal monitoring system for LGUs and guidelines for improving local financial disclosure. Implementation performance will be closely monitored and reported to the DOF and the World Bank in annual progress reports. At the end of the project and as part of the ICR, the borrower will undertake a final review that will evaluate the performance of the project and its intended impact on national development and LGU self reliance. Details on project objectives, key development and implementation performance indicators and arrangements for their monitoring and supervision are contained in Annex 1. 2. Key performance indicators: (see Annex 1) B: Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: No. 15362-PH Date of latest CAS discussion: 04/04/96 The proposed project is consistent with several key objectives of the most recent CAS for the Philippines. These include: (a) strengthening public policies and implementation capabilities; (b) improving the country's infrastructure and facilitating growth, particularly by mobilizing private investment and participation; and (c) alleviating poverty and upgrading basic social services. In addition, the CAS proposes to strengthen the ability of resource-poor LGUs to improve their service delivery. 2. Main sector issues and Government strategy: Urban finance and development in the Philippines is characterized by four challenges: (i) underdeveloped capital markets for LGU fnancing; (ii) weak local capacity in delivering local services and in managing and financing infrastructure projects; (iii) limited local resource mobilization; and (iv) poorly organized or unsystematic information to monitor LGU fiscal performance. -2 -  Underdeveloped capital markets. While long-term financing is presently scarce in the Philippines, the LGU credit market is particularly underdeveloped. LGUs are almost completely dependent upon Government Financial Institutions (GFIs) and the MDF for credit financing. Indeed, the MDF -- which has served as the main conduit for official development assistance (ODA) loans and grants to LGUs -- is presently the only source of long-term credit for LGUs. GFIs typically lend to LGUs on short-to-medium terms for revenue-generating projects. Private commercial banks are generally unwilling to lend to LGUs, due to difficulties in assessing the riskiness and profitability of LGU lending. A few LGUs have considered issuing bonds to raise long-term capital, but the bond market is also underdeveloped and transaction costs are high. Numerous Build-Operate-Transfer (BOT) transactions are being explored by LGUs, but few deals have been closed yet. Weak local capacity. Since the 1991 passage of the Local Government Code, LGUs have taken more responsibility and initiatives for improving local service delivery. Nevertheless, LGUs generally lack the managerial and financial capacity to meet the expanding demand for better services. Given their limited technical and financial resources; inexperienced staff; weak (or non-existent) creditworthiness; and lack of familiarity with the procedures, rules and regulations governing private sector transactions like bond flotation, commercial bank loans, and BOT projects, most LGUs cannot access private fnancing to support their development projects. Limited local resource mobilization. On average, LGU local revenues account for only one-third of total revenues; the remaining two-thirds represents intergovernmental transfers (i.e. IRA). LGUs often lack the administrative capacity and political will to collect taxes efficiently, and they must do more to enhance their own revenues through the imposition of fees and user charges for services like water supply and solid waste management. Poorly organized or unsystematic fiscal information. Existing LGU financial data are often released with considerable delays, contain inconsistencies, and are presented in a format that is difficult to understand. The national government's oversight and supervision of LGU finances remains relatively weak, and at present, there are few incentives to induce improved LGU fiscal performance. Also, currently there is no national policy to deal with financially weak or bankrupt LGUs. At the LGU level, financial reporting, disclosure and dissemination must be improved to allow the general public and potential private investors to understand and assess LGU finances. GOP policy framework. The GOP's policy framework for LGU financing (prepared with Bank support and presented by the DOF to the donor community during the December 1996 Consultative Group meeting) outlines the respective roles of various participants in LGU fnancing, and promotes local self reliance by reducing LGUs' dependence on the national government and concurrently expanding LGU access to private credit. Dependence on the national government will be reduced by: (a) enforcing a "graduation policy" whereby the more creditworthy LGUs access private sources of capital through commercial-bank loans, bonds, and BOT-type arrangements, and (b) limiting national government grant funds to the social and environmental aspects of local investments. GFIs and the MDF would play a complementary and subsidiary role to these private sources, and would refrain from lending to more creditworthy LGUs. The MDF is a key instrument for implementing the policy framework for LGU financing. The project is designed to operationalize the GOP's policy framework by reorienting and strengthening the MDF to: (a) enhance its role in helping resource-poor LGUs to establish a track record of creditworthiness and improve their capacities for planning, financial and project management; (b) support LGU projects with environmental and social objectives that are characterized as "non-bankable" due to their long gestation period and lack of identifiable revenue stream; (c) strengthen its own technical capacity to - 3 -  evaluate and monitor LGU credits and grants and oversee implementation of the GOP's new graduation policy for LGUs; and (d) promote access to ODA funding. MDF loans would be made at market termis, with technical assistance provided for project preparation and capacity building. Limited national government grants for social and environmental aspects of LGU projects will be provided. Emphasis will be placed on assisting LGUs improve their own revenue collection and fnancial reporting as a means to enhance their creditworthiness. Other donors such as the Asian Development Bank (ADB) and the US Agency for International Development (USAID) are collaborating with the GOP and the GFIs in preparing projects that would mobilize private and public fnancing for LGUs ineligible for MDF support. 3. Sector issues to be addressed by the project and strategic choices: While the project will address in varying degrees most of the sector issues identified above, a key goal is to help transform the MDF into a financial intermediary to improve LGUs' access to the private capital market. Viewed in this context, the GOP has made a strategic choice to reorient and reorganize the MDF, within the DOF, to fill gaps present in the municipal credit system. The GOP intends for the MDF's role as a financial intermediary to diminish over time as more LGUs migrate to GFIs or private capital markets. Thus the MDF's performance could be broadly measured in terms of how many LGUs succes'sfully graduate into market-based funding. However, in light of the large number of LGUs that are not yet fully creditworthy, it is likely that there will be a need and justification for the MDF for the next ten to fifteen years. Other strategic choices that the GOP considered and rejected as currently politically unfeasible or inconsistent with overall financial sector development were (a) creating a new public municipal development bank to undertake the responsibilities of the MDF; (b) obliging an existing GFI to assume the credit risk and onlend funds to resource-poor LGUs; and (c) establishing a government-backed municipal credit guarantee corporation. -4-  C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): 1. LGU subprojects, financed by a 95.7 72.1 77.1 80.6 mix of MDF loans and limited grants 2. LGU Training and Capacity 8.3 6.3 4.5 54.2 Building 3. LGU Resource Mobilization and 16.5 12.4 9.5 57.6 Monitoring 4. MDF Reorganization and 12.2 9.2 7.9 64.8 Strengthening Total Project Costs 132.7 99.3 99.0 74.6 Front-end fee 1.0 0.7 1.0 100.0 Total Financing Required 133.7 100.0 100.0 74.8 2. Key policy and institutional reforms supported by the project: Key policy and institutional reforns include strengthening and reorienting the MDF to serve as a financial intermediary for channelling long-term credit and grants to less creditworthy LGUs for their development projects. Specific actions include: (a) bringing together in one organizational unit, within the DOF, the technical and financial functions of the existing MDF (which are presently split between various central project offices and the Bureau of Local Government Finance (BLGF) of DOF); (b) providing the MDF with appropriately trained full-time management and technical staff; (c) developing and implementing new policies and procedures to ensure that MDF is more efficient and responsive to the needs of LGUs; and (d) enhancing the DOF's capacity to monitor and improve LGU finances. 3. Benefits and target population: The project would improve delivery of environmental and social services, infrastructure and public facilities at the local level; strengthen the management and financing capabilities of participating LGUs; enhance the national government's ability to provide fnancing, training and technical assistance to LGUs; and improve the national govermment's ability to monitor, assess and offer incentives to LGUs to improve their governance and fiscal performance. Beneficiary Targeting: The subproject financing component of LOGOFIND would be targeted principally at LGUs in the lowest income classes (3rd through 6th). At present, 1,344 LGU (out of a total of 1,681 -5 -  LGUs) fall into this target group. Because participating LGUs are selected through a demand-driven, bottom-up process that emphasizes self-selection, only those LGUs will be included in the project which meet eligibility criteria, are able to submit investment proposals, and agree to make necessary fiscal improvements. The eligibility criteria for an LGU to participate in the project are presented in Annex 2b. Higher-income LGUs in the 1 st and 2nd income classes could also access LOGOFIND funding on a case-by-case basis for environmental and social subprojects. The GOP preparation team has estimated that about 200 LGUs will borrow for subprojects under LOGOFIND during its implementation. Of this total, 180 LGUs are expected to belong to the 3rd through 6th income classes, and are likely to borrow for revenue-generating subprojects (a pattern demonstrated under previous Philippines' municipal development projects). About 20 LGUs in the first and second income classes are projected to borrow for eligible social and environmental subprojects. 4. Institutional and implementation arrangements: The project will be implemented over seven years. The DOF will be the lead executing agency, and will provide overall policy guidance and management of LOGOFIND. The DOF will use the MDF to channel loans and grants to participating LGUs, which will be responsible for subproject preparation and implementation. The DOF and the Bank have agreed on a plan to reorganize and strengthen the MDF. This plan involves a phased-approach of transforning the MDF from its current status as a financing mechanism within DOF to spinning it off or transferring it to an existing or new financial institutions. The plan is expected to take about three years to implement fully considering the budgetary constraints affecting government operations and the possible need for executive issuances or enabling legislation. The LOGOFIND project, though loan conditionality and financing, would support the MDF reorganization and strengthening. A description of the current MDF structure and functions, and the reorganizational plan agreed to at negotiations is provided in Annex 2e. For the first three years of the project when the MDF is being restructured, a new Office of the Municipal Development Fund (MDFO) has been created within the DOF, and will be staffed with full-time professionals. The MDFO will handle subproject promotion and supervision, as well as subproject appraisal and subloan disbursements and collections. The MDFO will also support implementation of the Bank-financed Community-Based Resource Management Project (CBRM), approved in early 1998. The new MDFO will draw its core staff from the DOF, BLGF, Local Government Academy (LGA) and the Department of Public Works and Highways (DPWH) units that have successfully implemented several previous municipal development projects and assisted in the preparation of this project. The institutional arrangements for initiating project implementation (as well as the MDF financing terms and conditions discussed below) will be set out in an Operations Manual, which will be adopted by MDFO as a condition of loan effectiveness. Funding for LGU subprojects would be provided by the MDF as a mix of loans and limited grants that would complement equity contributions from the participating LGUs. The loan/grant/equity mix for LGU subprojects is derived primarily from recently-approved government policy governing the cost sharing arrangements between the national government and local government projects. The objective of this policy is to limit grant support to specific types of devolved activities of national priority. Annex 2c shows the mix of loan/grant/equity financing to be provided by subproject type and income classes of LGUs under the LOGOFIND project. This financing mix is structured primarily to encourage local govermnent investment in environmental and social subprojects and to provide resource-poor LGUs with opportunities to access financing for basic municipal infrastructure and services. Final agreement on the LOGOFIND financing -6 -  mix scheme was reached at loan negotiations. The MDF subloans to participating LGUs will continue to carry an interest rate linked to a market-based rate, to help prepare these LGUs for eventual graduation to GFI or private financing. At negotiations, it was agreed that the interest rate applicable to LOGOFIND subloans would be calculated based on the weighted average interest rate (WAIR) on 91-day T-bills plus a two percent margin, fixed for the life of each subloan. DOF has agreed to review and revise this rate as necessary, at least twice each year (by June 30 and December 31) during implementation. It also agreed that the minimum rate to be charged on LOGOFIND subloans would be 14% per annum. The subloan maturity and grace period will be set in accordance with the expected life of the LGU subproject, but will not exceed 15 years and 3 years, respectively. The interest rate policy and other onlending terms would be described in the LOGOFIND operations manual. The DOF would be responsible for coordinating and managing the LGU training component. The Local Government Academy (LGA) of the Department of Interior and Local Government (DILG), through its Municipal Training Program (MTP), will likely play a key role in implementing this component. At negotiations, it was agreed that a Memorandum of Agreement would be finalized, as a condition of loan effectiveness, between DOF and DILG to define the role of LGA and its MTP in assisting with the implementation of the training component. The BLGF of DOF would be responsible for implementing the LGU Resource Mobilization and Performance Monitoring component of the project, working closely with other parties at the national and local levels. All procurement for the implementation of subprojects, financed by the Bank loan, would be undertaken by participating LGUs and supervised by the MDFO. DOF would be responsible for procuring items for the other components. All procurement would follow World Bank guidelines. The DOF would ensure that a financial management system would be established and maintained, including records, accounts and prepared financial statements, all in accordance with accounting standards acceptable to the Bank. These accounting standards would be consistently applied, adequate to reflect the project's operations and financial condition, and will register separately the operations, resources and expenditures for and in connection with carrying out the project. Accordingly, separate accounts would be kept by all the agencies and LGUs participating in the project in accordance with sound accounting practices. The project accounts, together with the Special Account and Statement of Expenditures (SOEs) would be audited annually by independent auditors; the audit reports would be furnished to the Bank by the MDF within 6 months after the close of the Government's fiscal year. Monitoring of project execution will be undertaken by the MDFO, which will provide the Bank with semi-annual progress reports not later than August 15 and February 15 of each year, with the first one submitted by August 15, 1999. The MDFO will be responsible also for contributing to the project's Implementation Completion Report within six months after the closing date of the loan. A mid-term review of the project would be jointly undertaken by the Borrower and the Bank by June 30, 2002. It would focus on reviewing: (i) progress in restructuring and strengthening the MDF and streamlining its appraisal and approval procedures; (ii) evolving demand from LGUs for project funds and whether any action is required to change lending terms and eligibility criteria; (iii) implementation performance and development impact of the project based on performance indicators; and (iv) any need for adjusting project design in light of the findings of the review. -7 -  D: Project Rationale 1. Project alternatives considered and reasons for rejection: Maintaining the existing MDF structure was rejected because it would not meet the needs for more streamlined operations nor for handling a large number of LGUs and their subprojects. Co-administration of MDF funds through a GFI or private bank was also rejected as an alternative because these institutions are generally unwilling to lend to 3rd through 6th income class LGUs since their creditworthiness is not well established. 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned). Implementation Development Bank-financed Progress (IP) Objective (DO) Establish and expand the MDF, as a First, Second and Third S S revolving fund, providing LGUs Municipal Development (mainly the higher-income, rapidly Projects (Ln. 2435-PH; Ln. urbanizing cities and municipalities) 3146-PH; and Ln. with long-term development financing 3455-PH)--MDP 1 and 2 and strengthening of local technical completed (ICR and OED audit capabilities ratings); MDP 3 ongoing Create a lending window for rural Community-Based Resource S S infrastructure/environmental LGU Management (Ln. 4595-PH) subprojects within the MDF framework Other development agencies Enhance local capacity and ability to USAID Governance and Local prepare and implement development Development (GOLD) project projects IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) 3. Lessons learned and reflected in the project design: The proposed project would be the fourth in a series of municipal development operations, dating back more than a decade, in which the Bank has used the MDF to on-lend funds to LGUs in the Philippines. The MDF has proven to be an effective mechanism in providing LGUs with direct access to long-term, affordable credit and in collecting loan payments from LGUs (at present it has no arrears.) The Operational Evaluation Department (OED) audit of the first and second municipal development projects indicates that their success reflects their demand-driven approach to generate sub-projects from LGUs, and their sequencing of institution building before the actual physical investments. Most of the sub-projects -- such as public markets, bus terminals and slaughterhouses -- generate revenues for LGUs. The audit confirmed that once LGUs completed and learned from these revenue-generating projects, they were willing and able to borrow for other types of projects with high social and environmental impacts such as water supply and health-related services. The OED audit also noted that the projects helped to establish -8 -  a solid institutional base for LGU training and capacity building (through the LGA's Municipal Training Program). In addition, the OED audit recognized the value of the Real Property Tax Administration (RPTA) program to help LGUs capture tax revenues associated with rising property values. The Bank's worldwide experience in providing credit financing to local governments through municipal development funds or intermediaries is mixed. The key lessons learned from the more successful experiences are that: (a) there must be strong government commitment to the financial integrity of the intermediarys operations (i.e., no political interference in its lending and collection decisions), (b) the viability of any lending program depends on the financial health (i.e. creditworthiness) of its borrowers and the stability of the economy as a whole; and (c) the role of the government-backed intermediary should be seen as an interim solution to facilitate more direct relationships between municipal governments and private capital markets. These lessons have been fully incorporated into the design of the proposed project. 4. Indications of borrower commitment and ownership: The national government's interest in the project emanates primarily from a continued strong commitment to the decentralization of service delivery responsibilities and financing to LGUs. The national government, particularly DOF, DPWH, Department of Budget and Management (DBM) and the LGA of DILG have actively collaborated in developing the project concept, and in fielding a team to prepare the project. Also, the DOF has recruited a highly-respected team of local consultants to plan the reorganization of the MDF, and the MDF-PGB has already issued resolutions to begin the MDF's restructuring and strengthening. 5. Value added of Bank support in this project: In designing and preparing this project, the Bank incorporated its global and Philippines-specific knowledge of municipal finance and overall capital market development. Through its support on establishing an LGU financing policy, the Bank has gained credibility with both the national government and the donor community in the Philippines, which look to the Bank for leadership in implementing projects and other actions supporting this new policy. E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (supported by Annex 4): i Cost-Benefit Analysis: NPV=US$20.1 million; ERR = 17 % O Cost Effectiveness Analysis O Other Tangible economic benefits will accrue from the LGU subprojects. As these are demand driven, it is difficult to predict the exact rates of return at this stage. In addition to the benefits noted, intangible benefits will accrue from the long-term improvements in local management and financing, implying that the rates of return are estimated conservatively. The Economic Rates of Return (ERR) for possible LOGOFIND subprojects are based on the costs of the subprojects, as well as the costs of other components for training, resource mobilization and technical assistance. The total project cost includes subproject costs as well as the other components such as training, local resource mobilization and technical assistance. This cost was compared to the benefits from the subprojects to estimate the ERR of the project at 16%, which exceeds the local discount rate of 14%. -9-  2. Financial (see Annex 5): NPV=US$ 61.1 million; FRR = 29 % The financial rates of return for revenue generating subprojects to be proposed by LGUs range from 27%-35%. Such revenue generating subprojects include public markets, bus terminals, and slaughterhouses. probable LGU subprojects range from 19% (for sanitation facilities) to 49% (for roads). The non-monetary benefits from roads and drainage, traffic management, sanitation facilities and shore protection were valued based on existing methodologies used in previous municipal development projects. Fiscal Impact: Under the project, LGUs apply for subproject funding through the MDF. The fiscal impact of the subprojects on LGUs will depend on: (a) the loan/grant/equity mix, and (b) the fnancing terms of the loan (duration, grace period, interest rate). The grant component of the financing mix will be limited, with the majority of funding coming from the MDF loan and LGU equity contribution. Hence, the fiscal impact of the project at the national level will be small. Before receiving approval for a subproject, the potential loanable capacity of the LGU is calculated based on historical values of local revenues and transfers. Preliminary debt service calculations verify that the LGUs will have sufficient revenues to service these debts (and provide required equity). Loan repayments by LGUs would be assured in several ways. First, the BLGF has established significant competence (through its experience with earlier municipal development projects) in assessing and judging the creditworthiness of LGUs. That competence will be applied to LOGOFIND subprojects to reject non-creditworthy applicants. Second, established appraisal criteria and processes that exist in the MDF will be applied by skilled staff members to LOGOFIND subprojects. Third, all LGUs participating under the project must adopt a fiscal improvement program for effective project execution and debt servicing. Finally, in the event that an LGU does not make its loan repayments on time, its IRA transfer (internal revenue allotment from the national government) would be intercepted to meet those loan obligations. This intercept feature is currently being used successfully (in about 12% of subloans), and allows the MDF to maintain no arrears. 3. Technical: The project will finance small-scale infrastructure works and equipment purchases in about 200 LGUs. It will also support engineering and technical studies needed to prepare these projects and to oversee their implementation. Preliminary engineering designs have been completed and commitments already secured from local officials for four LGU subprojects; similar studies and commitments will be obtained for an additional eight subprojects by December 1998. These twelve subprojects would form the initial LOGOFIND pipeline. Following the May 1998 election, and after new mayors took office, the CPO began to promote the project to assure a steady stream of LOGOFIND subprojects. So far, more than 90 LGUs have expressed interest in borrowing under LOGOFIND. The promotional activities will be accelerated once the project is negotiated. To enhance the quality and efficiency of LGU subprojects approvals, the MDFO will streamline and strengthen the subproject processing and technical standards established under previous municipal development projects. This will be described an Operations Manual for the project, which the MDFO will adopt as a condition of loan effectiveness. This manual will also include revised prototype designs for common subproject types to aid LGUs in identifying, preparing, costing and implementing such subprojects. The MDFO will closely monitor and supervise subproject preparation and implementation, and advise local officials when additional technical expertise is needed. - 10-  At negotiations, it was agreed that the MDFO would fiurnish the Bank for comments the subproject appraisal reports for: (a) the first twenty subprojects proposed for LOGOFIND financing; and (b) each proposed subproject costing three million dollars equivalent or more, prior to submitting such subprojects to the MDFO-PGB for review and approval. 4. Institutional: a. Executing agencies: Department of Finance b. Project management: For the first three years, the project will be managed by the new MDFO in the DOF. Under this arrangement, the MDFO would be staffed by experienced, full-time professionals and consultants, many of whom have worked on previous municipal development projects with different government agencies (e.g., BLGF, DPWH and LGA). The consolidation of activities under one office and the employment of full-time staff will improve the efficiency of all MDF operations and increase the institutional capacity to absorb new funds and address the increasing demands of LGU borrowers. As a condition of loan effectiveness, the DOF has agreed to appoint a qualified executive director of the MDFO, a project manager for LOGOFIND as well as other key staff. Within three years, and in accordance with the MDF reorganizational plan, the MDFO will be spun-off or transferred to an existing or new fnancial institution. At present, DOF is considering three options: (i) transferring the administration of the MDF, as a fund, to a subsidiary of an existing GFI; (ii) transferring the assets and liabilities (and the risks) of the MDF to a subsidiary of an existing GFI; or (iii) creating a new GFI, or municipal development bank, to own and operate the MDF. The spin-off or transfer of the MDF operations to a fnancial institution is expected to provide greater flexibility in using its resources, in recruiting and compensating qualified personnel, and in imparting the financial discipline necessary for self-sufficiency and improved efficiency. Furthermore, this transformation would reduce the financial burden on the national government of providing credit services to LGUs. The various legal and administrative actions required to implement these changes and the expected time of their completion are included in the MDF reorganizational plan, which was agreed to at negotiations. Before the transfer actually takes place, the Bank will assure its full satisfaction ahead of time with what responsibilities, obligations, risks and liabilities would be transferred to the financial institution, and how much compensation would be provided to the fnancial institution as well. 5. Social: The project targets LGUs in the lowest income classes (3rd through 6th). Generally, these LGUs need strengthening both financially and managerially, and have incidences of poverty that are higher than the national average. Public market improvements, which are expected to account for a large part of project subloans, would benefit the poor families who shop, and the local farmers and stall owners who sell, at these markets. The construction of slaughterhouses and transportation terminals, which are also expected to utilize project financing, improves local health and living conditions, creates local employment and raises local incomes. The project would also channel financing to LGUs to improve social services including school repairs and health clinics. Of the estimated 200 LGU subprojects to be fnanced, some may involve the acquisition of land, demolition of structures, and the relocation of people. Agreement was reached that this would be kept to a minimum. In accordance with the Bank's requirements, a "Land Acquisition and Resettlement Policy Framework" - 1 1 -  governing land acquisition, compensation and resettlement in all subprojects was submitted to the Bank for review and comment. This Policy Framework was finalized at negotiation, and will be included in the LOGOFIND Operations Manual. For the 4 LGU subprojects which will have prepared technical designs before negotiations, the necessary reports in accordance with the policy framework were submitted to the Bank for review and approval at negotiations. For the subprojects identified after the loan effectiveness, submission of necessary reports to the Bank for review and clearance and its implementation would be a condition for disbursement for each subproject. In addition, detailed guidelines for land acquisition and resettlement, including surveys and report preparation, and public participation and consultation would be prepared for inclusion in the LOGOFIND Operations Manual. 6. Environmental assessment: Environment Category El A Z B E C The environmental impacts will be low to moderate and localized to sub-project locations. The project will finance improvements to municipal services and expansion of basic infrastructure in about 200 LGUs. If environmental safeguards are not adequately adhered to in the design of the sub-projects, environmental problems can be expected. For projects of this nature, category B is assigned. An overall framework is being developed to manage the subsequent sub-project environmental impacts consistent with Bank and GOP policies. An environmental assessment framework has been agreed to with the Bank and the fnal version will be integrated into the LOGOFIN)D Operational Manual. This assessment framework would be applied to the 200 or so LGU subprojects financed under the project. A screening mechanism is being employed to categorize the sub-projects shown in Annex 2a. Category 1 sub-projects with significant environmental impacts (e.g. river/sea shore protection, sewage treatment plants etc.) will be required to follow DAO 96-37 (Environmental Impact System of Philippines) of the Department of Environment and Natural Resources; Category 2 sub-projects with moderate to low environmental impacts (e.g. public markets, slaughterhouses, etc.) will require to submit an environmental management plan as part of the sub-project design. Category 3 sub-projects with insignificant impacts (e.g. health clinics, schools etc.) will require, at a minimum, that planning and building codes are adhered to. The enviromnental assessment framework will provide the processing mechanism to be followed in the case of each category, with clear delineation of responsibilities between LGUs and the MDFO. Additionally, for the most commonly-financed subprojects (e.g., public markets and slaughterhouses), sound environmental practices are being incorporated in the prototypical design. This design will recommend minimum norms to be maintained for wastewater collection and treatment and garbage collection and disposal related to these subprojects. The DOF has agreed to use its best efforts to bring about the signing, within six months of project implementation, of a Memorandum of Agreement with the Department of Natural Resources for the following: (a) endorsement of the environmental and social policy frameworks described in the Operations Manual; (b) providing delegated authority to DOF/MDFO by DENR to appraise and approve Category 3 and 4 subprojects; and (c) an annual independent audit of the environmental and social assessment frameworks described in the Operations Manual. The project may also assist LGA to enhance and deliver its environmental training modules to LGUs. This training is expected to improve the skills of local government officials and also provide opportunities for the private sector and community groups to be engaged in environmental assessment and monitoring. During the preparation of LOGOFIND, technical staff working with the MDF received training of the Bank's environmental and social requirements and municipal environmental management. Follow-on - 12 -  training will be supported under the project. 7. Participatory Approach (key stakeholders, how involved, and what they have influenced or may influence; if participatory approach not used, describe why not applicable): a. Primary beneficiaries and other affected groups: One of the key eligibility criteria for an LGU to participate in the project is the formal expression of interest and commitment through a local council (Sanggunian) resolution endorsing the project. The council in turn must consult with primary beneficiaries and other affected groups such as market vendors and suppliers, jeepney and bus owners, and local taxpayers, particularly if adjustments in service fees and charges are required to service the borrowings. The project also requires that the subprojects be identified as a priority in the LGU's development plan, which is prepared in consultation with the community. In addition, the LOGOFIND project is establishing a new requirement that, during subproject implementation, the LGU must publish or post, in a location accessible to the public and in accordance with government regulations, basic information about the MDF subloan and subproject including costs, fnancing plan and contract awards. b. Other key stakeholders: National government agencies, particularly DOF, NEDA, DPWH, DBM, and DILG were actively involved in developing the LGU financing policy framework and conceptualizing the project including the MDF reorganization. These agencies also form the MDF's main executive body, the PGB. In addition, consultations were held during project preparation with local policy research institutions, academic groups and the Leagues of local governments on the LGU financing policy framework and the project design. F: Sustainability and Risks 1. Sustainability: A key determinant of project sustainability is the inclusion of appropriate incentives, conditionality and support for participating LGUs to improve their financial and management performance, so that they can become fully creditworthy over time and thus, graduate to GFI or private sources of funding. Sustainability will be further enhanced by at least three mechanisms in the project. First, the LGUs will have a sense of ownership of the project not only because they will generate and plan their own subprojects but also because they will contribute equity and borrow funds to finance these subprojects. Secondly, the project will support the development of institutional and human resource capacity that will continue beyond project completion. Third, LGU loan repayment is ensured with the inter-governmental (IRA) intercept mechanism. - 13 -  2. Critical Risks (reflecting assumptions in the fourth column of Annex 1): From Outputs to Objective Delays or reversal by Government in M Project design and conditionality will implementing the LGU financing policy support the implementation of the framework framework. Lack of sustained government M MDF-PGB recently approved commitment to strengthen and reorient resolutions have established the MDF commitment of key national agencies to institutional reforms. The enactment of Executive Order No. 41 has formally created the MDFO, and expressed the intentions to transfer the MDF to a GFI. This will be reinforced by project financing and conditionality. From Components to Outputs Inadequate demand from LGUs for M Initial pipeline of 12 subprojects has subprojects been identified and will be prepared by December 1998; survey of LGU demand for previous MDPs was used to estimate initial demand; excess demand from MDP 3 will be channeled to LOGOFIND. Participating LGUs will lack the M While the project will focus on the necessary human and fnancial capacity poorest and weakest segment of the to (a) prepare and implement their LGU market, the LGU eligibility subprojects quickly and at an requirements will ensure that acceptable level of quality; and (b) to participating LGUs have a minimum benefit substantially from the training level of financial and technical and advice offered to them competence, and that their subprojects are well prepared before being provided with MDF funding. Turnover in elected officials and staffs M Project supports capacity building at the of LGUs (potentially every three years) LGU and national levels, with TA and could reduce the capacity of LGUs to training, to enhance institutional implement subprojects sustainability. Inadequate and untimely provision of S DOF has assured that adequate project counterpart funds for the project funding will be included in its CYOO and onwards budgets, while funding from the MDF to LGUs is conditioned upon up-front equity contributions from the LGUs. -14 -  Expansion of LGU lending to 3rd-6th M The DOF has prepared a set of income classes will reduce the cost prototype subproject designs to help effectiveness and timeliness of the MDF LGUs identify, develop, cost and implement subprojects; these prototype designs and the operational manual will save time and costs, and lessen the procedural requirements for LGUs. Overall Risk Rating M Risks are further mitigated by the Bank's and other donor's well-established dialogue with the Government on LGU fnancing issues; by the close integration of the LGU financing dialogue with overall macro and financial sector dialogues; and by the close coordination provided by the Bank and other donors on future projects to be channel through the MDF and GFIs to LGUs. Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk) 3. Possible Controversial Aspects None G: Main Loan Conditions 1. Effectiveness Conditions Conditions for Effectiveness are: 1. Finalization between DOF and DILG of a Memorandum of Agreement to define the role of the LGA in assisting with the implementation of the project's training and capacity building component. 2. Appointments of (i) an MDFO Executive Director, with appropriate qualifications and experience; and (ii) a Project manager, procurement specialist, accountant and environmental specialist, whose qualifications and experiences are satisfactory to the Bank. 3. Adoption by the MDFO and MDFO-PGB of a LOGOFIND Operations Manual that is acceptable to the Bank. 2. Other [classify according to covenant types used in the Legal Agreements.] Implementation Conditions are: 1. MDFO-PGB would approve only those subprojects and lend to those LGUs that meet the eligibility criteria contained in the LOGOFIND Operations Manual that are satisfactory to the Bank. 2. No change would be made to the Operations Manual without the Bank's approval. 3. Subproject Appraisal Report for the first 20 subprojects and each subproject costing equal or more than US$3.0 million equivalent will be furnished to the Bank for comments. 4. DOF would comply with the milestones and timetable set out in the action plan to reorganize and strengthen the MDF, in a manner satisfactory to the Bank. - 15 -  5. DOF would comply with the milestones and timetable set out in the action plan to enhance LGU resource mobilization and performance monitoring, in a manner satisfactory to the Bank. 6. Audit reports of project accounts, the Special Account and Statement of Expenditures (SOEs) would be furnished to the Bank not later than six months after the close of the government's fiscal year. 7. Submission of semi-annual progress reports (by February 15 and August 15 of each year, with the first one submitted by August 15, 1999) and necessary documentation for the mid-term review June 30, 2002, the implementation completion report and the monitoring of implementation and development impact in accordance with key indicators agreed with the Bank. H. Readiness for Implementation 1 1. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. D 1. b) Not applicable. 1 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation. 1 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. I1 4. The following items are lacking and are discussed under loan conditions (Section G): 1. Compliance with Bank Policies 1 1. This project complies with all applicable Bank policies. O 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies. ho,mas L. Zearley Ke ,Vinay K. Bhargava Team Leader Sector Manager/Director Country Manager/Director - 16 -  Annex 1: Project Design Summary PHILIPPINES: Local Government Finance & Development Project (LOGOFIND) Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission) 1. Strengthen public sector Stated CAS objectives are closely linked to Bank mission 2. Improve infrastructure 3. Upgrade basic services Project Development Outcome I Impact Project reports: (from Objective to Goal) Objective: Indicators: 1. Expand and upgrade basic The DOF/MDFO will be - The national government infrastructure, and social and responsible for monitoring the will maintain or heighten its environmental services and performance indicators related commitment to the devolution facilities to LGU finances. As part of of service responsibilities and the annual project progress finances to LGUs. report, DOF/MDFO will collect project progress and -Macroeconomic conditions impact information and record will remain relatively stable actual performance indicators and the local capital market against agreed targets. will continue to develop, so that creditworthy LGUs will be able to access GFI and private funding. 2. Strengthen municipal management and administration 3. Implement Govermment's credit policy framework -17 -  Output from each C lutput Indicators: Prjc eoii(fro upt o Obetv) component: 1. Improved basic Number of LGU Subprojects Periodic progress reports will infrastructure, services and approved: be provided by DOF - The nation government will facilities Year 2000 - 20 proceed with the speedy 2001 - 25 implementation of actions to 2002 - 35 operationalize the new LGU 2003 - 40 credit policy framework. 2004 - 45 2005 - 35 2. Enhance LGU No. of LGUs receiving management capacity training: Year 2000 - 20 2001 - 25 2002 - 35 2003 - 40 2004 - 45 2005 - 35 3. Improved ability to monitor LGU credit rating system LGU fiscal performance established by December 2000 * Fiscal information system is established by March 2002 Regular monitoring reports are disseminated by June 2002 4. Improved local resource No. of LGUs participating in mobilization RPTA: Year 2000 - 100 (TMRCTC) 2001 - 150 (TMRCTC) - 50 (DC) 2002 - 224 (TMRCTC) 100 (DC) 2003 - 50 (TMRCTC) - 50 (DC) No. of LGUs with computerized business tax systems: 2000 - 10 (Impl.) 2003 - 20 (Rep.) 5. Enhanced institutional MDFO would have in place The Government will arrangements and capacity for new policies, procedures, and maintain its strong MDF operational manuals by an commitment to reorient and agreed-to specific date. strengthen the policies and management of the MDF, and will assign the resources and personnel necessary to it to operate efficiently. -18  .:Owt ,O } .- . . ... .. ...E'. '<g '' 4- :* Project Components I Inputs: (budget for each Project reports: (from Components to Sub-components: component) Outputs) 1. Infrastructure, services and Volume of financing (US$) is 1. Adequate LGU demand for facilities sub-projects committed and disbursed for sub-loans subprojects 2. Counterpart funding is Municipal infrastructure made available on an adequate Enviromnental projects and timely basis. Social projects 3. Participating LGUs will have the necessary capacity to (a) prepare and implement their subprojects quickly and at an acceptable level of quality, and (b) benefit substantially from the training and advice offered to them. 2. Training and capacity Delivery of training courses Training modules and list building and capacity building support of qualified training Piloting of programs institutions distance learning LGU twinning league and NGO collaboration * Delivery of MDFO conferences and workshops * Development and delivery of "rapid-response" TA to LGUs 3. Local resource * Completion of RPTA mobilization activities in LGUs * Documentation of best practices in private sector participation, inter-local cooperation asset management revenue planning * Development of business tax administration software * Piloting of innovative approaches in 3-4 LGUs private sector participation, inter-local cooperation asset management revenue planning - 19 -  4. LGU Performance Establishment of fiscal In accordance with a timetable Monitoring information system agreed to with WB * Development of fiscal performance indicators * Design and dissemination of regular fiscal monitoring reports * Completion of BLG staff training 5. Streamlined MDF * 20% reduction in subproject Revised operational manual procedures and approvals processing time * Improved timeliness of disbursements 7. Strengthened MDF Formation of MDFO in In accordance with a timetable DOF agreed to with WB Staffing of MDFO * Spin-off/Transfer of MDFO -20 -  Annex 2: Project Description PHILIPPINES: Local Government Finance & Development Project (LOGOFIND) By Component: Project Component 1 - US$95.7 million LGU Subprojects: This component would support subprojects for the expansion, rehabilitation and improvement of basic infrastructure, social and enviromnental services and facilities under LGU responsibility. As the project follows a demand-driven approach, LGUs would be given a choice of eligible subprojects to undertake. These subprojects are shown in Annex 2a, and are grouped as follows: Infrastructure (revenue and non-revenue) Projects; Social Projects; Environmental Projects; and Consultancy Services and Equipment. A more complete description of the subproject types and specific activities to be fnanced by the project will be contained in the LOGOFIND Operations Manual. Financing under this component would be targeted to LGUs in the 3rd through 6th income classes, in line with the government's policy of encouraging more creditworthy (and higher income class) LGUs to tap market-based fnancing. At present, 1,344 LGUs fall into the 3rd through 6th income classes. The eligibility criteria for an LGU to participate in the LOGOFIND project are presented in Annex 2b. Higher-income LGUs in the 1st and 2nd income classes could also access LOGOFIND funding on a case-by-case basis for social and environmental subprojects. Funding for LGU subprojects would be provided by the MDFO as a mix of loans and limited grants that would complement equity contributions from the participating LGUs. The loan/grant/equity mix for LOGOFIND subprojects is derived primarily from the ICC-approved policy governing cost-sharing arrangements between the national government and local government projects. Annex 2c shows the proposed loan/grant/equity mix by subproject types and income classes of LGUs. This financing mix is structured primarily to encourage local government investment in environmental and social subprojects and to provide resource-poor LGUs with opportunities to access financing for basic municipal infrastructure and services. Provisions will be made in the LOGOFIND Operation Manual to revise the loan/grant/equity mix, if necessary, during project implementation. Project Component 2 - US$8.3 million LGU Training and Capacity Building: This component would support LGU training and capacity building for (i) subproject development and implementation; (ii) municipal planning, finances, and management; (iii) improved training modules and delivery mechanisms; and (iv) piloting of new programs including distance learning; LGU twinning; collaboration with the Leagues of local governments, NGOs and the private sector; MDFO conferences and workshops; and a rapid-response ("just-in-time") technical assistance to LGUs. This component would be coordinated and managed by the DOF. The Municipal Training Program (MTP) of the DILG's Local Government Academy (LGA) is likely to play a key role in the implementation of this component. The responsibilities and financial arrangements for MTP's involvement in this component will be spelled out in a MOA between DOF and DILG, which will be signed as a condition of effectiveness. The component would finance (a) the cost of training including training materials, equipment and allowances, and payment to trainers; and (b) project staff development, and advisory and consulting services. The MTP has outlined the main elements of the proposed LGU training and capacity building component, expanding upon the municipal training program modules already developed under the previous World -21 -  Bank-funded municipal development projects (i.e., MDP 1, 2 and 3). The LOGOFIND-supported training for LGUs would be divided into two categories: (i) mandatory; and (ii) demand-driven, depending on the needs and capacities of participating LGUs. A preliminary list of the LGU training modules is available in the project files. Project Component 3 - US$ 16.5 million LGU Resource Mobilization and Monitoring: This component would support LGU Resource Mobilization and Monitoring including: (a) expanding the Real Property Tax Administration (RPTA) Program to achieve nation-wide coverage; (b) developing and implementing new initiatives to help LGUs improve creditworthiness and revenue generation; and (c) developing and implementing systems to improve monitoring of LGU fiscal performance and local financial reporting and disclosure. This component would be administered by the Bureau of Local Government Finance of the DOF, and would finance consultancy services, contractual staff, equipment and supplies, and training of staff. A detailed description of this component is provided in Annex 2d. Project Component 4 - US$12.2 million MDF Reorganization and Strengthening: This component would support the MDF Reorganization and Strengthening to implement, on a phased basis, new institutional structures; streamlined procedures and approvals; decentralized (field) operations; and contracting and training of management and staff. A description of the structure and functions of the MDF and its proposed reorganization and strengthening plan is presented in Annex 2e. Specific activities funded under this component include: (i) salaries of contracted staff; (ii) office equipment and technology; (iii) operating costs of the MDFO Central and field offices; and (iv) MDF staff development and technical assistance. -22 -  Annex 2a Philippines Local Government Finance and Development Project List of Subprojects Eligible for LOGOFIND Funding Infrastructure Proiects Revenue Projects * Markets * Slaughterhouses * Municipal water supply system (expansion and rehabilitation) * Municipal piers and wharves * Bus and jeepney transport terminals * Post harvest facilities * Cold storage and ice plants Non-Revenue Projects * Local roads, bridges, street furniture and lighting * Flood control and drainage Social Proiects * Health centers * School buildings * Community/area upgrading Environmental Proiects i Sanitation/public toilets and combined sewers * River/seashore protection (e.g., seawalls, embankments) * Solid waste management * Traffic management and engineering * Open space and public memorial parks Consultancy Services * Project preparation and feasibility studies * Detailed engineering and construction contract management * Urban development plans Ecquipment * Maintenance * Operating equipment (related to above subprojects) -23 -  Annex 2b Philippines Local Government Finance and Development Project Eligibility Criteria for an LGU to Participate The LOGOFIND project would be open to all 3rd through 6th income class LGUs. Higher income LGUs in the 1 st and 2nd income classes could also access such funding on a case-by-case basis for environmental and social subprojects. If an LGU wishes to obtain funds under the project, it must satisfy the following requirements: Primarv Eligibility Screening Criteria (a) there must be an expressed interest and commitment through a local Sanggunian resolution endorsing the project; (b) the proposed project must be identified as a priority in the LGU's development plan; (c) the LGU should have sufficient capacity to repay its borrowings including the LOGOFIND loan and to contribute the required equity to finance the project; Supporting Eligibility Screening Criteria (d) the LGU should have implemented an up-dated Revenue Code, as prescribed by the Local Government Code, and be prepared to adopt a fiscal and management improvement reform program required for effective project execution and debt servicing; (e) the LGU should be prepared to assign qualified technical staff, office space and budget to oversee project preparation and implementation; (f) the LGU should be willing to post or publish, in a location accessible to the general public and in accordance with COA regulations, basic information about the MDF subloan and subproject including the subloan amount, subproject costs, and contract awards; and (g) for LGUs applying for a second or subsequent MDF subloan, they should meet the following: (i) a good track record of voluntary payment of debt service, and (ii) satisfactory implementation and maintenance performance under previous subprojects. -24 -  Annex 2c Philippines Local Government Finance and Development Project LOGOFIND Proposed Loan-Grant-Equity Mix LGU INCOME CLASS Loan % Grant % Equity % I. Infrastructure Project A. Markets/Slaughterhouses Ist - 2nd N/A N/A N/A 3rd - 4th 70 10 Al 20 5th - 6th 75 15 A/ 10 B. Municipal Water Supply Project B/ Ist - 2nd N/A N/A N/A 3rd - 4th 80 0 20 5th - 6th (Level 1) 40 50 10 (Level 2 & Above) 90 0 10 C. Other Infrastructure Projects lst - 2nd 80 0 20 3rd - 4th 85 0 15 5th - 6th 90 0 10 IL Social Projects A. Health Centers/School Buildings Ist - 2nd 80 0 20 3rd - 4th 35 50 15 5th - 6th 20 70 10 B. Community/area upgrading TBD TBD TBD III. Environmental Project C/ A. River/Seashore Protections 1st 60 20 20 2nd- 3rd 35 50 15 4th - 6th 20 70 10 B. Other Environmental Projects 1st - 2nd 80 0 20 3rd - 4th 85 0 15 5th - 6th 90 0 10 IV. Consulting Services/Equipment Ist - 2nd 80 0 20 3rd- 4th 85 0 15 5th - 6th 90 0 10 A/ Environmental-related investments are estimated to represent 20% of total sub-project costs. The MDF grant would cover 50% of the costs of the environment-related investment for 3rd - 4th class LGUs and 70% for 5th and 6th class LGUs. B/ Grants will only be provided for Level I (point source development) sub-projects for 5th and 6th class LGUs. C I Grants for environmental sub-projects are consistent with the financing mix established under the CBRM project. Only Blue (and Green) environmental sub-projects would receive grants. TBD - To be determined by DOF in consultation with World Bank. -25 -  Annex 2d Philippines Local Government Finance and Development Project LGU Resource Mobilization and Performance Monitoring Component 1. The proposed LGU Resource Mobilization and Monitoring component of LOGOFIND, which would be coordinated and managed by the Bureau of Local Government Finance (BLGF) of the Department of Finance (DOF), includes two primary activities: (i) efforts to enhance LGU Resource Mobilization, including improvements to the Real Property Tax Administration (RPTA) Program and piloting other potential improvements in local revenues, and (ii) activities to improve LGU Performance Monitoring and Financial Reporting. The procurement of various types of equipment to support these two activities, as noted below, is also included in this component. 2. The activities under this component are envisioned to extend generally over two phases: (i) a diagnostic phase, expected to last for one year, and (ii) an implementation phase, expected to last for two years. Some implementation activities (e.g., training) may be undertaken before the diagnostic phase is completed. A Terms of Reference guiding the diagnostic phase of this component is included as Annex 2e. 3. LGU Resource Mobilization and Performance Monitoring Action Plan --The DOF and the Bank agreed on the following action plan for developing and implementing the above component. Improved Ability to Monitor LGU Fiscal Performance * Local fiscal performance indicators are developed March 30, 2000 * Database of revised fiscal indicators is completed March 31, 2001 * Revised formats for LGU fiscal reports are established September 30, 2001 * Computerized fiscal information system is operational March 31, 2002 * LGU fiscal monitoring reports are disseminated June 30, 2002 Improved Local Resource Mobilization Local best practice in resource mobilization is documented February 28, 2000 Model for computer-assisted local business tax is developed December 31, 2000 Local business tax collections for participating LGUs increase by at least 20% December 31, 2001 Real property tax collections for participating LGUs increase by at least 20% July 31, 2002 RPTA system installation is completed December 31, 2005 LGU Resource Mobilization 4. The sustainability of LOGOFIND sub-projects depends in large part on the ability of LGUs to enhance their local resource mobilization, both to support the operation and maintenance of sub-projects and to promote local self-reliance. The LGU Resource Mobilization component will expand the coverage of the RPTA and pilot other ways to enhance local revenue mobilization. - 26 -  Real Propertv Tax Administration Project 5. The RPTA, which is currently administered by the BLGF, has successfully increased local property tax revenues (on average by 40 percent at project end), enhanced the information base of the RPT, and strengthened the skills of assessment and treasury personnel in project management and maintenance operations. Analyses of the cost effectiveness of the RPTA may understate the full benefits of the program in that property tax revenue increases accruing to barangays and provinces were excluded from the cost effectiveness calculation. The World Bank's recent Performance Audit Report of the Municipal Development Project and Second Municipal Development Project (dated 12 June 1997) noted the satisfactory performance of these projects and recommended the continued support of the RPTA program to capture the tax revenues associated with rapidly rising property values. 6. The main phases of the RPTA include: (i) tax mapping that identifies real property units, establishes property boundaries, deternines actual use and discovers undeclared properties; (ii) records conversion and management that converts tax mapping information into individual property reports and collective assessment rolls, and installs and maintains a basic records management system in the local assessment office; (iii) tax collection enforcement that reviews and revises existing collection procedures to enhance revenue collections; and (iv) data computerization that establishes a computer-assisted database for the RPTA. 7. RPTA activities under LOGOFIND would continue the program carried out under the three Municipal Development Programs and fund the additional contractual staff, equipment and supplies necessary to achieve nationwide coverage. Nationwide coverage requires adding 524 LGUs to the RPTA program, including non-urban areas that face lower economic growth rates. To date, 832 LGUs have completed the RPTA program and 300 LGUs are currently participating in the RPTA program. Hence of the 1,607 cities and municipalities in the Philippines, 63 percent have participated in the RPTA. RPTA activities under this component will focus on enhancing cost effectiveness and collection efficiency by requiring participating LGUs to increase revenue collections and recover program costs within a five-year period, developing automated systems rather than relying on manually based systems, and focusing on improvement in collection rather than assessment. A detailed Project Implementation Plan, including a schedule of completion of each phase, expected improvements in RPT collections, required inputs (contractual staff, equipment, supplies, office space, etc.), and estimated costs, would be prepared for each participating LGU. 8. The RPTA program under LOGOFIND is expected to cover about 6 million real property units in 524 LGUs. The total cost is estinated at about P477,000,000 (about US$12 million equivalent), using an average cost of P80 per real property unit. These costs would be shared between the national government and local counterparts, as discussed below in paragraph (9). Assuming continuation of the existing cost sharing arrangements between the national government and LGUs implies a component cost of P286.6 million (or US$7.1 million). 9. Since the RPTA program was established, LGU participation has been encouraged by providing a grant to participating LGUs to finance part of the cost of contractual staff, equipment and supplies required to implement the RPTA. The existing cost-sharing arrangements between DOF/BLGF and LGUs for the RPTA program differ according to LGU income class as follows: -27 -  Existing Cost Sharing Arrangements Between for LOGOFIND RPTA Activities Income Class DOF Grant LGU Equitv 1-2 60% 40% 3-4 70 30 5-6 80 20 10. In light of ICC guidelines establishing a 50-50 cost-sharing arrangement between the national government and provinces, the DOF and BLGF are currently assessing the appropriate cost-sharing arrangements for the RPTA and other technical assistance provided to LGUs to enhance their revenue mobilization. The Bank project would fund the National Government's share of the program, i.e. the DOF grant to the LGUs. A Memorandum of Agreement would be signed between DOF (through BLGF) and participating LGUs that would specify the work program, resource requirements and financing arrangements based on the Project Implementation Plan. Piloting of Improvements in Local Resource Mobilization 11. Business taxes, licenses and fees are increasingly important revenue sources for LGUs, accounting on average for 10 percent of LGU revenues. Methods to enhance these local revenues -- including broadening tax maps to include business establishments; computerizing the administration of business taxes, licenses and fees; and developing local taxpayer education and promotion programs -- would be reviewed and piloted in a selected number of LGUs in this component. 12. A diagnostic of the experience of LGUs that have both completed the RPTA and successfully increased revenues from business taxes, licenses and fees will be conducted. Potential sites include Mandaluyong, Muntinlupa, Santa Rosa and Malolos. The results of this diagnostic will be used to develop software for computerizing business tax administration systems, and for piloting successful approaches in approximately 150 LGUs in the 3rd through 5th income classes that have at least 1,000 business establishments. This subcomponent -- including diagnostic, software development and piloting activities -- is expected to cost P37 million (US$0.9 million). 13. A final element of this component would be to identify and pilot a limited number of financial arrangements that have been used to enhance local resource mobilization in the Philippines and elsewhere. The measurement, monitoring and dissemination of these "best practices" can offer a demonstration effect and promote "healthy" competition among LGUs in enhancing local revenue mobilization. Innovative approaches to private sector participation and contract management, inter-local cooperation, and asset management will be identified and documented, and piloted on a limited basis to selected LGUs. For example, the experience of Mandaluyong City in Metro Manila (which uses a management contract arrangement for its public market) would be documented and evaluated, as well as other sites considering such arrangements (e.g., Santa Rosa). The Municipal Development Fund's experience in requiring revenue enhancement plans for participating LGUs will also be reviewed, and successful experiences piloted in other LGUs. 14. The specific activities for this "best practices" subcomponent include conducting diagnostic reviews (four in total) of successful approaches to: (i) private sector participation, (ii) inter-local cooperation, (iii) asset and financial management, and (iv) the efficacy of revenue enhancement plans. The results of these diagnostics would then be disseminated to LGUs participating in LOGOFIND, and funds for technical assistance would be made available to pilot these approaches in three to four LGU subprojects. This subcomponent -- including the four diagnostics and technical assistance to pilot these - 28 -  activities -- is expected to cost P3 million (US$0.1 million). LGU Performance Monitoring and Financial Reporting 15. The primary objectives of this work are to enhance the ability of the BLGF to monitor and analyze LGU fiscal performance, and to enhance LGU financial reporting. While this objective is consistent with the BLGF's mission to formulate and execute policies concerning the development of the financial viability of local governments, the demands of administering the MDF and deficient local fiscal data have precluded it from fully meeting this responsibility. For example, LGU fnancial data are often released with considerable delays, contain inconsistencies, and are presented in a format that is difficult to understand. Improvements in the quality and timeliness of fiscal information are required to monitor the revenue and expenditure performance of LGUs and their overall level of indebtedness, analyze LGU creditworthiness, attract investors to municipal bonds or other private sector activities such as BOT ventures, and to analyze the impact of various govermnent policies on LGUs. And if LGU borrowing expands as envisaged in the DOF's new policy framework, the BLGF must be able to monitor LGUs borrowing activities more thoroughly in order to assess the macroeconomic consequences of this expansion. 16. These performance monitoring activities include: (i) monitoring the revenue and expenditure performance of LGUs and their overall level of indebtedness, (ii) analyzing LGU creditworthiness, and (iii) analyzing the impact of various govermment policies on LGUs. To perform this function effectively requires improvements in the quality and timeliness of LGU fiscal data, new measures of performance (including measures of creditworthiness), and improved technical capacity through the development of a fiscal information system and training. 17. The main activities included under this subcomponent include: (i) systems development and automation of a fiscal information system, including data collection, and (ii) BLGF staff training and capacity building. Systems development activities, including the design and development of the fiscal information system and accompanying reports and manuals would be provided by an external consultant working closely with the MIS Division of the BLGF. Data collection would be performed by BLGF regional offices. These activities -- which would build on the diagnostic work of phase one -- are expected to cost P20.5 million (US$ 0.5 million) and would be structured to extend over a two-year period. 18. BLGF staff training and capacity building would include internal training, external training, and a study tour for selected staff. Internal training would include a series of short courses (1-2 weeks) for 20-25 staff members in topics such as Statistics and Analytical Tools, Database Management, Fiscal Policy and Analysis, Financial Analysis and Creditworthiness, Fiscal Performance Indicators, Data Entry and Control, Technical Writing, that would be offered by local universities. External training would provide skills development and comparative experience for selected senior staff members. A study tour to an industrialized country to observe how local fiscal data are reported, monitored and used in analyzing creditworthiness would be provided for approximately 10 staff members. Total training activities are anticipated to cost P5 million (US$0.1 million), and to extend over a three-year period. - 29 -  Equipment 18. This category includes the procurement of computers, communications equipment, reference and technical materials, and training equipment for the BLGF central and regional offices. This equipment is needed to enhance the timeliness of informnation flows among the central and regional offices, and to enhance the analytical capabilities of the BLGF. Equipment costs are estimated at P27.3 million (US$0.7 million). - 30 -  Annex 2e Philippines Local Government Finance and Development Project LGU Resource Mobilization and Performance Monitoring Component I. Introduction 1 . An important component of the Department of Finance's (DOF) policy framework for LGU financing of basic services and infrastructure projects is to expand LGU access to private sources of financing. A potential obstacle to the development of such a market is the lack of timely and understandable information about the financial performance of individual LGUs. Although financial data about LGUs are reported annually by both the Bureau of Local Government Finance (BLGF) of the DOF and the Commission on Audit (COA), these data are often released with considerable delays, contain inconsistencies, and are presented in a fornat that is difficult to understand. Improvements in the quality and timeliness of fiscal information would be useful in monitoring the revenue and expenditure performance of LGUs and their overall level of indebtedness, in analyzing LGU creditworthiness, in potentially attracting investors to municipal bonds or other private sector activities such as BOT ventures, and in analyzing the impact of various government policies on LGUs. 2. The BLGF is formally responsible for monitoring the fnancial affairs of local governments. This monitoring function requires the regular review of revenue and expenditure performance, as well as LGU borrowing. The desired expansion of LGU borrowing envisaged in the DOF's new policy framework may have significant macroeconomic consequences; hence the BLGF must be able to monitor more thoroughly the borrowing activities of LGUs. II. Objectives 3. The primary objective of this work is to enhance the ability of the BLGF to monitor and analyze the fiscal performance of LGUs. This requires irnprovements in the quality and timeliness of LGU fiscal data, developing new measures of performance, and improved technical capacity through training and the development of a fiscal information system. Specifically, the consultant will perform the following: * review the BLGF's current ability to collect information, analyze and monitor LGU fnancial performance, and summarize these findings in an inception report, recommend improvements to LGU fiscal data and reporting requirements, develop standards or benchmarks to monitor LGU fiscal performance, develop proposed policies for dealing with financially weak or bankrupt LGUs, and * develop a capacity building program for BLGF staff and a plan for computerizing its operations. 4. The BLGF will assign as project manager, a senior staff member, who will manage the consultants work and assure consistency with other government agencies. -31 -  M. Scove Of Work- Task 1: Review the BLGF's current ability to collect, analyze and monitor LGU financial performance (a) Conduct a detailed review of the Standard Government Chart of Accounts; the annual Consolidated Fund Trial Balance prepared by COA; and the annual, consolidated Budget Operation Staternent (BOS), and other financial reports prepared by the BLGF (b) Determine the appropriate level of aggregation/disaggregation of fiscal information, and whether the BLGF should continue compiling fiscal information from the BOS report or whether it should use data collected by COA as inputs (c) If the BOS report should be retained as an independent source of information, recommend improvements in its coverage (i.e., consistency with the Chart of Accounts in reporting of expenditures) (d) Assess the usefulness of other fnancial reports issued by BLGF that monitor LGU financial performance Task 2: Recommend improvements to LGU fiscal data and reporting requirements (a) Draw a stratified, random sample of between 85 and 100 municipalities, stratified by income class, reliance on different types of revenue, and the level of borrowing. From the stratified sample of LGUs, assess the accuracy of the types of financial data reported in the COA audited reports by specific categories (e.g., real property tax collections, economic development expenditures, etc.) (b) Develop detailed descriptions of appropriate items to be included in each category of the COA report (e.g., releases of DBM vs. cash receipts, full costs of economic enterprises, etc.) to improve the accuracy of reported information by drawing on actual experiences noted in Task 2 (a) (c) Work with BLGF staff, in coordination with COA, to create a "practical" classification manual to be disseminated to LGUs to irnprove their inputs to COA reports (d) Work with BLGF staff and MTP/LGA to design a training program for LGU officials based on the "practical" classification manual (e) For the stratified sample of LGUs, assess the historical accuracy of LGU data reported to COA over the past three years, especially with regard to specific budget items or actions, and document the itnpact of these items or actions on the accuracy of the data (f) Outline the procedures, data and resources necessary for the BLGF to institutionalize the standardization of LGU fiscal data on an annual basis, including whether an interagency cooperative agreement is necessary for the BLGF to gain access to all needed data in a timely manner (g) Based on a detailed review of the Standard Government Chart of Accounts, and the format of both the annual Consolidated Fund Trial Balance submitted to COA, and the annual Budget Operation Statement (BOS) submitted to the BLGF, recommend a new fiscal information format for reporting existing annual information for each LGU. This fiscal information format should present the existing financial data in a more relevant way, by, for example separating own source revenues from enterprise - 32 -  revenues and transfers, operational expenditures from enterprise expenditures and debt service, etc. (See Saldafia, 1992) (h) Create a "cross walk" between the categories of information reported in COA and BLGF reports described above and the new fiscal information format. Describe the elements of the new fiscal information fornat and how they relate to the COA and BLGF categories (i) For the stratified sample of LGUS, compile annual information from COA audited reports or other sources (e.g., the Public Debt Office of COA, GFIs, etc.) to create a comprehensive database of LGU borrowing by level of loan commitments, type of project (e.g., revenue generating), type of borrowing, source of funds (ODA, GFI, BOT, commercial bank), IRA transfers committed by project, etc. Document the process and resources necessary to expand the database to include all LGUs. (j) Recommend procedures for working with an interagency committee (PGB?) to establish quarterly monitoring of new LGU-loan commitments from estimated activity from MDF and other ODA, GFIs, BOT Center Task 3: Develop standards or benchmarks to monitor LGU fiscal performance (a) In consultation with the staff of the BLGF, develop indicators of fiscal performance (e.g., own-source revenues as a share of total revenues, analysis of actual versus budgeted revenues and expenditures, etc.) that can be inplemented with existing data (b) Apply the fiscal information format to a prototype LGU and develop a brief, "how to analyze fiscal data" guide, based on the prototype financial data and indicators of fiscal performance (c) Outline the procedures, data and resources necessary for the BLGF to apply the fiscal information format on an annual basis to the LGUs that it monitors (d) Work with staff of the BLGF, and the LGA or other designated training institution to develop a training module on the fiscal information format and how to use it to analyze fiscal performance (e) Identify appropriate outlets for disseminating the "how to" guide to the private sector (e.g., through the BOT Center or other venues), the GFIs and LGU citizens (f) Design a monthly or annual report to be produced by the BLGF that analyzes the fiscal performance of LGUs in the aggregate, to be broadly disseminated within the DOF, GFIs, Banco Central, etc. (g) Survey best practices -- both international and Filipino -- in local resource mobilization, including issues such as enhancing collections from business taxes, licenses, fees, user charges and other revenues; developing local taxpayer education and promotion services; encouraging private sector participation and using contract management methods for local enterprises such as public markets; and establishing interlocal cooperative agreements for joint revenue collection Task 4: Develop proposed policies for dealing with financiall weak or bankrupt LGUs (a) Review the legal guidelines used to determine municipal bankruptcy in selected other countries. Review existing legal guidelines for "insolvent" LGUs in the Philippines. -33 -  (b) Defne conditions associated with being an "insolvent" LGU (i.e., unable to meet debt service requirements) (c) Delineate a matrix of possible national government responsibilities toward LGUs who are" insolvent", which considers a range of options from no national government responsibility to responsibility for some positive intervention (e.g., financial assistance, oversight, assumption of responsibilities, etc.). Draft a policy statement for national government actions based on this matrix Task 5: Develop a capacity building program for BLGF staff and a plan for computerizing its operations (a) Provide training to the BLGF staff on the fiscal information format (b) Assess current skill mix and identify areas for further training (e.g., fiscal analysis, database management, etc.) to assume enhanced role in policy analysis and formulation (c) Assess the BLGF's computerization of LGU fiscal data (i.e., BOS) and recommend improvements to enhance the quality and timeliness of information; work with the BLGF MIS department to review possibilities for regionalizing the MIS function of the BLGF (d) Identify opportunities to work with COA to share computerized fiscal information from their annual audited financial statements of LGUs and their FISFAP system IV. Output 5. The consultants will produce an inception report within one month of project execution, to be submitted to the BLGF for approval. The final output of this work will be a study that includes the following components: recommended improvements to LGU fiscal data and reporting requirements, standards or benchmarks to monitor LGU fiscal performance, Filipino and international best practices in local resource mobilization, proposed policies for dealing with financially weak or bankrupt LGUs, and a capacity building program for BLGF staff and a plan for computerizing its operations. The manuals and formats discussed in detail in the tasks will be included as annexes to the final study. V. Key Oualifications of Consultants 6. The consultant team should be comprised of local consultants with the following key qualifications: Public Finance Economist (Team Leader) Research Assistants - 34 -  Accountant Management Information Specialist - 35 -  Annex 2f Philippines Local Govermnent Finance and Development Project MDF Structure, Functions, and Reorganizational Plan 1. Background. The MDF was created in 1984 by Presidential Decree 1914 as a revolving fund for Official Development Assistance (ODA)-funded projects but is presently only a disbursement mechanism for ODA loans and grants. Institutional and financial arrangements for lending were established with the support of the first World Bank-fnanced Municipal Development Project (MDP I), while the follow-on MDP II project supported the expansion of the MDF to include financing for LGUs in Metro Manila and its surrounding provinces. MDP III extended the LGU coverage of MDF while also strengthening the administrative procedures and revising the lending terms toward market rates prevailing in the Philippines. Another Bank-supported operation, the Regional Cities Development Project, was channeled through the MDF. The MDF has been expanded to become the main channel for ODA assistance for LGUs, absorbing both the Metro Cebu Development Project funded by Japan and the USAID's Local Resources Mobilization Program. The MDF is gradually expanding its operations beyond urban centers to rural areas and to environmental projects through the recently-approved Agrarian Reform Communities Development Project and the Community-Based Resource Management Project, respectively, both of which are funded by the Bank. 2. The MDF has operated mainly as a fund channeling mechanism for both foreign and local funds under donor-assisted projects. Loan recovery has been very good, with no existing defaults, due both to strong collection efforts by BLGF and the occasional use of the IRA intercept in cases where LGU repayments have been tardy. At the beginning of 1998, repayments to the MDF totaled over Pesos 1.3 billion. 3. Current Organizational Structure and Functions of MDF. The MDF is currently located within the Bureau of Local Government Finance (BLGF) under DOF. Its lending operations are overseen by an MDF Policy Governing Board (MDF-PGB), which is chaired by the Undersecretary of DOF and includes representatives of the DBM, DILG, DPWH, and the National Economic and Development Authority (NEDA). The membership and functions of the MDF-PGB and the policies of the MDF were laid down in 1992 in an MDF-PGB Resolution (No. 01-92-MDF; a copy is in the project files). For each of the projects whose funds are channelled through the MDF, there is a Central Projects Office (CPO) which supports the promotion and development of subprojects, appraises the subprojects, and monitors and coordinates project implementation. For example, under the MDPs, the CPO has been located in the DPWH. In addition, each project has had a Project Steering Committee which provides policy guidance, approves subprojects and coordinates the involved agencies in project planning, financing and coordination. 4. Planned Reorganization of MDF. 4.1 The DOF plans to reorganize and strengthen the MDF in two phases, with support of the LOGOFIND project. Under the first phase, which is expected to take three years, a new Office of the Municipal Development Fund (MDFO) has been created within the DOF (see below), and will be staffed with full-time professionals. The MDFO will handle subproject promotion and supervision, as well as subproject appraisal and subloan disbursements and collections. The MDFO will also support implementation of the CBRM Project. 4.2 On April 29, 1998, the MDF-PGB passed two resolutions, one endorsing the creation of a - 36 -  LOGOFIND CPO and another supporting the phased reorganization of the MDF including the formation of a new MDFO in DOF. On November 20, 1998, the President of the Philippines signed Executive Order (EO) No. 41 entitled "Reorganizing the Administrative Structure of the Municipal Development Fund, Consolidating its Functions in the Departnent of Finance and For Other Purposes". This EO officially creates within the DOF, the MDFO and describes its main functions and organizational principles. DOF shall issue a Department Order implementing EO 41 and shall designate the key officers of the MDFO. Details on the plan for setting up and staffing the MDFO have been prepared by DOF consultants and are summarized in a table below. The DOF is now finalizing the MDFO staffing (plantilla) positions. 4.3 The second phase of the MDF reorganization will involve the spin-off or transfer of the functions and responsibilities of the MDFO to an existing or new fnancial institution. At present, DOF is considering three options: (i) transferring the administration of the MDF, as a fund, to a subsidiary of an existing GFI; (ii) transferring the assets and liabilities (and the risks) of the MDF to a subsidiary of an existing GFI; or (iii) creating a new GFI, or municipal development bank to own and operate the MDF. The various legal and administrative actions required to implement these changes and the expected time of their completion is included in the MDF reorganizational plan that DOF and the Bank agreed to at negotiations (see below). Before the transfer actually takes place, the Bank will assure its full satisfaction ahead of time with what responsibilities, obligations, risks and liabilities would be transfers to the financial institution, and how much compengation would be provided to the financial institution as well. 4.4 Consultants to the DOF have already outlined the enabling actions required to implement the three options for transferring the MDF to a GFI described above. This information is summarized below. OPTIONS ENABLING ACTIONS 1. Transferring the administration of the MDF, as a a. DOF decision which: (i) endorses the transfer of fund, to a subsidiary of an existing GFI the function and operations of the MDF to a newly-created subsidiary of a GFI; (ii) provides guidelines for the terms and conditions under which the GFI will administer the MDF on behalf of DOF; and (iii) provides policy guidance for the management of the MDF, as part of the GFI. b. Signing of the Memorandum of Agreement between the DOF/MDFO and the GFI for the transfer of the administration of the MDF and the creation of a subsidiary to manage its funds. c. Passage of Republic Act authorizing the transfer of the administration of MDF as a fund or subsidiary of an existing GEl. d. Approval of Articles of Incorporation pertaining to the operation of the MDF as a subsidiary of the GFI. -37-  2. Transferring the assets and liabilities (and the a. DOF decision which: (i) endorses the transfer of risks) of the MDF to a subsidiary of an existing GFI the assets, function and operations of the MDF to a newly-created subsidiary of a GFI; and (ii) provides guidelines for the management of the MDF by the subsidiary. b. Signing of the Memorandum of Agreement between the DOF/MDFO and the GFI for the transfer of the assets and administration of the MDF and the creation of a subsidiary to manage its funds. c. Passage of a Republic Act authorizing the transfer (and risks) of the MDF to a subsidiary of an existing GFI and designating the public officer who will execute the contract on behalf of the Republic of the Philippines. d. Issuance of a Deed of Assignment between the Republic of the Philippines and the existing GFI. e. Approval of Articles of Incorporation pertaining to the operation of the MDF as a subsidiary of the GFI. 3. Creating a new GFI or LGU development a. DOF decision which (i) endorses the transfer of bank/corporation to own and operate the MDF. the assets, function and operations of the MDF to a newly-created GFI; and (ii) provides guidelines for the management of the MDF by the GFI. b. Passage of a Republic Act creating a new GFI and providing for the transfer of the MDF funds to the new GFI. c. Approval of Articles of Incorporation pertaining to the operation of the MDF as a subsidiary of the GFI. - 38 -  4.5 Action Plan for Reorganizing the MDF. The DOF and the Bank agreed on the following action plan for implementing the MDF reorganization. ACTION TARGET DATE Issuance of MDF-PGB resolution creating the MDFO May, 1998 (completed) Submission of MDFO staffing (plantilla) positions for 1999 to DBM June, 1998 (completed) Request to DBM for inclusion of LOGOFIND budget in 1999 DOF budget July, 1998 (completed) Endorsement of the Office of the President of an Executive Order creating December, 1998 MDFO under DOF (EO 41) (completed) MDFDO-PGB approval to appoint an MDFO Executive Director and form an January, 1999 Ad Hoc Committee to draft implementing rules and regulations (IRR) for (completed) E041 Submission to DBM of proposed MDFO staffmg positions for first two years End-February, 1999 of operations Appointment of an MDFO Executive Director and creation of an Ad Hoc End-March, 1999 Committee to prepare the IRR Completion of implementing rules and regulations for E041 End-April, 1999 Issuance of DOF department order to implement IRR; DBM approval of End-May, 1999 MDFO staffmng positions; and commencement of recruitment/hiring of MDFO staff Completion of recruitment of key MDFO staff End-September 1999 Assessment of MDFO Performance and consultation with World Bank End-June, 2000 DOF Decision of Option for Spinning Off/Transferring MDFO (see PAD for End-December, 2000 discussion of Options and Enabling Actions) Drafting and Submission to Congress of proposed legislation, if necessary End-March, 2001 Expected Spin Off/Transfer of MDFO End-March, 2003 -39 -  Annex 3: Estimated Project Costs PHILIPPINES: Local Government Finance & Development Project (LOGOFIND) Wmmm 'R On "M Ioca.,oreiI Tota LGU Subprojects 54.7 41.0 95.7 LGU Training and Capacity Building 8.0 0.3 8.3 LGU Resource Mobilization and Monitoring 11.3 5.2 16.5 MDF Reorganization and Strengthening 10.3 1.9 12.2 Total Baseline Cost 84.3 48.4 132.7 Physical Contingencies 0.0 0.0 0.0 Price Contingencies 0.0 0.0 0.0 Total Project Costs 84.3 48.4 132.7 Front-end fee 1.0 1.0 Total Financing Required 84.3 49.4 133.7 -40 -  Annex 4: Cost Benefit Analysis Summary PHILIPPINES: Local Government Finance & Development Project (LOGOFIND) [For projects with benefits that are measured in monetary terms] d- i! Presetal f Flows FJa -' -a' t Economic F ,a. - Benefits: Costs: Net Benefits: 20.1 mn. 61.2 in. 13.4 mn IRR: 17% Summary of Benefits and Costs: Economic benefits from LOGOFIND will result predominantly from its subprojects. Since the actual mix of subprojects will be demand-driven, projections were made based on the probable types of subprojects to be proposed by LGUs (which reflect the experience of previous Municipal Development Projects.) The benefits for markets, bus terminals and slaughterhouses include revenues generated from these subprojects, while nonmonetary benefits were analyzed for other subprojects (e.g., savings in maintenance costs and medical expenses for shore protection subprojects, savings in time and fuel for road and traffic management subprojects, and improved sanitation valued in terms of willingness to pay for water and toilets). Costs include capital investment and maintenance expenditures. The total project cost, which includes subproject costs and the cost of other components such as training, Local Resource MobilizationlRPTA and technical assistance. These costs were deducted from the benefits of the subprojects and the entire project registered a 17% economic rate of return with a net present value (NPV) of P804,160,294 at a 14% interest rate. Main Assumptions: The Economic Rates of Returns (ERR) for potential LOGOFIND projects were estimated based on established cost-benefit methodologies used in previous Municipal Development Projects. The ERR for the overall investment is estimated at 17%, including the costs of capacity building and technical assistance activities. Seven representative subprojects were analyzed: (a) markets, (b) bus terminals, (c) slaughterhouses, (d) roads, (e) traffic management, (f) shore protection and (g) sanitation facilities. The first four categories of subprojects are revenue generating, while the last two categories reflect environmental subprojects. The ERR of potential social subprojects was not calculated due to their non-quantifiable benefits. Table 1: Average Rates of Return of Representative Subprojects Subproiect Average Rate of Return Markets 30% Bus terminals 27 Slaughterhouses 35 -41 -  Roads 49 Traffic management 41 Shore protection 45 Sanitation facilities 19 Note: rates of return from markets, bus terminals, and slaughterhouses are based on revenues generated from the subprojects. Rates of return from the other subprojects are based on non-monetary benefits. Sensitivity analysis / Switching values of critical items: The two prime risks for the project are: (a) a delay in subproject implementation, and (b) lower demand for subprojects than originally anticipated. Lessons learned from previous municipal development projects -- which were characterized by considerable rates of return -- will be used to reduce these potential risks in LOGOFIND. Table 2 presents a sensitivity analysis for the two identified risks. A one-year delay in the implementation of subprojects reduces the rate of return to 14% (a two percentage point decrease from the base case.) If 50% fewer subprojects are implemented, the rate of return falls to 10%. Other standard tools of sensitivity analysis, such as consideration of a 25% increase in costs corresponded to a 14% ERR while a 25% decrease in benefits also corresponded to a 14% ERR. Combining a 25% increase in costs and a 25% decrease in benefits results in an ERR of 12%. Table 2: Sensitivity Analysis of Subproject Packages 1-Year Delay 50% Fewer 25% decrease in revenues + Base case in Suburoiects Subproiects 25% increase in investment costs ERR 17% 14% 10% 12% Financial Analysis of Representative Subprojects Table 1 (above) presents the representative LGU subprojects for LOGOFIND with the corresponding average rates of return. Since the subprojects are demand driven, as previously mentioned, projections were made on the probable types of subprojects to be proposed by the LGUs. These probable types became the basis for estimating the financial rates of return. The detailed assumptions on how each rate of return was computed for each representative subproject are contained in the project files. For revenue-generating projects, slaughterhouses provided the highest rate of return (35%) compared to markets and terminals with 30% and 27%, respectively. For nonrevenue generating projects, roads registered the highest rate of return of 49%, while shore protection, traffic management and sanitation facilities registered rates of return of 45%, 41%, and 19%, respectively. If the difference between the present value of fmancial and economic flows is large and cannot be explained by taxes and subsidies, a brief explanation of the difference is warranted, e.g. "The value of financial benefits is less than that of economic benefits because of controls on electricity tariffs." -42 -  Annex 5: Financial Summary PHILIPPINES: Local Government Finance & Development Project (LOGOFIND) Years Ending (US$ million, 1998 Rrices I Year 1 Year2 | Year 3 | Year 4 | Year 5 | Year 6 | Year 7 Total Financing Required Project Costs Investment Costs 2.1 7.2 10.6 18.0 21.8 17.5 9.9 Recurrent Costs 5.5 7.9 10.4 8.3 7.4 5.9 Total Project Costs 2.1 12.7 18.5 28.4 30.1 24.9 15.8 Front-end fee 1.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Financing 3.1 12.7 18.5 28.4 30.1 24.9 15.8 Financing IBRDIIDA 2.8 10.1 14.8 21.9 22.2 17.8 10.3 Government 0.3 1.3 1.2 1.8 1.8 1.6 1.5 Central 0.0 1.3 2.5 4.7 6.2 5.5 4.0 Provincial 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Co-financiers 0.0 0.0 0.0 0.0 0.0 0.0 0.0 User FeeslBeneficiaries 0.0 1.3 2.5 4.7 6.1 5.5 4.0 Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Project Financing 3.1 12.7 18.5 28.4 30.1 24.9 15.8 I Year1 I Year 2 I Year 3 I Year 4 I YearS 6 Year 6 I Year 7 Total Financing Required Project Costs Investment Costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Recurrent Costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Project Costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Front-end fee 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Financing 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Financing IBRD/IDA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Government 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Central 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Provincial 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Co-financiers 0.0 0.0 0.0 0.0 0.0 0.0 0.0 User Fees/Beneficiaries 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Project Financing 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Main assumptions: As the project is demand driven, it is difficult to forecast the specific subproject activities that LGUs will invest in; consequently, it is difficult to predict investment or financial requirements during the - 43 -  implementation period. More refined estimates of project costs (covering investrnent and recurrent expenditures) and financing sources will be provided by the GOP team at project appraisal. -44 -  Annex 6: Procurement and Disbursement Arrangements PHILIPPINES: Local Government Finance & Development Project (LOGOFIND) Procurement All procurement for the implementation of subprojects, financed by the loan/grantlequity mix, would be undertaken by the LGUs and supervised by the MDFO. DOF would be responsible for procuring items for the other components. All procurement under the project would follow the Bank guidelines (Guidelines for Procurement under IBRD Loans and IDA Credits of January 1995, revised January and August 1996 and September 1997; and Guidelines for Selection and Employment of Consultants by World Bank Borrowers of January 1997, revised September 1997). A procurement specialist, familiar with the Bank's guidelines and the implementation of World Bank funded projects, will be hired as part of the management staff of the MDFO. Procurement methods (Table A) a) Civil Works: Civil works will include the expansion, rehabilitation and improvement of basic infrastructure, social and environmental facilities. Simplified procurement procedures, similar to shopping among registered contractors, would be introduced for contracts under US$50,000, totalling about US$5.0 million. Quotations would be solicited from at least three registered contractors. Contracts equal to, or larger than, US$50,000 equivalent each and totalling about US$85.0 million would be procured in accordance with the National Competitive Bidding (NCB) procedures acceptable to the Bank. A procurement side letter will be issued by the Govermnent detailing the procedures under local rules that are not acceptable to the Bank, and which will not be followed under this loan. There will be no ICB for civil works since the works are small, scattered geographically and not technically complex. The LOGOFIND Operations Manual will include sample bidding documents developed in compliance with the World Bank procurement guidelines and specifically designed for very small works. Postqualification of bidders shall be done in accordance with para. 2.57 of the Guidelines. b) Goods: Goods and equipment to be procured under the project include vehicles, computers and office equipment. Sizable packages for contracts greater than US$200,000 each of goods, equipment and materials suitable for procurement by ICB are not anticipated, but if it does take place, domestic preference will be given. Therefore, goods will be suitably packaged into lots of less than US$200,000 and procured according to NCB procedures acceptable to the Bank. Goods' contracts procured through NCB are estimated to be about US$5.0 million equivalent. Contracts of less than US$50,000 equivalent and totalling about US$4.7 million would be procured according to national shopping procedures acceptable to the Bank. Shopping should be based on comparing price quotations from at least three suppliers. Requests for quotations should indicate the description and quantity of the goods as well as the desired delivery time and place. c) Consultant's Services and Training: About US$16.0 million and US$5.4 million would be allocated to consultants services and training, respectively. The selection and appointment of consultants would be done in accordance with the Guidelines specified under "Procurement Methods" above, and using the Bank's Standard Request for Proposal - Selection of Consultants, dated July 1997 and revised April 1998. The selection of firms would be based on quality, and cost and single selection, while the selection of individual consultants would be based on quality as reflected in their prequalifications and experience. -45 -  d) Salaries and Fees of Personnel Contributed by the Central and Local Government: As a contribution to the project, the central and local governments will contract and pay for personnel services estimated at US$9.6 million. The procurement of these personnel services, funded by the Borrower, would be done by the Borrower using its own procurement procedures. e) Incremental Operating Costs: About US$11.6 million would be allocated to cover the operating costs of the MDFO, including costs for office supplies and project staff travel and operating costs of equipment and facilities, but excluding salaries. Prior review thresholds (Table B) All civil works contracts procured according to NCB with a value of at least $300,000 equivalent each, all goods contracts procured according to NCB with a value of at least $100,000 equivalent each, and the first five (5) civil works and goods contracts per year regardless of amounts will be subject to the Bank's prior review. Prior review of civil works and goods include bidding documents, evaluation reports and draft contracts. Prior review would also be required for contracts of individual consultants estimated to cost at least US$50,000 equivalent, as well as for contracts of firms estimated to cost at least US$100,000 equivalent. Prior review procedures would apply regardless of the value of consultant's contracts with respect to draft letters of invitation and contracts, terms of reference, sole source selection (if used), qualification criteria, evaluation reports, award proposals and final contracts when substantial differences to the original draft are made. For the contracting of management staff, prior review would only be required for management positions. For the other contracts of civil works and goods not subjected to prior review, the Bank will review them on a random sample basis, one out of five contracts, after they have been awarded. Disbursement Allocation of loan proceeds (Table C) Allocation of the loan proceeds would be made against expenditure categories as shown in Table C. Use of statements of expenditures (SOEs): For civil works and goods contracts below US$300,000 equivalent, consulting frmns contracts below US$100,000 equivalent, individual consultant's contracts below US$50,000 equivalent, sub-loans and grants, and all operating costs and training expenditures, withdrawal applications will be supported by Statement of Expenditures (SOEs). For civil works and goods contracts over US$300,000 equivalent, consulting firms contracts over US$100,000 equivalent, and individual consultant's contracts over US$50,000 equivalent, withdrawal applications would be supported by full documentation and signed contracts. Special account: To facilitate loan disbursements, the MDF will open and maintain a separate special deposit account in a commercial bank specifically authorized for this purpose by the Bangko Sentral ng Pilipinas, on terms and conditions satisfactory to the Bank, including appropriate protection against set-off, seizure and attachment. The SA, which would cover the Bank's share of eligible expenditures in all disbursement categories, would have an authorized allocation amounting to US$5.0 million with an initial withdrawal of US$2.5 million to be withdrawn from the Loan Account and deposited in the SA. The balance shall be withdrawn when the amounts disbursed and committed total US$50.0 million. Applications to replenish -46 -  the Special Account, supported by appropriate documentation, would be submitted regularly (preferably monthly, but not less than quarterly) or when the amounts withdrawn equal 50 percent of the initial deposit. The SA shall be audited annually by the auditors acceptable to the Bank. Advances from MDF to MDFO and its field offices, LGA, BLGF and LGUs: To facilitate project implementation in a devolved environment, MDFO and its field offices, LGA, BLGF and LGUs may request for a 90-day cash advance facility from MDF. Prior to granting this facility, MDFO, together with the Bank's Financial Management Specialist, will assess the financial management capacity of the unit. If the assessment result confirms that there is fnancial management capacity, the unit would be provided with the 90-day cash advance facility. Each unit will then open two separate accounts; a World Bank Project Account in the authorized government depository bank (local branch), and the other for GOP counterpart funding - called Government Project Account. The concerned unit will submit its 90-day cash requirement to MDFO, together with their work and financial plan. MDFO will review the request and will recommend to MDF to release the 90-day cash requirement. Upon a receipt of such recommendation from the MDFO and the financial management assessment result, MDF will transfer the 90-day cash advance to the unit's World Bank Project Account. Monthly replenishment of such cash advances shall be required from each unit. MDFO will monitor and control the transfer of cash advances to its field offices, and the submission of satisfactory proof of incurred eligible expenditures for purposes of monthly replenishment. Accounting, Financial Reporting and Auditing Arrangements: One of the main objectives of the project will be to improve financial management of the participating LGUs through technical assistance (see Annex 2e for details) to strengthen accounting, financial reporting and auditing systems. This is a longer-term improvement program which will enhance the capacity of BLGF to monitor the financial performance of the municipalities as well as the financial management and fiscal performance of the municipalities. The improvements proposed go beyond the management of the Bank-financed projects by embracing all aspects of revenues and expenditure management by the LGUs. In order to ensure sound financial management of sub-project LGUs (the IAs), Financial Management Units (FMUs) will have to be established at the MDFO central and field offices. The FMUs shall be staffed with qualified and experienced financial analysts and financial management specialists who shall be responsible for financial appraisal of sub-projects and project implementing agencies. The appraisals shall include an assessment of the financial management systems and capability of the IAs. Based on this assessment, FMU staff will prepare action plans to implernent the Financial Management Systems acceptable to the Bank and assist the lAs in implementation. The staff will also review periodically the financial management arrangements of sub-projects and the effectiveness of internal control procedures. FMU staff of the MDFO will take overall responsibility for quality control of the work of field FMUs. Project disbursements to implementing agencies (IAs) are routed through the MDF as sub-loans and/or grants. The accounting policies and procedures of the MDF are governed by the Department of Budget and Management (DBM) and COA Circular No. 2-97 of March 21, 1997. This circular describes the accounting policies and procedures, the chart of accounts, and accounting entries. MDFO shall ensure that all IAs maintain separate project accounts to record project-funded transactions. MDFO shall prepare consolidated project accounts. In order to facilitate overall financial management of the project, MDFO shall install the Financial Information System for Foreign Assisted Projects (FISFAP) and where appropriate at their Regional offices. The Bank and COA have agreed that installation of FISFAP for project accounting shall satisfy the financial management requirement for the Bank and the Government. As part of FISFAP systems a set of standard project financial management reports shall be agreed upon for -47 -  quarterly and annual financial reporting by IAs. All LAs are required to prepare the agreed standard financial management reports quarterly and submit to the FMU at MDFO. These reports will be in a format acceptable to the Bank and will be used for monitoring of project progress by the MDFO. The FMU at MDFO will be responsible for consolidation of the IA financial management reports and the consolidated reports will be submitted to the Bank quarterly. In addition, the MDFO will be responsible for preparing annual consolidated project financial statements based on the financial statements prepared by the IAs. MDFO will require that the IA financial statements are audited by COA, and an opinion rendered thereon. MDFO will be responsible for submission of the annual consolidated project financial statements for the audit by COA. COA will perform an audit of the project fnancial statements and render an opinion thereon. A separate audit of the operations of the Special Account and the withdrawal of expenditures through SOEs will also be carried out by COA, who will likewise provide an opinion thereon. COA shall also audit the operations of the 90-day cash advance facilities extended by MDF. -48 -  Table A: Project Costs by Procurement Arrangements (US$ million equivalent) 9)". .d .... ti ~~~~~~~~~~~tG fB.F. , oa , ..t 1. Works 0.0 85.0 5.0 0.0 90.0 (0.0) (72.8) (4.3) (0.0) (77.1) 2. Goods 0.0 5.0 4.7 0.0 9.7 (0.0) (2.7) (2.7) (0.0) (5.4) 3. Services 0.0 0.0 21.4 0.0 21.4 (0.0) (0.0) (12.4) (0.0) (12.4) 4. Miscellaneous 0.0 0.0 11.6 0.0 11.6 (0.0) (0.0) (4.1) (0.0) (4.1) 5. Front-end fee 0.0 0.0 1.0 0.0 1.0 (0.0) (0.0) (1.0) (0.0) (1.0) Total 0.0 90.0 43.7 0.0 133.7 (0.0) (75.5) (24.5) (0.0) (100.0) " Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies 2Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff of the project management office, training, technical assistance services, and incremental operating costs related to (i) managing the project, and (ii) re-lending project funds to local government units. -49 -  Table Al: Consultant Selection Arrangements (optional) (US$ million equivalent) A. Firms 16.3 0.0 0.0 0.0 0.0 0.0 16.3 :___________ ______(0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) B. Individuals 0.0 0.0 0.0 0.0 0.0 5.1 0.0 5.1 (0.0) (0.0) (0.0) (0.0) (0.0) (1.9) (0.0) (1 .9) Total 16.3 0.0 0.0 0.0 0.0 5.1 0.0 21.4 (0.0) (0.0) (0.0) (0.0) (0.0) (1.9) (0.0) (1.9) 1\ Including contingencies Note: QCBS = Quality- and Cost-Based Selection QBS = Quality-based Selection SFB = Selection under a Fixed Budget LCS = Least-Cost Selection CQ = Selection Based on Consultants' Qualifications Other = Selection of individual consultants (per Section V of Consultants Guideleines), Commercial Practices, etc. N.B.F. = Not Bank-financed Figures in parenthesis are the amounts to be financed by the Bank loan. - 50 -  Table B: Thresholds for Procurement Methods and Prior Review' 1. Works Less than 50 Simplified procedure First 5 contracts each similar to national year (1.75) shopping 50 and above NCB At least $300,000 (41.0) 2. Goods Less than 50 National Shopping First 5 contracts each year (1.75) Less than 200 NCB At least $100,000 (7.0) 3. Services Individual, less than 100 Qualifications All (25.3) Firms, regardless of value QCBS Firms for services costing less than 100 Other 4. Miscellaneous Total value of contracts subject to prior review: $76.8 million Overall Procurement Risk Assessment Frequency of procurement supervision missions proposed: One every 6 months (includes special procurement supervision for post-review/audits) Thresholds generally differ by country and project. Consult OD 11.04 "Review of Procurement Documentation" and contact the Regional Procurement Adviser for guidance. - 51 -  Table C: Allocation of Loan Proceeds A. Subloans and grants in 77.1 90.0 support of subprojects. B. Goods 5.3 100% of foreign expenditures, 100% of local expenditures (ex-factory costs) and 80% of local expenditures for other items procured locally C. Consultants Services and 12.5 100.0 Training D. Miscellaneous 4.1 80.0 (Incremental Operating Costs) Total Project Costs 99.0 Front-end fee 1.0 100.0 Total 100.0 - 52 -  Annex 7: Project Processing Schedule PHILIPPINES: Local Government Finance & Development Project (LOGOFIND) 'P fl'''t-- ''';k0"ui"-e -vimF Time taken to prepare the project (months) 1 8 28 Fimt Bank mission (identification) 10/13/96 10/13/96 Appraisal mission departure 06/30/98 06/30/98 Negotiations 08/24/98 02/16/99 Planned Date of Effectiveness 04/30/99 06/30/99 Prepared by: Department of Finance, with support from other national agencies and consultants Preparation assistance: PHRD Grant Bank staff who worked on the project included: a 1e Thomas L. Team Leader/Financial Specialist Zearley Dana Weist Senior Economist Jose Antonio League Operations Officer/Urban Specialist P. Illangovan Environmental Specialist Pramod Agrawal, Lanfranco Resettlement Specialist Blanchett--Revelli Cecilia Vales ProcurementlDisbursement Specialist Rene SD Manuel Procurement Specialist Margaret Png Legal Counsel Hung Kim Phung Disbursement Officer James Ford Peer Reviewer Tim Campbell Peer Reviewer - 53 -  Annex 8: Documents in the Project File* PHILIPPINES: Local Government Finance & Development Project (LOGOFIND) A. Project Implementation Plan Includes Operations Manual prepared by LOGOFIND team and consultants. B. Bank Staff Assessments Back-to-office reports in November 1996, February 1997, July 1997, October 1997, December 1997, March 1998 and June 1998. C. Other LOGOFINDDocumentsfor Technical Discussions/Appraisal, Washington, DC, June 10-16, 1998, Prepared by LOGOFIND Project Preparation Team, June 6, 1998. LOGOFIND Project Preparation Report, April 1998, Prepared by Department of Finance and submitted to the ICC Technical Board. LGU Financing of Basic Services and Infrastructure Projects: A New Vision and Policy Framework, Department of Finance, December 1997 (presented at Consultative Group Meetings in Tokyo). Municipal Training Program, Summary of (LGA) Training Modules to be offered under LOGOFIND, May 1998. *Including electronic files -54 -  Annex 9: Statement of Loans and Credits PHILIPPINES: Local Government Finance & Development Project (LOGOFIND) Difference between expectec and actual Original Amount in US$ Millions disbursements Project ID FY Borrower Purpose IBRD IDA Cancel. Undisb. Orig Fnm Rev'd Number of Closed Projects: 126 PH-PE-39022 1999 PHILIPPINES LGU URB&WATER SANITA 23.30 0.00 0.00 23.30 0.00 0.00 PH-PE-56524 1999 LBP BANIKG SYS REF (FSAL 300.00 0.00 0.00 200.00 0.00 0.00 PH-PE-57598 1999 DEVELOPMENT BANK OF THE P RURAL FINANCE III 150.00 0.00 0.00 150.00 3.34 0.00 PH-PE-57624 1999 REP OF PHILS PRIVATE ENT CREDIT 150.00 0.00 0.00 150.00 1.50 0.00 PH-PE-4566 1998 GOP EARLYCHILDDEV. 19.00 0.00 0.00 18.10 1.10 0.00 PH-PE4576 1998 GOP WATER DISTRICT DEV. 56.80 0.00 0.00 56.80 7.04 0.00 PH-PE4595 1998 GOP COMMUNITY BASED RESO 50.00 0.00 0.00 48.50 3.10 0.00 PH-PE-51386 1998 GOP SZOPAD SOCIAL FUND 1QOO 0.00 0.00 9.50 2.25 0.00 PH-PE-37079 1997 SUBIC BAY METRO. AUTH. AGRARIAN REFORM COMM 50.00 0.00 0.00 45.81 4.85 0.00 PH-PE-40981 1997 REP OF PHILS. SECOND SUBIC BAY 60.00 0.00 0.00 58.12 41.62 0.00 PH-PE-4602 1997 GOP THIRDELEMEDUCATION 113.40 0.00 0.00 110.35 44.01 0.00 PH-PE-4613 1997 GOP WATER RESOURCES DEVE 58.00 0.00 0.00 53.94 22.28 0.00 PH-PE4571 1996 GOP TRANS GRID REINFORCE 250.00 0.00 0.00 162.08 -20.94 0.00 PH-PE-4611 1996 LBP MNLA 2ND SEWERAGE PR 57.00 0.00 9.00 48.00 37.17 3.34 PH-PE-4614 1996 GOVT OF THE PHILS RURAL FINANCE II 150.00 0.00 0.00 31.15 -22.85 0.00 PH-PE-4567 1995 NPCANDPNOC WOMENSHEALTH&SAFE 18.00 0.00 0.00 15.54 4.79 0.00 PH-PE-4584 1994 GOVOF PHILIPPINES LEYTE CEBU GEOTHERMA 211.00 0.00 0.00 26.82 26.81 0.00 PH-PE-4607 1994 SBMA LEYTE LUZON GEOTHERM 227.00 0.00 0.00 83.30 83.27 0.00 PH-PE-4609 1994 GOP SUBIC BAY FREEPORT 40.00 0.00 0.00 2.91 2.25 0.00 PH-PE-4568 1993 GOP URB HEALTH & NUTRITI 0.00 70.00 0.00 51.58 35.27 0.00 PH-PE-4589 1993 GOVT. OF PHILIPPINES IRRIG OPER SUPP II 51.30 0.00 0.00 19.02 18.08 0.00 PH-PE4599 1993 GOP TAX COMPUTERIZATION 63.00 0.00 0.00 19.92 19.95 0.00 PH-PE4538 1992 GOP SECOND VOCATIONAL TR 0.00 36.00 0.00 9.57 8.23 0.00 PH-PE-4592 1992 GOP MUNICIPAL DEV III 68.00 0.00 0.00 27.84 25.84 12.84 PH-PE4597 1992 GOVT. OF PHILS. HIGHWAY MANAGEMENT P 150.00 0.00 0.00 40.93 39.21 2.46 PH-PE4558 1991 ROP ENV. & NAT. RES. MGT 158.00 66.00 0.00 15.83 12.54 0.00 PH-PE4572 1991 R.P. COMMUNAL IRRIG. II 46.20 0.00 3.34 13.51 16.87 2.34 PH-PE4552 1990 COCONUTFARMSDEVT. 121.80 0.00 0.85 31.35 32.21 19.81 Total: 2,651.80 172.00 13.19 1,523.77 449.79 40.79 Active Closed Projects Projects Total Total Disbursed (IBRD and IDA): 1,306.42 6,823.47 8,129.89 of which has been repaid: 47.23 3,748.32 3,795.55 Total now held by IBRD and IDA: 2,763.37 3,117.53 5,880.90 Amount sold: 0.00 31.35 31.35 of which repaid: 0.00 31.35 31.35 Total Undisbursed: 1,523.77 42.35 1,566.12 Actual disbursements to date minus intended disbursements to date as projected at appraisal. - 55 -  PHILIPPINES STATEMENT OF IFC's Held and Disbursed Portfolio 3 1 -Dec- 1998 In Millions US Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1967/88 MERALCO 8.67 0.00 0.00 0.00 8.67 0.00 0.00 0.00 1970/86/88/89 PLDT 12.21 0.00 0.00 9.89 12.21 0.00 0.00 9.89 1974/79 Maria Cristina 0.00 0.00 0.44 0.00 0.00 0.00 0.44 0.00 1979/90 General Milling 0.00 0.00 1.73 0.00 0.00 0.00 1.73 0.00 1980/82/89/90/94/95 AACT 21.90 0.00 2.73 0.00 18.40 0.00 2.73 0.00 1989 H&QPV-I 0.00 0.00 0.61 0.00 0.00 0.00 0.61 0.00 1990 Avantex Mill 5.63 0.00 1.98 0.00 5.63 0.00 1.98 0.00 1992 Bacnotan 4.20 0.00 5.63 3.00 4.20 0.00 5.63 3.00 1992 Pilipinas Shell 0.00 11.63 0.00 0.00 0.00 11.63 0.00 0.00 1993 H&QPV-ll 0.00 0.00 2.50 0.00 0.00 0.00 2.40 0.00 1993 Pagbilao 51.00 0.00 10.00 8.60 51.00 0.00 10.00 8.60 1993/94 Mindanao Power 0.00 0.00 4.50 0.00 0.00 0.00 4.26 0.00 1994 Walden Mgmt 0.00 0.00 0.05 0.00 0.00 0.00 0.05 0.00 1994 Walden Ventures 0.00 0.00 3.75 0.00 0.00 0.00 1.88 0.00 1995 Sual Power 30.00 0.00 17.50 196.00 21.30 0.00 0.00 151.20 1996 All Asia Growth 0.00 0.00 4.00 0.00 0.00 0.00 4.00 0.00 1996 All Asia Manager 0.00 0.00 0.04 0.00 0.00 0.00 0.04 0.00 1996 All Asia Venture 0.00 0.00 0.01 0.00 0.00 0.00 0.01 0.00 1997/98 Far East Bank 25.00 0.00 15.00 50.00 25.00 0.00 10.00 50.00 1998 H&Q PV HI 0.00 0.00 7.50 0.00 0.00 0.00 0.00 0.00 Total Portfolio: 158.61 11.63 77.97 267.49 146.41 11.63 45.76 222.69 Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic 1999 TRP 0.00 0.08 0.00 0.00 1998 DRYSDALE 15.00 0.00 0.00 10.00 1998 PRYCE GASES 10.00 0.00 3.00 5.00 1998 2/2/99 45.00 0.00 0.00 15.00 1997 BATAAN P/E 30.00 0.00 10.00 163.00 1997 MAGSAYSAY LINES 8.00 3.00 0.00 26.50 1997 PT&T 30.00 5.00 0.00 30.00 1967 MANILA ELECTRIC 0.00 0.00 0.00 0.36 Total Pending Commitment: 138.00 8.08 13.00 249.86 - 56 -  Annex 10: Country at a Glance PHILIPPINES: Local Government Finance & Development Project (LOGOFIND) Eat Lowrt- 2V12199 POVERTY and SOCIAL ... Asia & mIddie- Phillpplsq* Pacfic Incon# Development dlamond^ 1997 Population, mid-year.(mtIons..) 73.4 1,753 2,282 Life expectancy GNP pet capita (Atles methlo ,USS). 1,200 970 1,230. GNP (A/as method, US$ biliobns) 881 1,707 Z818 Averase anniust growth, 1991497 Population 3%): 2. t .S 12 Labor force (%) 2-7 IA 1.3 GNP Gross per primary Most ricent estimat (tatet ear availaW. 1014-7) capita enrollment Povetty (% ofpopitlatlon beow national povet e) :.. S4 Urbar population (%Of total 0opuaOtion) se 32. 42 tjfeexpectaincy at birth (years) 66 6S 69 Infanrt mortlity (Cer 1.000 live bilths) 36 .38 36 Child malnutrition (% of childrew under 5) 30 16 - Access to safe water Access to safe water (% of population) 85 84 84 Illiteracy (% of pgoulation age 15+) 5 17 19 Gross primaryenrollment 6 %ofschoolagepopulation) 117 118 114 - Philippines Male .. 120 116 Lower-middle-income group Femrate .. 119 113- KEY ECONOMIC RATIOS. and LONG-TER* TRENDS -7 IS" 196 19.7 Economic ratios' GOP (USS billions) 17.2 29.8 82.9 82.2 Gross domestic fvestmentrODP 32.9 16.0 24.0 24.8 Exports of goodsand services/GDP 19.3 26.3 40.6 49.0 Trade Gross domestic savingslGWI 26.9 19%9 15.2 14.S Gross nationalsavinWslGDP 277 19.3 201 20.11 Current accourt balance/GOP 8-6.4 3.2-- -4.8 -8S 2 tnterest payments/GOP 1.0 3.8 2.0 21 Domestic Investment Total debtUGDP 35.1 94.5 48.4 S5i3 Savings Totar debt service/exports 18.9 33.7 13.4 9.2 Present value of debttGOP .. 52.7 Present value of debt/exports .. 88,1 Indebtedness ...1- -- 978-86 19ti7497 t996 S107 1998-02 (average annoal owth) GOP 1.8 3.2 58 . 5.2 4.0 - Philippines GNP per capita -0.8 1.4 4.8- 3.1 21 Lower-middle-income group Exports of qoods and services 6.0 9.5 15.47 17,5 8.8 STRUCTURE of the ECONOMY (X of GDP) 1976 1986 1996 1997 Growth rates of output and investment (%) Agriculture 29.3 23.9 20.6 18.7 20 . Industry 35.7 34.6 32.1 32.2 to Manufacturing 25.4 24.6 22.8 22.3 * Services 35.1 41.5 47.3 49.2 -1. 92 93 94 95 96 97 -20 Private consumption 62.3 72.1 72.9 72.6 -30 General government consumption 10.8 8.0 11.9 12.9 -G - GDP Imports of goods and services 25.2 22.4 49.3 59.4 (average annual growth) 1976-86 1987-97 1996 1997 Growth rates of exports and Imports (%) Agriculture 1.4 1.8 3.8 2.9 30 Industry 0.7 3.3 6.4 6.1 Manufacturing 0.5 3.0 5.6 4.2 Services 3.2 3.8 6.4 5.5 io Private consumption 2.4 3.7 6.2 3.0 o General government consumption -0.3 3.9 4.1 1.6 92 a3 94 95 96 s7 Grossdomesticinvestment -3.2 6.2 12.5 11.7 -.o1 Imports of goods and services 2.1 11.3 16.7 14.4 - Exports a Imports Gross national product 1.5 3.8 7.2 5.3 Note: 1997 data are preliminary estimates. This table was produced from the Development Economics central database. The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete. - 57 -  Philippines PRICES and GOVERNMENT FINANCE Domestic prices 1976 1986 1996 1997 Inflation (%) (% change) 20 Consumer prices .. 0.7 8.4 5.0 15 Implicit GDP deflator 8.3 3.0 7.7 6.1 10 Government finance s (% of GDP, includes current grants) a Current revenue .. 13.0 18.9 19.5 92 93 94 95 96 97 Current budget balance .. 1.4 4.2 4.2 GDP deflator -O-CPI Overall surplusldeficit .. .. .. 0.2 TRADE (USS millions) 1976 1986 1996 1997 Export and import levels (USS millions) Total exports (fob) .. 4,842 20,543 25,228 40,000 Coconut oil .. 333 Sugar .. 103 .. 30,000 - Manufactures .. 2,672 17,106 21,488 Total imports (cif) .. 5,044 31,885 36,355 20.000 - *1 Food .. 193 1,624 1,510 1,0 M Fuel and energy 869 3,008 3,074 Capital goods .. 839 10,472 14,369 0 Export price index (1995=100) . 76 100 91 92 93 94 95 9j 97 Import price index (1995=100) .. 61 101 .. Exports a imports Terms of trade (1995=100) .. 124 99 BALANCE of PAYMENTS (US$ millions) 1976 1986 1996 1997 Current account balance to GDP ratio (%) Exports of goods and services 3,262 7,702 33,490 40,365 Imports of goods and services 4,381 5,868 41,371 50,477 3 l Resource balance -1,119 1,834 -7,881 -10,112 Net income -253 -1,321 3,339 4,729 I I I I I Net current transfers 288 441 589 1 080 -3 Current account balance -1,105 954 -3,953 -4,303 4 Financing items (net) 1,051 184 8,060 940 -5 Changes in net reserves 54 -1,138 -4,107 3,363 ., Memo: Reserves including gold (US$ millions) .. .. 11,834 8,918 Conversion rate (DEC, local/USS) 7.4 20.4 26.2 29.5 EXTERNAL DEBT and RESOURCE FLOWS 1976 1986 1996 1997 (US$ millions) Composition of total debt, 1997 (USS millions Total debt outstanding and disbursed 6,040 28,204 40,145 45,433 IBRD 316 3,017 4,666 4,179 A: 4,179 IDA 27 92 193 195 |:195 Total debt service 571 2,961 5,357 4,541 0G:11,794 c: 855 IBRD 35 406 766 709 _:2.947 IDA 0 1 3 3 Composition of net resource flows Official grants 61 401 247 188 | ., _ | Official creditors 212 196 -6 107 Private creditors 883 295 2,138 2,869 Foreign direct investment 132 127 1,517 1,253 Portfolio equity 0 0 1,333 73 World Bank program F: 14,299 Commitments 226 151 528 60 Disbursements 102 197 457 305 A-1IRO E - Bilateral Principal repayments 14 170 426 409 -A I DD 0-Other multilateral F - Private Net flows 88 27 31 -104 c - IMF G - Short-term Interest payments 20 238 343 303 Net transfers 68 -210 -312 -408 Note: This table was produced from the Development Economics central database. 2112J99 - 58 -  116' 120 122 ~~~~~~~~~~ ~ ~~~~~~~~~~~~~~~~~~T. oololo I 0 0 110 aaron R4~~~~ B1-ACAN~PO PHILIPPINES . PAN-PHILIPPINE HIGHWAY .6~w. 20' ~~~OTHER MAIN ROADS20 0s2\ '- FERRIRS I"g ZASno L + INTERNATIONAL AIRPORTS 4'.PRoVINCE MAJOR PORTS ___ 50 RIVERS Raboya * PROVINCE CAPITALSIsnd ' 8) REGION CAPITALS 6p-'C PROVINCE BOUNDARIRS 4 "0/-o6' REGION ROUNDARIRS Atp-,jJ Manila o 'K ~~~~Bay ltnaa.Hano~~~~~~~~~~~~~~~~~~~~~~L gn 2 UaS. - 0 - - 1- Bay 4 0t9O ~ole//METROPOLITAN CAR Cerdillore Admtiristrtive Region-~y T,ITodno : Cnnngo. M NL 9 Ca.,. non~~~~~~~~~~~~~~ona ~~~~ MUNICIPAtO 00. 506n22560'O2oa Trgnyei ' 16' * ~****D** - PROW6a BOUNDARIES IS geponn l22 CAVIT E22PROVINCE 024 N- V Ta na RI . I'm,o OWe KIOMTESPROV IS B-nra Ian ix Wester Maodoeno ,do , IOETRoa al 07 Soolo'e.oo 56 Z-6, Oond.N22 156 ta S 20. Ybc x NorMowr Mindnoe nan CYg O~ , NCR National Capito Region " Coono 60. Mjao od.-oI IV Seotlne Togolo -0M.aOoa IeeMtro 7, )a4Cn 22 A- I -aon&-M 014' 24.Ck .6 D-aoN-.tl 25. Lag 63 DnaaolaS.u -'14 27 OW "&dno6 65 Onanno 29. Pdac-on 67. 0oinXKdan Eslno 31. RSealonrl kee v~ um.W& 64. NoC" N~ 33 niAl XIII Cero= 34 CannoaN_ lo 70 MgodI O Mindayo e 37~ lla6at or Sion44St 0' 36. Sagt ARM141Aetenonmouo ReIo of %, 6' i VI %estern V iseyno MoinMo2n a y jn .0-Y,n 39. Akin 74 taaaolo S.t,oung ~3 - 44 Nova. Ooood2I Cubn slnVilloo VII Central Vioayno 60. 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