Document of

The World Bank

Report No: 23340-PH

PROJECT APPRAISAL DOCUMENT

ONA

PROPOSED LOAN

IN THE AMOUNT OF US$100 MILLION

TO THE

REPUBLIC OF THE PHILIPPINES

FOR A

SECOND SOCIAL EXPENDITURE MANAGEMENT PROJECT

May 6, 2002

Human Development Sector UnitEast Asia and Pacific Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective April 4, 2002)

Currency Unit = Philippines Pesos (PHP)1.00 Peso = US$0.020US$1.00 = 51.10

FISCAL YEARJanuary 1 -- December 31

ABBREVIATIONS AND ACRONYMS

ADB Asian Development Bank HDI Human Development IndexAPIS Annual Poverty Indicators Survey IT Information TechnologyAusAID Australian Agency for International JBIC Japan Bank for International Cooperation

Development LGU Local Govermnent UnitBFAD Bureau of Food and Drugs MIS Management Information SystemsCAS Country Assistance Strategy MOOE Maintenance & Other Operating ExpenditureCBIMS Community-Based Information & MTPDP Medium-Term Philippines Development Plan

Monitoring System NCR National Capital RegionCFAA Country Financial Accountability NGAS New Government Accounting System

Assessment NSO National Statistics OfficeCIDSS Comprehensive & Integrated Delivery of PESS Philippines Education Sector Study

Social Services PIM Project Implementation ManualCPAR Country Procurement Assessment Report PLS Procurement and Logistics ServiceCOA Commission on Audit PMU Project Management UnitDBM Department of Budget & Management PSEP Philippines Social Expenditure PrioritiesDepEd Department of Education PTCA Parent Teacher Community AssociationDOH Department of Health SEMP 1 First Social Expenditure Management ProjectDOTS Directly Observed Treatment, Short Course SOE Statement of ExpenditureDPWH Departrnent of Public Works and SSD Social Sector Department

Highways TA Technical AssistanceDSWD Department of Social Welfare & UDGS Unified Data Gathering System

Development UNFPA United Nations Population FundEU European Union UNICEF United Nations Children's FundFM Financial Management USAID United States Agency for InternationalFMR Financial Monitoring Reports DevelopmentGOP Government of the Philippines

Vice President: Jemal-ud-din Kassum, EAPVPCountry Director: Robert Vance Pulley, EACPF

Sector Director: Emmanuel Y. Jimenez, EASHDTask Team Leader: Jayshree Balachander, EASHD

PHILIPPINESSECOND SOCIAL EXPENDITURE MANAGEMENT PROJECT

CONTENTS

A. Project Development Objective Page

1. Project development objective 32. Key performance indicators 3

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 42. Main sector issues and Government strategy 43. Sector issues to be addressed by the project and strategic choices 6

C. Project Description Summary

1. Project components 82. Key policy and institutional reforms supported by the project 103. Benefits and target population 104. Institutional and implementation arrangements 11

D. Project Rationale

1. Project altematives considered and reasons for rejection 112. Major related projects financed by the Bank and other development agencies 123. Lessons learned and reflected in the project design 134. Indications of borrower commitment and ownership 145. Value added of Bank support in this project 14

E. Summary Project Analysis

1. Economic 142. Financial 143. Technical 154. Institutional 155. Environmental 176. Social 187. Safeguard Policies 19

F. Sustainability and Risks

1. Sustainability 19

2. Critical risks 203. Possible controversial aspects 20

G. Main Loan Conditions

1. Effectiveness Condition 212. Other 21

H. Readiness for Implementation 22

I. Compliance with Bank Policies 23

Annexes

Annex 1: Project Design Summary 24Annex 2: Detailed Project Description 28Annex 3: Estimated Project Costs 33Annex 4: Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary 34Annex 5: Financial Summary for Revenue-Eaming Project Entities, or Financial Summary 37Annex 6: Procurement and Disbursement Arrangements 38Annex 7: Project Processing Schedule 50Annex 8: Documents in the Project File 51Annex 9: Statement of Loans and Credits 52Annex 10: Country at a Glance 54

MAP(S)IBRD 27408R2

PHILIPPINESSecond Social Expenditure Management Project

Project Appraisal Document

East Asia and Pacific RegionEASHD

Date: May 6, 2002 Team Leader: Jayshree BalachanderCountry Manager/Director: Robert V. Pulley Sector Manager/Director: Emmanuel Y. JimenezProject ID: P069916 Sector(s): BY - Other Public Sector Management, MH -

Human DevelopmentLending Instrument: Sector Investment & Maintenance Theme(s): Education; Health/Nutrition/Population; SocialLoan (SIM) Protection; Public Sector

Poverty Targeted Intervention: Y

Project Financing DataP[] Loan [ ] Credit [I] Grant [ Guarantee [ Other:

For Loans/Credits/Others:Loan Currency: United States DollarAmount (US$m): 100.00

Borrower Rationale for Choice of Loan Terms Available on File: N Yes

Proposed Terms (IBRD): Fixed-Spread Loan (FSL)Grace period (years): 8 Years to maturity: 17Commitment fee: 0.85% Front end fee (FEF) on Bank loan: 1.00%

Payment for FEF: Capitalize from Loan Proceeds

Initial choice of Interest-rate basis: Auto. Rate Fixing by period 6 months

Type of repayment schedule:p(] Fixed at Commitment, with the following repayment method (choose one): annuity[ I Linked to Disbursement

Conversion options: [X]Currency [X]Interest Rate [X]Caps/Collars: Borrower to Pay from Own Resources

Financing Plan (US$m): Source Local Foreign TotalBORROWER 15.35 0.00 15.35IBRD 51.82 48.18 100.00Total: 67.17 48.18 115.35

Borrower: REPUBLIC OF THE PHILIPPINESResponsible agency: DEPT. OF BUDGET & MGMT. WITH DEPED, DPWH, DOH AND DSWDDepartment of Budget and Management (DBM)Address: DBM Building I, Gen. Solano St., San Miguel, Manila, PhilippinesContact Person: Underecretary Laura B. PascuaTel: (63-2) 735-4934 Fax: (63-2) 735-4961 Email: lbpascua@dbm.gov.ph

Other Agency(ies):

Department of Education (DepEd)Address: DepEd Complex, Meralco Avenue, Pasig City, PhilippinesContact Person: Undersecretary Emesto PanganTel: (63-2) 633-9342 Fax: (63-2) 631-9640 Email: espangan@pacific.net.ph

Department of Health (DOH)Address: San Lazaro Compound, Sta. Cruz, Manila, PhilippinesContact Person: Undersecretary Alexander PadillaTel: (63-2) 743-8301 Fax: (63-2) 743-1829 Email: bihc@central.doh.gov.ph

Department of Social Welfare and Development (DSWD)Address: DSWD Complex, Batasan Pambansa Complex, Constitution Hills, Quezon CityContact Person: Undersecretary Clifford BurkleyTel: (63-2) 931-9147 Fax: (63-2) 931-9146 Email: ccb@philonline.com

Department of Public Works and Highways (DPWH)Address: DPWH Building, Bonifacio Drive, Port Area, ManilaContact Person: Undersecretary Teodoro EncarnacionTel: (63-2) 527-4111 Fax: (63-2) 304-3020 Email:

Estimated Disbursements ( Bank FY/US$m):FY 2003 2004 2005 2006

Annual 12.00 24.00 30.00 34.00Cumulative 12.00 36.00 66.00 100.00

Project implementation period: 3.5 yearsExpected effectiveness date: 09/01/2002 Expected closing date: 12/31/2005

MCS PAD F- R. MW. 2ar

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A. Project Development Objective

1. Project development objective: (see Annex 1)

The project's core objective is to improve basic social services by (i) enhancing performance(efficiency, quality and equity) and governance (transparency and accountability) in the three social sectordepartments - (Education (DepEd), Health (DOH) and Social Welfare (DSWD)), and the school buildingprogram implemented by the Department of Public Works and Highways (DPWH) - with the oversightand support of the Department of Budget and Management (DBM); and (ii) providing quality inputs tosuch services. The following strategies will be used to achieve the objective:

* Achieve immediate efficiency gains and quality improvements through improved planning,procurement and tracking for key inputs such as textbooks and drugs.

* Continue with the medium to long term program for systems and process improvementbegun in the first Social Expenditure Management Project (SEMPI) - for financialmanagement, procurement and distribution, and information systems - and institutionalizechange in entire organization including regional offices. Cover additional areas forexpenditure management improvement/reform - teacher deployment and drug regulatorysystems.

* Support government and civil society in the development of transparency andaccountability mechanisms through budget analysis, public expenditure tracking, clientfeedback.

2. Key performance indicators: (see Annex 1)

Key indicators of improvement in the delivery of basic social services* student:textbook ratios (1:2.5 to 1:1 in the four core subjects - math, science, English, Filipino)* percentage of fully immunized children 61% (2001) to 67% (2005)* TB cure rates (80%)

Key indicators of improvement in management of social expenditures* percentage savings resulting from improved procurement of textbooks, drugs* FM improvement

spread sheet based automated accounting systems installedmanagement reporting established

* Procurement ImprovementProcurement units reconstitutedProcurement processes streamlinedE-procurement implemented

* Teacher DeploymentReduction in number of "red" zone schools - student:teacher ratio (STR>50) from 500 to <100Inter-quantile ratios (IQRs) for each division close to 1Institutionalization of new teacher deployment system

* Drug Regulatory SystemPerformance standards for the Bureau of Food and Drugs defined and maintained

Key indicators for improved governance and accountability* Develop and implement an independent Public Expenditure Tracking System* Increase in client satisfaction with basic social services according to a Report Card Survey

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B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1)Document number: R99-55(IFC/R9946) Date of latest CAS discussion: 05/11/99

The project will support the overall CAS goal of re-establishing a pattern of rapid and sustainedpoverty reduction. Specific strategies that are supported include (i) strengthening public expendituremanagement and governance, and (ii) improving investments in human resources (education and health)and ensuring the efficient provision of basic social services. The CAS points out the need for Bank supportto help improve the performance of publicly funded social programs which are heavily utilized by the poor.The CAS identifies the SEMP type approach as a useful instrument for both protecting basic socialservices during a period of budgetary constraints and for effecting much needed improvements in publicexpenditure management in the social sector, so that available funds are used effectively and efficiently.The project will also support the achievement of specific social sector development targets of the CAS suchas increasing primary school completion rates, and reducing rates of infant mortality and TB incidence.The project's responsiveness to and fit with the CAS have been validated jointly by the Bank and theGovernment during discussions on the country lending program.

2. Main sector issues and Government strategy:

Sector Wide Issues

Overview of Issues in the HD Sectors. By intemational standards, the Philippines is considered amedium performer in respect of human development overall although it outperforms countries of similarGDP with regards to access to education and gender equity. When indicators are disaggregated, significantdisparities become apparent between the lowest and highest income groups as well as among regions. Poorhouseholds rely heavily on publicly provided services (schools and health facilities) which are free orlow-cost, but are widely considered to be of substantially poorer quality than private services (World Bank:Filipino Report Card on Pro-Poor Services). Poor quality is reflected in low student achievement scoresin education, high mortality and morbidity in health, and overall low levels of satisfaction with public socialservices. Insufficient and inefficiently allocated and executed budgets, coupled with weak govemance byNational Govemment Agencies (DepEd and DOH) and by Local Govemment Units (LGUs), are mainlyresponsible for the poor quality of services.

Basic Education. The Philippines has a good track record in education provision with enrollmentrates at all levels exceeding expected averages. However, there are at least two areas of concern: lowprimary school completion (66% on average) in certain regions and amongst the poor; and poorperformance in math and science. Opportunity and direct costs, relevance and quality of education arereasons for the high dropout rates. Poorly qualified math/science teachers, inappropriate sequencing andlack of good textbooks and materials account for poor performance in math and science. The 1998Philippines Education Sector Study (PESS) (World Bank, Asian Development Bank: PhilippinesEducation for the 21st Century), identified the following priorities for basic education: (i) adequatelyfinance basic education inputs and lower unit cost by raising internal efficiency; (ii) improve teachereffectiveness through better deployment and improved preparation of teachers; (iii) increase localparticipation and accountability; (iv) improve access for the poor through new strategies, includingscholarships; and (v) improve student learning through curriculum reform, provision of textbooks, use ofvernacular in lower primary grades, and a longer basic education cycle.

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Basic Health Care. The Philippines exhibits a disease pattern typical of middle income countriesundergoing a health transition, with non-communicable diseases on the rise, while infectious diseasesremain a threat. There are large variations in health status by income level. The country has one of thehighest population growth rates in the region (2.35%). The devolution of health services to LGUs in 1991was intended to make primary health care more responsive to local users. The impact of devolution has notbeen systematically evaluated, but the process has been difficult with poor preparation on the part of bothLGUs and DOH. The main problems identified with the current system include insufficient mechanismsfor ensuring adequately funded and technically supported public health programs, a weak hospital systemand an uneven distribution of health human resources. Regulation of the quality and cost of health servicesand health products remains weak.

Social Welfare Services. The main sources of vulnerability in the Philippines are related to climateand economic instability, and in certain parts of the country, political unrest. At the household level, thisresults in lower real incomes due to loss of crops, reduced employment or higher prices, especially for food.Private transfers remain the main safety net for those affected. The need for welfare services is great andmuch more than the DSWD, a small and reasonably well-managed social welfare agency can address.However the department's programs systematically target poor, disadvantaged and extremely vulnerablepopulations and provide some measure of a safety net. About one third of the agency's annual budget ofUS$40 million is allocated to the Comprehensive and Integrated Development of Social Services (CIDSS),which aims to ensure basic needs are met in the poorest municipalities.

Social Expenditures. The Philippines Government has accorded relatively high priority to the socialsector. Education receives the largest share in the budget (excluding IRA and debt-service) under the 1987Constitution; the share of social expenditures in the last decade, in the national and local governmentbudgets has increased by about 25% and 100% respectively. The social sector was largely protectedduring the recent fiscal crisis (although there has been a small decline in its share of the 2001 budget).

The Government is the dominant provider of basic education, accounting for 92% of elementary and70% of secondary enrollment. The public sector is a relatively small player at the tertiary level, althoughthe continued creation of state universities and colleges has increased tertiary enrollment in publicinstitutions from 10% in 1981-82 to 24% in 1997-98. Basic education expenditures are progressive, buthigher education expenditures favor rich households. More than 90% of the basic education budget iscurrently allocated to personnel costs squeezing funds available for funding maintenance and otheroperating expenditures (MOOE) such as textbooks, training, furniture. In per pupil terms MOOE in 2000was only a quarter of what it had been in 1990. Unit cost ratios are estimated to be higher in public than inprivate schools, mainly because of poor governance and expenditure management. As a percentage share oftotal costs, household contribution to education is highest at the elementary level (57% compared with 29%for secondary and 14% for tertiary).

Public health expenditures at about 2% of GDP, have been growing at about 12% a year in nominalterms (3.8% real). The private sector accounts for more than half of total national health expenditures(55%), almost exclusively for personal care services. The public sector accounted for 38.6% ofexpenditures which occur equally at two levels - national and local. Health insurance coverage is minimalwith less than 2% of poor households covered by social insurance. More than half the DOH budget isdevoted to public hospitals and about 20% to public health programs. LGUs mainly find primary healthcare services, but spend more than 70% of their budgets on personnel services, leaving limited resources fordrugs, supplies and facilities improvement.

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Social welfare services effectively cover some of the poorest and most vulnerable sections, but areseverely limited in scope and coverage. There are few formal social safety nets. Publicly mandatedpensions and social security programs are limited to wage earners, who constitute less than half theworking population, and they provide limited benefits.

The Government's Strategy

Education. The Government would like to improve access to and quality of education byimplementing the following strategies: For access, ensuring a school in every barangay, and expandingsecondary schools in hard to reach areas. Compulsory collection of funds/fees from parents of publicschool students has been disallowed by DepEd. For quality, introducing a number of reforms in basiceducation as follows: school based management; partnerships (LGUs, civil society, communities, theprivate sector); improving efficiency of public expenditures; curriculum reform; assessment reform andinstitutionalizing in-service training (INSET). DepEd would also like to implement alternative learningsystems and demand side interventions.

Health. The Government's response to continuing unsatisfactory health outcomes is embodied inits Health Sector Reform Agenda (HSRA), a strategy adopted by the Department of Health (DOH) in1999. Five major areas of reform are proposed: (i) provide fiscal autonomy to government hospitals, toreduce their dependence on direct subsidies from government; (ii) secure funding for priority public healthprograms, using multi-year budgeting to guarantee the needed continuity in resource availability; (iii)promote the development of local health systems and ensure their effective performance by engaging localgovernment units in cooperative cost sharing arrangements to improve local health services and providingthem with the necessary technical assistance to enhance capacity for governance of health systems; (iv)strengthen the capacities of health regulatory agencies with special emphasis on the Bureau of Food andDrugs (BFAD); and (v) expand the coverage of the National Health Insurance Program. The DOH hasdeveloped an implementation plan to introduce reforms in a phased manner in "convergence sites" aroundthe country.

Govemance. The Department of Budget and Management with the assistance of COA, isspear-heading a number of reforms designed to improve budget execution and monitoring, and theefficiency of public expenditures. The list of targeted strategies include the development of a medium termexpenditure framework, performance management systems, financial management reform, and increasedtransparency and efficiency in procurement. The underlying direction of these changes is to improveaccountability while increasing the autonomy of implementing agencies. Recently, the Government hasalso expressed an interest in improving accountability and transparency by involving the public in budgetprocess, particularly budget monitoring, and institutionalizing the implementation of a "report card" onpro-poor public services. The government is also committed to improving the quality of social services forthe poor and implementing a number of pro-poor policies to reduce the incidence of poverty and promotesocial harmony.

3. Sector issues to be addressed by the project and strategic choices:

In the aftermath of the Asian financial crisis and in view of the poor performance of the Bank's HDportfolio in the Philippines, the first Social Expenditure Management Project (SEMP 1) focussed onprotecting public expenditures for basic social services and improving public expenditure management(procurement and financial management in particular) in the departments of Education and Social Welfare'.

The Department of Health was not included as it was in the midst of a major reorganization.

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The project is in its third year of implementation (due to close December 31, 2002); and has beensuccessful in the following ways:

* timely provision of basic inputs, including more than 35 million textbooks;* significant improvements in procurement and savings of about 40% in the cost of textbooks,

desks, and chairs for a total savings of US $20 million;* improvements to fnancial management and procurement processes and capacity.

The GOP requested the Bank for a follow-on operation to complete the on-going reforms inprocurement, financial management and information technology, institutionalize the improvements atnational and regional levels and expand the reform agenda to other aspects of expenditure management.High GOP commitment to expenditure reform and success of the approach are important reasons forcontinuing with the strategy to focus on improving public social expenditures. Taken together, the twoSEMP projects amount to programmatic lending for improving basic social services through a series offocussed social expenditure reforms for which there is a high level of government commitment, and forwhich necessary institutional capacity is built.

The approach would address some of the key recommendations of the PESS including adequatefinancing of basic education inputs and lowering of unit costs; better deployment of teachers and adequatesupply of textbooks. More than 90% of the DepEd budget of $2 billion per year is spent on personnelcosts. Correcting major deficiencies that exist in teacher deployment would have a significant impact onthe efficiency of resource use. The planning, procurement, allocation tracking and quality of all otherinputs, will likewise be significantly improved. The quality and cost of textbooks in particular, and thequality of the school building program implemented by DPWH, which are the major non-personnelexpenditures in the department, will improve significantly as a result of the project. Other PESSrecommendations are covered by other Bank or donors projects. The on-going Third Elementary Educationproject covers school based management. Improved access for drop-outs from low income householdsthrough targeted scholarships is proposed in the new CAS. The Asian Development Bank (ADB) ispreparing a sector reform project focused on the financing of higher education.

For the health sector, the project will support key public health programs and launch aprocurement, financial management and information technology improvement program in the agency. Itwill develop and help maintain performance standards for the drugs regulatory authority, the Bureau ofFood and Drugs (BFAD) . The Bank is currently preparing a Health Sector Reform Project, to pilot theimplementation of the GOP's Health Sector Reform Agenda. The Women's Health and Safe MotherhoodProject', addresses population concems.

DSWD performed well in SEMP 1, and will receive support for its core programs, CIDSS. Supportfor CIDSS will be phased out as a new community development project, Kalahi, under preparation forBank support, is implemented.

The project will support increased transparency, accountability and responsiveness in the executionof the budget and civil society initiatives in analyzing and demystifying budgets, tracking expenditures, andleakages, and obtaining client feedback. This will strengthen the sustainability of expenditure improvementinitiatives supported under the project.

The project closes in June 2002, but a follow-on project has been proposed in the CAS.

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C. Project Description Summary

1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed costbreakdown):

Project activities are grouped into three main components. The first will provide budgetarysupport and improve the cost and quality of inputs for key programs in education, health and social welfare(some retroactive financing for items urgently needed - vaccines, TB drugs and textbook - is included).The second will support the implementation of core management systems improvement to institutionalizeand sustain improvements in cost and quality of inputs. These include financial management, procurement,management information systems (MIS), and human resources management systems (teacher deployment inparticular). The third will develop and implement civil society led initiatives to enhance transparency andaccountability of the budget - including budget analysis, public expenditure tracking, and client feedback.

A. Strengthening Key Budgetarv Programs

A. 1 Basic Education Services cover the provision of key educational inputs such as textbooks,classrooms, and repairs and maintenance of existing schools. For each of these inputs, planning,procurement, quality, distribution and monitoring will be improved. For textbooks, internationalcompetitive bidding procedures in SEMP 1 resulted in significant savings and irnproved textbook quality.These gains will be consolidated while improving manuscript evaluation procedures, assessing textbookavailability and utilization and taldng action to ensure that textbooks are efficiently and effectively used soas to have a positive impact on student performance. The construction of classrooms using competitivebidding procedures will help bridge a large backlog while benchmarking cost and quality. Responsibilityfor school repairs and maintenance will be formally decentralized to the school level. The project willfinance small grants (up to $10,000) for minor repairs to school buildings.

A. 2 Public Health Services cover the procurement of drugs, vaccines and supplies for important andeffective public health programs - TB control, the Expanded Program for Immunization (EPI), and theprevention and control of rabies. The recent decline in a successful immunization program will be reversedby ensuring the timely and efficient procurement and distribution of vaccines. A steady supply of TBcontrol drugs will be assured to the DOTS (Directly Observed Treatment, Short Course) program beingimplemented with technical support from WHO. DOTS has entailed improvements/changes in diagnosticpolicies and microscopy services, case-holding strategies, treatment regimen, drug supply and monitoring.The project will finance the purchase of vaccines for the Rabies Action Project in the Visayas which aimsto declare the Visayas Region a rabies-free zone by 2005. The program combines the strategies of massdog immunization and dog population control.

A. 3 Social Services are provided through the Comprehensive Integrated Delivery of Social Services(CIDSS). CIDSS is a proven and highly successful barangay-centered activity in poor municipalities. Thepoorest barangays are identified using minimum basic needs indicators. Communities use the sameindicators to determine their most urgent needs, and subsequently plan projects to address these needs.Examples include small portable waterworks, sanitation (household toilets, drainage garbage and disposal),day-care centers, (improvements, materials), skills training, farm to market roads, drying pavements,livelihood development projects. The project will finance small grants to communities (up to $10,000) forsuch initiatives.

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B. Systems Improvement and ReforrmL

Technical assistance and training will be provided under this component for the following: (i)further implementation of the financial management, procurement and MIS/IT improvement programinitiated under SEMP 1 in DepEd and DSWD and support for financial management, procurement andMIS/IT improvement in DOH; (ii) teacher deployment and human resources planning in DepEd; and (iii)strengthening of the Bureau of Food and Drugs (BFAD).

B. 1 FM/Procurement/MIS/IT. The strategy for financial management improvements under SEMP 2would focus on introducing computerized database management systems that will facilitate the introductionof the new National Government Accounting System (NGAS), roll-out of the flash management reportingsystem, and skills upgrading of FM staff. Procurement improvements will focus on building capacity in theagencies for planning, streamlining processes, improving payment mechanisms, performing price analysisand maintaining benchmarks, tracking distribution and implementing e-procurement. The project willsupport an in-house effort to upgrade the Unified Data Gathering System (UDGS) and for PersonnelInformation Systems in DepEd, using standard database software, and providing necessary training at alllevels. The IT improvement program will develop IT infrastructure, upgrade IT knowledge and skills,develop strategic plans for information technology and create a governance and organizational structure forIT in the departments.

B.2 Teacher Deployment and Human Resources Planning. A study of teacher deployment issuescarried out during project preparation provides the basis for this component. It was found that while thenational distribution of teachers is fairly equitable, the regional distribution among divisions is less so, andthat at the final, most local level, the distribution of teachers among the schools shows major inequalities inmost divisions. The following activities will be implemented during the project: (i) monitoring teacherdeployment; (ii) deploying new teachers under a improved allocation system so that teachers can betargeted to the most needy schools, and institutionalizing the system; (iii) identifying and eliminatinglong-term vacancies; (iv) transfer of vacant teacher positions from teacher surplus to teacher shortageschools and (v) review and reverse (where appropriate) the designation of teachers to non-teaching roles.

B.3 Strengthening of the Bureau of Food and Drugs (BFAD). On the basis of a diagnostic assessmentof BFAD, an action plan for the improvement of BFAD will be implemented to strengthen BFAD'scapacity to meet agreed performance standards with regard to the rate of issue of product registrationcertificates, accreditation and conduct of testing and inspections, and issue of Good Manufacturing Practicecertification.

C. Strengthening Transparency and Accountabilitv.

The project will support the development and institutionalization through the provision of technicalassistance and training, of initiatives to strengthen transparency and accountability in the various stages ofthe budget process. These include collaborative efforts with civil society and the private sector in analyzingand demystifying budgets, tracking expenditures and leakages, (including validating the outputs of projectsand monitoring procurement processes in national agencies) and obtaining client feedback. Technicalassistance will be provided to review and refine methodologies for each of these activities. Second, theactivities will be linked through a focus on the social sector agencies. Third, there will be at least oneround of implementation of the initiatives. The planning, implementation and review of the results of theinitiatives would be done in a collaborative manner with the agencies to enable them to imnproveperformance and services, and with the Congress and the public to strengthen accountability. Finally, the

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tools that underpin these initiatives will be popularized and made available to interested citizen groups forcontinuous national and local application.

.. Indicative Bank- % ofComponent Sector Costs % of financing Bank-

(US$M) Total (US$M) financingA. Strengthening Key BudgetaryProgramsA.1. Basic Education 75.10 65.1 63.75 63.8A.2. Public Health Services 26.75 23.2 26.75 26.8A.3. Social Services 11.00 9.5 8.50 8.5B. Systems Improvement and Reform 1.00 0.9 0.00 0.0C. Strengthening Transparency and 0.50 0.4 0.00 0.0Accountability

Total Project Costs 114.35 99.1 99.00 99.0

Front-end fee 1.00 0.9 1.00 1.0Total Financing Required 115.35 100.0 100.00 100.0

2. Key policy and institutional reforms supported by the project:

The project will support the objective underlying current budgetary reforms of transforming theimplementing agencies from control driven, inefficient, non-transparent systems to more responsive,results-oriented, and accountable entities, in a transparent and productive government environment. Thiswill involve changes to existing government financial management systems, establishment of transparentprocurement systems, improvements to information and regulatory systems and development of standardsfor technology. Improved management of resources (e.g., teacher deployment) based on timely,transparent, and reliable information, etc., will involve a restructuring of the related bureaucracy,particularly with reference to the planning, procurement and financial units, which are now separate andpoorly linked. Procurement reform includes the development of a transparent and efficient system coveringplanning, cash requirement forecasting, timeliness and transparency in the procurement process andpayments, e-procurement and improving departmental systems and capacity. Transparency in budgetexecution and listening and responding to the poor are other key areas of change/reform.

3. Benefits and target population:

The primary beneficiaries of the project are the poor and disadvantaged sections of the populationwho rely heavily on publicly provided basic social services. The immediate benefit of the project is tosignificantly increase the availability of key inputs to improve the quality of basic social services.Specifically, the project will increase the availability of textbooks, new and repaired classrooms, and drugsfor key public health programs.

The medium to long term benefit is to improve the efficiency and effectiveness of public socialsector agencies through improved procurement and financial management (savings of about 40% resultedfrom such improvements under the SEMP 1), improved allocation and utilization of resources based ongood information and well articulated policies, improvements in the work environment of the agencies andincreased transparency, accountability and responsiveness through the public expenditure tracking andreport card processes.

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4. Institutional and implementation arrangements:

The project will be implemented for a period of 3.5 years, from September 2002 to December2005. Overall responsibility for the project will be vested in the Department of Budget and Management(DBM) in collaboration with the Commission on Audit (COA) and the line agencies (DepEd, DOH,DSWD and DPWH). The central and regional offices of the implementing line agencies (DECS, DOH,DSWD and DPWH), will be responsible for implementation of the specific project components.

An inter-agency Steering Committee, chaired by the DBM Secretary, and including the AgencyUndersecretaries and project directors, will provide overall strategic direction for the project, review projectprogress and solve any inter-agency issues that may arise.

Project Management Units (PMUs) in the DBM and in each of the line agencies will support andfacilitate the implementation of each component within their departments. These units, which willcoordinate all project activities of each implementing agency, are headed by a full time manager whoreports to the designated Project Director (Undersecretary or Assistant Secretary) of the Agency. ThePMUs will: (i) support and facilitate the expeditious implementation of each component in conformity withagreed procurement procedures; (ii) review and validate payment requests from implementing units andprepare statements of expenditure; (iii) complete agreed monitoring reports and facilitate monthly projectmonitoring; (iv) ensure that agreed benchmarks are met. The PMUs will be staffed by a core group ofagency personnel with accounting and monitoring responsibilities. Each of the agencies will also establishregional project management groups comprising the regional directors and their planning and financialofficers.

A financial management assessment of the three implementing agencies was carried out inaccordance with Bank guidelines. The Government is implementing a new government accounting systemstarting year 2002. The recently completed Country Financial Accountability Assessment (CFAA)concluded that the new accounting system conforms with generally accepted accounting principles. Theaccounting and reporting of the project expenditures will be subject to accounting policies and proceduresof the government's new accounting system. In addition, Financial Monitoring Reports (FMRs) in formatsagreed with the Bank will be produced quarterly. In order to improve planning and budgeting, performancemonitoring and overall financial management of the Project, an action plan to improve systems and carryout staff training was agreed.

D. Project Rationale

1. Project alternatives considered and reasons for rejection:

The main alternatives to a focussed public expenditure management reform approach aresector-wide reform programs in each of the social sectors, or sector investment projects. There are severalreasons why the expenditure management improvement approach takes precedence over the other twoalternatives in the Philippines. First, from the Bank's perspective, the performance of Bank fundedinvestment projects in the social sectors has been problematic as a result mainly of procurement andfinancial management weaknesses in the implementing agencies. No new projects can be initiated withoutthe assurance that procurement and financial management systems are in place. It should be noted that thenew management in the agencies with support from SEMP I, have succeeded in making significantimprovements, and that three projects in the portfolio have moved from unsatisfactory to satisfactorystatus. The improvements need to be consolidated and institutionalized. The second, mainly from theGovernment's perspective, is the priority for expenditure reform, given the overall fiscal constraint in theaftermath of the East Asian financial crisis, which limits the opportunity for new investments (all agencies

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have to live within tight budget ceilings, much of it committed to on-going/recurrent expenditures) andmakes it all the more urgent to improve the efficiency and effectiveness of available finances. The third ismanagement/project implementation weaknesses in the agencies, and legislative constraints which make itdifficult for them to manage and execute complex projects.

The project offers a real opportunity for imnproving the way the agencies currently do business,greatly enhancing the cost-effectiveness of available finances and progressively reforming the social sectoragencies. Moreover these initiatives are strongly supported by DBM and COA in the context of thegovernment's move towards improved governance and therefore have a greater likelihood of success.Further, the project will help lay a strong foundation for any subsequent investment program or reformagenda in the social sector agencies.

2. Major related projects financed by the Bank and/or other development agencies (completed,ongoing and planned).

Latest SupervisionSector Issue Project (PSR) Ratings

(Bank-financed projects only)Implementation Development

Bank-financed Progress (IP) Objective (DO)

Support the provision of basic social Social Expenditure S Sservices in the aftermath of the East Management ProjectAsia crisis and initiate procurement andfinancial management reform

(Jointly with ADB). Improve the Early Childhood Development S Squality and coverage of early childhooddevelopment services in 3 regions withworst ECD indicators.

S S(Jointly with JBIC). Improve access Third Elementary Educationand quality of education in 26 poorest Projectprovinces.

(Jointly with ADB, AusAID and other Women's Health and Safe S Sdonors). Improve the delivery of Motherhood Projectwomen's health services

Other development agenciesAsian Development Bank Secondary Education

Improvement ProjectNon-Formal Education ProjectIntegrated Community HealthServices ProjectMindanao Basic EducationProject

USAID (Governance, including Accelerating Growth,procurement and financial management Investment and Liberalizationreform) with Equity (AGILE)CIDA (Governance, including Policy Training and Technical

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procurement reform) Assistance Facility (PTTAF)UNDP Governance Improvement

FacilityUNDP Support to Family Planning,

Health InsuranceUNDP Gender EqualityAusAID Project on Basic Education

(PROBE)EU HIV/AIDS ProjectJBIC Education Facilities

Improvement ProjectJBIC Science and Mathematics

Education ManpowerDevelopment Project

UNFPA Family Planning andReproductive Health

UNICEF Women's and Child Health andNutrition

IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

3. Lessons learned and reflected in the project design:

The most important lesson from the recent/on-going projects in the Bank human developmentportfolio in the Philippines is that the implementation of Bank funded projects can be seriously impededwithout adequate implementation capacity and management oversight in the implementing agency.Complex projects in weak institutional settings are particularly vulnerable. Lack of capacity and weakgovernance for procurement can derail the implementation of all components and the project's impact on theground. Institutional capacity, including management ownership, and credible actions to address capacityissues are therefore critical for project success. The social expenditure management projects have beendesigned specifically to bring about the necessary system-wide management improvements that will benefitfuture operations as well as present investments.

Lessons common to projects Bankwide (OED summary) and reflected in the portfolio of humandevelopment projects in the Philippines include the following: overly complex projects undermineimplementation and effectiveness (e.g., Third Elementary Education Project); software components areparticularly difficult to implement and are often constrained by institutional and incentive factors (e.g.,implementation of a new drug distribution system in the Women's Health and Safe Motherhood project);projects implemented during or immediately after major institutional changes are likely to be poorlyimplemented if the new system does not stabilize quickly (e.g., Urban Health and Nutrition Project in theaftermath of the devolution of health services); and monitoring and evaluation is usually inadequate todetermiine whether the project did in fact succeed in meeting its objectives (all projects). In response, theproject will focus on a core set of objectives for which there is high commitment from the Borrower.Special attention will be paid to institutional issues and incentives in designing the system reform andsoftware components. There will be close monitoring of project inputs and outputs.

Lessons from SEMP 1 are that Borrower ownership can result in vastly improved projectperformance. However, one should not underestimate the time needed to implement change, either due toopposition from affected parties (e.g. legislators' opposition to competitive bidding for school buildings) orfrom technical difficulties in dealing with new procedures. Lack of adequate staffing of the PMU,

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particularly for financial management, delayed the submission of statements of expenditure and otherfinancial reports. SEMP 2 will require adequate staffing of the PMU and have a more realisticdisbursement schedule.

4. Indications of borrower commitment and ownership:

The project has been requested by the Government during programming discussions with thePhilippines Country Unit. In fact, the Government has been so pleased with this approach to lending thatthey would like to see it extended to other sectors - agriculture in the first instance. A Japanese PHRDgrant was obtained for project preparation and is being managed by the DBM. The DBM together with themanagement of the line agencies has also been active in defining the issues and seeking solutions. Mostrecently, in the preparation of the teacher deployment study, (financed by a PHRD grant), the DepEdResearch and Statistics Division prepared sample teacher distribution maps (using an under utilized GISsystem installed by UNICEF) for purposes of the study. The data interpretation and use so impressed theDepEd and DBM, that under the leadership of the two Undersecretaries, the regional offices have beentrained and maps are being prepared for the entire country for use in subsequent teacher deploymentdecision making. Part of what was proposed to be done under the project is thus likely to be installed evenbefore the study is completed. DOH for its part, has completed international competitive bidding for thefirst round of drugs procurement. The performance of the DSWD in SEMP 1, finishing ahead of schedule,speaks to the agency's commitment to the project.

5. Value added of Bank support in this project:

Bank support will ensure the timely and efficient delivery of inputs to key social sector programsduring a period of fiscal constraints. International experience in procurement, financial and publicexpenditure reform can be shared as a result of Bank involvement. Significant and immediate cash benefitswill accrue as a result of using international competitive bidding procedures for drugs and textbooks.Monitoring and evaluation of government programs and the budget will also improve significantly. Qualitytechnical assistance to support reforms (both during project preparation and implementation) can havefar-reaching and significant impact as evidenced by the improvements to teacher deployment that havealready been initiated.

E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8)

1. Economic (see Annex 4):O Cost benefit NPV=US$ million; ERR = % (see Annex 4)O Cost effectiveness* Other (specify)Based on experience in the first Social Expenditure Management Project, using an average savings rate of40% in the costs of items procured alone, the quantity of real resources purchaseable increases by 67%(1/1-0.4). This two-thirds increase in supply amounts to $46 million, yielding a return of about 40% oninvestment. This does not include benefits from investment in basic education, public health and socialservices, such as increased future earnings, as well as imputable economic value to deaths averted ordisability-adjusted-life-years saved.

2. Financial (see Annex 4 and Annex 5):NPV=US$ million; FRR = % (see Annex 4)

Weaknesses in the government accounting systems overall including "obligation" accounting andthe existing government chart of accounts, are being addressed by COA through the recently developedNational Govemment Accounting System (NGAS). There have been issues in the past with the readiness

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of COA's products for implementation in the agencies, particularly of computerized accounting systems.The project will support the implementation of NGAS in the social sector agencies.

The investment type operation that is being proposed cannot meet the immediate cash requirementsof the government as an adjustment project would, but has had the advantage of carefully protecting thetargeted social expenditures and of ensuring sustained attention on the proposed reform agenda andtherefore, of results.

Fiscal Impact:

As the programs funded under the project are priority government programs normally funded in thebudget, the project will not result in any additional fiscal burden to the government. On the other hand,considerable savings are expected from improvements in public expenditure management as in the case ofSEMP 1.

3. Technical:Best practice methods in the provision of basic social services - basic education inputs such as

textbooks, school buildings, school repairs and rehabilitation, and basic public health programs(TB-DOTS, EPI) will be implemented. The systems reform programs for financial management andprocurement have benefitted from extensive diagnostic studies during SEMP 1 and project preparation. AJapanese PHRD grant for project preparation has helped finance the development of implementation plansfor the reform components. Civil society monitoring is linked to Bankwide and international experiences inaccountability mechanisms including public expenditure tracking surveys.

4. Institutional:The new leadership in the key implementing agencies is committed to the reform agenda. The

DBM has been at the helm of a national budget reform process including the implementation of a MediumTerm Expenditure Framework, performance management, procurement reform and civil societyinvolvement in the budget process. The SEMP Loans are being used to develop and pilot systems andprocesses for these reforms that can be replicated in other agencies. For the social sector agencies, therecent movement of four projects in the portfolio from unsatisfactory to satisfactory status, and thesuccessful implementation of SEMP I (which has resulted in a savings to the government of about $20milllion) is evidence of management commitment and capacity for improved performance.

4.1 Executing agencies:

The new management at DepEd has already done much to salvage the reputation of the department,as evinced by the results of recent public opinion polls showing the agency had moved up from the 15th tothe 5th rank in terms of best performing agencies and the second most improved. The management hasdeclared commitment to improving efficiency and transparency at DepEd, have carried out significantimprovements in procurement and have begun implementing the new teacher deployment system developedduring project preparation. The DPWH district offices vary in their capacity and commitment to reform ofthe school building program. To minimize risk, only about a third of the offices is expected to participatein the project. The DOH underwent a major "re-engineering" under the previous administration. A UnifiedPMO dealing with foreign assisted projects appears to be functioning effectively. The current Secretaryhas expressed his intention to consolidate changes and pursue the health sector reform agenda. The DSWDimplemented its portion of SEMP I efficiently. It has a well-known NGO activist in charge who subscribesto project goals.

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4.2 Project management:

The team that is managing SEMP 1 is in place and has been involved in the preparation of theproject for the government. The leadership provided by the Undersecretaries of the three departments -DBM, DepEd and DSWD - in SEMP 1 has been exemplary and can be expected to continue in the newproject. Intra-agency coordination and PMUs need to be strengthened in DepEd and constituted in DOH.Financial management was poor at the beginning of SEMP 1, mainly because of lack of full time persons ineach PMU for this task. This has since been corrected.

4.3 Procurement issues:

A Country Procurement Assessment Report (CPAR) was prepared in 1997 and one is currentlybeing finalized. The reports underscore the fact that public procurement in the Philippines is not efficient,is prone to misuse and abuse and reduces value for money of public funds. The key reasons why thesystem does not function well include the following:

(a) a multiplicity of uncoordinated laws and administrative issuances which create confusion, causedelays and make enforcement difficult; (b) absence of a single professionally competent agency toformulate rules, disseminate issues and ensure they are implemented; (c) lack of professionalcapacity, skills and training among persons implementing procurement activities; (d) seriousdelays in registration and licensing of contractors and suppliers; (e) political interference; and (f)procrastination due to risk aversion and other reasons.

The current administration is committed to improving governance and issued two new ExecutiveOrders (E.O. 262 of 2000 an E.O. 40 of 2001) towards streamlining procurement processes. An omnibuslaw is also likely to to be passed. The CPAR is identifying changes that need to be implemented as part ofa long term government-wide procurement reform program, and these are likely to be the subject of anupcoming adjustment operation.

Assessment of the procurement capacity of the four agencies responsible for the bulk of theprocurement under the project was carried out. The assessment involved review of the procurementpolicies and procedures adopted and implemented in the agencies, and how they actualy implementedprocurement in SEMP 1 and other Bank and locally funded projects. The findings of the CPAR aregenerally applicable to the agencies. However, procurement under Bank-financed projects is not affectedbecause of waivers of local laws as part of the Loan Agreement. Further, the present leadership of theagencies is interested in addressing issues of efficiency, economy and transparency in procurement asproven by their performance in SEMP 1. Overall, the capacities of the agencies were rated as follows:DepEd - fair, DSWD - good, DOH - poor; DPWH - poor.

To mitigate the risks, a series of actions will be undertaken under the project. Among others:institutional capability will be strengthened within the departments through technical assistance coveringprocurement, financial management and information systems to be on board by January 2003; DOH willimplement procurement through UN agencies beginning with this year's vaccine requirements; by August2002, DepEd with appropriate technical assistance, will set up and build capacity in a single procurementunit and DOH will revamp the Procurement and Logistics Services (PLS) to streamline and improve all theprocurement functions of the two departments. A departmental order-mandating the new procedures hasbeen issued by DPWH.

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4.4 Financial management issues:

A Country Financial Accountability Assessment (CFAA) was completed recently and wasdiscussed with the Government. The main issues identified were the change over of the governmentaccounting system implemented on January 1, 2002 and the risks involved in implementing the new systemin some 2000 plus accounting units, computerization of the new accounting system, development of newaccounting policy and procedures manuals and training of staff. These issues are being addressed as partof implementation of the CFAA recommendations. The main risks include the implementation of a newaccounting system (mostly manual) and the need for extensive staff training; lack of coordination ofplanning and budget functions; weak linkages between physical and financial plans; and the absence of aneffective internal audit function to ensure compliance with internal control procedures. These are beingaddressed with agency level action programs under the project, except for the internal audit function whichis addressed through the implementation of CFAA action plans.

Compliance with audit covenants in Bank projects in the portfolio is 90%. Slow disbursementshave been a problem across the portfolio. SEMP I is behind schedule per the very ambitious initialforecasts ($100 million in 2.5 years), but is performing well by current budget and project executionstandards in the Philippines (not including savings of $35 million resulting from lower costs and pesodevaluation, disbursements are at about $50 million after two years of project implementation). Moreover,the project is likely to be fully disbursed as scheduled as all the major procurement items have beencontracted. SOEs are being submitted more regularly and with fewer errors as full time staff have beenappointed to the PMOs. With the experience gained in SEMP 1, fewer difficulties are expected in SEMP2.

5. Environmental: Environmental Category: C (Not Required)5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (includingconsultation and disclosure) and the significant issues and their treatment emerging from this analysis.

The project does not present any significant environmental risks. Activities involving minorinfrastructure development and rehabilitation shall comply with all relevant national regulations forsanitation, solid waste management, building codes, and land use zoning regulations. For sub-projectsunder CIDSS, a negative list has been agreed, to rule out purchases of pesticides, insecticides, and/or otherharmful chemicals. The criteria to be adopted for sub-projects are specified in the Project ImplementationManual.

5.2 What are the main features of the EMP and are they adequate?

N/A

5.3 For Category A and B projects, timeline and status of EA:Date of receipt of final draft:

N/A5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EAreport on the enviromnental impacts and proposed environment management plan? Describe mechanismsof consultation that were used and which groups were consulted?

N/A

5.5 What mechanisms have been established to monitor and evaluate the impact of the project on theenvironment? Do the indicators reflect the objectives and results of the EMP?

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N/A

6. Social:6.1 Summarize key social issues relevant to the project objectives, and specify the project's socialdevelopment outcomes.

The key issue is to seek ways to make basic social services in the Philippines responsive to thepoor. The poor are major consumers of public social services, particularly primary health care and basiceducation, but a recent consumer survey (the Filipino Report Card) suggests that they are dissatisfied withthe quality of public services. More recently, a number of disaffected urban youth participated in arebellion against the current government, which is regarded by them as representative of the middle andupper classes while the former president appeared to them to champion the poor. The government istherefore actively engaged in defining it's pro-poor agenda. The project will support these initiativesincluding some of the recommendations arising from an analysis of the consumer survey. For example,lack of drugs at primary health care facilities and textbooks in schools are important reasons why the poorare dissatisfied with social services. The project will finance these inputs and ensure that they are deliveredwhere they are needed the most. The report card will be repeated towards the end of the project to capturechanges in levels of satisfaction. The project will also promote a budget advocacy and monitoring effortthat involves the monitoring of project inputs by the beneficiaries, for example, parent-teacher associationsin schools and women's groups in health centers. It is expected that as a result beneficiaries will be awareof the benefits that should accrue to them under the project and can ensure that these are in fact delivered.

6.2 Participatory Approach: How are key stakeholders participating in the project?

The results of the consumer survey have been used in project design. In addition, clients andbeneficiaries will be involved in project implementation through the budget advocacy and monitoringcomponent.

6.3 How does the project involve consultations or collaboration with NGOs or other civil societyorganizations?

NGOs and other civil society organizations are responsible for designing and implementing thebudget advocacy and monitoring project as well as the Filipino report card on pro-poor services.

6.4 What institutional arrangements have been provided to ensure the project achieves its socialdevelopment outcomes?

The strengthening and reform of govemment management systems, the support of pro-poorservices, the budget advocacy and monitoring initiative as well as the survey of poor consumers are alldesigned to support social development outcomes.

6.5 How will the project monitor performance in terms of social development outcomes?

The Filipino Report Card on Pro-Poor Services will be repeated at the end of the project, andcommunity based monitoring of budget execution will take place during project.

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7. Safeguard Policies:7.1 Do any of the following safeguard policies apply to the proiect?

Policy ApplicabilityEnvironmental Assessment (OP 4.01, BP 4.01, GP 4.01) 0 Yes * NoNatural Habitats (OP 4.04, BP 4.04, GP 4.04) 0 Yes S NoForestry (OP 4.36, GP 4.36) 0 Yes * NoPest Management (OP 4.09) 0 Yes * NoCultural Property (OPN 11.03) 0 Yes * NoIndigenous Peoples (OD 4.20) * Yes 0 NoInvoluntary Resettlement (OP/BP 4.12) 0 Yes 0 NoSafety of Dams (OP 4.37, BP 4.37) 0 Yes * NoProjects in International Waters (OP 7.50, BP 7.50, GP 7.50) 0 Yes * NoProjects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)* 0 Yes * No

7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies.

The project complies with the Bank's safeguard policies. For the small and scattered sub-projects,the Project Implementation Manual includes the following provisions to ensure their observation:

* All land acquisition for a sub-project would be done between a willing buyer and seller or a willingdonor and the community, all following commercial practices in the area.

* As the project covers the whole country and each specific implementation area is not known at thistime, an Indigenous People's Policy Framework has been prepared. The framework includes arequirement for an IPDP based on OD. 4.20 for any sub-project which may have an impact onindigenous people.

* CIDSS relies heavily on social preparation and community selection of sub-projects. However, agrievance mechanism operates through the barangay level committee to deal with any disaffectedcommunity members.

F. Sustainability and Risks

1. Sustainablity:

The project will finance basic social services that are regularly funded out of the country budgetand hence the maintenance and continued operation of the assets is confirmed. The sustainability of thesector reform program however depends to a large extent on the political will and priorities of subsequentadministrations as well as the management and leadership of the agencies. Maintaining incentives fortransparency and accountability in subsequent administrations depends on the success of civil society toinstitutionalize efforts in this direction.

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2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1):

Risk Risk Rating Risk Mitigation MeasureFrom Outputs to ObjectivePublic social services are poor because of M Selection of a few key programs or parts of thesystemic and personnel incentive issues system (e.g., procurement) that are amenable tothat are not being addressed by the a focussed reform effort The government hasproject recently announced its desire to proceed with an

overarching public sector reform initiative.Government fails to maintain commitment M Strong buy-in of middle level management andand ownership for the reform process leadership in the bureaucracy as well as in the

political leadershipAffected stakeholders such as current S Information sharing with those who aregovernment contractors/suppliers, and concerned and interested in improving the waygovernment bureaucracy at middle and the government does business, including budgetlower levels sabotage reforms monitoring by civil society and public

expenditure tracking

From Components to OutputsTimely release of cash for project M Targeted cash release program agreed withimplementation DBM and direct payments where possiblePolitical stability and/or continuation in M Reform agenda widely accepted and recognizedpolicies of departmental leadership as high priority in implementing agenciesProcurement procedures implemented M Advance preparation of bidding documents,

provision of technical support by the Bankoffice in Manila

Delays in the implementation of the S Agree and covenant timetable for reformagreed reforms milestones

Overall Risk Rating M

Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk)

3. Possible Controversial Aspects:

The proposed reform programs will affect certain vested interests outside and inside thegovernment. As a result of improvements to procurement, suppliers who have in the past, profited frompreferential access and lack of transparency will be adversely affected. This is already apparent in theprocurement under SEMP 1 where the use of competitive procedures resulted in substantial reductions inprice and opened up competition to new or non-traditional suppliers. The FM improvement will alsoincrease transparency in the financial management of agencies and is likely to be resisted by any vestedinterests that may be affected as a result. Improvements to teacher deployment and more efficient resourceallocation could lead to disaffection from political interests that have profited from lack of transparencyand efficiency in this regard in the past.

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G. Main Loan Conditions

1. Effectiveness Condition

A Steering Committee for the Project has been established by Joint Department Order and chairedby the Secretary of DBM, the lead agency, and consisting of representatives from DEPED, DOH, DPWHand DSWD, to monitor the progress of the Project and coordinate Project activities.

The Project Implementation Manual covering procurement procedures, financial managementprocedures, project management procedures, performance indicators and policies complying with theBank's safeguards acceptable to the Bank, has been adopted.

2. Other [classify according to covenant types used in the Legal Agreements.]

Management aspects of the proiect or executing agency

(a) The Steering Committee will be maintained until completion of the Project.

(b) A PMU in each of DBM, DepEd, DOH and DSWD, will be maintained until completion of the Project,headed by a Project Coordinator reporting to the designated Undersecretary, and provided at all times withadequate funds and staffed by personnel with terms of reference and qualifications acceptable to the Bank.

Project Implementation

(c) The Project will be carried out in accordance with the Project Implementation Manual (PIM)containing descriptions of: (i) procurement procedures; (iii) project performance indicators; (iv)environmental criteria applicable to sub-project design and criteria for the selection of sub-projects and; (v)the agreed Framework for Treatment of Indigenous Peoples.

(d) In carrying out the Project, the Borrower shall ensure that all land required for purposes of the Projectis purchased from a willing seller following commercial practices in the areas or is donated by a willingdonor.

(e) The Borrower shall ensure that in carrying out the sub-project grants, information, aimed at disclosingall administrative, financial, enviromental, social, procedural and technical aspects pertaining to theselection, design, preparation and implementation of the Sub-projects is available free of charge at theoffices of the Barangay Captains or School Heads.

(f) In carrying out the Project, the Borrower shall avoid, and if possible, minimize cultural, social andeconomic adverse effects on Indigenous Peoples caused or likely to be caused by the Project; and through aprocess of informed consultation and participation, involve concerned Indigenous Peoples in the design andimplementation of Sub-Projects so as to ensure that the benefits received by the Indigenous Peoples underthe Project are in harmony with their economic, social and cultural preferences and protect their customaryuser rights.

(g) DOH, DSWD and DepEd shall, by March 31, 2003, furnish to the Bank for comments the draftFinancial Management, Procurement and Information Systems/Technology Improvement Plans andthereafter implement such Improvement Plans in a timely manner taking into account the Bank's commentsthereon, if any.

A Political sub-division within a city or a municipality.

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(h) DBM shall by December 31, 2003, furnish to the Bank for comments the draft action plans for thetransparency and accountability initiatives for the Borrower's budgetary processes in education, health andsocial welfare sectors and thereafter implement such action plans in a timely manner taking into account thecomments of the Bank, if any.

(i) DOH shall by November 30, 2002, furnish to the Bank for comments a draft time-bound action plan toaddress:

(i) the streamlining of the functions of the its Bureau of Food and Drugs (BFAD), (ii) thestrengthening of the capacity of such Bureau to carry out its responsibilities; and (iii) theaccreditation of private laboratories; and promptly thereafter, implementating the action plantaking into account the comments of the Bank, if any.

(j) DBM and DepEd shall by Dcember 31, 2004, institutionalize the new-teacher deployment systemagreed with the Bank.

Selection Criteria and Procurement Procedures for Sub-Projects

(k) No Sub-project shall include (a) expenditures intended for military or para-military purposes; (b) civilworks for government administrations or religious purposes; (c) fnancing of government salaries or taxes;or relate to the following activities (d) manufacture or use of environmentally hannful products, (e)producing, storing or transporting hazardous materials (f) logging, or (g) activities in protected areas.

(1) Grants for the repairs and maintenance of schools not exceeding PHP 100,000 per year, shall beimplemented according to terms and conditions set forth in the Project Implementation Manual.

(m) Grants for the implementation of CIDSS not exceeding PHP300,000 per sub-project, shall beimplemented according to terms and conditions set forth in the Project Implementations Manual.

Proiect Monitoring. Review. Reporting

(n) DBM and the agencies shall monitor and evaluate the project on an on-going basis against agreedperformance indicators.

(o) DBM shall furnish the Bank by January 31, 2004, a mid-term review assessing performance of theproject and measures necessary to reach project objectives; and shall review the report with the Bank byFebruary 29, 2004, and thereafter take any measures required to ensure the efficient completion of theProject and the achievement of the objectives thereof.

H. Readiness for Implementation

1 1. a) The engineering design documents for the first year's activities are complete and ready for the startof project implementation.

[] 1. b) Not applicable.

1 2. The procurement documents for the first year's activities are complete and ready for the start ofproject implementation.

1 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory

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quality.0I 4. The following items are lacking and are discussed under loan conditions (Section G):

1. Compliance with Bank Policies

Z 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.

0AQ ' 4 I2- as e Balachander' E u . Jimenez Robert V. Pulley

Team Leader Sector Manager/Director Country Manager/Director

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Annex 1: Project Design Summary

PHILIPPINES: Second Social Expenditure Management Project

Key Performance Data Collection StrategyHierarchy of Objectives Indicators . Critical Assumptions

Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission)Comprehensive human Elementary school completion National No major economic, social,development through access rates Statistics Office (NSO) health political or natural crisis.to basic social services; and and education surveysgood and effective govemance including:

Decline in prevalence of the Annual Poverty Indicatorsinfectious diseases Survey (APIS), and the

Family Income andExpenditure Survey (FIES)

Reduction in gaps in Filipino report card onminimum basic needs. pro-poor social services.

Project Development Outcome / Impact Project reports: (from Objective to Goal)Objective: Indicators:Improve basic social services Textbook:pupil ratio in 4 core National Education MIS Provision of basic socialby (i) enhancing performance subjects (math, science, (UDGS) services benefits the poor.and governance in the three Filipino, English) from 1:2.5social sector agencies - to 1:1DepEd, DOH and DSWD and(ii) providing quality inputs to Resume polio-free WHO Certificationsuch services certification DOTS Monitoring Reports

Reduction of measles cases by50% (7,194 to <3,500)Rabies-Free Visayascertification (<I case permillion population)Improve TB cure rate from80% to 85%Increased consumer/client Report Card Survey Government maintainssatisfaction with basic social commitment and ownershipservices. for reform process.Percentage savings from Financial Monitoring Reportsprocurement (FMRs)Computerized accountingsystem implementedReduction in # of schools with National Education MISstudent:teacher ratios (STR) (UDGS)of >50 from 500 to <100Improvement in the National Education MISInter-quartile ratios (IQR) for (UDGS)teacher deployment atdivision level from 2 to IPerformance standards BFAD Performance Reviewmaintained in BFAD

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Key Performance Data Collection Strategy.Hierarchy of Objectives Indicators - Critical AssumptionsOutput from each Output Indicators: Project reports: (from Outputs to Objective)Component:Significant improvements in Number of classrooms Financial Monitoring Reports The selected programs can bethe quantity, quality, completed to specification (FMRs). reformed or improved even intimeliness and effectiveness of (1,750). the face of systemicbasic inputs to education Project Supervision Reports weaknesses and poorincluding the provision of Number of grants provided for (PSRs). incentives for public servants .textbooks, and the the repair and maintenance ofconstruction and school buildings (40,000). Community-basedrepair/maintenance of information monitoringclassrooms. Number of textbooks system (CBIMS) reports.

distributed to elementary andsecondary schools. (50million)

Significant improvements in Increase TB smear-positive DOTS Monitoring Reportsquantity, quality, timeliness notification rateand effectiveness of inputs tokey public health programs. Administer TB drugs to

200,000 patients

Increase coverage of fully National Statistics Officeimmunized children from Immunization Coverage61% to 67%. Survey

Increase Child Protected atBirth (CPAB) for tetanustoxoid by 100% (0.2/1000 livebirths to 0.4/1000 live births)

Number of doses of Financial Monitoring Reportsanti-rabies vaccine (FMRs)administered.

Effective implementation of Implement 2000 CIDSS Financial Monitoring Reportssocial welfare and sub-projects (FMRs)development programs andtimely provision of inputs andservices.Public Expenditure FM-Procurement-MIS/IT Project Supervision Reports Key stakeholders, inManagement Improvement in improvement plans prepared particular, governmentDepEd, DOH and DSWD. bureaucracy at middle and

Spread-sheet based lower levels accept andaccounting system installed implement reform.

MIS flash reporting systemimplemented

Streamlined budget processimplemented

Procurement unitsreconstituted and procurement

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processes streamlined

DepEd Annual Statisticspublished within 6 months ofyear end

Contract distribution systemadopted in DOH

IT organization formed inDepEd

E-procurement implemented

New teacher deploymentsystem adopted

BFAD Improvement planadopted

Public Expenditure Trackingand Budget Monitoringsystems developed andimplemented

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Key Performance Data Collection StrategyHierarchy of Objectives Indicators Critical Assumptions

Project Components I Inputs: (budget for each Project reports: (from Components toSub-components: component) Outputs)A.Strengthening Key Financial Monitoring Reports Timely release of cash forBudgetary Programs (FMRs) project implementation.Basic Education Services $ 75.10 millionConstruction of about 1,750 Public Expenditure Tracking Political stability and/orclassrooms. Systems continuation in policies andRepair and maintenance of commitment to reform ofabout 20,000 school buildings departmental leadership.per year.Distribution of 50 milliontextbooks.Basic Health Services $ 26.75 millionPurchase of vaccinesDistribution of TB drugs(200,000 patients)Social Welfare Services $ 11.00 millionImplementation of CIDSS sub-projectsB. Systems Improvement $ 1.0 millionand ReformC. Strengthening $ 0.5 millionTransparency andAccountability

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Annex 2: Detailed Project DescriptionPHILIPPINES: Second Social Expenditure Management Project

The project has three components: Component I will provide improve the implementation of key programsin education, health and social welfare. Component 2 will support the implementation of core managementsystems improvement, including financial management, procurement, management information, humanresources management (teacher deployment in particular) and drug regulatory systems. Component 3 willdevelop and implement transparency and accountability mechanisms - including performance management,public expenditure tracking surveys, and client feedback.

By Component:

Project Component 1 - US$111.85 million

Strengthening Key Budgetary ProgramsA.] Education (US$75.10 million)Support to be provided to DepEd for activities covering the provision of key inputs for improving thequality of education: school building/classroom construction, repairs and maintenance, and textbooks.

School Building/Classroom Construction (US$14.72 million). There is an estimated backlog of 12,000classrooms in elementary schools throughout the country. A total of about 1,750 classrooms will beconstructed under the project. Under Filipino law, priority for the construction of classrooms is based onschool-age population and current estimated shortages. The project will provide funding for the DepEdexecuted portion of the school building program (SBP) with a view to benchmarking good practices usingcompetitive bidding procedures. In addition, the project will simplify and improve (i) design and standardspecifications (ii) the SBP database and program planning and implementation. The project will alsofinance the SBP to be implemented by the Department of Public Works and Highways (DPWH), usingNational Competitive Bidding procedures acceptable to the Bank. This involves significant changes in thecurrent procurement practices of DPWH for school buildings, including wide advertising, nopre-qualification of contractors and no fixed prices per classroom.

Repairs and Maintenance of School Buildings (US$16.78 million). Regular preventive maintenance andminor repairs are important to extend the effective life of existing school buildings. In the past, funds forrepairs and maintenance have been released directly to regional offices. Funds are spent differently indifferent regions, and reporting on their use has been weak. Under a pilot effort in SEMP 1, elementaryschools in one region directly received P10,000 for school repairs and maintenance. This pilot wassuccessful and it is proposed to extend this approach under SEMP 2. DepEd's Physical Facilities Divisionhas also developed a manual for use by school staff and Parent-Teacher Community Association (PTCA)for minor repairs and maintenance. The manual will be used in training school staff and members ofPTCAs. A training on book keeping and standard reporting procedures for accounting of the funds willalso be included. Schools will receive funds in the form of grants (up to a maximum $200-$2000 perschool) mainly for materials for rehabilitation works on the basis of an approved programs of works.PTCAs will play an important role in supplementing funds and providing labor. The program willstrengthen DepEd efforts for greater school-based management

Textbooks (US$ 43.60 million). Building on the successes with textbook procurement in SEMP 1, thatreduced prices and infused about 50 million textbooks into the system, the project will support a furtherprogram of textbook reform with the following goals: a) provide a sustainable supply of educationalmaterials that are both of high pedagogical quality and affordably priced; b) ensure that the right quantities

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of the right titles reach the right schools, through efficient, cost effective and transparent means, on time forthe beginning of each school year; c) ensure that educational materials available in schools are used bothefficiently and effectively and have a positive impact on both teacher effectiveness and studentperformance; d) increase transparency and eliminate leakages and corruption in the procurement oftextbooks; and e) strengthen the regulatory and institutional framework needed for the above objectives tobe achieved. A series of reviews of various textbooks quality issues will be carried out, such as curriculumscope and sequence and textbook availability and utilization.

A.2 Health (US$26.75 Million)

The objective of this portion of the health component of SEMP 2 is to ensure priority funding for majorpublic health programs of the Department of Health (DOH) -- namely EPI, rabies control, and TB control.Project funds would be used to purchase vaccines and TB drugs.

Expanded Program of Immunization (EPI) (US$9.60 million). The EPI program is a mature nationwideprogram. Staff in health facilities are trained in the operational principles of EPI. A national cold chainexists, with cold rooms in each region and in a number of provinces around the country. In 2001, theprogram was badly affected due to a severe shortage of vaccines, and resulted in a resurgence of polio.The highest priority for the program is to ensure that a multi-year plan for vaccine procurement is in placeand this will be assured with project support.

TB Control Proaram (US$16.14 million). Directly Observed Treatment Short Course (DOTS) coveragefor TB Control in the Philippines will reach 100% by August 2002. A satisfactory treatment success rateof 80% has been maintained since the introduction of DOTS, but notification rates of all cases and newsmear-positive patients have declined since 1993, which is atypical of a well implemented DOTS program.The most likely explanation for this is the shortage of anti-TB drugs. The project will ensure the regularsupply of high quality anti-drugs to strengthen DOTS impact.

Rabies Control Proaram (US$1.01 million). The DOH and Department of Agriculture work together toimplement the program through a Technical Working Group for Rabies Control. Prevention is the mainfocus of the program and is managed through animal vaccination. The rabies control program aims toreach universal coverage for animal anti-rabies vaccine, using human vaccines only after suspected infectedbites. The DOH has a network of animal bite centers where persons bitten by suspected rabid animals aretreated, with one center per province. The project will finance the procurement of vaccines.

A.3 Social Welfare and Development (US$ 11.0 million)

The project will fund the CIDSS program of the Department of Social Welfare and Development (DSWD)that systematically targets poor, disadvantaged and extremely vulnerable populations.

Comprehensive and Integrated Deliverv of Social Services (CIDSS) (US$11.0 million). CIDSS is a provenand highly successful barangay centered activity with projects currently being implemented in 5th and 6thclass municipalities. The poorest barangays are identified using a collection of 33 indicators related toincome, education, health, access to clean water, shelter, nutrition and child labour. Communities use thesame indicators to determine their most urgent needs, after which a People's Organization (PO) isestablished which submits a proposal for a community-based project to the DSWD field office. DSWDfield offices release funds to POs not exceeding US$10,000 per project based on approved projectproposals. Examples of CIDSS projects as of the end of 2001 include small water supply systems, feederroads, foot paths, day-care centers, toilets and income generation programs. The project will finance grants

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to POs to purchase materials for implementing these minor works. DSWD field offices and BarangayDevelopment Committees monitor fund utilization and outputs during project implementation.

Project Component 2 - US$1.00 millionB.] Systems Improvement and ReformA technical assistance component will be provided under the project to support continuing coremanagement systems improvement efforts in the 3 social sector agencies of DepEd, DOH and DSWD.This will include financial management, procurement, management information, human resourcesmanagement (teacher deployment in particular) and drug regulatory systems. The systems improvementprogram will be carried out by the agencies using a combination of in-house staff and outside consultantsas follows:

2. A.i Financial Management: The financial management improvements under SEMP 2 would cover thefollowing:

(a) Roll out of regional and division automation of accounting processes to all the regions and divisions.(b) Roll out of a flash reporting system to all regions and divisions.(c) Development and design of a central office accounting systems and process improvements.(d) Development and training of a financial analysis capability that could serve the central office andsixteen regional offices.(e) Continued training and skills upgrading of FM staff as part of govemance capacity building.

2.A. ii Procurement: The component will provide technical assistance for the following purposes:

(a) Assist the agencies with the implementation of the agency-wide annual procurement planning.(b) Link planning, budgeting, cash allocations and payment functions.(c) Assist agencies and train staff in the preparation of technical specifications; drafting of bid documents,selection of best procurement method according to the type of goods, and best practices in the evaluationand award committee.(d) Simplify the procurement cycle.(e) Develop a modem tracking and monitoring system to include the whole procurement cycle and inparticular execution of contract management functions(f) Explore options for distribution services.(g) Develop a computerized filing system to cover all stages of the bidding process incorporating systematiccodification of records.(h) Develop a price monitoring and evaluation system.(i) Establish staff profiles and provide training for procurement staff(j) Develop e-procurement

2.A. iii Management Information Systems (MIS) and Information Technology (IT) Improvement: Theproject will support the improvement of the management information system in DepEd which will involvethe streamlining, integration/linking and upgrading of the existing stand-alone database/informationsystems - United Data Gathering System (UDGS), the school mapping database, payroll decentralization,HR databases (TAO-PIS-Payroll-Civil Service). This will also include support for the creation of an MISunit and the attendant capacity building needs. The component will develop IT infrastructure, upgrade ITknowledge and skills, strengthen the strategic plan for information technology, by developing departmentwide standards and creating a governance and organizational structure in the departments.

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B. 2 Human Resources Management Improvement (DEPED - Teacher Deployment)

Teacher Deployment. A study of teacher deployment issues, carried out between March and December2001 in three phases, provides the basis for this component. It was found that while the nationaldistribution of teachers among the regions is fairly equitable, the regional distribution among the divisionsis (in some but not all regions) much less equitable, while at the final, most local level, the distribution ofteachers among the schools shows major inequalities in most divisions. The most readily-availableinstrument to redress inequalities is the new-teacher deployment process, which generally takes place everytwo years. Approximately 11,800 new teacher positions will be allocated during the deployment round dueto take place during 2002-03. In preparation, a format to be used by the divisions for requesting thedeployment of new teachers to specified schools was devised and field-tested. In this format, divisionalteams are required to provide teacher-availability data for all schools under their jurisdiction, so that thedegree to which requests are being targeted on the most-needy schools will be clearly apparent. Newformats for collecting school-level data through the UDGS were devised and field tested. These changesare needed to ensure that reliable data concerning enrollments, teacher numbers, and physical facilities areavailable to planners and policy-makers at all levels of the DepEd organization. Divisional teams weretrained to use the new-teacher deployment request form and the revised UDGS forms; and training wasprovided in the use of the Microsoft Office package for preparing the necessary tables andteacher-deployment maps. A needs-based list of schools to which the new positions will be allocated hasbeen generated by DepEd.

Teacher deployment will be regularly monitored in future, showing teacher availability at each schoolbefore and after each new-teacher deployment exercise. If the new positions are effectively targeted, thenumber of schools in the red zone (STR>50: 1) should drop substantially. Substantial progress towardsinstitutionalizing the new-teacher deployment system in both DepEd and DBM has already been achieved,but further steps are required including the issuance of a joint departmental order by DBM and DepEd onthe new system. It will also be essential to conduct further training, to ensure that at all levels of DepEd,from the Central Office to the schools, there is a critical mass of professional and administrative staff whounderstand the deployment system, know how to apply it, and feel comnmitted to its maintenance.

The potential of three other instruments will also be explored, and where possible utilized, during theProject period. (i) Identification and elimination of long-term vacancies. There is evidence that in a smallnumber of teacher-surplus divisions, substantial numbers of teacher positions have remained vacant forextended periods of time. However the data needed to identify these vacancies is not at present available.The revised UJDGS should fill this data gap, thus enabling remedial action to be taken. (ii) Transfer ofvacant teacher positions from teacher-surplus to teacher-shortage schools. There are organizational andstakeholder barriers to such transfers. During the Project the possibility of de-linking teacher positionsfrom specific schools (at both the elementary and secondary levels) will be explored, and appropriateactions proposed. (iii) Designation of teachers to non-teaching roles. In many teacher-surplus schools,substantial numbers of teachers are locally designated to non-teaching roles, either in the school or in thedistrict office. It is proposed that during the Project, a study of the roles and effectiveness of theselocally-designated teachers be carried out; and based on the findings, recommendations for appropriatechanges made.

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B. 3 Strengthening of the Bureau of Food and Drugs (BFAD)

On the basis of a diagnostic study of the BFAD, an agreed action plan will be implemented to strengthenBFAD's capacity to: (1) issue certificates of product registration, (2) accredit and conduct laboratorytesting and inspections, and (3) issue GMP certification in accordance with WHO guidelines according toan agreed performance standard.

Project Component 3 - US$ 0.50 millionC. Transparency and Accountability Mechanisms

The social accountability component will support ongoing initiatives of government and civil society inanalyzing and demystifying budgets; tracking expenditures, and leakages; and obtaining client feedback.The first step will be to review and refine the methodologies for each of these activities through technicalassistance. This would involve developing analytical and methodological skills in key accountabilitymechanisms for the development of sustainable and ongoing institutional capacity and rigor in civilsociety.The second step would be to focus the accountability initiatives on the three sectors (Health,Education, and Social Welfare) being supported through the SEMP, and thus link these stand-aloneinitiatives with one another. These would involve integrating the civil society inputs into various aspects ofthe public expenditure cycle with focus on SEMP outcomes. A number of localized applications enablingcommunity organizations to undertake participatory budgeting and district level community report cardswould be developed and piloted. The third step would be to test these refined, refocused and connectedsocial accountability initiatives through at least one round of implementation. The results of thisimplementation could be fed into the deliberations of a strengthened multi-stakeholder Budget Dialoguegroup, thus informing the effective and efficient allocation and use of public resources in SEMP-supportedsectors. The results will also be shared with concemed public agencies to enable them to improve theirperformance and the provision of related training to Government staff. Finally, the tools that underpinthese initiatives will be popularized and made available to interested citizen groups for national and localcontinuous application. Various dissemination mechanisms enabling use of public interest media and useof intemet would be developed. Finally these initiatives will be documented in terms of their impact onSEMP outcomes. Case studies on each of these initiatives would be prepared to enable assessment ofimpact and draw lessons for future initiatives.

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Annex 3: Estimated Project Costs

PHILIPPINES: Second Social Expenditure Management Project

Local Foreign Total.Project Cost By Component US $million US $million US $million

A. Strengthening Key Budgetary Programs 0.00 0.00 0.00A. I. Basic Education 54.67 20.43 75.10A.2. Public Health Services 0.00 26.75 26.75A.3. Comprehensive and Integrated Delivery of Social Services 11.00 0.00 11.00B. Systems Improvement and Reform 1.00 0.00 1.00C. Strengthening Transparency and Accountability 0.50 0.00 0.50Total Baseline Cost 67.17 47.18 114.35Physical Contingencies 0.00 0.00 0.00Price Contingencies 0.00 0.00 0.00

Total Project Costs1 67.17 47.18 114.35Front-end fee 1.00 1.00

Total Financing Required 67.17 48.18 115.35

Local Foreign TotalProject Cost By Category US $million US $million US $million

Goods 23.17 47.18 70.35Works 13.72 0.00 13.72Project Grants 26.78 0.00 26.78Technical Assistance 1.50 0.00 1.50Incremental Operating Costs 2.00 0.00 2.00

Total Project Costs' 67.17 47.18 114.35

Front-end fee ^ 1.00 1.00Total Financing Required 67.17 48.18 115.35

Identifiable taxes and duties are 0 (US$m) and the total project eost, net of taxes, is 115.35 (US$m). Therefore, the project cost sharing ratio is 86.69% oftotal project cost net of taxes.

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Annex 4PHILIPPINES: Second Social Expenditure Management Project

Background

The Government of the Philippines spends about 5% of GDP on the social sectors, three quarters of whichis devoted to education. Excluding the Internal Revenue Allocation (IRA) to local governments, and debtservice, social services account for the highest percentage share of national government expenditures at37%, of which education accounts for 28% (2000). Education is mandated to be accorded the highestpriority in the national budget under the Constitution of 1987, which also mandates the establishment andmaintenance of a system of free public education at the elementary and secondary levels. More than 90%of elementary school students, and 70% at the secondary level, are enrolled in public schools. The publicsector has been a relatively small player in tertiary education with more than 75% of students at that levelenrolled in private institutions. However the number of State Universities and Colleges and the resultantshare of higher education in total public education expenditures increased rapidly between 1990-1995, fromabout 14% to 20%. Since 1996, as a result of realigned spending priorities, the share of higher educationhas fallen back to about 15%.

The most significant features of the health system in the Philippines are the devolution of governmenthealth services to local governments under the Local Government Code of 1991; the domination of theprivate funds in total health expenditures (54% against 38% for public in 1997); and the high share ofpersonal health care spending (estimated at 64% of the total in 1997) as opposed to public health care(24%). The public sector plays a dominant role in the provision of primary health care and communityhealth services such as maternal and child care, family planning, control of communicable diseases,implemented by local governments with some technical support and provision of drugs and medicines fromthe national government.

Welfare services for extremely poor and vulnerable groups are provided by the Department of SocialWelfare and Development. However there is no publicly funded social safety net such as unemploymentcompensation or pension programs. Indeed such programs could not rely on government financing if theyare to be sustainable and accessible to all those who needed them.

The Bank's review of social sector expenditures in the aftermath of the East Asian financial crisis revealedthat although the social sectors were relatively protected, cash rationing, and weak budget executionresulted in severe shortages in critical inputs in education and health such as textbooks and TB drugs,signifying an urgent need to improve social expenditure management. DBM meanwhile had intensified itsown Public Expenditure Management Reforms initiative. Various efforts were afoot to improve financialmanagement and procurement. The government was also trying to move towards a Medium TermExpenditure Framework, Sectoral Efficiency and Effectiveness Reviews (SEER), performancemanagement - at the agency level (under the Organizational Performance Indicator Framework), and at theproject level (under Results Monitoring and Evaluation). Efforts are also under way to involve civil societyin the budget process and to obtain feedback from clients about public services.

Linkage to Overall CAS and Sector Strategy

Social sector policies to empower and protect the poor, and improved governance have been identified askey objectives of Bank assistance to the Philippines. In education, the Philippines Education Sector Studynoted deficiencies in the areas of the deployment of teachers, their poor training and preparation;overcrowded primary curriculum and poorly sequenced, rote learning approach to math and science in

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secondary school; textbook provision well below adequate standards; non-use of the vernacular as mediumof instruction in the first three grades of elementary school; poor resource allocation, especially as a resultof the proliferation of SUCs, and inefficient use of resources. The current project will focus on improvingoverall resource use, particularly with reference to teacher deployment, and by improving procurement andfinancial management, while ensuring that key educational inputs, such as textbooks, are protected andtheir quality improved. The Bank's Third Elementary Education Project and a proposed ADB (Higher)Education Sector Reform Project address other areas. The Department of Health has embarked on a majorHealth Sector Reform effort, including a re-engineering of the department, that includes the followingstrategies: 1) reduce fiscal dependence of hospitals; 2) secure funding for public health programs; 3)support local health systems; 4) improve regulation and 5) expand National Health Insurance, especiallyfor the poor. The current project will, besides improving expenditure management, support public healthprograms. A Health Sector Reform Project is currently under development to pilot the whole reformpackage in selected areas.

Rationale for Government Intervention

The rationale for public financing of basic education, besides the constitutional guarantee, includes thefollowing: positive externalities (increases productivity, reduces child mortality, affects fertility, health andnutrition, and schooling of the next generation); market failure (systematic under valuation and investmentof education by the poor, and failure in related markets such as credit) and equity (large body of literatureshowing that basic education mainly benefits the poor who face high relative costs as well as opportunitycosts, all subject to income constraints). Similarly for public health programs, there are externalities(reducing transmission of infectious diseases benefits others besides those affected by the disease), publicgoods (vector control is not excludable) and equity (infectious diseases disproportionately affect the poor)arguments.

Benefit/Impact Analysis

The benefits of basic social services financed under the project are well established and in lieu of a fullcost-benefit analysis, a likely impact or benefits statement is presented. Moreover, based on experience inthe first Social Expenditure Management Project, evidence is presented that direct "savings" or cashbenefits accruing to the government from lower costs due to improved procurement alone would result in ahigh rate of return on investment. The project has a satisfactory internal rate of return even withoutattributing any economic value to deaths averted or disability-adjusted-life-years saved from healthservices, or economic retums and social benefits from education.

Basic Education Services. The efficiency gains that will result from the implementation of the Educationcomponent include: (i) a reduction in the fiscal cost of delivering public education resulting from increasedefficiency in the provision of inputs; (ii) increase in the future earning power of students who received abasic education of higher quality; (b) a reduction in the fiscal cost of delivering public education as the rateof repetition and dropout are reduced. The needs-based deployment of about 25,000 new teacher positions,eliminating vacant positions and/or transferring them from teacher-surplus to teacher shortage schools andre-designation of teachers from non-teaching to teaching roles will significantly improve efficiency andeffectiveness of the $1.8 billion anual DepEd investment in teacher's salaries. The estimated private ratesof return to education in the Philippines show that education has a large, significant effect on wages. Onaverage, an additional year of education increases hourly wage earnings by 12 to 14%. (World Bank,Philippines Poverty Assessment, 2001). There are few estimates of extemality, but strong effects havebeen shown for exarnple, of the impact of education on the production of farmers. Interventions have beenselected keeping in view work previously done in the Philippines to estimate the relative cost-effectiveness

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of various inputs. In a 1996 study by Tan, three school inputs were identified with unambiguously positiveeffects on learning: books, classroom furniture and pre-school programs. Relating the effect of the inputsto their costs suggest that the first two are the most cost-effective options. For each item funded, there willbe significant improvements in quality, timeliness, efficiency and effectiveness. Textbook purchases forinstance, are linked to policies reducing the number of titles procured at the elementary level, adoption ofshort term curriculum changes and a long term plan for curriculum overhaul, coordination of title selectionamong various funders; teacher training in effective use of new materials; reliable information on quantitiesdelivered, book attrition rates and handling, storage and condemnation practices. Funds for repairs andmaintenance, now handled by the regional offices and poorly accounted for, will be released directly toschools.

Public Health Services. (i) Immunization is established and one of the most cost-effective and successfulinterventions to reduce child mortality and morbidity. The costs of the EPI Plus cluster of services inmiddle income countries was estimated to be about $25 per fully immunized child, and benefits, a reductionof about 10% of the disease burden among children under age 5. (World Development Report, 1993).About 2.5 million infants are targeted for full immunization coverage under the project at a total cost ofabout $ 9.6 million (cost of vaccines only, other inputs being provided by the government). As a result ofthe project an additional 125,000 children are expected to be fully immunized. The incidence of measles isexpected to decrease by 50% (from over 7000 to less than 3500 cases). The country is expected to return to"polio-free" certification after the 2001 resurgence of polio cases.

(ii) Tuberculosis (TB) is a major public health problem in the Philippines, ranked 7 among 22 nationsidentified by WHO as countries with a high burden of TB. A DOH TB prevalence survey (1997) alsoshowed significantly higher prevalence amongst the poor. The notification rate is 164 per 100,000population for all cases, and 85.6 for new smear-positive cases. In 2000, a total of 128,495 patients werediagnosed as infected, and received treatment. The disease is estimated to cause at least 25,000 deaths perannum. The introduction of DOTS has significantly improved the quality of the program and in particular,the cure rate. Serious shortages of drugs have however, left the program less efficacious than it could be.The project will ensure a steady supply of quality drugs for short course chemotherapy. This is likely tolead to an increase, initially, in the number of notified cases, as the numbers of those seeking treatmentincrease, before a long term decline in prevalence is established.

Expenditure Management Improvement. Direct (cash) benefits will accrue from lower procurement costs ofall items procured under the project using competitive bidding procedures, which resulted, in SEMP 1, inreductions of 25 to 60% in prices, compared with those paid under past procurement by the Government.The range of textbooks prices fell from P60-80 to P25-36, while the price of desks fell from P750 to P485and that of chairs from P600 to P 240. Using an average savings rate of 40%, the quantity of real resourcespurchasable increases by 67% (1/1-0.4) = 1.67). This two thirds increase in supply amounts to $ 46 million(of an estimated $70 million outlay for textbooks, and drugs), yielding a 46% return on the US$ 100million investment. This is in an underestimate of the total rate of return as it does not include the savingsfrom the systems-wide improvement to procurement processes, nor the returns from investments in basiceducation, public health and social services. Indeed if the prices of all publicly purchased inputs weresimilarly reduced as a result of systemic procurement reform, the return would be enormous.

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Annex 5: Financial Summary

PHILIPPINES: Second Social Expenditure Management Project

Years Ending

| Year 1| Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | Year 7Total FinancingRequiredProject CostsInvestment Costs 11.8 23.4 29.4 30.9 0.0 0.0 0.0

Recurrent Costs 4.8 5.2 5.2 4.6 0.0 0.0 0.0Total Project Costs 16.6 28.6 34.6 35.5 0.0 0.0 0.0

Front-end fee 1.0 0.0 0.0 0.0 0.0 0.0 0.0,Total Financing 17.6 28.6 34.6 35.5 0.0 0.0 0.0

FinancingIBRDIIDA 12.0 24.0 30.0 34.0 0.0 0.0 0.0Government 4.6 4.6 4.6 1.5 0.0 0.0 0.0

Central 0.0 0.0 0.0 0.0 0.0 0.0 0.0Provincial 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 0.0User Fees/Beneficiaries 0.0 0.0 0.0 0.0 0.0 0.0 0.0Total Project Financing 16.6 28.6 34.6 35.5 0.0 0.0 0.0

Main assumptions:

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Annex 6: Procurement and Disbursement ArrangementsPHILIPPINES: Second Social Expenditure Management Project

Procurement

Summary of the Assessment of the Aeencies Procurement Capacity. Overall responsibility for theproject will be vested in the Department of Budget and Management (DBM). Project Implementation Units(PMUs) in the DBM and in each of the line agencies will support and facilitate the procurementimplementation of each component within their departments. The Department of Education (DepEd) willbe responsible for the procurement of textbooks and the discretionary allotment under the school buildingprogram (SBP), while the Department of Public Works and Highways (DPWH) will be responsible for theprocurement of school building under the normal SBP. The Department of Health (DoH) will procurepharmaceuticals and vaccines and supplies, and the Department of Social Welfare and Development(DSWD) will supervise procurement implementation under the Comprehensive Integrated Delivery ofSocial Services (CIDSS).

Assessment of the procurement capacity of the three Social Sector Departments (SSDs), the Department ofEducation, the Department of Social Welfare and Development, and Department of Health as well as theDepartment of Public Works and Highways, which are responsible for the procurement under the project,was carried out in accordance with the Office Memorandum from the Manager of OCSPR, dated August11, 1998. The assessment involved review of the procurement policies and procedures adopted andimplemented in the 3 SSDs, and how they actually implemented procurement for SEMP I and other Bank,and locally funded projects. The Bank's last Country Procurement Assessment Report (CPAR) for thePhilippines was completed in March 1997, and another CPAR is currently being fmalized. The generalfindings of the assessment of DepEd, DSWD, DoH and DPWH conform largely to those of the CPARs.

In general, the laws, rules and regulations relating to procurement being implemented by the three SSDsand DPWH adhere to principle of competition and are intended to promote economy, efficiency andtransparency. However, certain laws, procedures and regulations may not fully support economy, efficiencyand transparency in procurement. Some of them are within the authority of the four departments to amend,and these have been identified with the technical assistance provided for DepEd and DSWD under SEMP1, and will be implemented under SEMP 2. Technical assistance for DoH has also been provided, under aproject preparation grant, to prepare a plan for procurement reform to be implemented under the project.Other legislative and central government interventions are needed to be included as part of long-termprocurement refonns. These are being identified under the CPAR and are likely to be the subject of anupcoming adjustmnent operation. However, procurement under Bank-financed projects is not affectedbecause of waivers of laws, rules and regulations on procurement that form part of the Loan Agreement.The management of the SSDs are addressing the issues of efficiency, economy and transparency inprocurement, as experienced in recent procurement of textbooks and drugs under on-going Bank-financedprojects. However, the agencies need further technical assistance to sustain department-wide procurementreform implementation.

Overall, the capacities of DepEd, and DSWD, mainly as a result of recent reforms instituted, were assessedto be fair for DepEd and good in the case of DSWD. DoH has been assessed to be lacking adequatecapacity to carry out procurement and administer the logistics of drug distribution, in particular, withregard to the Bureau of Food and Drugs (BFAD). DPWH, and in particular the district offices which willimplement the school building program, were rated to be high risk. The main overall risks concern: thequality assurance and regulatory aspect related to product registration and acceptance of drugs (DoH);

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failure to observe changes required to meet NCB procedures in the school building program; tediousacceptance process of textbooks resulting in more than 6 months's delay in the final payment to suppliers(DepEd); high level of political interference in the procurement process (DPWH) and inadequate planningcapacity and staffing (both DoH and DepEd) to ensure efficient and economic procurement and contractadministration.

To mitigate the risks, a series of actions will be undertaken under the project, including the following:institutional capability will be strengthened within the SSDs with technical assistance coveringprocurement, financial management and infornation systems to be on board by January 2003; DoH willimplement procurement of drugs through UN agencies to ensure timely and quality procurement; DepEdwith appropriate technical assistance will complete a study on streamlining and simplifying inspection,acceptance and payment processing of textbooks by March 2003; and DoH and DepEd staff will attendspecialized HD procurement training at AIM by November 2002. Also, DoH will revamp by March 2003the Procurement and Logistics Services (PLS), and DepEd will organize a single procurement unit, tostreamline and improve the procurement functions of the two departments. The DPWH has issued aDepartmental Order (DO) prescribing the procurement procedures to be followed for the SBP, includingappropriately packaging SBP contracts under NCB with national advertising.

Use of Guidelines. Procurement of goods and works, and consultant services funded wholly or partly bythe Bank Loan will be carried out in accordance with Bank procurement guidelines ("Guidelines forProcurement under IBRD Loans and IDA Credits" of January 1995 revised January and August 1996,September 1997 and January 1999, and the "Guidelines for Selection and Employment of Consultants byWorld Bank Borrowers" of January 1997 revised September 1997 and January 1999).

There are several conflicts between the procurement procedures of the Republic of the Philippines andthose which are acceptable to the Bank. A procurement supplemental letter will be issued by the Borrower,on the same date as the signing of the Loan Agreement, detailing procedures under existing national lawsthat are not acceptable to the Bank. The supplemental letter will have among others, the followingprovisions:

NCB opportunities, including those which are invited by local government units, shall be advertised innational newspapers of general circulation, with sufficient time for bidders to prepare offers, which shallnot be less than 30 days;

Price negotiation shall not be allowed. However, in case of budget limitation, adjustment in quantities ofgoods or scope of works may be agreed upon, subject to the concurrence of the Bank;

Bid and performance securities shall be specified in the bidding documents which at the bidder's option,may be in the form of a certified check, a letter of credit, or a bank guarantee from a reputable bank, butexcluding any for of surety bonds; and

Eligibility screening of contractors shall only be undertaken prior to contract award, but not for purposes ofparticipating in the bidding.

Standard Bid Documents. The Bank's Standard Bidding Documents (SBD) of Health Sector Goods(dated May 2000) will be used for the Procurement of Goods (January 1995, revised March 2000, January2001 and March 2002) and the SBD for the Procurement of Works Smaller Contracts (January 1995) forcivil works.

Procurement methods (Table A)

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Procurement under the sub-components of the project will be carried out by the specific SSD-IA followingagreed procedures and using the appropriate Standard Bidding Documents (SBD) of the Bank.Procurement under the project will comprise: (i) textbooks; construction, and repairs and maintenance ofschool buildings for DepEd, (ii) community sub-projects for DSWD, and (iii) drugs, vaccines and suppliesfor DoH.

A. Goods: (US$ 70.35 million). Goods envisioned under this component, include (i) printing and delivery oftextbooks and teacher's manuals, estimated at US$ 43.60 million; and (ii) supply and delivery ofpharmaceuticals and vaccines, and supplies, estimated at US$ 26.75 million.

a) All the goods packages are expected to be large with estimated costs in excess of US$ 200,000. Thesewill be procured following Intemational Competitive Bidding (ICB) using the appropriate Bank's SBDs.Procurement of textbooks using SBD for textbooks estimated at US$ 40.85 million will be implemented byDepEd. Procurement of pharmaceuticals and vaccines using SBD for health sector goods estimated at US$16.14 million will be implemented by DoH. Doll has already procured the first batch requirements ofpharmaceuticals and vaccines estimated at US$ 8.92 million, the Government will advance payments of thepharmaceuticals and vaccines contracts which will be reimbursed under retroactive financing.

b) Subsequent vaccine requirements will be procured through UN Agencies in view of the crucial aspect oftimeliness in the supply of vaccines for a successful immunization program and the unpredictable and longdelays in the procurement process in DOH at this time. Moreover, the lack of timely vaccine procurementin the last two years has created an emergency situation with a resurgence of polio. Expandedimmunization program (EPI) vaccines estimated at US$ 9.60 million will be procured through the UNICEFwhile anti-rabies vaccines estimated at US$ 1.01 million will be procured through the WHO. These twoagencies have proven to be reliable sources of vaccines in the past.

c) New mathematics textbooks supporting a recently revised curriculum are needed at the beginning of theschool year in June 2002. Procurement of math textbooks for 1st to 3rd year high school estimated at US$2.75 million will be done through direct contracting due to urgency. The appraisal mission reviewed thetextbook manuscript for content and was satisfied that the price was comparable with the cost of textbooksrecently procured under ICB, even slightly cheaper, and of similar quality. The Government will advancepayments of the textbooks which will be reimbursed under retroactive financing.

B. Works: (US$ 13.72 million). Works will consists of construction and rehabilitation of school buildings.DPWH will implement the regular school building fund allocated per legislative district while DepEd willimplement the remaining portion of the school building fund allocated at the discretion of the department.No international competitive bidding (ICB) is expected due to the small size and dispersed nature of schoolbuilding contracts. Selection of contractors will be carried out following post qualification proceduresacceptable to the Bank. The following thresholds will apply:

a) Civil works contracts estimated at US$ 50,000 or more equivalent, up to an aggregate amount notexceeding US$ 7.84 million will be procured under National Competitive Bidding (NCB) proceduresacceptable to the Bank. Procurement of school building construction and rehabilitation estimated betweenUS$100,000 and US$ 400,000 per legislative district will be clustered into one contract, and implementedby DPWH district offices. The NCB bidding documents will be in line with the DPWH Department Orderprescribing the procurement procedures for the SBP and will be reviewed by the procurement specialist.

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b) Individual civil works contract estimated to cost less than US $50,000 equivalent, up to an aggregateamount not exceeding US$ 5.89 million will be procured through simplified procurement procedures forsmall works. Contracts will be awarded on the basis of quotations from at least three qualified contractors.Procurement documents earlier agreed under SEMP I will be adapted and used. Participation ofnon-governmental organizations (NGOs) would be acceptable, if they are qualified and have a good trackrecord. The individual school buildings allocated under the discretionary power of DepEd will be difficultto cluster since these will be geographically dispersed.

c) Contracts for different pre-fabricated school building types which are proprietary and obtainable onlyfrom specific sources, and costing less than US$20,000 equivalent per contract, up to an aggregate amountnot to exceed US$ 0.20 million will be procured through direct contracting. DepEd is piloting theimplementation of different types of pre-fabricated school buildings appropriate for different ecologicalzones to explore the feasibility for larger scale implementation at a later date.

C. Project Grants. (US$ 26.78 million). The Project will provide funds to carry out: the repair andmaintenance of school buildings estimated at US$16.78 million under DepEd; and small scale communityprojects of the Comprehensive Integrated Delivery of Social Services (CIDSS) estimated at US$10 millionunder DSWD.

a) Schools will receive funds in the aggregate amount of US$16.78 million, in the form of grants rangingfrom US$200 to a maximum of US$2,000 for repair and maintenance works needed on the basis of anapproved program of works. PTCAs will play a large role in supplementing the meager funds throughprovision of free labor, transport and hauling, tools and equipment, among others. Procurement by theschools involves community participation from the identification of program of works, to implementation ofrepair and maintenance, and acceptance of works. The school will procure local construction materialsneeded for the repair and maintenance. The procurement by the school involves: (i) local shopping forgoods and materials; (ii) direct purchase for goods that are obtainable only from specific sources in thecommunity; and (iii) direct labor hiring from beneficiary communities. Where fornal receipts are notcomnmon, especially in the rural communities, signed proof of purchases and payments between the sellerand buyer, witnessed or ascertained by the school head and PTCA president, may substitute the formaldocuments. The schools will have regular accounting of grant utilization prominently displayed in theschools' bulletin boards, and easily accessible to the community.

b) The CIDSS program of DSWD in the aggregate amount of US$10.04 million provides small grants tocommunities for projects to meet the minimum basic needs. The individual grants to communities will notexceed US$10,000, and will finance projects identified by organized communities and approved by DSWD.Communities provide labor and DSWD provides materials and simple equipment to carry out the project.Examples of projects include small water supply systems, feeder roads, footpaths, day care centers,communal toilets, and income generation programs. The Peoples Organization (POs) will procure itemssuch as local construction materials, handicraft raw materials, livestocks, seedlings, and other livelihooditems under approved proposals. The procurement by the PO involves: (i) local shopping for goods andmaterials; (ii) direct purchase for goods that are obtainable from only from specific sources in thecommunity; and (iii) direct labor hiring from beneficiary communities. Where formal receipts are notcommon, especially in the rural communities, signed proof of purchases and payments between the sellerand buyer, witnessed or ascertain by the PO president or auditor, may substitute the formal documents. ThePOs will have permanent bulletin boards displayed to the communities showing grant utilization, updatedregularly.

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D. Incremental Operating Cost (US$ 2.00 million). Support for project management, operations,monitoring and supervision activities for DepEd, DOH, DSWD, and DBM (including travel, subsistenceallowances, provisions of consumable supplies and materials, but excluding staff salaries) transportation,training, repairs and maintenance will be provided in accordance with existing Govenmment prescribedlimits and procedures acceptable to the Bank.

Table A: Project Costs by Procurement Arrangements(US$ million equivalent)

Procurement MethodExpenditure Category ICB NCB Other N.B.F. Total Cost

1. Works 0.00 7.84 5.88 0.00 13.72

(0.00) (5.88) (4.41) (0.00) (10.29)2. Goods 56.99 13.36 0.00 70.35

(53.48) 0 (12.81) (0.00) (66.29)3. Services 0.00 0.00 26.78 0.00 26.78Project Grants (0.00) (0.00) (21.42) (0.00) (21.42)

4. 0.00 0.00 2.00 0.00 2.00Incremental Operating Cost (0.00) (0.00) (1.00) (0.00) (1.00)5. Front-end fee 0.00 0.00 0.00 0.00 0.00

(0.00) (0.00) (0.00) (0.00) (0.00)

6. Technical Assistance 0.00 1.50 1.50(0.00) (0.00) 0 (0.00) (0.00)

Total 56.99 7.84 48.02 1.50 114.35(53.48) (5.88) (39.64) (0.00) (99.00)

"Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies.2'Includes civil works and goods to be procured through small works, community participation, direct

contracting, UN agency procurement, and incremental operating costs.

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Table Al: Consultant Selection Arrangements (optional)(US$ million equivalent)

Selection MethodConsultant Services

Expenditure Category QCBS QBS SFB LCS CQ Other N.B.F. Total CostA. Firms 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)B. Individuals 0.00 0.00 0.00 0.00 0.00 0.00 1.50 1.50

(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)Total 0.00 0.00 0.00 0.00 0.00 0.00 1.50 1.50

(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)

1\ Including contingencies

Note: QCBS = Quality- and Cost-Based SelectionQBS = Quality-based SelectionSFB = Selection under a Fixed BudgetLCS = Least-Cost SelectionCQ = Selection Based on Consultants' QualificationsOther = Selection of individual consultants (per Section V of Consultants Guidelines),Commercial Practices, etc.N.B.F. = Not Bank-financedFigures in parenthesis are the amounts to be financed by the Bank Loan.

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Prior review thresholds (Table B)4. Prior review. The procedures set forth in Paragraph 2 of Appendix I to the Guidelines shall apply to:

a) For DPWH, the first three civil works contract procured through NCB procedures, and all thosecontracts equal to or greater than US$300,000, and for DepEd, the first three contracts equal to or greaterthan $20,000 in each year to be procured according to "small works" procedures, and all contractsprocured through direct contracting; b) All goods contracts awarded through ICB, all goods contractsprocured through UN agencies, and are goods contract procured through direct contracting.

5. Post review. With respect to each contract not govemed by paragraph 4 above, the procedures set forthin Paragraph 4 of Appendix 1 to the Guidelines shall apply. Ratio shall be between 1:4 to 1:1 0 contracts

(for works) and 1:20 (for project grants).

6. Domestic Preference. For ICB procurement, goods or textbooks or drugs/vaccines manufactured in theterritory of the Borrower may be granted a margin of preference in accordance with and subject to theprovisions of Paragraphs 2.54 and 2.55 of the Guidelines and Annex 2 thereto.

Table B: Thresholds for Procurement Methods and Prior Review'

Contract Value. Contracts Subject toThreshold Procurement Prior Review

ExpQnditure Categoiy (US$ thousands) Method (US$ millions)1. Works US$50,000 and above NCB First three contracts, and

all those equal to or greaterthan US$300,000(US$2.6 million)

Less than US$50,000 Small works First three contracts each(US$0.36 million)

year estimated to costUS$20,000 or more

Less than US$20,000 Direct Contracting All (US$0.2 million)

2. Goods US$200,000 and above ICB All (US$ 56.99)

Procurement through UNAgencies All (US$10.61)

Direct Contracting All (US$ 2.75)

3. Services

Total value of contracts subject to prior review: US$73.31 million

Overall Procurement Risk Assessment

High

Frequency of procurement supervision missions proposed: One every 6 months (includes special

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procurement supervision for post-review/audits)which will be carried out by procurement proficient staff from the Bank's office in the Philippines, an

independent consultant.

'Thresholds generally differ by country and project. Consult OD 11.04 "Review of ProcurementDocumentation" and contact the Regional Procurement Adviser for guidance.

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Disbursement

Allocation of loan proceeds (Table C)Disbursement of the proceeds of the loan will be made against the expenditure categories shown in TableC.

Table C: Allocation of Loan Proceeds

Expenditure Category Amount .n USSmillion Financing PercentageWorks 9.70 75%Goods 63.00 100% of foreign expenditures, 100% of

local expenditures (ex-factory cost), and80% of local expenditures for other items

procured locallySchool Repairs and Maintenance Grants 12.30 80% of Grant amount disbursed

CIDSS Grants 8.00 80% of Grant amount disbursedIncremental Operating Costs 1.00 50%Unallocated 5.00

Total Project Costs 99.00Front-end fee 1.00

Total 100.00

A financial management assessment of the three participating agencies; Education (DEPED), SocialWelfare (DSWD) and Health (DOH) was caried out in accordance with the Bank's guidelines for"Assessment of Financial Management Arrangements in World Bank Financed Projects" dated June 30,2001. A summary of the findings and recommendations of the assessment is given below. A separatereport of the assessment is available in project files.

Country IssuesA Country Financial Accountability Assessment (CFAA) was completed recently and was discussed withthe Government. The main issues identified were the change over to a new government accounting system(NGAS) (implemented on January 1, 2002) and the risks involved in implementing the new system in about2000 accounting units, the computerization of the new accounting system, development of accountingpolicy and procedures manuals and training of staff. These issues are being addressed as part ofimplementation of the CFAA recommendations.

The Bank has also proposed changes to current fund flow procedures of Bank funds. The recommendationnow pending with the DOF is the remittance of Bank funds directly to the Special Account of projects. TheBSP and the BTR through which funds are currently being coursed now, and DBM where the Notice ofCash Allocation (NCA) is issued before funds are released to projects, will just receive payment advice andreport on disbursements to satisfy their requirements for monitoring and documentation. This procedure isexpected to speed up disbursement of Bank funds.

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Risk AnalysisThe risk that the funds will not be efficiently and effectively used for the attainment of project objectives ismoderate. The inherent risks of the project consist of the slow release of funds to implementing agenciesunder the present budgetary funds flow system, risk of delay in reporting of financials due to the transitionto the new government accounting system (NGAS), and the use of the old chart of accounts in the 2003budget preparation. The control risks on the project FM are the non-computerized accounting systems ofthe three implementing agencies which regularly process voluminous transactions, the weak internal controlon the disbursements of DOH covering expenditures amounting to P300, 000 and below and the absence ofa tight linkage in the physical progress and financial status of project components and their quarterlyvariance analysis. Measures are currently being put in place to mitigate these risks under the financialimprovement program of the agencies under SEMP 1.

Fund FlowThe loan funds for the project will flow via a combination of direct payments to suppliers and contractors,Letters of Credit to be covered by Special Commitment or reimbursement of expenditures pre-financed bythe Government. As the appropriations are approved as nationally funded programs, DBM will providebudget authorizations (allotment) and notice of cash allocation (NCA) to the agencies through the GOPbudget process. Funds advanced through NCAs will flow through Bureau of Treasury to the three agenciesand DBM will claim reimbursement of these pre-financed expenditures from the loan account bysubmitting Statement of Expenditures. In case of large contractual payments, for example for procurementof text books, drugs or civil work contracts, DBM may request the Bank for direct payments by submissionof Withdrawal Applications with full documentation. A Special Account shall be maintained for financingsmall central level expenditures.

Accounting Policies and ProceduresThe Government has introduced a new accounting system (NGAS) starting January 2002. The new systemis installed in all three agencies. The NGAS system was reviewed during the recently completed CFAAwhich concluded that it conforms with generally accepted accounting principles. The project financedexpenditures will be recorded in the general ledger of each agency following accounting policies andprocedures of NGAS. As Bank financed programs are pre-identified, the account coding system will alloweach agency to identify separately the expenditures eligible for Bank financing. Each agency will preparefinancial statements for reporting purposes. The financial statements will be based on informationextracted from its general ledgers. A consolidated project financial statement will be prepared by DBM forreporting to the Bank.

The accounting systerm is manual as computerized systems are still under development. The projectagencies will install interim arrangements to computerize transaction processing using a spread sheetpackage developed under SEMP I technical assistance. Training of agency central and regional staff oncomputerized accounting will also continue under SEMP 2. These actions and other financial managementtraining provided under SEMP I are expected to facilitate improved financial management of SEMP 2project.

Accounting and Reporting of small grants financed under the ProjectThe Project will finance small grants for the schools repair and maintenance program and grants tocommunities under the CIDSS program. The mission has reviewed the operational and financial manualfor the CIDSS program and found it acceptable. DepEd has also prepared an operational manual for theschool repairs and maintenance program. Grants for both programs will be approved by the authorizingbodies in accordance with the agreed operations manuals. The disbursement will be made directly to thebeneficiaries of the grants in accordance with the disbursement procedures in the operations manuals. The

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Barik will reimburse grants on submission of statement of expenditures.

Organization and StaffingThe financial management organization is generally standard in all three agencies with separate divisionsresponsible for budget, accounting, payroll, systems and cash disbursement. An Assistant Secretary forFinancial Services heads the financial management function of each agency. The regional offices of theagencies are also organized similar to central offices with separation of budget, accounting and cashierfunctions. All agencies have an adequate number of financial staff. A number one priority in each agencyis training of staff in modem financial management techniques which is being addressed under project TA.

AuditInternal audit is not a well established function in GOP although they are authorized under the InternalAudit Code. However, COA resident auditors carry out a continuous audit in most agencies. The CFAAhas recommended that a review of COA audit and the need of Departmental management of internal auditfunction be carried out as rationalization of auditing.

The Commission on Audit is audit institution mandated by the Philippines constitution to audit the books ofaccounts of Government departments. For this project, COA shall audit each agency and the consolidatedproject financial statements in accordance with international auditing standards. The audit report shallprovide separate opinions on the consolidated project financial statements, the operation of the specialaccount and the withdrawals from the loan account based on statement of expenditures.

Reporting and MonitoringImplementing Agencies whose disbursements are made in the regions or in smaller subdivisions thereofprepare their SOEs at the office where the expenditure originated. These are consolidated in the regionsand at the central office of each agency together with the other centrally disbursed expenditures. TheImplementing Agencies subsequently submit these to DBM for consolidation and preparation of statementof expenditures.

Each agency shall be required to prepare Financial Monitoring Reports (FMRs) which will allowmonitoring of the Bank-financed programs. The Financial Monitoring Reports shall include (a) Statementof Sources and Uses of Funds; (b) Statement of Uses of Funds by Project Activity; (c) Physical ProgressReport; and (d) Procurement Report. The formats of the Reports were discussed and agreed with therespective agencies. The reports (a to c) will be produced quarterly and submitted to DBM within 30 daysafter the end of the quarter. The Procurement Report will be submitted semi-annually. DBM shall beresponsible for consolidating the reports and submitting the Consolidated Financial Monitoring Reportswithin 45 days after the end of the quarter.

ConclusionThe financial management arrangements for the SEMP 2 project meet the Bank's minimum requirements.The on-going SEMP I TA for financial management improvement and the installation of NGAS underSEMP 2 will help improve and strengthen the system further.

Use of statements of expenditures (SOEs):

Withdrawal applications will be supported by SOEs for (i) civil works under contracts costing less than$300,000 equivalent each; (ii) goods under contracts costing less than $200,000 each, excluding vaccinesand pharmaceuticals; (iii) grants; (iv) incremental operating costs. All other withdrawal applications willbe supported by full documentation and signed contracts.

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Special account:A Special Account (SA) shall be maintained by the DBM PMO. The authorized allocation shall beUS$2,000,000. Disbursement for the Project shall be under the Traditional SOE based method with optionto convert to a periodic disbursement method using FMRs. In any case, FMRs shall be required to besubmitted by the Project according to a format agreed with the Bank for monitoring purposes.

The following FMRs shall be submitted:

1. Financial Report: Statement of Sources and Uses of Funds - Using the SEMP I format of thePhysical and Financial Status Report but should include Current and Cumulative column. In additions,Receipts should be added before the use of funds and Fund balance should be added at the end. Asummary sheet should be included showing accomplishment by component. This will be submitted on aquarterly basis.

2. Physical Progress Report: Use the SEMP I Physical and Financial Status Report which hasbreakdown by component and sub-component The financial column must be linked to the FinancialReports in term of the figures reflected. This will be submitted on a quarterly basis.

3. Procurement Report - SEMP I Annual Procurement Plan with addition of forecast and status interms of stage and amount. This will be submitted on a semi-annual basis.

The agreed FMR report formats are included in the Project Implementation Manual. No special system isneeded to produce the above reports.

Supervision Plan

Objective and Nature: The FM supervision of the project shall be periodically done to ensure that loanproceeds are used only for the purposes for which it was granted, with due regard to economy, efficiency,and the achievement of the project's objectives. This normally addresses the following: (a) the mitigationor compensating procedures that have been undertaken by the project on the risks and weaknesses identifiedduring the assessment or in the previous supervision; (b) ensuring that the FM system agreed is beingmaintained or further strengthened; (c) that the FMRs are being submitted on a timely basis and thatdisbursements are on track; and (d) that there is adequate and timely budget appropriation & releases.

Coverage: The supervision should address the total project financial management and may include thefollowing: (a) Maintenance of an adequate FM system including implementation of the NGAS; (b) FundsFlow/cash planning; (c) test review of SOEs; (d) timely reporting; (e) discussions with auditor on progressof audit, findings or on familiarity with the requirements of the Bank.

Frequency and Duration: The project will be supervised periodically, at least every 6 months. By thenature of the work required under Bank's policy and depending on the state of the project's financialmanagement and the status of the FM action plans, supervision may be from a minimum of I week to amaximum of 2 weeks. However, 2 to 3 days visit could be done on a more frequent basis addressinglimited FM concerns.

Staffing: The supervision will be done by a FMS, FMO or an FM Consultant with supervision of an FMS.

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Annex 7: Project Processing SchedulePHILIPPINES: Second Social Expenditure Management Project

Project Schedule Planned ActualTime taken to prepare the project (months) 12First Bank mission (identification) 06/15/2000 03/05/2001Appraisal mission departure 03/08/2002 03/08/2002Negotiations 04/09/2002 04/24/2002Planned Date of Effectiveness 09/01/2002

Prepared by:

Department of Budget and Management, with Departments of Education; Health; Social Welfare andDevelopment; and Public Works and Highways

Preparation assistance:

Hugh C.A. Somerset - Teacher DeploymentNigel Wakeham - School Building ComponentKurt Moses - MISDiana Newton - TextbooksDr. Dongil Ahn (TB Specialist, WHO, Manila)Dr. Pieter Van Maaren (TB Specialist, WHO, Manila)Dr. Marajke Becx-Bleumink (TB Specialist)Ian Walker - Public Expenditure Tracking SurveyPaul Clark -Financial ManagementRosario Manasan - Public Expenditure Tracking Survey

Bank staff who worked on the project included:

Name SpecialityJayshree Balachander Task Team Leader

Dominic Reyes Aumentado Procurement/Civil Works

May Olalia Operations

Karin Nordlander Legal

Wijaya Wikrema Finanacial Management

Yolanda Taylor Procurement

Sabrina Terry Team Assistant

Christian A. Rey ProcurementlOperations

Bhuvan Bhatnagar Social Development

Alfonso de Guzman TextbooksLisa Bhansali LegalTeresa Ho Health

Hung Kim Phung DisbursementCynthia Manalastas Team AssistantParmesh Shah Social Development

Lingzhi Xu Procurement

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Annex 8: Documents in the Project File*

PHILIPPINES: Second Social Expenditure Management Project

A. Project Implementation Plan

DBM: SEMP 2 Project Implementation Manual

B. Bank Staff Assessments

Aumentado, Dominic- DepEd Procurement Capacity Assessment, March 2002Rey, Christian - Country Procurement Assessment Report (Draft, March 2002)Taylor, Yolanda - DOH Procurement Capacity Assessment, March 2002Wickrema, Wijaya - Financial Capacity Assessment, March 2002Wickrema, Wijaya - Country Financial Assessment (Draft, March 2002)

C. Other

Cabangal, Norman. Procurement Assessment Report on the Philippine Education Department. (Preparedfor CPAR). Jan 2002Capuno, Joseph. An Analysis of Health Care Financing and Service Delivery in the Philippines underDecentralization (prepared for PER), Dec 2001Government of the Philippines, DepEd. Evaluation of the School-Based Repair and Maintenance Scheme.July 2001Manasan, Rosario. Education Financing and Service Delivery. (Prepared for PER).Dec. 2001.Moses, Kurt. A Strategy for Education Management Information Systems. April 2002Newton, Diana. Strategic Planning for Educational Materials in the Philippines, May 2001Reinikka, Ritva and Svensson, Jakob. Assessing Frontline Service DeliverySomerset, Antony. Teacher Deployment in the Philippines, Jan 2002Wakeham, Nigel. SEMP 2 Civil Works - Implementation Specialist's Report, October 2001WHO Review of the Drug Regulatory System: Philippines, August 2001

*Including electronic files

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Annex 9: Statement of Loans and Credits

PHILIPPINES: Second Social Expenditure Management Project02-Apr-2002

Difference between expectedand actual

Original Amount In US$ Millions disbursements

Project ID FY Purpose IBRD IDA GEF Cancel. Undisb. Orig Frm RevdP069491 2002 PH-LGU URBAN WATER & SAN APL2 30.00 0.00 0.00 0.00 27.88 0.00 0.00

P057731 2001 Metro Manila Urban Transport 60.00 0.00 0.00 0.00 57.60 -1.27 0.00

P066069 2001 LAND ADMIN & MANAGEMENT 4.79 0.00 0.00 0.00 4.08 0.79 0.00

P066509 2001 MMURTRIP-Bicycde Nwk 0.00 0.00 1.30 0.00 1.25 0.06 0.00

P058842 2000 MINDANAO RURAL DEV 27.50 0.00 0.00 0.00 23.72 10.22 000

P059933 2000 COASTAL MARINE 0.00 0.00 1.25 0.00 1.12 1.35 0.00

P065113 2000 PH-SOCIAL EXPENDITURE MGMT 100.00 0.00 000 0.00 58.63 58.48 0o00

P039019 2000 PH-FIrst Natl Rds Improve. 150.00 0.00 0.00 0.00 127.88 37.38 0.00

P039022 1999 PHIL-LGU URBAN WATER & SANITATION PROJ 23.30 0.00 0.00 0.00 18.04 16.34 0.00

P057598 1999 RURAL FINANCE III 150.00 0.00 0.00 0.00 108.91 81.41 0.00

P048588 1999 PHIL-LGU FINANCE AND DEVELOPMENT PROJECT 100.00 0.00 0.00 40.00 56.14 21.14 0.00

P004566 1998 PH-EARLY CHILD DEV. 19.00 0.00 0.00 0.00 15.19 10.19 0.00

P004576 1998 PHIL-WATER DISTRICTS DEVELOPMENT PROJECT 56.80 0.00 0.00 0.00 32.89 48.44 17.24

P004595 1998 COMMUNITY BASED RESO 50.00 0.00 0.00 10.00 32.97 27.32 0.00

P051386 1998 SZOPAD SOCIAL FUND 10.00 0.00 0.00 0.00 0.33 0.33 0.00

P037079 1997 AGRARIAN REFORM COMM 50.00 0.00 0.00 0.00 6.96 -3.24 0.00

P040981 1997 PH-SECOND SUBIC BAY 60.00 0.00 0.00 23.85 21.02 44.86 21.02

P004613 1997 WATER RESOURCES DEVE 58.00 0.00 0.00 7.27 28.32 32.59 1.94

P004602 1997 PH-THIRD ELEMENTARY EDUCATION 113.40 0.00 0.00 20.10 72.68 78.03 29.29

P004611 1996 PHIL-MANILA SEWERAGE II 57.00 0.00 0.00 9.00 42.00 51.00 21.11

P004571 1996 TRANS GRID REINFORCE 250.00 0.00 0.00 45.52 80.Q2 110.84 61.67

P004614 1998 RURAL FINANCE II 150.00 0.00 0.00 0.00 2.64 2.64 0.00

P004567 1995 PH-WOMENS HEALTH & SAFE MOTHERHOOD 18.00 0.00 0.00 4.30 3.11 7.41 3.11

P004403 1994 CONS. OF PRIORITY PR 0.00 0.00 00 2.D00 2.96 6.92 0.00

Total: 1537.79 0.00 2.55 162.03 826.91 643.21 155.37

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PHILIPPINESSTATEMENT OF IFC's

Held and Disbursed PortfolioJan - 2002

In Millions US Dollars

Committed DisbursedIFC IFC

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic1980/82/89/90/94/95 AACT 0.00 1.70 0.00 0.00 0.00 1.70 0.00 0.002001 APW Trade 0.00 1.00 0.00 0.00 0.00 1.00 0.00 0.001996 All Asia Growth 0.00 4.00 0.00 0.00 0.00 4.00 0.00 0.001996 All Asia Manager 0.00 0.04 0.00 0.00 0.00 0.04 0.00 0.001996 AllAsiaVen Mgmt 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.002000 Asian Hospital 7.00 0.00 0.00 0.00 4.00 0.00 0.00 0.001997 BataanP/E 29.82 0.00 10.00 116.55 29.82 0.00 10.00 116.551998 DrysdaleFood 13.46 0.00 0.00 10.00 11.66 0.00 0.00 8.802001 Filinvest 22.00 0.00 0.00 0.00 16.00 0.00 0.00 0.001979/90 General Milling 0.00 0.65 0.00 0.00 0.00 0.65 0.00 0.001998 H&Q PV m 0.00 5.76 0.00 0.00 0.00 5.76 0.00 0.001989 H&QPV-I 0.00 0.61 0.00 0.00 0.00 0.61 0.00 0.001993 H&QPV-l 0.00 1.43 0.00 0.00 0.00 1.43 0.00 0.002000 MFI MEP 0.00 0.12 0.00 0.00 0.00 0.12 0.00 0.002001 MNTC 46.00 0.00 0.00 0.00 0.00 0.00 0.00 0.001970/72/00 Mariwasa 9.43 0.00 3.00 0.00 9.43 0.00 3.00 0.001993/94 Mindanao Power 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.002001 PIATCO 50.00 0.00 0.00 50.00 0.00 0.00 0.00 0.001993 Pagbilao 30.00 10.00 0.00 3.00 30.00 10.00 0.00 3.001992 Pilipinas Shell 0.00 1.56 0.00 0.00 0.00 1.56 0.00 0.002000 PlantersBank 15.00 0.00 8.71 0.00 15.00 0.00 8.71 0.001998 Pryce Gases 13.00 0.00 0.00 5.00 13.00 0.00 0.00 5.002000 SME.com 0.00 0.21 0.00 0.00 0.00 0.12 0.00 0.002000 STRADCOM 12.00 0.00 8.00 0.00 0.10 0.00 8.00 0.001995 Sual Power 27.19 17.50 0.00 140.05 27.19 17.50 0.00 140.051999 UPPC 20.00 0.00 10.00 0.00 20.00 0.00 10.00 0.001992 Union Cement 0.00 5.63 0.00 0.00 0.00 5.63 0.00 0.001994 Walden Mgmnt 0.00 0.05 0.00 0.00 0.00 0.05 0.00 0.001994 Walden Ventures 0.00 1.59 0.00 0.00 0.00 1.59 0.00 0.00

Total Portfolio: 294.90 51.86 39.71 324.60 176.20 51.77 39.71 273.40

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic2001 AEI 1.00 0.00 0.00 0.002000 Asian Hospital 0.00 0.00 0.00 5.002000 LTO Project 0.00 0.00 0.00 20.002001 PEDF 4.50 0.00 0.00 0.00

Total Pending Commitment: 5.50 0.00 0.00 25.00

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Annex 10: Country at a GlancePHILIPPINES: Second Social Expenditure Management Project

Philippines at a glance 4/30/02

Eat Lower-POVERTY and SOCIAL Asia & middle.

PhUippines PeriJ Incone Devatopmwnt dimond'2000Population, mid-year (mDlbns) 75.6 1,853 2,046 Life expectancyG1NI percapila(Atlas metiod USS) 1,040 1,060 1,140GNI (Atls met", USS bilUlon) 78.8 1,964 2,327

Avexug annual Growth, 1994-00

Populetion (M) 2.1 1.1 1.0 G GLabor foce (%) 2.6 1A 1.3 GNI Goms7

per pniwyMost reent estimaet _at er voaviabbb, 1994-00) capita enroment

Pverty (% of popuLton heiow nralnrf povw rty Ine) 37 .Urban populaon (S%tfft W(polaouledn) 59 35 42Ufe expectsincy t birthLvea) 69 69 69iant noxtstty (er 1,000l Ike brths) 31 35 32Child malnutItI on (% df chdren under 5) 30 13 11 Acces to Impmved water sourceAccess to an Improved water source (% dPoplpatfun) 87 75 80IWleracy (%, otprlstaon aeM 15+) 5 . 14 15Gross pmary enmrment (% ofadoo-agepopuLatb,) 117 119 114 Ph/7ippines

Male .. 121 116 Lower-nlddleincrome groupFemale .. 121 114

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

10o 1990 1999 2000Economic ra7tiosGDP (USSibilons) 32.5 44.3 762 74.7

Gros dromeclnvteslnt/GDP 29.1 24.2 18.4 17.8Exports o1 goods and servces/GDP 23.6 27.5 51.0 56.3 TraeGross domestic avtng/GDP 24.2 16.4 19.2 24.0Gmss national savngs/GODP 19.5 28.0 30.3

Currnt account balano/GDP -5.9 -5.8 10.0 125 Domestc InvestmentIntrest payment/GODP 1.8 3.5 2.7 3.3 eavIngsTotal dbtVGDP 53.6 69.0 69.6 720Total debt servIce/exports 26.6 27.0 14.0 12.0Present value of debUVGP . .. 85.1 .Pr nt vue of dbexpa rt ,. 111.0 ,

Indebtedness19uo.o 109rS00 1909 2000S 2000-04

(aye"7 annual gn owfh)GOP 11.0 33 3 4 4.0 4.2 _ PhFlpplnetGOP per captt7 -1.2 1.0 I.4 2.1 2 2 Lower-vn/*Deoroe groupExports of goods and send-es 3.5 7.3 3.6 17.7 5.6

STRUCTURE of the ECONOMY1960 1990 1999 2W00 Growth of Invastnt and GDP 1%)

(t of GDP)AgrIculture 25.1 21.9 17.1 15.9Industry 36.8 34.5 30.6 31.1 1S;

ManufactulnD 25.7 24.8 21.6 22.6 o TServices 38.1 43.6 522 5Z,9 95 g 05

Private consumpton 66.7 71.5 68.0 63.2 .20oGeneral govemrnment cornumption 9.1 10.1 13.1 12.6 - GDI -_-GDPImports of goods and services 28.5 33.3 51.3 50.2

(average annua/ growll) 1 -90( 1990-00 1999 2000 Growth of exports and Imports I%)

Agrhutture 1.0 1.6 6.5 3.3 30Industry -0.9 32 0.9 3.9 Is

Manucurnt 0.2 3.0 1.6 5.6 ServIces 2.8 4.0 4.0 4A4 |

5 f1== 7

Prvate ornsumptcn 2.2 3.9 0-3 -21 aGeneral Dovemment consumption 0.6 3A 6.7 -1.1 01

Gross domesUc Investment -2.1 3.1 -2.0 z3 - E * hImports of goods and servIes 3.4 7.7 -2.6 4.0

Note: 2000 data are prelimnary estimates.

The dianonds show four key Indlcators In the country (in bold) cornpared wilt is Incomeroup average. f data are missina, fu diamond witbe lnomnpbto.Exports ofgo,s and semices is In local currncy unite.

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Philippines

PRICES and GOVERNMENT FINANCE1980 190 19m 2000 in I%)

Domesdc prices(1 change)Consumer prices .. 142 8.7 4.3 _Implidt GDP deflator 14.3 13.0 8.0 6.7

Govemment finance(X of GDP, Indudes cun ent grants)Current revenue .. 18.8 16.1 15.8 95 9s 97 58 oCurent budget balance .. 0.3 0.3 -0.7 GDP defbtar CPIOverall aurplus/defict .. 3.5 -3.8 .4.1

TRADE

(US$ myilIons) 198s 1900 1999 2000 Export and Import levls (USS mitl.)

Total exports (fob) .. 8,186 34,210 37.295 40o000n.a. .

n.a .000.Manufactures .. 5,708 31,097 33,394 _* **

Total Imports (df) .. 12208 36278 36,102 . * _ _ _Food .. 858 1.982 1.256 10oo0Fuel and energy .. 1.842 3,395 4,524Capital goods .. 3.122 14,555 15,011 o

94 a Ia 57 98 Ia 0Export prIce Index (1995=1009) ..Import price Index (1995-100) .. .. .. .. *Export *mpbropTerms ot trade (19950100) ..

BALANCE of PAYMENTS

(US$ mllions) logo 1W 19 2000 Currant account balance to GOP (%)Exports of goods and services 7,238 11,430 39.012 41,473 15sImports of goods and servAces 9.147 13.987 35287 37,884 IResource balance -1,911 -2,537 3,704 3,848 0

Net Income .439 .744 4,104 3,788 5*Net current transfers 447 714 481 430 o :iI :

Current account balance -1,903 -2,587 7,847 9,349 es* 7 e Ia I Ia

Flnandna Items (net) 2.794 2,474 -2,889 -9,845Changes In net reserves -891 93 4.941 420 ro

Memo:Reserves Inctuding gold (US$miliots) . Z008 14,987 14,910Conversion rate (DEC, locailUS$) 7.5 24.3 39.1 44.2

EXTERNAL DEBT and RESOURCE FLOWS19o0 1990 1990 2000

(US$ mi#itons) Compostdon of 2000 debt (USS mill.)Total debt outstandIng and dlsbumeed 17,417 30,580 53,0D0 50,100

IBRD 928 3,943 4,040 3,827 G A 3,627IDA 34 101 208 207 - -:5.4 ::237

C: 2,032Total debt service 2,183 3,590 8,400 8,700 xD: 3.281

IBRD 108 597 841 572IDA 0 2 4 5 _ -

Composton of net resource flowsOffidal grants 59 362 170 E: 12,3e2Offidal creditors 367 935 -130 -215Private credltora 948 109 3.920 2,138Foreign direct Investment -108 530 1.427 1.584 F: 24.416 Portfolio equlty 0 0 422 45

World Bank programCommitments 695 1,008 208 255 A- IBO E -B00tntDIsbursements 230 507 184 162 8- IDA 0- Othe rmnrdiletrel F. PrvatePrincIpal repayments 33 302 387 352 C * IMF G . ShortternNet fkws 197 206 -223 -190Interest payments 73 297 258 225Nettransrerm 124 -91 -481 -415

Development Economics 4/30102

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t9

MAP SECTION

IBRD 27408R2

I Ii- 'i' * D;)''^

' j

4-~= - : ; d's_i __

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