6-Al S S bC~-* rit.Documat of

The World BankZ Z 77 - P/tt

FOR OMCLAL USE ONLY

Rqirt No. P-5452-PH

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

AND THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

IN AN AMOUNT EQUIVALENT TO US$158 MILLION

AND A PROPOSED CREDIT

OF SDR 50 MILLION (US$66 MILLION EQUIVALENT)

TO THE

REPUBLIC OF THE PHILIPPINES

FOR AN

ENVIRONMENT AND NATURAL RESOURCES SECTOR ADJUSTMENT PROGRAM

MAY 29, 1991

thr docil dbieas a Ite cted dWibution and may be usisosd whopients ody i the peatormati ontheir offida duie Its conteTs way not otherwbe be dbdksed without World Bank authorization

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CURRENCY EQUIVALENTS

Appraisal (May 1990)US$1.0 = P21 P1.0 US$0.047

Current (May 1991)US$1.0 - P28 P1.0 - US$0.036

FISCAL YEAR

January 1 to December 31

ACRONYMS

A&D - Alienable and DisposableADB - Asian Development BankBFAR - Bureau of Fisheries and Aquatic Resources (DA)CARP - Comprehensive Agrarian Reform ProgramCBRM - Community-Based Resource ManagementCFLA - Community Forest Lease AgreementCFSA - Community Forest Stewardship AgreementCG - Consultative GroupCSC - Certificate of Stewardship ContractCVRP - Central Visayas Regional ProjectDA - Department of AgricultureDAR - Department of Agrarian ReformDENR - Department of Environment and Natural ResourcesDOD - Department of DefenseEFF - Extended Fund FacilityffARM - Philippines Forestry, Fisheries and Agricultural

Resource Management (Study)GDP - Gross Domestic ProductGEF - Global Environment FundGET - Global Environment Trust FundCOP - jovernment of the PhilippinesICB - International Competitive BiddingIFC - International Finance CorporationIMF - International Monetary FundIPAS - Integrated Protected Areas SystemISF - Integrated Social ForestryLCB - Local Competitive BiddingMLT - Medium-Long TermNEDA - National Economic Development AuthorityNGO - Non-government OrganizationOECF - Overseas Economic Cooperation FundO&M - Operations and MaintenanceOPSF - Oil Price Stabilization FundPSSD - Philippine Strategy for Sustainable DevelopmentRRDP - Rainfed Resources Development ProjectSOE - Statement of ExpenditureTLA - Timber Licensing AgreementTPSA - Timber Production Sharing AgreementUNDP - United Nations Development ProgramUSAID - United States Agency for International DevelopmentWID - Women in Development

FOR OFFICIAL USE ONLY

UZLZZZM

NVIRONNENT AD NATURAL RSUERCES OSECTR ADJUSTNENT pROGRAM

Table of Contents

Pag2 No.

LOAN AND CREDIT SUZMOARY ... .................................... i

I. COgNTY POLICIES AND AM GROUP ASSISTCE ST ..........T.. 1

A. Introduction . ............................................. 1B. Recent Economic Developments ............................... 2C. Medium-Term Strategic Framework ............................ 2D. Bank Group Assistance Strategy ............................. 4E. Aid Coordination and External Financing .................... 11F. IFC Operations ........................................... 11G. Summary .................................................,.11

II. THE ENVIRONMENT AND NATURAL RESOURCES SECR .................. 12

A. Overview ......... 12B. Rural Natural Resources Management Issues .................. 13C. Institutional Issues ........................................ 16

III. THE SETOAL ADJUSTMENT PROGRAM .............................. 19

A. Perspective and Objectives ......... ...................... 19B. The Program .............................................. 21

IV. THE PROPOSED PROJECT .......................................... 28

V. REC.3D.ATION ............................................... 40

Annex A. Key Economic IndicatorsAnnex B. Statement of Bank Loans and IDA CreditsAnnex C. Policy Agenda Action MatrixAnnex D. Supplementary Project Data SheetAnnex E. Description of Global Environmental Facility ComponentAnnex F. Estimated Costs and FinancingAnnex G. Allocation of Loan and Credit ProceedsAnnex H. Letter of Sectoral Policy

Hans: IBRD 22867, 22869

This report is based on the findings of an appraisal mission to the Philip-pines in May 1990. Mission members included T. Wiens, W. Magrath, J. Smyle,R. Sedjo, and R. Aquino. Task Manager for this project was T. Wiens, andreviewers included A. Contreras and R. Burcroff. The project was cleared byD. M. Dowsett-Coirolo, Division Chief and G. Kaji, Dbe'ctor.

This document has a restricted distribution and may be used by rfoipe.tis only in the performanceI of their offlcial duties. Its entents may not otherwise he dLsclosed without World Rank authorimtion.

THE PHILIPPINES

ENVIRONMENT AND NATURAL RESOURCES SECTOR ADJUSTMENT PROGRAM

LoAn and Credit SUmmary

Borrower: Republic of the Philippines.

Amount: Loan: US$158 million equivalent.

Credit: SDR 50 million (US$66 million equivalent).

Terms: Loan: 20 years, including 5 years of grace, at the standardvariable interest rate.

Credit: Standard, with 35 years maturity.

Descrigtion: The project would be a hybrid operation, consisting of aquick-disbursing sector adjustment program based on policyand institutional reforms, and an investment project insupport of institutional strengthening and regional communi-ty-based resource management activities. The objectives ofthe sector adiustment Drogram are to preserve what remainsof the biological diversity of the Philippines; where theseresources have been degraded or destroyed, to reestablishthem wherever practicable and financeable; and elsewhere tointroduce sustainable land use practices. The means tothese objectives, as pursued in the program of legislation,administrative action, and studies, are primarily to: (a)determine what areas of the Philippines must be preservedundisturbed and introduce an effective management syitem;(b) impose user fees for public resources which discouragerent-seeking behavior; (c) improve enforcement of loggingregulations; (d) provide secure tenure rights to users inreturn for sustainable resource use; (e) provide extensionservices to upland populations; and (f) establish mechanismsfor support of community-based resource management andlivelihood projects.

The investment component, implemented over a seven-yearperiod, would finance: (a) the design of an IntegratedProtected Areas System, including a suitable legislativeframework; (b) program support for management of ten priori-ty protected areas; (c) improved monitoring of loggingoperations and enforcement of forestry laws and regulationsthrough provision of equipment, training and technicalassistance to selected DENR regional and local offices; and(d) development in four regions of the capacity of localgovernments and line agencies to generate and service small-scale community-based resource management and livelihoodprojects in watershed areas, combining community organizingand pre-cooperatives development; improvements in tenure and

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resource management; introduction of sustainable means oflivelihood; and improvement of infrastructure and services.

Benefits: The loan and credit would support the efforts of the Govern-ment to introduce sustainable development policies andinstitutional reform. As a result, incentives and opportu.nities for depletion and degradation of tropical forest anderosion of hilly areas would be reduced; incentives andresources for introduction of sustainable upland land usesand protection of natural forests and biodiversity would beexpanded; a sound institutional basis for the preservationof the biological diversity of the Philippines would be inplace; local governments and field staff of line agencies inabout 48 municipalities, 26 provinces, and four regionswould have the training, experience, and organizationalframework to deliver support to rural communities in theuplands; and the livelihood and tenure status of about20,800 families from among the poorest segments of thePhilippines population would be directly enhanced. Improvedpublic recovery of rents would provide the means of financ-ing long-term environmental protection.

Risks: The risks arise mainly from possible delays, inadequateimplementation, or non-sustainability. The principal con-cern is that legislative action could be unduly delayed,prove deficient when completed, or be ineffectively imple-mented. However, key legislative drafts have been submittedto Congress, and the most critical has already passed boththe House and Senate in satisfactory form, .o that earlypassage of a reconciled bill is very likely. Government'scommitment to carry out the needed reforms is very high, anda significant number of prior actions have already beentaken. The implementation of the investment component isalso subject to risks due to institutional weaknesses andpossible reluctance of beneficiaries to adopt recommendedpractices. The emphasis of project design on long-terminstitutional strengthening and incorporation of lessonsfrom prior projects will mitigate these risks.

Financing Plan:

--- (US$ million) ---

IBRD 26.0 132.0 158.0IDA (US$ equivalent) 0.0 66.0 66.0OECF 0.0 100.0 100.0GEF 10.5 9.5 20.0Japan-WB TA Grant 3.3 1.3 4.6NDF 0.0 1.0 1.0Gov't and beneficiaries 19.4 0.0 19.4

309.8 369.O

Apuraisal Report: Not applicable.

Maps: IBRD 22867, 22869

REPORT AND RECO1MENDATION OF THE PRESIDENTOF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND

THE INTERNATIONAL DEVELOPMENT ASSOCIATIONTO THE EXECUTIVE DIRECTORS

ON A PROPOSED LOAN AND CREDIT TO THEREPUBLIC OF THE PHILIPPINES

FOR AN ENVIRONMENT AND NATURAL RESOURCES SECTOR ADJUSTMENT PROGRAH

I submit the following report and recommendation on a proposedloan for the equivalent of US$158 million and a proposed IDA credit of SDR 50million (US$66 million equivalent) to the Republic of the Philippines to supportan Environment and Natural Resources Sector Adjustment Program. The loanwould have a term of 20 years, including five years of grace, at the Bank'sstandard variable interest rate, and the IDA credit would be on standard terms,with 35 years maturity. Part I of this report assesses the medium-termstrategic framework and Bank/IDA country assistance strategy. Part II dis-cusses sectoral issues, and Part III presents the sector adjustment program.

I. COUNTRY POLICIES AND BA1N GROUP ASSISTANCE STRATEGY

A. Introduction

1.1 As a result of stabilization and adjustment measures undertaken inthe latter half of the 1980s, the Philippines economy registered a remarkablerecovery during 1987-89. The fall of the Marcos administration and the returnto democracy under a new administration led by President Corazon Aquino sinceMarch 1986 generated significant international goodwill for the country and asizeable increase in official development assistance. As a result of thisassistance and the Government's economic adjustment efforts (at both themacroeconomic and sectoral reform levels), economic growth averaged about 61per annum in 1987-89 and key macroeconomic balances improved (the fiscaldeficit and current account showed substantial improvements in 1987-88).However, several underlying structural problems were not solved; these includ-ed a still high level of public sector deficit, low levels of savings andinvestment, a resultant large external and internal public debt, an overvaluedexchange rate, and high levels of poverty and unemployment. By the end of1989, the current account deficit had widened to 3.31 of GDP, compared to 11in 1988, and the consolidated public sector deficit stood at 41 of GDP, com-pared to 3.1X the year before (Annex A). The Philippines economy was thus ina vulnerable position when it was hit in 1990 by a series of exogenous shocks,most notably the Gulf crisis.

1.2 The updated Country Brief was distributed on January 4, 1991. AReport entitled Country Economic Memorandum: Issues in Adjustment and Compet-itiveness was distributed on October 31, 1990. In addition, a Memorandum onIDA Eligibility of the Philigpines was distributed on April 12, 1991(IDA/SecM91-124).

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B. Recent Economic Developments

1.3 Despite the deterioration ef the fiscal situation and the weaken-ing of the current account, economic growth continued in 1989 (GDP grew by5.6X). Private investment registered reasonably strong gains and publicinvestment in infrastructure -- although rising -- was insufficient to offsetthe deterioration of the capital stock, itself caused by inadequate operationsand maintenance (O&M) systems. Consequently, transportation and energy infra-structure, as well as the services sector, came under increasing pressure,resulting in breakdowns in transport deliveries and power supply. During 1990a series of exogenous shocks and setbacks weakened the fragile economic recov-ery that had begun in 1987. Policy slippages compounded the situation, and aslowdown in growth resulted. GDP grew by only 2.51 in 1990 (which impliesstagnant per capita income) and inflation accelerated to 14X, compared toaverage real growth of 6X and inflation of 10 per annum in 1987-89.

1.4 The downturn began in early 1990 with a prolonged drought thatstretched through the first half of the year. The drought curtailed agricul-tural production and, as a result of inadequate water resources, serious powershortages soon followed. In July 1990, a devastating earthquake caused severephysical and human loss: nearly 1,600 persons were killed and assets valued atabout 1 of GDP were destroyed. The earthquake was soon followed by anotherequally strong shock--the Gulf Crisis, which placed severe pressures on thebalance of payments. In 1990 alone, the cost of oil imports rose by US$400million and workers' remittances declined by US$50 million. All of these fac-tors undermined confidence that the economic recovery could be sustained, andboth manufacturing output and private investment faltered as a result.

1.5 These exogenous shocks were initially compounded by hesitant domes-tic policy. In reaction to developments in September, the Government raiseddomestic oil prices by an average 331, which was insufficient to prevent thedeficit in the Oil Price Stabilization Fund from growing. Meanwhile, Govern-ment expenditures continued to grow, especially capital expenditures as aresult of a pick-up in project implementation, but 'rre not compensated byincreased revenue mobilization. Monetary policy showed large fluctuations,particularly in the uecond and third quarters, in response to fiscal pres-sures. By October 1990, the program supported by the IMF's Extended FundFacility (EFF) was substantially off track.

C. Medium-Term Strategic Framework

1.6 The Government's economic program in the medium term consists ofthree main parts: (a) a stabilization program; (b) concerted efforts to deepenthe economic adjustment program and thereby to achieve sustainable growth; and(c) programs to alleviate poverty.

1.7 Stabilization. In November 1990, the Government took severalactions that were most urgently needed: it devalued the exchange rate, result-ing in a nominal depreciation in the value of the Peso to the US Dollar ofabout 251 in 1990, thus eliminating the real appreciation that had occurred in1988-89; it convened a "Budget Summit" between the Executive and Legislativebranches, which resulted in an agreement to limit the 1991 budget in nominalterms to the 1990 levels (a decline in real terms); it raised oil prices by anadditional 33% in December, which stemmed the erosion of the OPSF deficit; it

adopted an import surcharge of 91 (as a temporary measure to increase fiscalrevenues); and it raised the Central Bank's resprve requirements from 211 to25X.

1.8 As a next major step, in January-February 1991 the Gavernmentformulated and agreed with the IMF on a Stabilization Program, aimed atimproving the fiscal balance and controlling the money supply. The program issupported by a Standby Arrangement which was approved by the laP's Board onFebruary 20, 1991. Principal objectives of the stabilization program are: (a)to reduce the fiscal deficit from 5.21 of GNP in 1990 to 3.51 GNP at end-1991and 2.51 by end-1992; (b) to reduce the annual rate of inflation from 141 inDecember 1990 to around 91 by the end of 1991 and to 71 by end-1992; (c) toreduce the current account deficit from 5.81 of GNP in 1990 to 4.51 In 1991and to below 41 in 1992; (d) to reconstitute official reserves to the equiva-lent of 2-1/2 months of imports by end-1992; and (e) to promote a gradualrecovery of growth from 1-21 in 1991 to 3-4X in 1992. To achieve these objec-tives, the Government undertook to reduce the public sector borrowing require-ments; to limit the supply of base money; to place a ceiling on short-termexternal debt; to eliminate the OPSF deficit by August 1991; and to increaseinternational reserves. Attainment of these objectives is expected to lay thebasis for restoration of fiscal health and external viability. GDP growth isprojected to increase gradually to 5-6Z per annum, the investment savings gapto narrow, and the current account and external debt position to improve asshown in Table 1 below.

Tabt 1: StERY INDICATS(In Percentages)

190iaL...... .. raif Projected1980 1986 1989 1990 1991 1992 1993 1994 1995

Relt GDP Growth Rate 5.3 1.4 5.6 2.6 2.5 3.9 5.0 5.3 5.3Real per Capita Growth RateTotal Coneuvption 1.6 -1.0 4.8 0.8 -2.7 -1.0 0.6 2.0 3.0

Share of GDP:Gross Investoent 31.4 12.1 18.6 18.1 18.9 20.9 22.6 23.3 23.3DCesstic Savings 23.1 16.2 16.0 13.7 16.6 19.4 21.3 21.7 21.7current Account Batance -5.4 3.1 -3.3 -5.? -4.0 -2.9 -2.5 -2.7 -2.9

Total Debt OutstandingDisbursed 49.5 92.2 65.1 65.6 73.3 73.3 69.6 68.9 66.2

Growth Rate:GDP Deflator 15.6 0.9 10.6 14.2 12.0 10.0 10.0 10.0 10.0

1.9 AdJustment and Growth. At the Philippines Consultative Group (CG)meeting in Hong Kong in February 1991, the Government elaborated on its stabi-lization program and articulated the need to deepen its adjustment efforts.Foreign donors expressed strong support for the economic policies now in placeand stressed the cr'ical need for the Government to adhere to the stabiliza-tion program. Donors agreed to provide about US$3.3 billion of assistance in1991, about the same level as was pledged during the previous CG meeting heldin Tokyo in July 1989.

1.10 The Government's objective for the medium term is to restoresustainable economic growth, led principally by the private sector, through a

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labor-intensive, export-led strategy, while attempting to reduce high levelsof poverty through income generation and targeted programs. In order to meetthe growth objective, a substantial upgrading and renewal of the capital stockin Infrastructure is required. At the same time, the Government recognizesthat efficiency improvements across the economy are needed urgently. TheGovernment also plans to make a substantial impact in improving the economicconditions and opportunities of the poor in both the urban areas and the manysmall towns and villages that dot the Philippines archipelago. Nearly half ofall families, or some 30 million persons, live below the poverty line in thePhilippines and while there has been some progress in recent years, this maybe reversed if slow economic growth persists. Thus, a vital part of theGovernment's medium-term strategy--on both p-oductivlty and equity grounds--is to restore economic growth to at least 5-6X per annum. This would allowa reasonable rate of per capita income growth.

1.11 Pgv_MrX Alleviatign. The Government is deeply concerned aboutincome distribution issues, to which it has directed special efforts in thepast, such as agrarian reform, vocational training, and health and nutritionprograms. Poverty in the Philippines is concentrated in the rural areas -- itis estimated that 571 of the population lived below the poverty line in 1985,and since then there has been only modest improvement. Overall, approximatelyseven million persons were added to the ranks of the poor between 1979 and thepresent. Pockets of poverty and deprivation are also growing in the congestedand deteriorating urban areas: expenditures on rural infrastructure and serv-ices have declined steadily since the 1970s, and agricultural productivity instaple crops is low. An essential element of the Government's strategy in-volves developing rural projects complemented by initiatives in environmentalmanagement, which have a significant poverty impact. Emphasis is being placedon rural infrastructure development; irrigation investment; agriculturalresearch and revitalization of the national extension service; credit, infra-structure and extension for poor upland communities; rehabilitation of therural credit system nationally; and development of the small coconut farmsubsector.

D. Bank Group Assistance Strategy

1.12 The Bank Group's assistance strategy in the Philippines is tosupport the medium-term framework that is being put in place, first throughassistance in macroeconomic policy reforms and, second, through support oflasting sectoral reform programs. The economic and political sustainabilityof this medium-term strategy depends upon actions regarding a number of struc-tural issues facing the country. At the minimum, the following elements areneeded in order to achieve these goals: firm macroeconomic management;increased domestic resource mobilization; increased efficiency in publicinvestment; increased efficiency in private investment through improvements inthe regulatory framework; and continued efforts to reduce the debt burden,with a view to regaining creditworthiness.

1.13 Over the long term, in order to reduce poverty and ensure sus-tainability of economic and social progress, the reform and adjustment programshould include: widespread provision of family planning services; continuedefforts to protect the natural resource base; a concerted attack on inequali-ty through a strengthened land reform program; and targeted interventions insupplying social services.

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1.14 Key constraints to future growth and development remain and needto be tackled. These are:

(a) low levels of domestic resource mobilization (low savingsand inadequate tax effort), exacerbated by the large exter-nal debt and adverse balance of trade developments;

(b) limitations in basic infrastructure, particularly in genera-tion and distribution, transport (roads and ports), andtelecommunications, as well as inadequate maintenance ofexisting capital stock;

(c) institutional weakness in the public sector, over-centrali-zation, inadequate guidelines and procedures for administra-tion delegation; and

(d) continued high population growth (2.3X), which results inover 750,000 new entrants to the labor force annually andposes an enormous challenge to job creation.

1.15 The outlook for achieving sustainable growth and confrontingsocial inequality hinges upon the ability of the society to develop a consen-sus regarding the many challenges facing the economy. The past five years haveseen major changes in the functioning of the executive-legislative-judicialinstitutions. While this broad participation has not been an easy task, ithas become a central feature to developing this consensus. As the countryprepares for national elections in mid-1992, progress on the economic reformagenda is likely to remain a dominant issue.

1.16 Past Assistance. As of March 31, 1991, the Philippines had re-ceived 124 Bank loans (of which two were on Third Window terms) amounting toUS$6,536.2 million and six IDA credits amounting to US$105 million (Annex B).The last IDA credit was approved on June 27, 1979. IFC's total gross invest-ments as of March 31, 1991, amounted to US$417.6 million and investments heldby IFC (outstanding) totalled US$172.6 million. The share of the Bank Groupin total MLT debt disbursed and outstanding is currently about 15X, and itsshare in total debt service (after rescheduling) is about 20X. These ratiosare expected to decline gradually, while net flows are projected to remainpositive in 1991-95.

1.17 Bank lending to the Philippines grew from an annual average ofabout US$90 million a year in the early 1970s to about US$420 million andseven loans in FY8O-84. However, the lending program decreased sharply inFY85 and FY86, because of the limited scope for policy-based or project lend-ing amidst the political and economic turmoil that prevailed. Economic recov-ery and reorientation of Government policies after March 1986 facilitated areturn to a normal volume of Bank lending. In FY87, lending totalled US$332million, mainly accounted for by the Economic Recovery Loan. In FY88, lendingincreased to US$483.5 million, and remained at about the same level in FY89(US$495.6 million). In that year, a project for health development expandedthe Bank coverage of social sector issues. In FY90, lending increased toUS$941.8 million, partly on account of the Debt Management Loan of US$200million, which supplemented the Bank's regular assistance program for that

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year. Other loans supported energy, municipal development, industrial invest-ment, urban water supply and small coconut farms development.

1.18 The Bank Group has financed projects in most sectors of theeconomy, with particular emphasis on agriculture, which accounted for almostone-third of total Bank/IDA lending prior to 1985. Lending for SECALs, ener-gy, water supply and sewerage, and social sectors have been growing in impor-tance, as can be seen in their shares in Table 2 below.

Tebt* 2: OISTRIUUTION Of 80i LENDING BY SECTOR, FY83-90(us$ sit tlams an percentage)

Suetor At I

Agriculture 250.0 2? 45.0 5 121.8 8(2) ()(1)

Induetry/DFI 4 - - - 65.0 4(1) (1)

Power/Energy 73.5 8 100 10 455.5 32(3) (1) (2)

frwrwt 102 11 114 11 -T1) (2)

UrbanwVter Suppty & 168.1 18 229 23 225 16Sewerage (4) (2) (4)

EdcRationVHeatth/Popul 24.4 3 - e 70.1 5(1) (1)

SALs/SECALs/ 302.3 33 500 51 500 35Debt Reduction (1) (2) (2)

Total 0 vI 143v*4 100

NOTE: The rmfer of projects is shown in parentheses.

1.19 The Dolicy-based loans, which began as early as 1980 with structuraladjustment lending and continued with a policy loan for agriculture inputs,have been particularly important in helping to launch the economic recovery,to tackle the heavy external debt burden, to help reform public sector enter-prises and to assist the reform process in the energy and financial sectors.The objectives of these loans are summarized in Table 3.

1.20 Current and Future Assistance. In FY91 to date, five loans havesupported elementary education, communal irrigation, emergency earthquakereconstruction, industrial restructuring and cottage enterprises.

1.21 The Bank Group's assistance strategy for future lending will becentered upon six areas:

(a) DeeRening the Adjustment Program: One or two operations tostrengthen the structural adjustment that was initiated inthe 1980's will be pursued. The next stage is to take theprogram several steps further by focussing on reforms intrade policy and removal of remaining anti-export bias.Attention will also be paid to the debt overhang and measuresto reduce the debt burden;

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Teble 3: BANK GROUP ADJUSTMENT LENDING SINCE 1983

Loan vate Amount POticy Focus(USS N)

SAL-1 1980 200 Tariff reform, begin removal of quantitative restrictions onimports and Improve export frsnework.

SAL-11 1983 302 Restructured investment incentives, reduced sales nd eXcisetaxes on imports.

Agriculturat 1984 150 Removal of price and other controls on agricultural outputsInputs and ir4uts and break up of the Sugar and Coconut nnopoltles.

Economic 1986 300 Reforms of pubtic financial institutfons, trade restrictions.Recovery public Loan investment, and tax system.

Reform Program 1987 200 Restructured controls on public corporations, mplementedGoverrnent Corps. program of privatization and ctosure for over 200 corporations

Financial Sector 1989 300 Reformed Central Sank regulation and control of prfvate banksimproved legal system, conpetition ong banks, depositor pro-protection, interest rates.

Debt Management 1989 200 Supported buyback of USS1.33 bittion of external debtLoan at a cost of US665 million; iprovement In debt menagement

system.

(b) Furthering the Role of the Private Sector: Building onthe progress achieved under the Reform of Government Corpo-rations Loan, the Bank Group will continue to assist theGovernment's efforts to privatize large public enterprises.These efforts will encompass rationalization of investmentincentives, simplification of the regulatory framework andother measures to improve private Investment;

(c) Exnanding and URgrading the Infrastructure: Projects intelephone system expansion, geothermal development, ruralelectrification, irrigation operations and maintenance, andmunicipal development (water supply and sewerage) areplanned;

(d) DeveloRing Human Resources: Projects for vocationaltraining, and expansion of engineering and science educationare planned;

(e) Environment and Natural Resource Management: The Environ-ment and Natural Resource Adjustment Program will have amajor impact on the management of scarce natural resourcesin the country and will also help to combat poverty in theoutlying regions and preserve biodiversity. Other initia-tives on the environment may also be undertaken, such assolid waste disposal systems; and

(f) Alleviating Poverty: Projects for rural infrastructureand provision of rural finance are under preparation. Aproject on family planning and population might be consid-ered, focussing on the health aspects, if the Bank Groupconsiders that there is a firm enough base to move ahead inthis area. The Bank Group's efforts to support poverty

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alleviation will continue to be broad-based through bothself-standing operations and appropriate targeting withinthe framework of other sectoral projects.

1.22 The overall level and pace of Bank assistance to the Philippineswill depend upon a stable situation existing and the success of policy makersin the Philippines to strengthen the macroeconomic framework and to deepen theadjustment program. In order to support economic growth, the Bank plans toconcentrate on investment lending in infrastructure -- power and transport --and human resource development. Policy-based lending would focus on reformsof the regulatory framework and private sector development. A lending levelof US$500-$600 million per year is planned for such normal operations. Addi-tional lending for debt reduction and for long-term sustainability issues,such as poverty and population, will be considered. Regarding IDA, on thebasis of the Philippines' limiced creditworthiness, its low level of percapita income (which has declined to US$645), and its high incidence of pover-ty, the Management has determined that the country is eligible for IDA re-sources, given that the macroeconomic framework has now been strengthened.

1.23 At the same time, unless the Philippines can work itself out ofits heavy external debt burden and mobilize additional resources, its develop-ment program will not be sustainable. Among East Asian countries, thePhilippines is the only one with such a formidable constraint. To date thePhilippines has pursued a debt strategy built around preserving its goodrelationships with all creditors, while at the same time taking steps toimprove its debt structure. To this end, the Government has obtained resched-uling of Paris Club and commercial debt, and has retired part of its commer-cial debt through buybacks and debt-equity swaps. The Bank's role andits dialogue with the Government has been particularly useful with respect todebt management and the mobilization of external resources, most of whichcomes from official sources. Indeed, Bank advice and support on debtissues will be critical in the long process of reestablishing commercialcreditworthiness, which is likely to take at least five years, defined as thecountry's being able to attract new borrowings on a voluntary basis fromcommercial sources.

1.24 Since the country assistance strategy hinges largely on two funda-mental aspects -- growth and poverty alleviation -- the strategies in thesetwo vital areas are elaborated below.

1.25 SuDoorting Growth. The past assistance strategy encouraged ef-forts to engender growth and ensure the distribution of related benefits, asreflected in the active lending program throughout the 1970s. The effective-ness of Bank assistance was, however, constrained by overall policy distor-tions and the subsequent political upheaval. In recent years, the need toencourage efficiency has become paramount. The Bank has focussed upon:supporting macroeconomic reforms (domestic resource mobilization, exportcompetitiveness, financial sector reform); correcting price signals and remov-ing trade distortions; rationalizing the investment regime; supporting theGovernment's Privatization Program and assisting the reform of public enter-prises. Clearly, if the Philippines is to attract a greater share of thesubstantial flow of foreign investment funds now moving into neighboring EastAsian countries, it needs to offer a comparable policy environment to privateinvestors.

1.26 Regarding the grivate sector, the Bank will continue to follow amulti-faceted approach designed to improve the operating environment. Criti-cal to private sector performance will be continued movement by Governmenttoward further deregulation of economic activity. There has been majorprogress toward deregulation, and simplification of procedures in iny sec-tors, including agriculture, finance, trade, power generation and telecommuni-cations, within the frameworks established under a series of Bank-supportedprograms. Howev3r, there remains considerable scope for further action andderegulation in the critical areas of transport (both road and maritime), andindustry.

1.27 Regarding the public sector, it is essential to increase thecapacity of the infrastructure and services sectors to supply inputs requiredby private enterprises. Again, the need to obtain efficiency improvements inthe public sector will continue to guide the assistance strategy. Attentionwill be given to improving the level, content, and process for allocatingpublic investment and expenditures. Studies undertaken under the Debt Manage-ment Loan will help to provide the basis for future action on O&H expendi-tures.

1.28 The Bank will continue to encourage efforts to improve domesticresource mobilization. Support will take the form of technical advice (ontaxation), through economic and sector work and policy support, as well asthrough investment vehicles to improve cost recovery and rationalize user-charges in major sectors. There is considerable scope, and great need, forincreased internal cash generation from public entities. Another area withpotential is local revenue generation: a study of the fiscal aspects of localgovernment is underway, associated with a review of the Government's plans fordecentralization.

1.29 Poverty Alleviation. The Bank's assistance strategy in thepoverty area draws from the Government's program (para 1.11), as well as aBank study of the poverty issue in the Philippines, which was distributed tothe Board (Report No. 7144-PH, dated October 17, 1988). The proposed agendahas three main elements: sustainable rural development (incorporating bothland reform and addressing the linkages between poverty and environmentaldegradation); family planning; and expanded, rationalized, social sectorsupport. In all three areas there will be a need to involve and supportprivate voluntary and non-governmental organizations: the Philippines isrelatively well-endowed with such institutions, and government policy isconducive to their integration in service delivery. In mid-1990 the Govern-ment launched a poverty alleviation program, PRO-POOR, comprising line agencyprograms targeted for the poorest municipalities in the country; the publicworks infrastructure component is the most significant in terms of expendi-tures.

1.30 All of these efforts will be supportive of, but not dependent on,Government's implementation of the Comprehensive Agrarian Reform Program(CARP), on which progress has been slow, due to lack of financial resources,inadequate infrastructure, and weak institutional systems. The Governmentfeels that to redistribute land without adequate services only builds frustra-tion. Thus, the importance of rural infrastructure projects is again under-scored.

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1.31 Family Planning Program. The current level of population growthis straining the country's already over-burdened natural resource base and theGovernment's ability to mobilize adequate resources for the provision ofsocial services. Vigorous implementation of a broad-ranging strategy isneeded to provide family planning education and services as well as improvedmaternal and child care. The Government has taken initial steps in thisdirection and the Bank is assisting with technical advice.

1.32 Human Resource Development. Per capita expenditures on socialservices have declined in real terms from the levels attained in the 1970s.Despite expanded access to education, quality has fallen. There are alsosubstantial unmet needs in vocational and technical training, as well asinformal training; improved skills in science and engineering are needed tosupport industrialization and technology transfer, and to strengthen thenational technical capacity for environmental management. In health and nutri-tion, standards of service delivery have similarly declined, with a consequentrise in disease. The absolute number of persons lacking access to clean waterand sanitation facilities has increased substantially over the last decade.In all these areas the poor suffer a disproportionate share of the decline.The Bank's strategy is to address the problems at two levels: by targetingincreased expenditures to critical areas (primary education, vocational train-ing, urban health, nutrition, basic urban infrastructure), and by encouragingmore efficient use of the resources now allocated through rationalization andreorientation of policies. Improving access of the poor to adequate curativecare should be a key element in the strategy. The Bank's human resourcestrategy will involve major changes in the areas of health and education, andstructured support of the already large, but inefficient, private sector rolein service provision.

1.33 Regarding Women in Development (WID), a Bank assessment on thePhilippines was completed in 1989. While the indicators showed that womenhave reasonably good access to education, employment opportunities and serv-ices, the main areas identified for improvement involve maternal health andfamily planning services. In addition to the family planning initiatives, theBank will continue to include WID components in suitable projects aimed atimproving the economic conditions of the urban and rural poor.

1.34 Economic and Sector Work. As mentioned above, the Bank is engagedin a number of economic and sector studies which will help to underpin themacroeconomic dialogue and to define development issues and future lendingstrategies in key sectors. The last economic report focussed on issues ofcompetitiveness, in the context of macroeconomic policy and industry and tredeissues. The next economic report will focus on domestic resource mobilizationand management, including budget systems, and selected public and privateinvestment issues. Reports on poverty alleviation, natural resource manage-ment and the environment, energy, financial and education sectors have beencompleted over the past two years. Their findings formed the basis for cur-rent lending operations in those areas. Other economic and sector work inprogress, or planned, includes studies of the capital markets (including thesocial security system and pension funds), regionalization and decentraliza-tion, employment (focussing especially on the informal sector), family plan-ning, and irrigated agriculture programs.

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1.35 Coordination with the IMF. There i8 extensive coordination be-tween the Bank and the IMF, both in developing and in monitoring progressunder the economic reform program. Staff frequently cross-partieipate in eachother's missions. Various Fund agreements have supported programs initiatedby the Bank, including reforms in the public, corporate, and financial sec-tors, and improvements in public investment and expenditure allocations.Likewise, Bank operations have supported reforms which have been primarilyunder the guidance of the Fund, including tax and exchange rate reform. Someissues, such as trade liberalization and the removal of marketing monopoliesin agriculture, have been jointly developed and supported. The work on capi-tal markets is being closely coordinated, so as to mesh with the objectives ofthe stabilization program.

E. Aid Coordination and External Financing

1.36 Successful implementation of the country assistance strategy willrequire continued close coordination with the donor community. The Bankis well placed to continue this role, through its Chairmanship of the Philip-pines CG. At the CG meeting held in Tokyo in July 1989, the MultilateralAssistance Initiative (MAI) for the Philippines was launched. The February1991 CG meeting held in Hong Kong reviewed progress under the MAI andconcluded that it was generally good. The next CG meeting is tentativelyscheduled for early 1992.

1.37 The support of the international community will continue to becritical for the Philippines to meet its external financing requirements. Theunidentified financing needs for the 1991-92 period have been estimated inexcess of US$2 billion under the conservative assumptions that GDP growth willaverage 2.5X over the rext two years and that two crucial variables, oilprices and international interest rates, will remain about at their currentlevel. The support pledged at the recent CG is expected to contribute sub-stantially towards meeting the Philippines external financing needs. Inaddition, continuing good relations with bilateral and commercial creditorsare expected to contribute to this end by means of further debt reschedulingand restructuring, as well as provision of new loans.

F. IFC Operations

1.38 The size of IFC's portfolio was mentioned in para. 1.16. IFC'sassistance revolves around promoting the development of competitive upstreamindustries to help broaden the country's industrial base. New investmentopportunities in the Philippines are emerging as firms currently based inKorea, Taiwan and Japan look offshore for lower-cost production sites. IFC isassisting this process by liaising between foreign sponsors and potentiallysuitable local firms. Changes in trade, investment and financial policies arealso opening up new opportunities to local business, and here too IFC isfacilitating new ventures through its extensive overseas contacts. In addi-tion, new vehicles for promoting long-term financing, such as guarantee facil-ities for local currency loans, are being developed by IFC.

G. SUmmam=

1.39 In the past five years, the Philippines has experienced economicrecovery, strong growth and, more recently, some setbacks that resulted in a

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slowdown of growth. However, starting in November 1990, the Government hastaken actions and formulated a stabilization program that offers the prospectof improved fiscal health and a return of external viability. TheGovernment's medium-term framework consists of the stabilization program, adeepening of the adjustment program, and poverty alleviation measures. Ifsustainable growth is to be restored, it is essential for the Government topursue further economic reforms that lead to a substantial improvement inmacroeconomic balances and in efficiencies across sectors. On the assumptionthat macroeconomic performance continues to be satisfactory, a level of Banklending of around US$500-600 million per year is planned, aside from specialinitiatives in such areas as debt reduction, environment, population andpoverty (para. 1.22). Criteria for judging performance will include progressunder the stabilization program (para. 1.8) and progress in deepening theadjustment effort (paras. 1.21-28).

1.40 The Bank's activity will focus on supporting both macroeco-nomic and sectoral reform programs. Investment lending to stimulate growththrough financing of key projects in the energy, transport, infrastructure,agriculture and social sectors will feature in the Bank's program, aswill operations to support the private sector through appropriately pricedfunds for investment and through actions to rationalize the trade and invest-ment regimes facing potential investors. Special emphasis will be given topoverty alleviation initiatives through developing the rural infrastructureand through support for such activities as family planning. The latter wouldalso have a beneficial impact on women in development. Regarding the externalfinancing outlook, it is likely to take five years at least, before the Phil-ippines will be able to attract voluntary new borrowings from commercialsources, so that continued work on debt reduction measures or instruments willcontinue to be an important area of Bank involvement.

1.41 The Environment and Natural Resources Sector Adjustment Programpresented below is directed towards protection of the natural resource base,but would also primarily affect inequality and poverty, mobilize additionaltax revenues, and improve private investment efficiency by reducing incentivesto extract economic rent from exploitation of public resources.

II. THE ENVIRONMENT AND NATURAL RESOURCE SECTOR

A. Overve

2.1 Economic "sectors" are usually defined as a set of distinguisha-ble institutions contributing to the economic product of society. The envi-ronment and natural resource "sector" is better defined as a set of processesof enhancement, depletion or degradation of the stock of social capital whicheither foster or threaten the sustainability of economic development. In thePhilippines, certain processes have been judged of greatest economic signifi-cance to the economy, where policy changes and other interventions couldachieve significant enhancement of natural resource management and thus make asubstantial contribution to the country's prospects for sustainable develop-ment. These processes include the disappearance or degradation of forests,which once covered nearly one-half of the Philippine land area; the erosionand changes in hydrological regimes which result from the conversion of forestto other land uses, notably shifting cultivation and pasture; the conversion

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of mangrove swamps to fishponds; degradation of coral reefs; and depletion ofnearshore fisheries through overfishing and destructive techniques. Theseproblems are linked in three ways: (a) all involve use of common accessresources which in theory are publicly-owned and managed, but in practice havebeen subject to nearly unrestrained private exploitation; (b) all involve thelivelihood of a large, impoverished, and largely neglected segment of therural population, including upland farmers and small-scale coastal fishermen;and (c) all are related to each other through the physical or biological linksof common ecosystems.

2.2 Other processes, such as depletion of mineral resources and air andwater pollution, exist in the Philippines and are serious in particular areas,but have been regarded as less significant economically. The causes of theseproblems are relatively obvious, most frequently arise from point sources, andstrategies for solution involving a combination of regulation and investmentsare more readily identified, even if their implementation remains beyond thecapacities of the Philippine government at present. The proposed Programdiscussed below deals with rural resource management issues. Industrialpollution will be the target of another Bank operation under preparation, andefforts are being made, particularly in energy and power projects, tostrengthen environmenta-l procedures and oversight capacity.

B. Rural Natural Resources ManaFement Issues

2.3 Rural natural resources play an important part in the Philip-pines' economy. Agriculture, forestry and fisheries together employ half thelabor force, earn one-fifth of export revenues and contribute about onequarter of GDP. In addition, over 60X of the populace live in rural areas.In terms of national comparative advantage, the agricultural sector has beenshown to be a more efficient earner and saver of foreign exchange than theindustrial sector. However, a long-term process of resource degradation anddepletion threatens the sustainability of this economic role, as follows.

2.4 In the Philippines, half the land is classified as "Alienable andDisposable" (A&D), which may be privately owned, and the other half, mostlyabove the 181 slope, as public "Forest Land". Of the 15 million ha of ForestLand, only six million ha have significant tree cover, and only one million hais productive, old-growth forest. Government underpricing of rights to har-vest the public forest has induced excessive logging, and discouraged interestin reforestation or plantation forestry. Logging in the uplands has openednew areas for settlement through road creation and partial clearing of for-ests. It has also reduced to critically low levels the forest habitat of themany species of flora and fauna endemic to the Philippines, and directlycontributed to short-run soil erosion problems. It is mainly due to logging(licensed or illegal) that the old-growth dipterocarp forests, the most valu-able commercially, have shrunk from ten million ha in the 1950s to only onemillion ha today.

2.5 Rapid population growth, resulting diminution of unoccupied arablelowland, inequitable land distribution and landlessness, and general impover-ishment create a pressure for migration. Because of the availability ofsemi-cleared land in the uplands, on which immigrants can build a betterlivelihood, the direction of migration is to the uplands, as well as to the

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urban areas. As a result, today about 18 million people, one-third of thetotal Philippine population, live in upland areas, of which perhaps 8-10million are farming on Forest Land. The annual per capita incomes of suchupland farmers average about P2,000 (US$95), less than half the officialpoverty line for rural residents. Continuing immigration accounts for thehigh rates of growth in upland population, as much as 3.5X in logging conces-sion areas, compared with a national average of about 2.41. However, a highproportion of forest inhabitants are members of (non-hispanicized) ethnicminorities, whose claims to "ancestral lands" often predate Span:sh occupa-tion.

2.6 Immigrating farmers, as well as most long-established upland popu-lations, employ extensive subsistence farming techniques (mainly shiftingcultivation of rice, corn and root crops). Shifting cultivation is employedbecause it minimizes labor and cash input requirements by substituting landfor labor and fertilizer. In areas of open access, which applies de fac tomost upland areas including all the newly settled land, lack of secure tenureor titling provides no incentive for land improvement or nutrient maintenanceas the viability of shifting cultivation diminishes. These farming techniquestend to promote very high rates of erosion on some four million ha of land al-ready occupied. (This is not true of all upland farmers - long-establishedindigenes frequently employ sensible conservation techniques, and in generaldisplay more concern for the land and local environment than immigrantgroups.)

2.7 In the upstream areas of watersheds, erosion leads to directloss of soil and nutrients, abandonment of fields and compensatory conversionof further forest areas to cultivation. Downstream, erosion and uncheckedrainfall runoff contributes to siltation, causes alternate floods and watershortage, and critically reduces the efficiency of water use. In combination,these effects are damaging to water conservancy systems in the lowlands,reducing productivity and increasing costs of maintenance and restoration ofthe irrigation and hydropower systems. For example, an upstream sheet erosionrate of about 50 t/ha/year in the Magat watershed has reduced to 25 years theeffective life of a reservoir originally designed to last 100 years. Deterio-rating productivity in the lowlands contributes to the migratory "push"(completing a vicious circle). The degradation of the uplands thus entailshigh social costs.

2.8 Like the uplands, coastal and near-shore fisheries are a publicresource, the open-access nature of which has attracted the most impoverishedelements from adjacent agricultural and coastal areas and induced them to usenon-sustainable extraction techniques. Most of this population (a labor forceof around 770,000 persons) is dependent on the near-shore (municipal) fisher-ies, which are extremely sensitive to two habitats which figure in differentparts of the life cycles of various fish, namely the mangrove forests and thecoral reefs. The accelerated cutting for fuelwood and conversion of mangroveareas to brackish water fishponds have reduced the 450,000 ha of mangrovesthought to exist in 1918 to 240,000 ha in 1980 and 150,000 ha today. Coralreefs have been destroyed by the cutting and export of coral and severelydamaged by certain fishing techniques. Only 30X of the remaining reefs areconsidered to be in good to excellent condition. Near-shore habitats are alsoecologically linked with the inland and upland areas: increased water turbid-ity and reduced light penetration due to soil erosion reduces growth, or even

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kills through smothering, the off-shore coral reefs and seaweed beds.Destruction of coastal mangrove forests opens interior areas to increasedtyphoon damage, creating a backwards linkage.

2.9 Most of the population employed by the fishing industry are poor,and have few livelihood alternatives which do not add to excessive pressure onthe resource base. Overfishing beyond the sustainable yield and use ofdestructive fishing methods are general consequences. Competition betweencommercial fisheries (mainly larger boats, supposed to keep well off-shore),and the small-scale "municipal fisheries" (with boats under three tons), isalso severe, even in the near-shore areas. The municipal capture fisheriesaccount for 75% of employment in fisheries and for 50% of annual production,while the commercial fisheries employ only 6X of the workers but catch 26X ofthe fish (the remainder being aquaculture).

2.10 Macroeconomic Consequences. The likely consequences of a "policy"of inaction on these issues are quite clear: the primary forest will disap-pear within a few years, as 7-8 million cu m are extracted each year (underlicense or illegally). The residual, left in poor shape from the first cut,will be further degraded as continued migration from the lowlands and uplandpopulation growth adds to the existing pressure. By the year 2000, perhapsone-fourth of the residual will remain, but with little commercial value; theremaining area will be under shifting cultivation, grassland, and brush.Possibly 30 years from now, long before hardwood forests planted today couldmature, timber suitable for furniture or construction use will have beenexhausted, and fuelwood and pulpwood will be in short supply. Fuelwood de-mands will long since have depleted the remaining mangroves, and the areaswill have been converted into fishponds to partially offset the expecteddecline in the coastal fisheries, due to excessive fishing pressure and reefdestruction.

2.11 The economic losses arising from this scenario (within the span ofa single generation) include relative losses to the future Philippine popula-tion arising from excessive exploitation of resources by the current popula-tion, as well as absolute losses arising from unproductive or destructive usesof resources. Even rough quantification of these costs is quite difficult,because: (a) understanding of some of the biophysical processes involved indegradation remains incomplete; and (b) insufficient monitoring of variousforms of degradation in the Philippines prevents extrapolation from individualcases or pilot studies. Nevertheless, the magnitude of social costs is cer-tainly enough to justify serious concern.

2.12 For certain losses to the future population, it is possible tocite indicative magnitudes. It is clear that soil erosion is leading tosignificant losses of fertility in seven to eight million ha of upland areawhich will eventually be needed for crops or tree plantations. In areas ofovergrazed grassland, as in the Magat Watershed, annual losses of soil andnutrient may cost more than P 1,000 (US$50) per ha, on a replacement costbasis. There are about two million ha of open grasslands nationwide, indicat-ing an annual loss approaching P 2 billion (US$100 million). Downstreamlosses - drastically shortened life of dams, increased maintenance and reha-bilitation costs for irrigation facilities, and loss of crops due to floodingor decreased dry season water availability - are also significant. Estimatesof current and future annual losses to fisheries arising only from excessive

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fishing pressure (excluding destructive methods) are in the range of P 1.0-1.8billion (US$50-90 million). Loss of the remaining habitats which harbor thediverse and often unique flora and fauna of the Philippines entails futurelosses of potential tourist revenues (an industry whlich now annually generatesover US$600 million in receipts, and which has been growing at 17X p.a.), andIncalculable losses associated with the potential development of medicines,pharmaceuticals, various biochemical products and planting materials based onthe genetic pool now preserved in tropical forests and coral reef environ-ments. On the other hand, protection of resources from rapid depletion willalso entail significant costs, For example, as a measure to relieve excessiveharvesting pressure on domestic forests, the Government has recently liberal-ized imports of logs. In 1989, the first year of liberalized imports, report-edly about 600,000 cu m of logs were imported, at a foreign exchange cost ofover US$130 million.

2.13 There are also significant fiscal implications: full rent recov-ery on timberlands alone would yield additional annual Government revenues ofup to P3.5 billion (US$125 million), or 0.4X of GDP, equivalent to nearly 3Xof National Government tax revenues. Not all of this would be collectible,however: conversion of production forests to protected status, which shouldresult from legislation in Congress or administrative decision by DENR, wouldinvolve a sacrifice of potential tax revenues, if domestic log production weredecreased. The ban on log and lumber exports already imposed, by shiftingpotential rents downstream to the processing and manufacturing sector, hasalso made it more difficult to extract rents from the logging industry.

C. Institutional Issues

2.14 The 1987 Constitution gives explicit recognition to management ofthe environment, linking the better use of natural resources to the goals ofexpanded productivity, sustainability and equity through open democraticprocesses and distributive justice. The agencies with the most direct respon-sibility for the achievement of these ideals are the Department of Environmentand Natural Resources (DENR), the Department of Agriculture (DA) and theDepartment of Agrarian Reform (DAR). The establishment of DENR represents amajor effort to create a natural resource and environmental lead agency. DENRis responsible for management of public lands, including forest land andcoastal mangroves, whereas DA's efforts are confined to A&D ltAnd. Managementof coastal fisheries by default falls largely within the authority of DA'sBureau of Fisheries and Aquatic Resources (BFAR), although in principle small-scale, near-shore fisheries are supposed to be under municipal control. DAR'sfocus has been on agrarian reform in rice and corn areas and limited areas ofresettlement in the uplands, although it is now charged with overall coordina-tion of CARP, which is scheduled to distribute some seven million ha of publicland over the next few years.

2.15 At the national level, the most significant organizational issuesrelating to natural resource management stem from the inappropriate mandates,resource limitations, confusion arising from reorganization, and potentialfor corruption of the line agencies charged with managing natural resources,and from the ineffectiveness of local governments and user groups which stillneed to be empowered. DENR's predecessor was primarily a regulatory agencyrather than a developmental one, although it was ineffective in performing

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even this more limited role. It viewed the management of the public ForestLand as its exclusive responsibility, was unwilling to recognize ancestralland rights of indigenous Filipinos and the de factp rights of recent immi-grants to the uplands, and resisted attempts by other agencies to service theupland population. However, DENR has begun to take a developmental role,which has been well articulated in its Philippine Strategy for SustainableDevelopment, corresponding Action Plan, and presentations to internationaldonors at a Mini-Consultative Group Meeting on the Environment held in Manilain February 1990. Nevertheless, the DENR remains poorly staffed and equippedto provide the range of services required under its current mandate, both inmeeting the needs of upland farmers and its traditional regulatory role. Thenucleus of a service program exists within DENR's Integrated Social Forestry(ISF) program, but it requires strong leadership, training, and the resourcesfor a major expansion. Poor mobility and communications limit the ability ofDENR field staff to perform their traditional functions as forest managers,much less provide services to agricultural communities in which they have nocomparative advantage. DENR is also handicapped in some important respects byinadequate legislation and regulations.

2.16 Conversely, DA, although long developmental in orientation, has con-centrated on the lowlands and lacks the expertise (not to mention the staff,travel budget, transport and communications equipment) required to contributeto agricultural development in rainfed hilly lands. It has recently initiateda new thrust toward support of upland agriculture, but is not yet equipped tochallenge DENR's monopoly on service provision to populations occupying publicland. The field organization absorbed from 3FAR suffers from the same defi-ciencies in relation to the artisanal fisheries. In general, the serviceswhich are required in the uplands and coastal communities include: (a) commu-nity organizing; (b) assistance in securing or improving resource tenure; (c)research on and extension of appropriate production technologies; and (d)modest provision of credit or equivalent inputs. DAR, despite its focus onland tenure issues and coordinative role in CARP, is directly involved mainlywith land classified A&D. DENR has the legal mandate to issue the limitedtenure instruments (renewable 25-year leases) that are constitutionally au-thorized for utilization of public Forest Land.

2.17 Effective provision of such services can only occur at the communi-ty level, yet power and authority in the Philippines have traditionally beenconcentrated at the apex of the administrative hierarchy. Hence, the ongoinggovernment reorganization, which has involved a commitment to regionalizedmanagement of line agencies, increased empowerment of local governments, andimproved collaboration between government and private organizations (NGOs) atall levels is a positive development. Nevertheless, actual devolution ofpower has been slow and effectively resisted by vested interests. Genuineempowerment of local government awaits provision of a local revenue base, aswell as some revisions in legal codes. Although the most effective measuresto build local capacity for resource management have been associated with NGOsworking from the bottom-up, the numbers of NGOs with effective field capabili-ties are few, and fewer still are the NGOs able to serve and strengthen otherNGOs.

2.18 The potential for corruption is particularly high in those agen-cies directly responsible for allocation, management or regulation of naturalresources use. Lacking proper pricing of access rights, profit or rent from

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obtaining and maintaining such rights is sufficient to support high levels ofillegal payments. Imposition of onerous rules and regulations, interpretedwith administrative discretion, gives officials the power to command suchpayments. Unless the system for allocation, management and regulation ofresource use is first changed to reduce reliance on rules and administrativediscretion and also to increase mandatory resource user fees to levels commen-surate with economic rents, government decentralization programs may simplydecentralize the locus of corruption.

2.19 Of course, incentives for unlicensed access, illegal exploitation,and nonpayment of user fees would remain and possibly even increase--conse-quently there is no escaping the need for thorough monitoring and enforcementprograms. This need is increasing as public policy in the forestry sector isshifting from an emphasis on regulation of production to protection fromexploitation. Although the extent of illegal logging is a matter of conjec-ture, it is possible that the volume of logs removed illegally (includingillegal practices of licensed concession holders) approaches in size the legalharvest. Even though DENR has broad police powers, there is insufficientdisincentive for illegal practices because:

(a) DENR has neither arms, vehicles, nor communication systems tomatch those of illegal operators, nor does it get systematicpolice or military support;

(b) DENR must prosecute cases of violations in court, yet isunable to obtain convictions due to insufficient and poorly-paid legal staff, unsympathetic courts, and a legal systemoffering many opportunities to the defendant;

(c) DENR's monitoring is confined to transport arteries; it isnot equipped to monitor on-site logging activities or lumbermills; and only succeeds in identifying and prosecuting low-level operatives; and

(d) DENR's monitoring systems are not designed to minimize lower-level staff collusion in illegal activities.

2.20 The legal and regulatory framework which supports the activitiesof Governmental institutions is too frequently ineffective, outdated, unreal-istic, or inconsistent with sound policies. Laws too often were written withno consideration of enforceability, or have never become enforceable due tolack of implementing regulations or necessary budgetary appropriations. Oncertain issues, the problems with the legal framework appear virtually intrac-table. For example, Philippine land law has both formal and local common lawcomponents, which are often mutually inconsistent and provide (for instance)no basis for recognition of communal property rights, however ancient inorigin. Moreover, the Constitution and other laws flatly forbid any aliena-tion of "Forest Reserves", and limit administrative powers to reclassify suchland for non-forest uses, no matter what actual uses prevail. In other in-tances, the law is mainly obsolete: for example, the National Parks enablinglegislation dates from 1932 and has been modified by a large number of acts,executive orders, proclamations, and presidential decrees since that time.Both enabling legislation and the gazetting legislation require a complete

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overhaul. The legal backing for DENR's powers to protect the forests is alsoflawed: e.g., DENR is given nominal police authority, but not the authorityto bear arms or to draft the services of law enforcement agencies; fines andpenalties prescribed by earlier laws have been trivialized by infla^.on; andliability and penalities for violations are focussed on the cutting and trans-port of forest products, rather than marketing and processing points; and onindividual violators rather than the sponsoring corporate organizations.

III. THE SEgTORAL ADJUSTMENT PROGRAM

A. Perspective and Oblectives

Reforms in Pers2ective

3.1 The Bank's concern with rural environmental degradation in thePhilippines dates from the late 1970s, when, in order to protect downstreamirrigation infrastructure from watershed degradation, it flnanced a WatershedManagement and Erosion Control Project (Ln. 1890-PH). The design of thispioneer effort was flawed in several respects, and the Bank's understandlngand concern for the problems of environmental degradation did not mature untilthe 1983 Agricultural Sector Memorandum (Report 4318-PH), which placed haltingenvironmental deterioration In forestry and fisheries at the core of futureBank lending strategy in Philippine agriculture. The Central Visayas RegionalProject (Ln. 2360-PH), an innovative and experimental area development programtargeting the links between poverty and environmental degradation in theuplands and coastal zones, was the first result. Experience with implementa-tion of this project in turn contributed to recognition that the root causeshad to be addressed through modifications of national policy requiring insti-tutional and legislative change and cutting across entrenched interests.Parallel growth of public consciousness in the Philippines, along with thechange of Government and subsequent institutional reorganization, facilitatedinitiation of a major strategy study in 1986, the Forestry, Fisheries andAgricultural Resource Management (ffARM) Study (Report No. 7388-PH, January17, 1989). The DENR followed up with formulation of the Philippine Strategyfor Sustainable Development (PSSD), which was endorsed by the Cabinet inNovember 1989 and presented to the donors at a Mini-Consultative Group Meetingin February 1990. The proposed Sector Adjustment Program results from discus-sions of the ffARM Study and PSSD with Government.

3.2 Involvement of Other Donors. Technical and financial assistancefrom other multilaterals and various bilaterals in recent years has increas-ingly focussed on rural environmental degradation and related poverty prob-lems. The ADB has initiated a major Forestry Sector Program Loan centered onreforestation and a Forestry Master Plan study, with matching funding byJapan's OECF; a Fisheries Sector Program Loan; a Low Income Upland CommunitiesProject; and preparation of new projects in mangrove replanting and industrialtree plantations. New Zealand has begun to implement an industrial treeplantation project. USAID has completed an upland agricultural project, andhas recently initiated a major program of assistance, including debt-for-nature swaps, in the environment and natural resource sector. Technicalassistance by ferm= in concluding a forest inventory, AbtralLa in landresource planning and data base construction, Sweden in a SPOT-satelltemapping of land uses (through the World Bank's ffARM Study, which was also

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assisted by Canada and MMDZ), the United States in an NGO-implemented study ofbiological diversity issues, and the FrA Foundation ln development of agro-forestry, have helped establish the bases for future programs. There havebeen frequent exchanges of views among donors, and three consultative meetingswith donors have been organized by DENR (June 1989, February 1990, and October1990), with the result that donor programs in the sector are reasonably wellcoordinated.

Objectives of the AdJuStment proram

3.3 Based on the strategy for improved management of natural resourcesrecommended by the ffARM Study, the Bank has been working closely with DENR,DA and DAR to develop a Program combining policy and institutional reform anda redirection of administrative attention and effort. Because the ADB programloan for fisheries and a project for replanting mangroves deal adequately withthese areas, policy measures involving management of small-scale capture fish-eries and mangrove areas have been excluded from this Program, and elementsinvolving forestry have been defined to be complementary to the ADB ForestrySector Program Loan and follow-up operations under preparation, which empha-size production forestry, processing efficiency and reforestation. The broadobjectives of this Program are to preserve what remains of the biologicaldiversity of the Philippines; where these resources have been degraded ordestroyed, to reestablish them wherever practicable and financeable; andelsewhere to introduce sustainable land use practices. The means to theseobjectives, as pursued in this Program, are primarily to:

(a) determine what areas of the Philippines must be preservedundisturbed and introduce an effective management system;

(b) introduce user fees for public resources which discouragerent-seeking behavior;

(c) improve enforcement of logging regulations;

(d) provide secure tenure rights to users in return for sustain-able resource use;

(e) provide extension services to upland populations; and

(f) establish mechanisms for support of small-scale, community-based resource management and livelihood projects.

3.4 The Government has expressed a commitment to implement a program ofpolicy and institutional reform in the environment and natural resource sectorconsistent with these objectives. The 1987 Constitution provided a firmmandate, which has been reinforced by growing public awareness of environmen-tal problems (especially deforestation), corresponding initiatives in Con-gress, and the concern of external donors. Significant actions have alreadybeen taken, unilaterally as well as in the context of the externally-supportedprograms. The Government has formulated a Philippine Strategy for SustainableDevelopment as a broad policy statement, which has been discussed and formallyapproved by the Cabinet. This is supplemented by an Action Plan, under whichlegislation has already been submitted to Congress, various task forces andstudies have been initiated, and new administrative actions have been taken.

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The nature of the problems requires a comprehensive approach to solution,combining legislative and administrative actions with public investment andinstitutional strengthenitvg. Variations in the content of the actions ispossible; indeed, flexibility is necessary in dealing with highly-chargedissues involving serious tradeoffs between private and public interests. Theprogram described below was developed in response to these considerations.

B. The EXogrm

Preseryation of Biological Diversity

3.5 The objective is to protect for the benefit of future generations arepresentative selection of the critically-limited remaining areas of rela-tively undegraded habitats for flora and fauna native to tropical forests,mangrove swamps, and coral reefs. Actions required include:

(a) submission and passage of enabling legislation which defines,establishes, and makes provisions for proper management of anational protected areas system;

(b) identification of appropriate sites for preservation, basedmainly on considerations of biodiversity, size, ability toprotect from degrading activities, and tourism value;

(c) provision of the budgetary funds and programs to graduallyupgrade management of parks and reserves, beginning with asmall number of high-priority sites; and

(d) protection of priority sites from degradation ty existing andnew occupants, largely by prevention of illegal logging,shifting cultivation, forest fires, and hunting and gatheringactivities (including fishing, within marine reserves).

3.6 Surveys of the conditions of the 60 existing parks and reserves arenow underway, and candidate sites will be identified which could fill gaps inor better serve the purposes of a protected areas system. Representation oflowland forests, freshwater swamp, mangrove, tropical pine forest, and themarine environment would be given special consideration; and existing reservesin degraded condition or which serve no legitimate purpose would be disposedof. Based on a prioritization of sites, and detailed estimates of budgetarycosts for adequate development and maintenance, including a program to obtainsupport from existing occupants, a development program for an IntegratedProtected Areas System (IPAS) would be formulated. Satisfactory enablinglegislation to establish a legal foundation for IPAS has been drafted andsubmitted to Congress. Passage of this legislation would be followed bycompletion of implementing guidelines and regulations and submission to Con-gress of budgetary requests based on management plans for an initial develop-ment program encompassing a core of high-priority protected areas.

3.7 Pasture Leases. Commercial grazing on steep slopes has been amajor source of erosion and a cause of forest fires in the Philippines. Amedium-run target would be to eliminate such leases from parks, reserves,critical watersheds, and all areas with slopes over 50X. DENR would conduct a

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review of the locations of existing leases in relation to these criteria;would cease to renew or issue pasture leases in such areas and cancel leasesInsofar as its authority permits (barring wholesale legislative authorization,which is unlikely, tlme-consumlng documentation of contract violations will berequired to provide sufficient cause for cancellation of such leases). As afirst step, a review has been completed of pasture leases in the Magat Water-shed in Luzon, where pastoral activities are the primary cause of degradation,and leases on lands draining into the Magat River have been cancelled. Simi-lar steps would be taken in the near future for ten priority protected areasand an additional critical watershed.

Rent Reeover

3.8 Increasing the level of fees or charges for use of public resourcesto recover a high proportion of economic rents is intended to reduce theincentive to exploit these resources and increase pressure for more efficientutilization; reduce the scope for administrative abuse; and provide signifi-cant additional budgetary revenues for Government. Current forest chargesmainly constitute a legislated fee of P30 (US$1.42) per cu m of roundwoodextracted; previous to the log export ban, about 20X of the export value wascaptured by an export tax (however, a large volume of undeclared or misde-clared exports escaped this tax). Current estimates of average economic rent(domestic market value of stumpage less extraction costs and "normal" profit)in prevailing market conditions (influenced by the log export ban) range fromP 210-1,500 per cu m, or between 101 and 401 of wholesale value, depending onlog quality, costs of logging in varying conditions, etc. If exports wereallowed and border prices prevailed, then rent would approach two-thirds ofthe border price--in other words, with the export ban, some of the rent issacrificed as a subsidy to domestic processing. The approach to capturing ahigher proportion of economic rent would differ as between existing and newlicenses. The area under new licenses, including anything which replacescancelled or expired concessions, ls likely to be fairly small. However, astrategy of protecting primary forests and opening up residual forests tologging has been accepted in principle by DENR as part of a Master Plan forForestry Development. If this proves technically and politically feasible toimplement, most existing concessions would be cancelled, and large areas notnow under concession management would be newly licensed.

3.9 Existing Licenses. Government charges are governed by existinglegislation and outstanding leaseholds (TLAs). DENR has administrative powerto set fees commensurate with the costs of specific services, but no legal au-thority to set tax rates. DENR has nevertheless used its limited mandate torequire of all concessions a refundable "reforestation deposit" of P10,000(US$476) per logged hectare (about one-half the official compensation rate forcontract reforestation). Presidential Memorandum Order No. 298 issued in June1990 under the President's emergency powers further authorized DENR to collectfrom concessions an Environmental Fee, which was promptly set at P500 per cu mof logs; although the legality of this charge has been challenged, DENR hasbegun collecting it. New legislative bills have passed the House and Senate,requiring an increase in the Forest Charge to 20% or 401, respectively, of theManila wholesale price of roundwood (this would apply to both new and existingtimber concessions). The bills are presently in Bicameral Committee forreconciliation, which is expected to involve choice of a compromise figure(probably 301). Estimated to yield P 600-1,200 per cu m for different grades

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of log, the new level of Forest Charge should capture at least 75X of avail-able economic rent in logging, about 100l for medium quality logs under aver-age logging conditions, and would make logging of steep slopes unprofitable.DENR would monitor the level of economic rent and recommend future adjustmentsin legislation. As changes in laws and regulations affecting logging andprocessing may affect the level of rents and their distribution among subsec-tors, DENR would also conduct a study examining the effects of measures suchas the current bans on export of both non-plantation roundwood and lumber toindicate their impact on both efficiency and rent recovery.

3.10 New Licenses. The 1987 Constitution effectively abolishes theconcession system, as applying to new licenses, and requires instead "co-production" or joint ventures between Government and private loggers, known asTimber Production Sharing Agreements (TPSAs). Since the only asset the Gov-ernment contributes to such ventures is the stumpage, this provision effec-tively mandates full rent recovery and provides a legal basis for close moni-toring of logging costs and profits of new licenses. As a first step in thisdirection, a DENR administrative order applied to expired or suspended con-cessions provisionally imposed a "forest management fee" of P250 (US$11.90)per cu m. Subsequently, guidelines were issued for TPSAs requiring a publicbidding process, which would be the best approach for recovering full economicrent. Although, prior to these guidelines, three pilot TPSAs were initiatedas experiments, Government's share was negotiated rather than bid, and yieldedrevenues of only about 20X of wholesale log prices. Full implementation ofthe TPSA program has been stalled due mainly to uncertainty over the impact ofimpending Congressional action on logging bans. DENR has inventoried a numberof expired concessions, however, and during 1991, it plans to expand imple-mentation of TPSAs beyond the pilot level, employing competitive bidding forat least two logging areas and applying the Community Forest Management Agree-ment (CFMA) concept to a third. Market prices and logging cost data developedfrom co-production arrangements would be used in estimating the level ofeconomic rents and targeting legislative changes in fees for existing conces-sions.

3.11 Mangrove Areas. A study supported by the ADB Fisheries SectorProgram Loan will determine an appropriate rental fee for use of mangroveareas converted to fishponds. DENR would review this study and support actionby DA to increase the rental fee, in order to increase pressure for abandon-ment of unproductive fishponds and reduce incentives to make new conversionsof mangrove areas to fishpond use. A new DENR-DA administrative order, ap-proved by DENR and pending approval by DA, provides that mangrove areas inwhich fishponds are idle or abandoned revert to DENR control as forest reserveand be made available for re-establishment of mangrove forest under appropri-ate Stewardship Contracts. A survey financed by the ADB Program Loan wouldalso establish the locations of idle or abandoned fishponds, and DA would takeadministrative action to revoke licenses and ensure reversion. DA's actionsabove are conditions for the second tranche release (projected for June 1991)of the ADB loan; DENR, through its membership in the Coastal Zone ResourcesManagement Committee, would support these actions.

Enforcement of Forestry Law and Regulations

3.12 DENR would implement a strategy for improved enforcement, appliedinitially in selected areas where illegal operations have been identified as

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prevalent. This would seek, in the short run (1991-92), to increase theeffectiveness of enforcement by concentrating efforts on a few critical pointsand activities, and removing current constraints on monitoring and enforcementactivities. In the long run, DENR would seek to intensify direct managementpresence of its foresters within the forests, particularly where TLAs arecancelled, primary forests are given protected area status, and TPSAs or CFMAsare extended. A satisfactory plan for an intensive monitoring and enforcementprogram has been developed, and terms of reference for technical assistance inits implementation have been agreed. Major features of the short-run programwould include:

(a) cooperation with the Department of Justice to speed up prose-cutions and reduce obstructionism of local courts, throughappointment of special courts and particular fiscals (prose-cutors) to have jurisdiction in forestry cases, and throughtraining of judicial personnel in forestry law and conse-quences of environmental degradation;

(b) cooperation with the Department of Interior and Local Govern-ment to assist in apprehensions, requiring, in addition to aMemorandum of Agreement between DENR and DILG, detailing of asmall, mobile strike force for selected joint enforcementoperations; and involvement of the Philippine National Policein monitoring committees at all levels;

(c) introduction of a multiple-point monitoring system includingdirect surveillance at lumber mills, aerial surveillance ofprimary and selected residual forests to identify illegalcutting and small-scale processing activities; and groundsurveillance of access and transport routes, equipped withadequate communications systems;

(d) program monitoring by committees at central, regional, andprovincial levels including DENR, local government, military,church, and other NGO representation, the committees toreceive regularily published indicators of performance suchas volume of confiscated logs and other property, mill clo-sures, cancellation of TLA concessions, and legal prosecu-tions; to review enforcement-related DENR programs and dis-cuss major violation problems; and to serve as the entrypoints for monitoring information provided by NGOs;

(e) legal services to ensure well-prepared court cases, throughcontract hiring of lawyers and assistance in prosecutions;

(f) provision of adequate transportation and communicationsequipment to field personnel responsible for enforcement; and

(g) programs to win community support and defuse the livelihoodissue, such as targeting various existing Government programsto generate constructive means of livelihood.

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Tenure RISA

3.13 Certificate of Stewardship Contracts (CSCs). Due to constitution-al provisions, the only form of tenure open to occupants of public Forest Landat present consists of renewable 25-year leaseholds, mainly the CSCs issued toexisting occupants in areas designated for the Integrated Social ForestryProgram. These include both individual and collective (Community ForestStewardship Agreement) contracts. In the past, CSCs had limited tenure value,as they were not clearly heritable, renewable, or transferable. A recentadministrative order and revised contract document ensure that CSCs are her-itable, renewable, and transferable (with restrictions to prevent developmentof absentee pseudo-landlords), on terms that give them substantial tenure andcollatoral value in the eyes of recipients.

3.14 Manglr_v CSCs. A version of the CSC contract appropriately modi-fied to provide exclusive tenure for individuals or groups of residents will-ing to replant and manage mangrove areas for livelihood purposes on a sus-tained yield basis has been approved and issued.

3.15 Indigenous Communities. As many as five million members of in-digenous or minority communities have land occupancy claims predating theintroduction of Spanish or American land systems of property rights. Many areupland cultivators or forest occupants, and the logical targets of efforts toextend conservation-oriented land and forest management techniques. However,their cooperation is discouraged by the fact that neither Government norestablished law, which regards them as 'squatters' on public land, recognizetheir claims to collective or individual land tenure, although the 1987 Con-stitution authorizes the recognition and protection of "ancestral domains".An important legal precedent exists in the form of an early Supreme Courtdecision which states, in effect, that land subject to documented claimspredating Spanish and American property rights law is not subject to that law.Legislation is now before Congress which would set up a Commission to deline-ate and adjudicate such claims. Although the difficulties of documentingclaims and presence of conflicting claims will make this a slow and difficultprocess at best, initiating the process would in itself discourage furtherencroachment on ancestral lands and encourage cooperation from indigenousgroups. DENR has supported this interpretation and approach, and submittedparallel legislation providing better administrative mechanisms for dealingwith the interests of indigenous communities pending the work of this Commis-sion. Without waiting for the passage of this legislation, DENR has set up atask force to delineate ancestral claims and provide land titles when claimsare uncontested to indigenous cultural communities in the Cordillera Adminis-trative Region. It has also expanded the use of the Community Forest Steward-ship Agreements (CFSA) program, to turn over resource management rights toincreasing numbers of such communities, with no prejudice to their land rightsas defined in the future.

3.16 Local Communities. Of the 15 million ha of public land currentlyreserved for forest use and managed by DENR, only about 6-7 million are actu-ally forested, and substantial remaining areas may be reforested as financialresources permit. Present "contract reforestation" programs cover only theestablishment period (three years), after which the seedlings and their even-tual timber production become Government property. As such, they are likelyto be damaged or destroyed by local residents seeking to use the land for

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other purposes. To create an incentive for community maintenance and manage-ment, DENR has devised and issued a new contractual instrument, the ForestLand Management Agreement, providing a substantial share of benefits at matu-rity (including selective harvesting rights) to registered groups of localresidents in return for the obligation to sustainably manage the reforestedarea.

3.17 Sound management of critical watersheds, national parks, andnature reserves is now often compromised by the presence of occupying popula-tions, often predating the legal establishment of such public reserves andoften with substantial tenure claims. Where such populations cannot be reset-tled or evicted or the boundaries of the reserve defined to exclude them, analternative strategy is to involve these populations in the protection andmanagement process while legitimizing and supporting livelihood activitieswhich can be reconciled with this process. However, DENR's current legalinstruments, such as the CSC and CFSA, and the related developmental programsare based on laws excluding use of such instruments from critical watersheds,national parks, and nature reserves. The draft IPAS legislation submitted byDENR seeks legislative authorization for extension of limited tenure instru-ments to protected areas in instances where the corresponding Management Planfinds such residence can be made consistent with general management objectivesand where a long-term protective management program defining correspondingcommunity and individual obligations has been established and funded. Thislegislation would also define a role for protected area management personnelin developing buffer zones around protected areas.

Extension Services

3.18 In areas where land use conversion has occurred and where farmingis potentially sustainable, the objective is to induce adoption of sustainableand conservation-oriented farming techniques, which requires a Government-ledeffort to develop community organization, provide tenure security, and extendagro-forestry technology. Previous extension efforts in the uplands have beencharacterized by a small but relatively complete program led by DA, mainlyamong communities of indigenes, a larger (ISF) program led by DENR focussedmainly on issue of CSCs, and a large number of pilots conducted by NGOs activein the uplands. Larger scale externally-funded projects such as the Bank'sCVRP and USAID's Rainfed Resources Development Project have drawn heavily onNGO techniques. Both publicly and NGO-sponsored programs have had a measureof success in obtaining adoption of sustainable farming techniques, and thetechniques and principles have been proven to increase farm incomes whilereducing environmental degradation. However, delivery of extension and commu-nity development services in the uplands has only begun to go beyond pilotsand demonstrations. Although CARP targets only a fraction of upland resi-dents, its implementation has greatly expanded the number of clientele slatedto receive services. ISF is DENR's lead program for increasing the sustain-ability of livelihood of communities residing on public forest land. Withsupport from CARP and external donors, DENR has already taken steps to giveISF new administrative independence and prominence, and to enlarge and enrichthe objectives and capabilities of this program under recently-issued guide-lines. An entirely new category of civil service positions (Social ForestryTechnicians) has been created, and so far about 1,000 staff have been recruit-ed and trained to serve the non-traditional functions mandated by the newguidelines.

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3.19 The objective of the adjustment program is to further develop apollcy framework and organizational structure appropriate for a much-expandedupland extension program. DENR has recognized, through statement of policyand program implementation, that the population presently residing on publicForest Land is in large part there to stay; that earlier policies of ignoringor evicting them were counterproductive; and that, in the interest of utillz-ing them as a positive force in resource conservation, it is crucial thatissues of their livelihood, tenure, and necessary technical, economic, andsocial services be addressed by the Government. In principle, communityservices should be provided by the functionally-relevant agencLes regardlessof where the communities are located. In practice, service provision for allagencies continues to be constrained by the existing geographical distributionof agency staff, difficulties of redeployment, limited budget for redirectionof effort, and shortages of staff with appropriate qualifications. BecauseDENR's mandate for management and protection of public resources requires thatit promote sustainable development of communities residing on public forestland, DEWR in the short run would take a lead role in stimulating and coordi-nating service provision for such communities. In so doing, it would activelypromote a transition to coordination of service delivery by local governments,provision of agricultural extension by the DA, and provision of health, educa-tional, and other services by the appropriate agencies. In subjects such ascommunity organizing or agroforestry, where DENR, DA and DAR have commontraining requirements, DENR would assist in implementing a common trainingprogram for regional and local staff of all three agencies. The above princi-ples have been affirmed in Resolution No. 01-90 of Cabinet Cluster A (RuralDevelopment), signed by the Secretaries of the departments and agencies in-volved in rural development.

3.20 Census of Forest Occupants. The completion of an accurate censusis a clear prerequisite for expansion of the ISF program. The census isrequired to pinpoint areas of concentration of occupants such as upland farm-ers, and establish whether the users are untenured (residing on public ForestLand) or potential recipients of titles (occupants of A&D land who are alsoutilizing public Forest Land). Such a census was carried out in 1989 and anadvisory task force including non-governmental experts has been set up toevaluate the preliminary results and take any corrective actions necessary.

3.21 NGO QLnkagu. Training, organizational and management capabili-ties, and motivation relevant to upland extension work are concentrated inNGOs in the Philippines. However, these NGOs tend to be scattered and limitedin their scope of activities, and often would be reluctant (or be betteradvised not) to expand their scale of operation. There are a number of compe-tent NGOs which are willing to produce training materials, provide sites forfield training, and supply training staff or trained field workers for commu-nity organization work. Such NGOs would be increasingly employed by Govern-ment, under contractual arrangements, in support of programs such as ISF orCommunity Forestry. In addition, NGO leaders and members at the municipallevel would be invited to participate along with political and administrativerepresentatives in committees established for coordination and supervision ofGovernment service delivery and natural resource regulation and management.DENR, in particular, has established (through Administrative Order) policiesand procedures favoring involvement of NGOs, and would continue to deepen itsongoing process of accreditation and involvement of NGOs along the above

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lines, and where possible devolve regulatory and coordinative powers to localresource management committees with NGO representation.

Community-Based Resource Manafement and Livelihood Prolects

3.22 Among the significant constraints in upland farming are the gener-al poverty of the population, lack of cash savings, and lack of collateral forborrowing. Yet, introduction of sustainable and conservation-oriented farmingtechniques requires infrastructure, such as access roads or paths and small-scale water impoundments, temporary llvelihood support, to the extent thatagroforestry is to replace shifting cultivation, and inputs such as seedlingsand fertilizer. Government programs for provision of these requirements arejustifiable on both poverty and environmental grounds. Financial provisionhas been included in the CARP program and (for nursery establishment, seed-lings provision, and employment in replanting) in the ADB/OECF Forestry Pro-gram Loan. The main concern of the adjustment program is to ensure that thefunds are effectively utilized.

3.23 The recommended approach is that funding for these activities,whatever their source and institutional sponsorship, be administered on apooled basis at the provincial or municipal level. Requirements for disburse-ment should draw on the experience of projects sponsored by NGOs, or thebetter-managed community-development projects. For example, a preliminarystage of community organization and expression of needs should precede dis-bursement for infrastructure; and construction should be executed using commu-nity-based management and labor-intensive (income-generating) techniques.Provision of credit should be linked to two forms of sustainability - adoptionof sustainable agricultural techniques, and sustainability of the creditprogram (either through use of local revolving funds or a program to developcreditworthiness of borrowers). DENR has issued guidelines for its ISF andCommunity Forestry programs which are consistent with such agreed principlesof implementation.

IV. THE PROPOSED PROJECT

Origin. Rationale and Objectives

4.1 Originating from the dialogue with Government concerning the stra-tegic recommendations of the ffARN Study (paras. 3.1 and 3.3), the presentoperation would support implementation of those recommendations for reforms inthe environment and natural resource sector required for sustainable growth.The specific objectives of the project would be to develop an effective pro-tected areas system, charge user fees for public resources which discouragerent-seeking behavior, improve enforcement of logging regulations, providesecure tenure rights to users in return for sustainable resource use, offerextension services to upland populations, and develop mechanisms for supportof small-scale, community-based resource management and livelihood projects inimpoverished upland areas. The operation would also help to fill a gap inmeeting the estimated foreign exchange requirements of the Government's devel-opment program. In the past, such operations have also served as vehicles forattracting substantial co-financing from other donors, which has enhanced

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their overall balance of payments impact, and this Ls also expected to be thecase with the proposed operation.

Summary Proletl Descrition

4.2 The project would consist of a sector adjustment component aimedat implementing major reforms in the incentive, legal, and regulatory struc-tures governing management of Philippine natural resources -- especiallyforests and soils on public lands, and an investment component which wouldstrengthen the central and local public institutions charged with monitoringor managing these resources.

4.3 Sectoral Adjustment Comnonent. The actions needed to fully imple-ment the olLcyX reforms encompassed by this program are summarized in thepolicy-action matrix in Annex C, and would be supported by and monitored underthe proposed project. Actions viewed as most critical to achieving the objec-tives of the program are summarized in Table 4 below (pp. 30-32). Most ac-tions have already been completed; actions requiring more time or prior stud-ies, which are highlighted in boldface, would be conditions of effectivenessor release of the second tranche (June 1992) of the loan and credit associatedwith the adjustment component (Annex C). It is understood that disbursementof the second tranche, in addition to stated conditionalities, would requiremaintenance of a satisfactory macroeconomic framework.

4.4 Investment Component. The proposed component, to be implementedover a seven-year period, would finance: (a) consultancies to carry out thedesign of an Integrated Protected Areas System (IPAS), leading to submissionof enabling legislation to Congress and development and funding of managementplans for areas initially gazetted for inclusion within IPAS; (b) provision ofequipment, training and technical assistance to DENR national, regional andlocal offices to enable improved monitoring of logging operations and enforce-ment of forestry laws and regulations in Regions II, X, and Samar; and (c)provision of technical assistance, training, equipment, infrastructure, andinputs to develop in Regions I (including Cordillera Administrative Region),II, IX, and X the capacity of local governments and line agency field staff toplan, generate and service small-scale, community-based resource managementprojects in watershed areas, combining community organizing and pre-coopera-tives development, improvements in tenure and resource management, introduc-tion of sustainable and non-destructive means of livelihood, and improvementof infrastructure and social services. Details of the investment componentfollow, and are further explained in the Project Implementation Volume.

Detailed Features of the Investment Component

4.5. Integrated Protected Areas System Design Studies. This component,to be implemented over a 15-month period which began in October 1990, consistsof studies by consultants, which have been initiated using Japan-World BankTechnical Assistance Grant funding, and would be monitored and supervisedunder the proposed project. Remaining technical assistance funds would bedisbursed as part of the cofinancing package of the project. The work isdivided into the following components: (a) legislative study of IPAS, involv-ing drafting of enabling and gazetting legislation, implementing guidelines,and related executive orders; (b) design studies covering terrestrial, marine

I3Ab J: SELECTED ACTIOS TO SE NONITORED UHDER TUE PROJECT £1

Objectives/Proposed Action Program Actons Already Taken Condition of Efftetfnonassa Seoond Trancbe Relese (6/M2a

A. Protect Btolaical D(versitv

1. Daet goD anffectiv wInte-

ara PrtecedAreasvste

(a) Prepare and submit Satisfactory enabting Legistation Setiefaoory io _ tiag gdi*tInssenabling legislation; sthmitted to Congress; consultants for INS legsttln lasa_issue regulations appointed to study gazetting issues

(b) Prepare and Implement Consultant appointed and study abn ent plan pr d for 10management plans for taderway wrio; cewerCupom kudWt re*msts gazetted areas sabtted to bWreow r

(c) ELiminate pasture Completed report on status and Similar reports copleted for aboveleases from parks, rationale for cancellation of pas- tO protected areas and at least arereserves, critical ture leases in the N_t watershed, other critieal tmtereohd; agreedwatersheds, and all and agreed adeinistrative actions adeinistrative actions takenareas dith slopes > 50X taken

B. Riscem gov1y g JIlLmlLonoaln

1. Introduce user £es reoovr-jQ full e!onc rents

(a) Competitive bidding for Procedural guidelines issued; Ini- PeFMc bidHnh fr at least ao nemnew Logging licen3es tfal areas identified and timber IPSs cmpleted

inventory authorized

1/ Abbrevl.ated from Annex C.

2/ Boldfaced items conditions for effectiveness or tranche release.

-bjectives/Proposed Action Progrm Actions Already Taken Condition of £ffectivress Second Tranche Release C6/92)

(b) LegIslation setting Administrative Order iaposing Envi- Forest charge of at least 2QS of Implemented; normal legal remediesadequate forusla for ronrental Fee; bills approved by market value passed by Co4nress for non-comptiance plus cancellationforest charge House and Senate of TLA permits

(c) Naintain reforestation Strengthened monitoring to ensure Revised procedures implementeddeposit and provide for compliance and Institution of trueperiodic adjustments performance bond

2. 1m rove enforceent gf forestrv tow and regtuations

(a) Develop and implement onitoring plan agreed and TOR for Program nitoring comission andan adequate monitoring TA in implementation drafted supporting system pot into effectsystem

(b) Develop and implement Enforcement plan agreed and TOR for Anmnal evaluation report on imple-an adequate enforceent TA in implementation drafted mentation, including quantitativestrategy indicators, agreed with Bank

C. Encoae Sustainable Me UsPractices

1. Provide secume tenure rLits

(a) Improve tenure value of A.O. revising CSC term issued; Routine issueStewardship Contract revised contractual form issued

(b) Extend modified CSC for A.O. defining wmgrove CSCs and Routine issuemWarove areas appropriate contractual fom issued

tc) DEMN pubtic recognition Task force created to delineate Adeqate fwuning provided for taskof prior rights of ancestral domains and recommnd orce a d evaluation report on work"ancestral domains3 and property transfer mechanism; delin- asuitted to Ba*Assaciationadministrative assis- eation guidelrnes issued. Statementtance in delineation of Poticy recognizes ancestral

domain rfghts fn principte

ObjectiveslProposed Action PrograM Actions Already Taken Condition of Effectiveness Second Tranche Release (6192)

Id) Devise and issue nev A.0. and guidetines defining instru- Routire issuecontractuat instruments ment signedgiving property rightsover reforested areasto local residents

2. Establish organitationalframework for orovision ofextension services fn u1tardareas

(a) Recognition of exten- Resolution of Cabinet Cluster A on lmplementation within administrativesion requirements of Rural Development and Statement of units covered by public investmntupland populations and Policy extend this recognition; cop,onentagreement on sourcing implementation within scope of

public investment component agreed

(b) Improved autonomy, ISF separated from FVB, Ass't Secre-visi-bility mandate. tsry responsible for program. 1e0and staff complement ISF and CFS guidelines issued; nevfor ISF program field staff positions added for

*Socisl Forestry Technicians"

(c) Implement comon train- Training moterists developed; imple- Implementation within adainistratiweing program (DA, DEIR, mentation within scope of publlc units covered by public investmentDAR) inmestent component agreed component

(d) Complete Census of Census coplete, processing and Remedil studies iplemented, IfForest Occupants correction underway future meaures roded

aoreed

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and wetland ecosystems; (c) preparation of preliminary management plans for 10identified protected areas; (d) boundary delineation and land use mapping forthese 10 areas; (e) development and initial implementation of a trainingprogram for staff at all levels involved in IPAS implementation; and (f)seminars and workshops designed to develop public support for and involvementin IPAS.

4.6 The submission to Congress of satisfactory IPAS enabling legisla-tion was among the major policy actions completed to date under the sectoradjustment program. Completion of the preliminary management plans for 10protected areas, and the issue of satisfactory implementing guidelines follow-ing passage by Congress of IPAS enabling legislation are among the majorsecond-tranche conditionalities. Detailed terms of reference have been de-veloped, consultant teams have been selected, and work has begun on all as-pects of the IPAS studies (summary terms of reference are given in the ProjectImplementation Volume).

4.7 IPAS Program Support. The component, the inclusion of which isconditional on co-financing by the Global Environment Fund (GEF), wouldprovide program support for the development, preservation and management ofresources within 10 priority reserves under the IPAS program, following thecompletion of draft management plans for each reserve. It would lay thefoundation for a long-term, efficient program of management and administrationof protected areas which could be sustained with a reasonable level of gove_n-mental and external support and substantial NGO involvement. The componentwould be phased over a seven-year period and would finance four main activi-ties: (a) site development, including buffer zone establishment, boundarydemarcation, and construction of infrastructure (access roads and trails,offices, housing, visitor facilities, etc.); (b) resource management, includ-ing habitat restoration, surveying, inventory, protection, and research; (c)socio-economic actions, including buffer zone management, community outreach,and educational programs; and (d) development and updating of long-term sitemanagement plans. Following the project implementation period, ongoing man-agement would be financed from routine Government budgetary support supple-mented by an IPAS Fund established with Government, external donor, and NGOparticipation to provide sustained support to biodiversity conservation activ-ities and introduce an NGO-based protected areas management system. Annex Egives further details on the proposed GEF component.

4.8 The component would be appraised for the GEF following completionin late 1991 of the feasibility studies now under preparation; and would benegotiated following fulfillment of conditions for release of the second-tranche (which would provide the legislative foundation for the IPAS system).The 10 areas identified as having priority for early inclusion in IPAS repre-sent six of the most important biogeographic zones (based on endemism; out ofa total of 15 such zones distinguished in the Philippine Islands), a mix ofterrestrial, marine and wetland environments, and include six existing nation-al parks.

4.9 Monitoring and Enforcement Component. This activity would fi-nance the provision of: (a) training and educational efforts to increasecommunity awareness of the negative effects of illegal logging, and the estab-lishment of joint Government-NGO monitoring committees to encourage communityinvolvement in monitoring and enforcement activities; (b) training, technical

- 34 -

assistance, equipment, and operational support to increase the quantity,quality, timeliness, and utility of Governmental monitoring activities, ad-dressing all identifiable weaknesses; and (c) training, technical assistance,equipment, and operational support to improve the effectiveness of all opera-tives involved in forestry law enforcement. The sub-component complements theother investment sub-components by addressing a variety of institutionalweaknesses which have contributed to a breakdown of respect for forestry lawsand regulations and an ongoing threat to the remaining forests of the Philip-pines from illegal logging. It supports both an intensive program, monitoredas part of the policy component of the project, which is intended to have amarked effect within a two-year period in discouragirg illegai logging and logprocessing in parts of Regions II (northeast Luzon), VIII (Samar only), and X(northern Mindanao), where it is now prevalent; and a less-intensive or moreroutine monitoring and enforcement program financed over a five-year period.

4.10 Regional Community-Based Resources Management Component. Thecomponent entails regional investments in watersheds of northern Luzon (Re-gions I and II, including the Cordillera Autonomous Region) and central andwestern Mindanao (Regions IX and X), which account for about 43X of the pri-mary and residual forested area remaining in the Philippines. The projectwould finance: (a) extension of sustainable techniques of livelihood, includ-ing agroforestry and forest management, and improvement of infrastructure insome 104 focal communities distributed across these regions; and (b) training,technical and management assistance, equipment, and vehicles to strengthenlocal government and line agency units in some 48 municipalities and 26 prov-inces within these regions. Implemented by local government and line agencystaff, the component would support the development of institutional capacityto plan, generate and service small-scale community-based resource managementand livelihood projects in upper watershed areas. Typical or critical siteswould be selected in one watershed per province to serve as focal communitiesfor the provision of services, to include community organizing and pre-cooper-atives development; improvements in tenure and resource management; as well astechnological extension, infrastructure construction and other social serv-ices. About half of total investments would directly benefit the selectedfocal sites, and the remainder would strengthen Govern-ment and NGO capabilities at the municipal, provincial, and regional levelsbenefiting a wider area and larger number of clients.

Relationship between Policy and Investment Components

4.11 Certain policy reforms are regarded as important prerequisites tosuccessful implementation of the public investment component, and, conversely,.rtain public investments are needed for effective implementation of the

policy reforms. User fees recovering full economic rents would reduce "rent-seeking" behavior and potential for corruption; and effective use of refores-tation deposits would provide an incentive for more responsible concessionmanagement. Together with development of adequate monitoring and enforcementplans and procedures, these policy elements need to be packaged with invest-ments better equipping DENR to monitor logging, enforce logging regulations,and manage protected areas. Similarly, the improved tenure instruments, acommitment to cooperative and coordinated service provision to populationsresident on forest lands, and a census to identify this population are keyconditions for CBRM projects aimed at increasing sustainability of livelihoodactivities in these areas. Under the present condition of severe constraint

- 35 -

activities in these areas. Under the present condition of severe constrainton budgetary expenditure and civil service size, external financial supportfor technical assistance, retraining, equipment, and civil works defines thelimits within which Government redirection of effort to protect biodiversityand provide services to the upland population can be immediately implemented.Crucial policy conditions for successful implementation of the public invest-ment component have all been put in place.

Prolect Costs

4.12 Project costs, expected to total US$369 million, net of taxes andduties, and were estimated on the basis of the current exchange rate(US$1.00-P 28) and are detailed in Annex F. They include:

(a) a quick-disbursing component of US$266 million equivalent tofinance general imports in support of the Government's sectoradjustment program. The quick disbulrsing component of theloan and credit would provide some much needed BOP support ata time when the Philippines faces a large unfinanced paymentsgap. Given current projections, the quick disbursing compo-nent, if released in the 1991-92 time frame, would fillapproximately 16-18X of the gap. Major efforts are underway,however, to mobilize additional sources of financing frombilateral and multilateral donors, making use of the consul-tative group mechanism; and

(b) an investment component totalling US$103 million, includingdesign studies leading to creation of an Integrated Protect-ed Areas System (US$2.2 million); IPAS program support (US$22million); the program to strengthen monitoring and enforce-ment capacities (US$14.2 million); and the regional communi-ty-based resource management program (US$64.6 million). Thecosts of the investment component include physical and pricecontingencies, estimated to be 331 of base costs in Pesos atOctober 1990 prices.

Loan and Credit Amount. Borrower and Executing Agency

4.13 The adjustment program would be supported by a Bank loan of US$158million equivalent and an IDA credit of SDR 50 million (US$66.0 million equiv-alent) to the Republic of the Philippines. Given the nature of most of thereforms, it is proposed to designate DENR as the executing agency. The loanwould be for a term of 20 years including five years of grace, and would carryinterest at the Bank's standard variable rate; the credit would carry standardIDA terms with a maturity of 35 years. The adjustment component would befinanced by US$100 million of the Bank loan, all of the IDA credit of SDR 50million (US$66 million equivalent), and OECF cofinancing of US$100 millionequivalent. It is proposed that retroactive financing be allowed for expendi-tures incurred from negotiations of the loan (February 19, 1991) throughloan/credit signing, up to the amount of US$33 million (201). The investmentcomponent would be financed by US$58 million of the IBRD loan. As the loanwould be directed to the Regional Resource Management subcomponent, addressingthe needs of the poorest rural residents, and to the Monitoring and Enforce-

- 36 -

ment subcomponent, which seeks to protect the remaining tropical forests fromillegal harvssting, substantial financing of local costs is justified. Cofi-nancing expected for this component includes a Japan-World Bank TechnicalAssistance Grant of Y 747.5 million (US$5.3 million equivalent) which wasreceived earlier; an undisbursed amount equivalent to about US$4.6 millionremaining at project effectiveness would be used to co-finance technicalassistance.gL Co-financing assistance of up to US$20 million is anticipatedfrom the Bank-administered Global Environment Trust Fund (GET) within theframework f the GEFL2 and US$1 million from the Nordic Development Fund. Theoverall financing plan is as follows:

Table 5: FINANCING PLAN(USS million)

Investment ComponentRegional Monitoring

Adjustment IPAS IPAS Resource & Enforce-Component Design Program Mgt Proj ment Total

IBRD 100.0 50.0 8.0 158.0IDA (US$ equivalent) 66.0 66.0OECF 100.0 100.0GEF 20.0 20.0Japan-WB TA Grant 2.2 2.4 4.6NDF 1.0 1.0Gov't, and Beneficiaries 2.0 12.2 5.2 19.4

Total 266.0 2.2 22.0 64.6 14.2 369.0

Tranching. Disbursement. and Procurement

4.14 Tranching of the ProRosed Loan and Ce,dit. It is proposed todisburse the adjustment portion in two tranches, each consisting of US$50million of the IBRD loan and SDR 25 million of the IDA credit. It is expectedthat the IBRD tranches will be matched by OECF cofinancing. The adjustmentprogram has been designed to be front-loaded. Prior to submission to theBoard, elements of the program which can be implemented by administrativeaction without a specific study have been completed, drafts of key legislationhave been submitted for Congressional action. Where actions have to awaitresults of further studies, the terms of reference have been drafted and

LI This sum includes funds already advanced for IPAS Design consultanciesinitiated in October 1990 but not completed until after Effectiveness.

/2 Subsequent to review by GEF Participants at their May 1991 meeting, theproposed GEF component was retained in the GEF Work Program. Grant fundingwill be available from the GET for this GEF project subject to its successfulpreparation and appraisal, and negotiations of the legal documents.

- 37 -

reviewed by the Bank, study teams constituted, and work already started. Thefinal passage of the reconciled Forest Charge legislation (para. 3.09) hasbeen designated as a condition of effectiveness. The first tranche will,therefore, be disbursed at loan/credit effectiveness, expected by October1991. Disbursement of the second tranche about eight months later would beconditional on completion of actions which require more preparation time andand/or completion of studies. It is understood that disbursement of thesecond tranche, in addition to stated conditionalities, would require mainte-nance of a satisfactory macroeconomic framework.

4.15 DLsbgement. The proceeds of the adjustment loan component andcredit would finance general imports not contained in a negative list, withthe local currency counterpart funds used for general budgetary expenditures.Positive list disbursement is not appropriate because of the difficulty ofdefining import 'requirements" of the environment and natural resources sec-tor. The adjustment component of the loan of US$100 million and the IDAcredit of SDR 50 million would be disbursed in two equal tranches, the firstat the date of effectiveness, expected in October 1991, and the second in June1992. Loan funds for the investment component of US$58 million (or 56X oftotal project cost) would be disbursed over an eight-year period, slightlyshorter than the nine-year disbursement profile of agricultural sector loansto the Philippines, because no major construction work is foreseen under theproposed project and a technical assistance grant (para. 4.13) has facilitatedearly startup. Allocation of loan/credit proceeds, disbursement rates, andexpected disbursements are shown in Annex G.

4.16 To expedite implementation, a Special Revolving Fund Account ofUS$3 million, representing the equivalent of about four months' reimbursementfor the public investment component, would be established in the Central Bank.In view of the large numbers of small transactions expected in this component,Statements of Expenditure (SOEs) may be used for payments for training, incre-mental operating costs, agroforestry inputs, civil works under force account,and for expenditures under US$200,000 each on civil works under contract andequipment and vehicles.

4.17 Procurement. The quick-disbursing adjustment component of theloan and the credit would finance 100X of CIF costs of eligible private andpublic sector imports. All import contracts costing US$5 million or more willbe subject to simplified international competitive bidding (ICB) in accordancewith the Bank's Guidelines for Procurement; except that, subject to the Bank'sprior approval, contracts for commonly traded commodities may be awarded onthe basis of prices available from organized international commodity markets.Contracts for lesser value, if originating in the public sector, will beawarded following local procurement procedures which have been agreed with theBank. Contracts of less than US$5 million originating in the private sectorwill be subject to compliance with normal commercial practices of the import-ers. Wherever possible, quotations from at least two eligible countries willbe sought, except where direct contracting is justified.

4.18 To facilitate economic procurement of goods, works and servicesunder the institutional strengthening and investment components, wheneverpossible, items to be procured would be grouped into purchases of at leastUS$200,000 each. Such contracts for equipment and vehicles would be procuredthrough ICB. In evaluating ICB tenders, a preference margin of 151 of the CIF

- 38 -

bid price or actual customs duties, whichever is less, would be allowed forequipment manufactured in the PhilLppines. Contracts for goods from US$50,000to US$200,000, up to a total of US$3 million, may be procured using localcompetitive bidding (LCB) procedures acceptable to the Bank. Most civil worksare slmple, small, dispersed and labor intensive, and are expected to involvecontracts under US$50,000 and a partial contribution of labor from beneficiarycommunities. These may be awarded through LCB procedures acceptable to theBank or carried out by the Site Management Units under force account. Procure-ment of items valued at less than US$50,000 may be through prudent shopping,based on a comparison of at least three price quotations. This would includemainly agricultural inputs and incremental operating expenses. All bid pack-ages above US$200,000 for equipment and vehicles (amounting to about 4X oftotal loan disbursements) would be subject to prior review by the Bank, andother Bank-financed contracts to post-award review. Contracts for technicalassistance, studies and training totalling US$15.0 million would be awaxdedand carried out in accordance with Bank Guidelines for the Use of Consultants.

Statement of Policy on Sectoral Adjustment

4.19 The proposed loan and credit are based on a Government Statementof Policy on Environment and Natural Resources Sector Adjustment, in the formof a letter to the Bank dated May 16, 1991, (Annex H) jointly signed by theSecretaries of DENR and the Department of Finance, and a Policy Resolutionadopted by the Cabinet Subeluster on Rural Development (Cluster A, ResolutionNo. 01-90). These two instruments express the Government's commitment toundertake and implement the reforms discussed in Part III above. The letterstates the Government's intention to carry out each of the measures within itsadministrative discretion, and the Policy Resolution expresses the agreementamong six Departments, NEDA, and two Presidential Offices involved in manage-ment of rural affairs on a division of responsibilities and a framework forcooperation in implementation of rural development programs on forest lands.These two instruments provide the framework for subsequent loan/credit super-vision and become the basis for monitoring actual performance. They includeappropriate targets and indicate the timing of various actions, based on theattached implementation matrix.

Cofinancing

4.20 Grants of Y 140 million and Y 607.5 million have been made by theGovernment of Japan through the Bank to GOP to finance technical assistance inpreparation and implementation of the proposed project. It is anticipatedthat about US$4.6 million equivalent will remain unexpended at effectiveness,and serve to partially finance technical assistance during implementation.The Overseas Economic Cooperation Fund (OECF) of Japan is expected to cofi-nance the policy component of the project with a US$100 million loan matchingIBRD funds. The Global Environment Trust Fund (GET) is expected to provide agrant of up to US$20 million to finance the IPAS program support, subject tosuccessful preparation, appraisal and negotiations in late 1991. The NordicDevelopment Fund is expected to co-finance on IDA-equivalent terms aboutUS$1.0 million of the costs of the monitoring and enforcement component,including mainly equipment imported from Nordic countries. The Governmentof the Netherlands has expressed interest in cofinancing a part of the RegionX CBRM subproject. The United States Agency for International Development(USAID) is expected to make grants in support of policy studies and implemen-

- 39 -

tation of the IPAS program in parallel, but not as direct cofinancing, drawingon design work to be carried out under the project. The adjustment programhas been presented to the donor community at two mini-CG meetings Meetings onEnvironment and Natural Resources as a possible umbrella activity open tocofinancing possibilities.

Benefits and Risks

4.21 The main benefits of the loan and credit will derive from theencouragement and financial support it will give to the efforts of Governmentto introduce sustainable development policies and institutional reform. As aresult of the reform program, incentives and opportunity for depletion anddegradation of tropical forest and erosion of hilly areas will be reduced;incentives and resources for introduction of sustainable upland land uses andprotection of natural forests will be expanded; a sound institutional andorganizational basis for the preservation of the biological diversity of thePhilippines will be in place; local governments and field staff of line agen-cies in about 48 municipalities, 26 provinces, and four regions will have thetraining, experience, and organizational framework to deliver support to ruralconstituencies in the uplands; and the livelihood and tenure status of one ofthe poorest segments of the Philippines population will be enhanced. Directbeneficiaries, the residents of upland barangays selected as focal sites,would number about 20,800 families. About 31,200 ha of cultivated land aretargeted for conversion to conservation-oriented farming techniques, some7,300 ha of woodlots, orchards, and protective forests would be established,and assistance in creation of some 300 community enterprises would be provid-ed. However, because of the focus on development of institutional capabili-ties of local government and line agencies, the number of potential indirectbeneficiaries would be considerably larger.

4.22 The characteristics of the proposed public investment componentmake meaningful estimation of economic rates of return impossible. This isself-evident for the IPAS design and program support components, where bene-fits emphasize such intangibles as the preservation of biological diversity;and for the monitoring and enforcement component, where quantitative predic-tions relate to reductions of rates of forest depletion and degradation, andthe preservation of tropical forests. The regional community-based resourcemanagement activities component, leaving aside the institutional developmentactivities, is essentially an extension project, in which the technologiesextended, rates of adoption, and income-generating benefits will vary amongclients and sites, and major social benefits (reduction of soil erosion andforest destruction) will also be difficult to assess. Therefore, financialand economic analysis have been applied mainly in establishing guidelines forlocal selection of activities financed by the investment component and,through modelling of client livelihood activities, indicating the prioritiesamong technologies to be extended.

4.23 The risks associated with this type of program are mainly thosearising from possible delays, inadequate implementation, or non-sustainabili-ty. The principal concern is that legislative action could be unduly delayed,prove deficient when completed, or be ineffectively implemented. However, keylegislation has already been submitted to Congress, and separate bills forForest Charges legislation which is central to the reform program have beenapproved in satisfactory form by both the House and Senate, so that early

- 40 -

passage of a reconciled version is very likely. The inclusion of a long-terminvestment and institutional strengthening component with strong cross-linkageto policy reforms provides the opportunity for continuous monitoring but-tressed by legal remedies, and should therefore minimize the possibility ofbacksliding.

4.24 Completion of the policy reforms would correspondingly reducerisks of failure of the institution-building and investment components. Themain risks of the latter are that: (a) political or administrative weaknessesmay defeat attempts to improve effectiveness of DENR in enforcement of forest-ry law and regulations, and/or implementation of the IPAS design; (b) uplandfarmers may prove reluctant or slow to adopt the conservation-oriented prac-tices which the project seeks to extend; and (c) service activities may not bemaintained following project completion. Certain features of project designhelp to minimize these risks; assistance in enforcement features developmentof a monitoring system designed to expose violations and quantitatively meas-ure apprehensions and successful prosecutions, allowing DENR management, thePhilippine public and the Bank to track progress. Assistance for the actualimplementation of IPAS will be sought from GEF only following enactment byCongress of adequate enabling legislation and completion of studies and man-agement plans in the IPAS design phase. The upland watershed developmentcomponent has been designed on the basis of positive and negative lessons ofprevious rural community development projects, including those sponsored byNGOs, and in particular would be founded on the expressed needs and objectivesof client upland communities and individuals. Although institutionalstrengthening would initially employ numbers of experienced contractual or NGOpersonnel, a transition to reliance on regular (mainly retrained) civil serv-ice and local government personnel is built into project design, which alsowould seek to minimize per client or per hectare costs of extending conserva-tion techniques. These aspects of design would make the community developmentcomponents more sustainable than typical pilot projects. At the same time, anincrease of several percent in annual Government budgetary revenues due toincreased forest charges, a portion of which may be earmarked for local gov-ernment use, would provide financial resources for eventual implementation ofIPAS and for maintaining and extending community development services inforest areas.

V. RECOMMENDATION

5.1 I am satisfied that the proposed loan and credit would comply withthe Articles of Agreement of the Bank and of the Association, and recommendthat the Executive Directors approve the proposed loan and credit.

Barber B. ConablePresident

Attachments

May 29, 1991Washington, D.C.

Annex A- 41 - Page 1 of 2

REPUBLIC OF THE PHILIPPINES

ENVIRONENT AND ATURAL RESOURCES SECtOR ADJUSTMENT PROGRAM

Table 1: Keg Ecgnomic In1igaton9

Actual Preti. Proiect1ions1966 1967 196 1969 199 1991 1992

Real Growth Rates:Gross Domestic Product (GDP) 1.4X 4.72 6.32 5.6" 2.6 2.52 3.9XGross Domestfc Income CGDY) 2.12 4.8 9.52 6.1X 0.6 3.02 4.72

Real per Capita Growth Rates:Gross Doustic Product (GDP) -0.92 2.32 38. 3.22 0.32 0.2X 1.6Total Cansumptf0n Li -1.02 1.8X 4.1X 4.8% 0.8X -2.7X -1.0%Private Conssuption LI -0.82 1.52 4.02 4.52 1.12 -3.52 -1.52

Debt and Oebt Service (LT4INF+ST):Total Om (USSt) 28368 30132 29176 28908 30325 32233 33769Total DOD/SOI 92.22 87.5X 74.52 65.12 65.6X 73.3x 73.3XDebt Service (USSN) 3039 3630 3483 334 3418 4026 4178Debt Service/Exports 26.22 30.82 26.9X 21.62 19.82 20.9X 20.8XDebt Service/GDP 9.9X 10.5X 8.92 7.62 7.42 9.22 9.12

Interest Burden (LY+INF+ST):Interest Paid (USIN) 1619 1849 2006 2183 2119 2356 2470Interest/Exports 18.82 20.2 18.8X 17.62 16.22 15.22 14.4Interest/GDP 5.3X 5.46 5.1X 4.9X 4.6X 5.42 5.42

Gross Investmwrt/GDP 12.1 15.2S 17.12 18.62 18.12 18.9X 20.92IcOR Z -22.6 -26.9 55.7 5.4 3.8 3.9 4.3

DOmestic Savings/SDP 16.2X 4.4 15.72 16.0X 13.7? 16.6 19.4XResource Balance/GDP 5.02 2.02 0.22 -2.6X -2.5 -0.92 -O.?7

National Savings/GDP 14.52 14.22 15.92 15.32 12.72 15.72 18.4"Current Accou.mt Balance/GDP 3.12 -1.3X -1.02 -3.3 -S.?X -4.02 -2.92

Marginal Domestic Savings Rate 146.52 -24.02 36.02 21.6 -75.9X 132.82 91.3XMarginal National Savings Rate 182.9 5.82X 43.82 5.32 -90.0 134.6X 89.12

Goverrnent Investment/GDP n 2.7? 2.8X 2.5X 2.62 3.0X 3.2X 3.22Goverrment Savings/SDP a 4.02 2.02 2.42 1.02 1.3X 1.3X 2.32Private Investment/GDP 12.12 15.S 17.12 18." 18.12 18.92 20.92Private Savings/DP 10.52 12.22 13.52 14.32 11.42 14.32 16.12

Government Revenues/GoP L 12.6X 14.6 13.72 15.82 15.92 16.72 16.6Govewrnt Expenditures/SOP L 17.6 16.82 16.32 17.82 18.12 19.22 17.92Budget Deficit (+)/GDP L 5.02 2.42 2.82 2.02 2.32 2.S5 1.32Primary Deficit C.)/GDP 3 1.52 -2.42 -1.92 -3.72 -3.22 -2.62 -3.12

GOP Deflator (2 growth rate) 0.92 7.9X 9.72 10.6X 14.22 12.02 10.02

Real Exchange Rate (1989.100) 106 97 95 100 102 120 120Term of Trade Index (1969100) 93 96 105 100 90 93 97

Export (GUFS) Volume Growth Rate 21.82 -1.32 1S.92 8.32 6.3 10.6 8.92Exports (GNFS)/GDP 23.22 21.82 23.82 24.42 25.32 27.32 28.6X

Ilqort (GOtS) Voltum Growth Rate 12.92 26.52 33.42 27.32 5.4X 4.02 8.32IaportS CGNFS)/GDP 14.82 17.82 22.42 27.02 27.72 28.12 29.32

NP Current Account Balance (USSM) 954 -44 -390 -1465 -2638 -1745 -1359

Growth rates may differ from 1972 NA because of rebesing.F fPw-eyar average one-perWid lag.C Central Govermuent.

-42 - Annex APage 2 of 2

Igble 2: Belanc ot Pnt(ritfttns of a curren prices)

. CtUat Erlm. igr iecti_ns190 Ivor im19908 IVW i §

A. E?orts oGtGNS- 7702 8065 9479 10829 11469 13984 153011.INiMsaei F0B) 4842 5720 ?074 7821 8131 10123 113672. Ionfactor Services 2860 2345 2405 3008 3338 3861 4166

B. 1Laorts o : s868 7861 9440 11983 13641 15246 16355I. NerchaUnIs-e Cf08) 5044 6737 6159 10419 11969 13367 143422. monfactor Services 824 1124 1281 1564 1672 1879 2013

C. Resource Balance 1834 204 39 -1154 -2172 -1262 825

D. MIet Faeto_r tncan: *1321 -1221 -1204 -1141 -1209 -1304 -1350I. ractor i eceRpts 931 1109 1187 1578 1575 1570 16372. Factor Payments 2252 2330 2391 2719 2783 2874 2987

a. Total Interest Paid (MRS) 1619 1849 2006 2183 2121 2200 2276b. Interest rrears -64 5 93 6 6 6 6c. Other Factor Payments 632 475 286 536 662 674 71o

E. Nei Curren tr, 235 376 500 830 743 821 816I. current Rtecexpts D 239 378 S03 832 745 823 818

a. Workers$ Raiittances 163 211 388 360 372 385 397b. Other Current Transfers 76 167 115 472 373 438 421

2. current Payments 4 2 3 2 2 2 2

F. Currinpccm£ alance:1.Ice ore O7ttc1 a cital Grants 748 -641 -665 -146S -2638 -1745 -13592. Official Capital Grants 206 197 275 0 0 0 03. After Officiat Capital Grants 954 -444 -390 -1465 -2638 -1745 -1359

G. Lona-Term Canital Inflows (net): 1249 457 459 99? 1497 2136 16681. birect Investment 127 307 986 854 450 61S 6312. Met Long-Term Borrowing (MRS) 422 -94 95 719 171S 1671 1187

a. Disbursements 1539 1333 13S 1?03 2662 3654 3165b. Repayments 1117 1427 1281 985 938 1359 1551

3. Other Long-Tem Inftows (net) 720 218 -529 -S76 -669 -150 -150

i. W eor-eu at -108 108 -31 189 200 223 2378. Intcrrest Arrears -64 5 93 6 6 6 6b. Other Not Short-Term Capital -1040 -144 -16 183 194 217 231

2. Capital ftows n.e.i. 0 0 0 288 510 0 03. Errors and Oissions -0 -209 479 150 462 0 0

1. Chanlet Reserves: -1099 335 -626 -159 -30 -614 S4S1%. ae redit frx Ir"Or 1137 21 -128 106 -361 256 -1062. Resem chunees n.eJ. -1236 314 *497 -26S 331 -870 -441

J. As Shares of GIOP (current US$s)1. Resource Bauance 6.0X 0.6X 0.1X -2.62 -4.72 -2.9X -1.S2. Interest Payments 5.32 5.4X 5.1X 4.9X 4.6X 5.0Q 4.9X3. Current Account Balance 3.1X -1.3X -1.0Q -3.3X -5.72 -4.02 -2.9X4. Long-Term Capitat Inftows 4.12 1.32 1.22 2.2X 3.22 4.9X 3.6X5. net Credit frem IMF 0.42 0.12 -0.32 0.22 -0.8X 0.6 -0.22

1. Gross Reserves Mic gold) 1728 968 1003 1417 9242. Gold (end-year Lorndo 883 1344 1166 907 10693. Gross Reserves (mcd Id) 2611 2312 2169 2324 19934. Gross Reserves (months O aports) 5.3 3.5 2.8 2.3 1.8

L. ExdefRate:a. ualt Averse 20.4 20.6 21.1 21.7 24.4b. End of Year 20.S 20.8 21.3 22.4 28.0

2. In Real Terms (1989=100)a. N (PAC estioste) 100 104 113 114b. Index Real Exchang Rate 106 97 9f 100 102 120 120

N. NorandwL Item: GDP (current USS) 30763 34440 39142 44392 46224 43963 46073

- 43 - Annex BPage 1 of 2

THE STAUS OF SANK GROUP OPE9AlIO IN THE PHUPPINES

A. STATEMENr OF BANK LOANS AND IDA CREDfS (ASof Muc 31, 1991)

Lamr Amount million)Cre __ _ a _lNr YeU Bowmo Pups Sam* IDA Undbrt

Nt&, n loan aWd sk gilly" dIsbur 3,5614.66 106.18

Ofie SEC sA ad Progra Las

190t 1981 Rep. of oe Phippinb SAL I 199.gm 1=9 Rep. Of te Phippnes SALN 30.2469 1965 Rep. d PhilippIs Agrcbu Sector ipta 150.002767 16 Rep. Of the PhiippinesM0 Economic Recovery P ml MOO

Sub-Tolal 96221

i-e8 19S6 Rep. d the Phmppbe MedIumca4le fton 32A3 .33040 1962 Rep. of h PhiAppne AgvIc. Suppodt Services 20.60 .53

2173 196 Rep. of to hilppk"s Communlon 38.50 3.06220D low Rep. of fe Phflppie hdstral Trag 16.40 3.172257 19S Rep. of fte Phippine Rginl ClUes Devebpment 42.06 15.902360 1t Rep. ofte Philippne Ceta Viays Regonal Dev 24.97 7.562418 1 ¶A Rep. of ft Pippin HwasV 102.00 63.622435 1964 Rep. f e Phi ippi Muricipal Developmnt 40.00 24.17

s6 1966 Rep. of te Philippi Manil Water DbbAIon 38.00 1z992716 1986 Rep. ofe PhRlppie Rural Roads 1 82.00 62.7826 16T Rep. d me Plpp P Provril Pa 32.00 15J52948 1966 Rep. dff ePhippines I ion Operaos Support 23.50 11.10*2956 1968 Rep. of f8 Phmpp Prog for Govemnnn Reorm 200.00 50.082: 198 PhIL Natlonal 01 Co. BaconManilo eothemal Powr 41.00 15.09269-1 lo Rep. d 8w Philippie Bacon4anit Geotemal Power 59.00 54.952874 1966 Rep. of te Philipphes Hou Setor 1.00 55.T53036 1899 Rep. of Philippie SMiV 60.00 21.963049 199 Rep. of the Pipps Finabl Seodr 300.00 1t0.003084 1989 0ev. Sank odf OPhl. Manl Pow DtubAon 65.50 61.103099 1969 Rep. cd to Philppnes Health DOvelopmet 70.10 64.963123 1990 Dev. Bk* of ft PhiL bkduablvetenrt Crofedt 65.00 8.573124 19SO0 Mero. Wateuwok a sew. Angra Water Suply 40.00 25.633146 1990 Rep. dtme Phipples MuNidp# Devaopment a 40.00 37.503149 1990 Rep. of O hPhippines Debt Maaeent Lon 200.00 50.003163 1990 Phil. Nanl Powr Corp, Enwey Secor Loen 200.00 151.S63164 1990 Phi. Natonal 01 Co. Erwgy Sector Loan 150.00 138.573168 1690 Rep. of te PhilIppnes Energy Sectrf Loan 40.00 34.943204 1990 Rep. of the Phpnes COODOtA Fume Deveon 121.80 116.603242 1990 Rep. of the Philpines WS/Sswer/Sannhaton 85.00 650O3244 1991 Rep. of the Phippines Second BEmkentuy Education 200.00 186.543281 1991 Rep. of the Phippirnes communl Wrrgaton a 4620 46.203263 1991 Rep. of te Philippnes Earthuake Reonrsticon 125.00 100.603287 1991 Rep. of mte Phlppines Industrial Retnittng 175.00 176IOO3312 1991 Rep. of eh Philppimes CO2age EnterprliseJ 5. 15.00

TOtl 6S36.24 105.18 1,M86.53of which has been rpaid 1.595O7 4.11

Tota now held by Bank and IDA 4,941.16 101.06Amount cold 31.35

af wtilh rpaid 31.35

Tota wnlbre 1,665.63 - 1,85.53

La The stau of t pro lstd In Part A scribed In a sepaat repat on all anMAD 1naned projects In beculn,which b updatd two yearly and cir td to me Exeutve DCreeto on Apri 30 and Ocber 31.SAL. SECAL or Program Loan

,~~~~~~~~. . . . * *z *a.. *, , a z ** , * ,- , , q, , a<,,! S: 0za F-,eu

ml~ II fla 1f}i0 li i Xa

iii~ i§11 !titilil,:g;2Xx }

§} |||SO 0SiESI 1| ii CllllEl a l§4| l}]

amM ACTION Mm~

Objectivesa/rqposed Action Program Actions Already Taken Short Term 1/ Nedliu term (1991-92) 11

A. Protect ioloalcal 01rai

1. pevl gl eff te ve fntersh -ted Protected Arfts $vstem

Ca) Oetermine and survey Consultants appointed and studies Sites identified, descilbod, *dproposed sites uriderway Justifled

(b) Prepare and suhmdt ena Satisfactory enabling legislation Sstitfctsr iy IpW tins idibfnesbling legislatfon; subaftted to Congress; consultants for Ir*epattd Frotected Are S ateIssue regulations appointed to study gazetting issues legislation ismad

(c) Prepare and iplement Consultant appofnted and study angment c Fne prpeprd ferp t Owagaement plans for Underway er toa; ecsteoei1mi tuSt rCUSteqgazetted areas ubettei to cmurei

(d) Eliminate pasture Completed report on status and Siatler reports coopleted for haboeteases from parks, rationale for cancellation of pas- torrestrial protected aeas *nd atreserves, critical ture Leases in the agt watershed least one other crttical watershed;watersheds, and all and agreed administrative actions agreed adidnistrative ctions takenareas with slopes > 5U ttken

S. DisoiraM gExEh r It 1LLl

1. 1ntroduc asr Ie rec-.fm haL wamia £Em

(s) Copeitive biddino for Procedural guidetfnes issued; fnf- Pslic biddeg fhwr at ltst tr n emnew logging licenses tial areas identified and tiaher TPU co peteinventory authorized

un

1/ Boldfaced items conditions for effectiveness or tranche release.2/ Conditions for second-tranche release of ADB Fisheries Sector Loan.

ObjectIves/Proposed Action Program Action Already Taken Short Tem feudlm Ten (1991-92)

(b) Legislation setting AdAnistrotive Order 1eoino End- Forest ehge of at least 2M of Itplemented; nosrl tge9l rhdHesadequate formulo for ronarntal Fee; b111s approved by value Pessod bY Congress for non-cooepiune plus concellationforest charge RoMe and Senate of TL pUrmits

(c) Naintain reforestation Strengthened mnitoring to ensure Revised procedures loptem entddeposit and provide for compifance and institution of trueperiodic adjustments perforiance bond

(d) Study effects on prices TOa agreed, stud* crrled out,and rents of export ban actions ogreedand other restrictions

Ce) tncreased fees for Study of appropriate rentst fee urd- DA A.D. Iopl.mentirs AD-agreed nevfishpond use of man- erway, sponsored by ADS Fisheries fee leveitgrove areas Sector Loan

0%(f) Reversion of idte or Joint DEnR-DA emorandu of Agree- Survey (AB-fin nced) curried out;

abandoned fishpond ment on reversion signed by SElR DAAENR/"Nurv C_ttee rescindedareas to forest use leases of all ldlo pondu

2. tworave gnforeement offoretr tam and reoulatlons

(a) Develop and lopleent Monitoring plan agreed and TOR for Preogpe eftorwim condiuin adan adequate monitoring TA in opletentation drafted 04portin sy te pkt Irto effectsystem

(b) Develop and Iptlement Enforcement plan agreed and TOR for nnual evaluation report on iqile-an adequate enforcement TA in foplementation drafted wentatien. inctuding quantitativestrategy indicators, agreed with Sank d

(e) Entlst cooperation of Memoranda of Agreement betmeen DEnRDepts. of Justfee and and DOJ and DILG be1ng draftedDefense

bjectlves/Proposed Actfon Proram Actions Already Taken Short Term Medfum Term (1991-92)

E¢useSustainabto UQ UsePractfce

1. Prvide secure tnr I_

(a) tmp ov tenure vatue of A.0. revisinig CSC Terms issued; Routine 1essutSC (Stewardship CCfr revised contractuat form issuedtract)

(b) Extend modif fed CSC for A.0. defining manrove CSC8 and Routine issuemangrove areas appopriate contractual form Issued

Cc) Legislation to recog-nize, delineate, andadjudicate land occu-pancy cLaims of indige-nou comamities

(d) DEON public recognition Task force to delfneate ancestral Adcbq tfwing providod for taskof prior rights of domins ard recomd mechanisms for force ad ealmuation eepoe t on uork"ancestral domains" and transfer of resource ownership stedtted to ak*lAusaiationadeinfstrative mssst- rights and aragemant responsibilttyance In delineation in operation; deifneation gufdelSnas

issued. Statement of Policy recog-nies ancestral dbmain rights inprinciple

(e) Expand mubers of Seven CFLs issued in 1990; 20 tar- 1991 target achieved plus agreedComnamity Forest Leases geted for 1991 target for 1992issued

Cf) Devise and iSue new A.O. and gudetlines defining Snstru- Routine issuecontractual instruments m*nt signedgfving property rights °over reforested areasto local residents

Objectives/Proposed Action PrograM Actions AWready Taken Short Ter medlum Term C1991-92)

(g) Authorize ISF and CFS oraft IPAS legislation provides Routine issue.in protected areas scope for such Progrms in appropr-

ate zones within protected areastere port of long-Term protectivemnagement program.

2. Eab!ush orpanizationa

frmSRd M for Eo2ii3n ofextemIon services la uDlanareas

(a) Recognition of exten- Resolution of Cabinet Cluster A on isptementatfon within adcinistrativesion requfrements of Rural Devetopment and Statement of units covered by pubtic investmentuptad populations od Policy extend this recognition; componentagreement on sourcilno lopLementation within scope of

p4blI c .tweotwent caoponent agreed

Co(b) Iproved wutonWo ISf separated from Fl, Asslt Secre-

visibilitfy, mndte, tary responsible for progra. NeWand staff colePent ISF and CFS gufdetines issued; newfor ISF program fIeld staff positions added for

$ocisal Forestry Technfclans"

(a) lrptlement comon train- Training materials developed; fmple- optementtion ithin administrativeing proraC (D DEWA mentation within scope of public units covered by Public investmentODR) investment component agreed coponent

td) Couplete Census of Caomus couplete, processing and Reedital studies iplemented, ifForest Occupants correction underway, future measures needed

agreed

000(e) Develop 16 liages VW Desk created; registration of lupltemnation within adinistrative ' oft uwderwrVy; #QQs ued ext IGsvely units coverd by public investmentin centractual work; roles conffrmed c etin Statennt of Policy

1Jectives/Proposed Action Propm Actions Atrea Taken Short TeM Ndium Term (199I-92)

3. Esttisb 1s 1SQ kmew tSt and CFS suidslines; organi- aptementatfion within adinistrative.i g small-scale. pu zatton an procedures for fntersgen- units oweed b public Ivestntnity- d resource G.amer, cy, L6 and UGO miwotvement in caqompete od tiveliho KleIt pubic Snest ment corqaonent agreed

0

0l

LAC

- 50 -

Annex DPage 1 of 1

REPUBLIC OF THE PHILIPPINES

ENVIRONMENT AND NATURAL RESOURCES SECTOR ADJUSTMENT PROGRAM

Supplementary Project Data Sheet

Section I: Timetable of Key Events

(a) Time taken to prepare the project: 24 months(b) Identification Mission: June 1989(c) Preappraisal Mission: January 1990(d) Appraisal Mission: May 1990(e) IBRD Negotiations: February 1991(f) IDA Negotiations: May 1991(g) Board PresentaLion: June 1991(b) Planned Date of Effectiveness: October 1991

Section II:_ Special Conditions

Substantial progress has already been achieved in implementation of thereform program. Elements of the program which can be implemented by adminis-trative action without a specific study have been completed, and satisfactorydrafts of legislation have been submitted to Congress. Where actions have toawait results of further studies, the terms of reference have been drafted andreviewed by the Bank, study teams constituted, and work already started.Separate bills for a key piece of legislation have passed both Houses of Con-gress and are now in Bicameral Committee for reconciliation. Passage by Con-gress of the reconciled legislation authorizing a forest charge of at least201 of market value is the sole special condition of effectiveness, and thefirst tranche of the loan/credit will be released upon effectiveness. Thesecond tranche release conditions are as follows:

(a) Satisfactory implementing guidelines for Integrated Protected AreaSystem legislation shall have been issued;

(b) Management plans for 10 protected areas shall have been preparedand corresponding budgetary requests shall have been made;

(c) Public bidding procedures for at least two Timber Production Shar-ing Agreements shall heve been completed;

(d) Satisfactory funding for the existing task force to delineateancestral domains shall have been agreed with the Bank/Association,and an evaluation report on the task force work shall have beensubmitted to the Bank/Association;

(e) Satisfactory monitoring and support systems for the prevention ofillegal logging shall have been put into effect.

- 51 -

Annex EPage 1 of 4

REPUBLIC OF THE PHMIIPPINES

ENVIRONMENT AND NATURAL RESOURCES SECTOR ADJUSTNENT PROGRAM

Description of Global Environmental Facililty Component

1. Aackground and Rationale for GEF. The Philippines includes, within itsmoist tropical forest, wetlands, and marine environments, an exceptionallyrich assemblage of both terrestrial and marine life forms, including about12,000 plant species (3,800 endemic), 170,000 species of fauna, 960 terrestri-al vertebrates (43X endemic), and about 500 species of coral. The presentsystem of protected areas, including over 61 national parks, wildlife sanctu-aries, or equivalent reserves exists mainly on paper, for lack of resources,funds, personnel and political will to manage and protect the system. Scien-tific studies are underway, financed by a Japan-World Bank Technical Assist-ance Grant, to develop a new legal framework for an "Integrated ProtectedAreas System* (IPAS), identify the priority areas for biodiversity conserva-tion, and develop management plans (feasibility studies) for an initial coreof 10 priority areas. However, the benefits of biodiversity protectionaccrue mostly to the international community as a whole, and the Government isunwilling to commit high-cost foreign borrowings for such conservation activi-ties.

3biectives

2. The GEF component would provide program support for the develop-ment, preservation and management of resources within 10 pre-selected priorityreserves under the IPAS program, following the completion of feasibilitystudies (draft management plans) to determine the most appropriate managementsystem for each of these reserves. It would lay the foundations for a long-term, efficient program of management and administration of protected areaswhich could be sustained with a reasonably level of Governmental and externalsupport and substantial NGO involvement.

3. The 10 areas, listed in Table 1, have been pre-selected as havingpriority for early inclusion in IPAS. These represent six of the most impor-tant biogeographic zones (based on endemism; out of a total of 15 such zonesdistlnguished in the Philippine Islands), a mix of terrestrial, marine andwetland environments, and include six existing/candidate national parks. Ateam of local experts, advised by an internationally-recognized expert inprotected areas management, was engaged in October 1990 to develop "feasibili-ty studies", i.e., preliminary management planning documents, for these 10areas. Basic tasks will include review and analysis of existing bio-physicaldata on the 10 areas and field collection and analysis of socio-economic,legal, and other data on the areas and the populations currently occupying orresiding in the environs of these areas; preliminary delineation (includingaerial mapping of existing land uses) of the scope and boundaries of the 10areas and any corresponding buffer zones; and draft design of conservation anddevelopment plans for each area, which identify specific objectives and goals,

- 52 Annex EPage 2 of 4

ZBile 1 : TEN PRIORITY SITES FOR PROTECTED AREA STATUS

Biogeographic Area Sites Probable Future Status

Batanes 1. mt. Iraya Natlonal Park2. Undetermined Marine national park or wetlands

Sierra Madre 3. Palanan National Park4. Undetermined Strict nature reserves

Mindoro 5. Mt. Iglit Baco National Park/Biosphere ReserveWestern Visayas 6. Mt. Canlaon National ParkSulu Islands 7. Turtle Islands Marine Natlonal Park and/or wetlands

8. Undetermined Wildlife sanctuaryMindanao 9. Mt. Apo National Park

10. Siargao Is. Marine National Park and/or wetlands

analyze conservation and social impacts, identify critical issues for theguidance of government, and recommend conservation measures. Output willinclude estimation of manpower and budgetary requirements for implementationof the recommended management plan during a five-year startup phase. Thesestudies are scheduled for completion by August 1991, and will provide thebasis for a detailed appraisal of the GEF-supported component in late1991/early 1992.

Project Description

4. The project would be phased over a seven-year period and wouldinclude four main components: (a) site development, including buffer zoneestablishment, boundary demarcation, and construction of infrastructure(access roads and trails, offices, housing, visitor facilities, etc.); (b)resource management, including habitat restoration, surveying, inventory,protection, and research; (c) socio-economic actions, including buffer zonemanagement, community outreach, and educational programs; and (d) developmentand updatlng of long-term site management plans, and monitoring and evaluationof component implementation.

Prolect Costs

5. Pending completion of preliminary management plans for the 10protected areas (after August 1991), only hypothetical cost estimates areavailable. These are based on detailed and realistic projections by DENR ofprobable requirements of infrastructure, regular staff, and operating expensesover a seven-year period, based on the general characteristics and purposes of10 specific protected areas, including five National Parks from Table 1, andassuming models of development and management meeting international standards.Total base costs are estimated to be P 500 million (US$17.9 million), includ-ing about US$1 million for technical assistance. Assuming physical and pricecontingencies total nearly 25%, total costs would be about US$22 million.

53 - Annex EPage 3 of 4

abJ,1 2: PROJECT COST SUMMARY

ForeignLocal Foreign Total Local Foreign Total exchange----thousand Pesos---- -----thousand US$---. (X)

Site Development 114,960 114,960 229,921 4,106 4,106 8,211 50XResource Management 94,549 53,184 147,733 3,377 1,899 5,276 36XSocioecon. Management 58,376 14,594 72,970 2,085 521 2,606 201Management Planning 14,876 6,375 21,251 531 228 759 30XTechnical Assistance 0 27,999 27,999 0 1,000 1,000 1002

Total Base Costs 282,762 217,113 499,875 10,099 7,754 17,853 432

Physical Contingency 26,321 22,350 48,671 940 798 1,738 461Price Contingency 88,376 62,084 150,461 1,414 993 2,408 412

Dida 395.690 303.315 699.006 12.453 9.546 21.999 43X

Proiect Issues

6. The primary issues relate to the ability of Government to iplementthe component and sustain the level of management reached under the projectfor the 10 protected areas. Implementation is predicated on completion ofthe preliminary management plans, gazetting of those areas not already gazet-ted, and budgetary authorization by Congress. As the management planning isalready underway and fully funded, the only uncertainty here relates to timeof completion (with a likely range of August-December 1991); in any case,Appraisal would require prior completion of the preliminary management plans,Both gazetting and budgetary authorization are subject to Congressional ac-tion; GEF funding for the first seven years should be sufficient to obtainPhillipine Congressional passage of counterpart funding (about 101 of totalcosts). As this component is an integral gart of a policy-based loan, dis-bursement of GEF resources would be conditional on issue of implementinggPuidelines for IPAS. following passage of IPAS enabling legislation. which isalso a condition for second tranche release of the SEGAL. A decision would bemade at Appraisal as to vhether prior gazetting should also be a condition ofdisbursement for each Dark or reserve.

7. Sustainability would require reliable sources of continuing supportafter 1998, either from the Government budget or a special Fund. It is esti-mated that the 101 Government financing, spread over seven years, would beadequate to fund routine staffing for management purposes, but additionalfunding for O&M would be required. It is the intentiotz of DENR (expressed indraft IPAS legislation) to set up individual Foundations for the support ofparticular protected areas, endowed by a combination of Government, privatesector, and foreign donors, which could provide a more reliable long-termsource of financial support and even assume management functions for theindividual areas on a contractual basis. This concept is supported by theBank and other donors, including USAID, which has programmed up to US$25million over five years for debt-for-environment swaps in the Philippines.These funds, if fully committed, will be managed by NGOs as a long-term endow-

- 54 - Annex EPage 4 of 4

sent which could, iner alia, complement Government and GEF resources byfinancing NGO management activities, land purchases, and post-implementationsupport for protected area management, which are not financed within theproposed GEF component. Decisions would be made at Anpraisal as to the scopo.standard, and budgetary costs of grotected areas management which could beflltaLine In 2nentum in the Philinnines and on the combination of mechanisms

_enired to ggarantee this su2ort, Assurance of such continued supportshould be feasible once major canital investments have been made and would beiought from Government as a condition of disbursement.

- 55 -Annex FPage 1 of 1

REPUBLIC OF THE PHILIPPINES

ENVIRONMENT AND NATURAL RESOURCES SECTOR ADJUSTMENT PROGRAM

Estimated Costs and Financlng a

Estimated Costs:

Local Forein Total--- (US$ million) ---

A. Sector Adiustment 0.0 266.0 266.0

B. Investment ComponentIPAS Design 0.7 1.1 1.7IPAS Program Support 10.1 7.8 17.9Regional Resource Mgt 33.5 20.9 54.5Monitoring & Enforcement 5.0 6.7 11.7Physical and Price Contingencies _.92 7.3 17.2Sub-total 59.2 43.8 103.0

TOTAL PROJECT COST 5 309.8 369.0

Financing Plan:

A. Sector AdjustmentIBRD 0.0 100.0 100.0IDA (US$ equivalent) 0.0 66.0 66.0OECF O. 100.O 100.0Sub-total 0.0 266.0 266.0

B. Investment Component

IBRD 26.0 32.0 58.0GEF 10.5 9.5 20.0Japan-WB TA Grant 3.3 1.3 4.6NDF 0.0 1.0 1.0Gov't and beneficiaries 19.4 0.0 19.4Sub-total 5932 .8 103.0

TOTAL FINANCING 309.8 369.0

LI Costs are net of taxes and duties.

- 56 - Annex G

Page 1 of 1

REPUBLIC OF THE PHILIPPINES

ENVIRONMENT AND NATURAL RESOURCES SECTOR ADJUSTMENT PROGRAM

Allocation of Loan/Credit Proceeds

Category &wwv Percent to be Financed(US$ million)

A. Sector Adiustment

(1) Eligible imports 166.0 1001 of foreign expendi-tures

B. Investment Comnonent

(2) Civil Works 15.1 751

(3) Equipment and vehicles 7.6 1001 of foreign, 1001 oflocal (ex-factory cost),and 851 of other local

(4) Agroforestry Inputs 4.6 751

(5) Project Management andTechnical Services 15.0 1002 .

(6) Incremental OperatingCosts 12.0 74Z

(7) Unallocated 3.7

TOTAL ,224.0

Estimated IDA/IBRD Disbursements

------------- US$ million -------------

Annual 176.9 9.8 8.8 10.4 9.0 5.6 3.6Cumulative 176.9 186.7 195.4 205.8 214.8 220.4 224.0

- 57 - Annex HPage 1 of 8

PHILIPPNE

IVIRBM2N X NATUR4L RESMCE $g ADJUAMSTE LOANYCREDIT

REPUBLIC OF THE PHILIPPINES

DEPARTMENT OF ENVIRONMENT AND NATURAL RESOURCESMANILA

May 16, 1991

Mr. Barber ConablePresidentThe World BankWashington, DC

Dear Mr. Conable:

Re_ Statement of Policy gn Ekiroment and Natural Resources SectorAdjgut ment

This letter refers to the proposal for assistance from the WorldBank to the Government of the Philippines to support policy reforms requiredto improve management of the country's natural resources. The purpose of thisletter is to set out the focus and broad objectives of the Government's poli-cies and programs with respect to environment and natural resource management,the policy adjustments that are underway, and the steps being taken tostrengthen the institutional framework for implementation of these policies.

Fundamental Emiomental Issues

The extensive denudation of Philippine forests is a matter ofgrave concern for the Government and our people. Whereas approximatelyone half (or 16.5 million ha) of our land mass was under forests in the1950's, only about a third of these forests currently remain. Worse still,virgin forests now cover under one million ha, and may entirely disappear inless than a decade. Annual timber yield and the production of forest-basedindustries have already fallen steeply, seriously eroding the sector's contri-bution to GDP and exports, and to jobs and income that support the livelihoodof over a million people. Even more threatening is the degradation caused tothe overall environment as a result of destruction of forests. Severe soilerosion is a widespread problem, affecting the productivity of forest andagricultural lands, silting up rivers, canals and reservoirs, and contributingto flash floods, droughts, and shortage of water supply. Several species offlora and fauna have become endanged or extinct. We find ourselves in themidst of a crisis, a further worsening of which may cause incalculable damageto our economy and ecology, and to the lives and livelihood of our people.

- 58 - Annex HPage 2 of 8

Although some corrective activities responding to these problemswere initiated decades ago, the results have been disappointing. Comprehensivereassessment of the efficacy of past policies and programs, and the reasonsfor their failure, have been carried out in the last two years. This has ledus to conclude that several root causes lie behind the present crisis: First,the long-standing practice of awarding forest exploitation privileges at toolow a standard charge and to a limited number of persons chosen at the discre-tion of the Forest Administration, has created windfall gains encouraging theexcessive, and often illegal, exploitation of timber resources. Unsustainablelogging, together with large scale conversion of forest lands into alienableand disposable lands for agricultural purposes, in turn, are largely responsi-ble for the shrinkage of old-growth dipterocarp forests from 10 million ha inthe 1950s to under one million today, and the consequent reduction of foresthabitat of the many species of flora and fauna endemic to the Philippines tocritically low levels. Second, rapid population growth, resulting diminutionof unoccupied lowland arable land, inequitable land distribution and landless-ness, and general rural impoverishment have created a continuing surge ofmigrants in search of livelihood into upland forests opened to access bylogging. Under this pressure, abetted by illegal logging, there has beenwidespread destruction of residual forests and conversion to unsustainableforms of agriculture, especially shifting cultivation, leading in turn to acritical soil erosion problem. Third, forest-based indigenous cultural commu-nities, who for many centuries had utilized forests and forest land withoutdestructive effects, were not officially recognized as legitimate occupantsand owners, and consequently could not be mobilized as a positive force inresource management. Fourth, in the absence of effective management and regu-lation by public agencies, public resources have been treated by their usersas "open access", free resources. Without secure access or property rights,users have had no incentive to regulate their exploitation or abstain fromresource destruction. And lastly, public management has been handicapped bylack of coordination among agencies due to diverse mandates and priorities,concentration of authority at the central office, budgetary constraints oneffective service delivery and failure to recognize the importance of the roleof the NGOs in the pursuit of national goals.

Pr2pose Reforms Snf ImplementLng Strategies

In dealing with these fundamental causes, we have recognized theneed for comprehensive policy reforms and an active implementation program.That is why we sought to formulate a Philippine Strategy for SustainableDevelopment (PSSD) and a corresponding Action Plan. The PSSD, as endorsed bythe Cabinet in November 1989, reflects extensive studies and discussions ofthe above and related issues with national and international experts. It waspresented to and discussed with representatives of international donors andNGOs at the Mini-Consultative Meeting on the Environment held in February1990. The PSSD includes the following implementing strategies for dealingwith the fundamental issues discussed above (other elements of the PSSDaddress issues of urban pollution, the role of environmental considerations indecision-making, population growth rates, etc.).

- 59 -Annex HPage 3 of 8

(a) PropAr Pricing g Natural Resources. In order to reduceincentives for excessive rates of utilization, the Governmentshould charge a price recovering the full economic rent forexploitation of natural resources, Including the costs which suchuse imposes on society. By reducing capture of such surpluses byindividuals and by internalizing societal costs, a self-regulatingsystem of economic restraint on resource use would be created.

(b) Pro22 B119Lght Reform. Again to promote self-regulation inthe exploitation of natural resources, secure access rights oreven p'ivate ownership rights over these resources would beassigned to responsible individuals and communities, to give thema lasting tie with and long-term stake in the protection of theseresources. There is a need to develop creative and secure instruments such as forest stewardship contracts, small-holder timberconcessions, artificial reef licenses, community forests, etc. toensure both equitable access and tenurial security in theutilization of natural resources, provided that the recipientindividuals or communities demonstrate the capacity forsustainable development of such resources.

(c) Establishment gf &n Integrated Protected Areas Systgm. Pro-tected areas would be established for the conservation of wildlifeend unique ecosystems, with a view to conserving genetic resourcesfor scientific, educational, cultural and historical values. Theestablishment of protected areas would be preceded by a reassess-ment of the status of parks and equivalent reserves, in order todevelop rehabilitative strategies for degraded parks and identifynew areas where conservation of genetic resources and preservationof biological diversity can be pursued.

(d) Rehabilitation oi Degraded Ecosvsteml. A rehabilitativeeffort of unprecedented scale is needed in the reforestation ofdenuded watersheds, mangrove replantation, etc. However, thismust be linked to ecosystems protection programs, policy reforms,and institutional strengthening that decisively deal with thesocio-economic roots of ecosystem degradation.

(e) Inducing Growth in thb Rural Areas. As rural poverty is oneof the main inducements of resource destruction, so it is neces-sary that a strategy for reducing rural poverty be effected withthe following elements: (i) empowerment of the rural poor throughgreater participation in policy-making processes and projectimplementation; (ii) accelerated implementation of land reform toachieve equity in the distribution of wealth and boost producerincentives; (iii) grant of equitable access for the rural poor tonatural resource use and benefits; (iv) removal of economic policyand public investment biases against the rural sector; (v) provi-sion of infrastructure and support services to increase ruralproductivity and expand market access; and (vi) strengthening ofsocial services such as education, health and nutrition in therural areas.

-60- Amex HPage 4 of 8

(F) Intgmr at gL PORpatJcon ConcznMs nd Socal Hlfar inalnUMez ZJInnlg. Population is the critical factor in anyeffort at sustainable development. It is therefore imperativethat in developing countries like the Philippines where populatlongrowth rates are still at unmanageable levels, that the populationfactor, in all its dimensions, is turned into a real assot insupport of sustalnable development. The country's populationprogram must not be limited to controlling numbers but must alsoinclude improvements In health, education and values foration.Migration into urban areas must also be considered in thepopulation program.

MediT Ation !Zan

The government is committed to a series of actions in the medium-term which will foster the growth and development of the Philippines and whichwill form the framework for the PSSD. In order to provide a stable macroeco-nomic environment in which the PSSD can succeed, the government commits itselfto pursue appropriate policies in such areas as exchange rate management,public sector management, fiscal balance, and price stability which are condu-cive for the long-term development of the economy. In this context, it isunderstood that adherence to a sound program of economic management is neces-sary for the release of the second tranche of the Environment and NaturalResources Sector Adjustment Loan.

Implementation of PSSD will be a long-term process, and many spe-cific actions will entail further study, public debate, Congressional deci-sions, and/or prior institutional strengthening. Alternative actions can betaken in pursuit of the same ends, and the social, private and budgetary costsinvolved will limit the choice of actions and the pace of change. Withinthese constraints, many choices have already been taken to deal frontally withthe main issues, and further steps during the next two years (1991-92) havebeen identified. In detailing these below, we confine the scope of discussionto policy areas of primary concern to this Environment and Natural ResourceSector Adjustment Program. Complementary policies and actions have beenidentified in the areas of rehabilitation of degraded ecosystems under theADB-OECF financed Forestry Sector Program and coastal fisheries under the ADBFisheries Sector Program. Urban and industrial environmental concerns arebeing addressed in the context of other programs supported by the World Bank,such as the Energy Sector Loan and the proposed Industrial Pollution Project.

(a) Establishment gX Ani Effective Integrated Protected AreasSvste. Congressional authorization to develop an IPAS was re-ceived in 1989. To date, a task force and associated consultingteam has been appointed to determine and survey proposed sites,prepare and submit required legislation, and prepare managementplans for ten priority protected areas. Field work began in June,and a draft of enabling legislation which meets internationalstandards has already been prepared and reviewed by the Bank.Before the end of 1991, this and corresponding gazettinglegislation will be submitted to Congress, along with budgetrequests for CY 1992 which permit full implementation of newmanagement plans for at least ten protected areas. It isanticipated that such legislation will prohibit pasture leases in

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parks, reserves, critical watersheds, and all areas with slopesgrcater than 50%. In the interim, DENR has already completed areview of the status of nine pasture leases outstanding in theMagat watershed (designated a critical watershed) and issuednotices of cancellation to seven leaseholders whose leaseholds lieon slopes draining to the Magat River. A Special Order has beenissued creating a Committee to review pasture leases nationwide,especially with regard to ancestral land claims. For its firstactivity, the Committee is tasked to review all PLAs issued inMindoro by May 1991. Before January 1992 DENR will undertakesimilar reviews and lease cancellations for the ten protectedareas (see above) and at least one additional critical watershed.

(b) Proper Resource Pricing. As prescribed by the 1987 Constitu-tion as well as DENR administrative order, no new TLA permits(logging concessions) have been or will be granted. In addition,the utilization of timber resources within any public forest areaexcept those within existing TLAs would henceforth be undertakenunder Timber Production Sharing Agreements (TPSA) to be grantedthrough competitive bidding, or under a Community Forest Manage-ment Agreement. As a trial of such procedures and a basis forassessing appropriate levels of public charges for timber harvest-ing, three sites covering a total of 1594 ha have been identifiedand inventories of harvestable timber have been authorized. Atleast two of these sites will be offered to prequalified biddersin public bids to be held before March 1992, if commercial har-vesting of timber is still legally authorized at these locations.

Legislation prescribing an increase in the forest charge to atleast 20% of Manila wholesale value of logs extracted has now beenseparately passed by the House and Senate. Congressional passageof a reconciled bill is expected shortly. Prior to this passage,DENR, with the authorization of the President, had already issuedAdministrative Order No. 62, Series of 1990, imposing an Environ-mental Fee equivalent to that prescribed in the legislation on allexisting TLA holders. Implementing regulations provide thatinability of TLA holders to provide evidence of full payment ofassessed fees will be considered sufficient grounds for immediatecancellation of TLA permits. To monitor compliance, DENR, on aquarterly basis, will compile complete provincial statistics onthe volume of logs of each quality extracted from TIA concessionsand the corresponding fees received. In 1991 DENR will alsoinitiate studies of the effects of increased forest charges andother regulatory measures, such as the export ban, on wood indus-try prices and rental value of forest land. The Department ofAgriculture has already agreed (under the ADB Fisheries SectorProgram Loan) to evaluate the rental value of mangrove areasconverted to fishpond use, and revise the fee level appropriately;a survey will also be carried out to identify idle or unproductivefishponds in such areas, and to rescind leases of all idle ponds;and all of the above will be completed by June 1991. DENR willwork with DA through the Coastal Zone Resources Management Commit-tee to arrange to make such areas available for replanting ofmangroves.

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Under Administrative Order No. 21, Series of 1988, DENR also hasrequired TIA holders to put up a reforestation deposit of P10,000per hectare which serves as a guarantee to ensure that funds areset aside to carry out reforestation in logged over areas. Tostrengthen this scheme, Administrative Order No. 1, Series of1991, was recently issued to (a) increase the size of the depositto P12,500 per hectare to cover costs of two years of plantationmaintenance and ensure survivability; and (b) impose a 3-yearsurety bond of this amount as a remedy for non-compliance.

(c) Enforcement. In order to increase the effectiveness ofGovernment's enforcement of law and regulations pertaining toforestry, we have drafted plans for introduction of an improvedmonitoring system and an upgraded enforcement program.

(d) ProDerty Rights Reform. DENR has issued an AdministrativeOrder improving the tenure value of the Stewardship Contract (CSC)to the maximum extent permissible under the 1987 Constitution, andhas issued appropriately revised contract forms. A special con-tract form along with corresponding guidelines has been issued forCSCs applicable to mangrove areas. An Administrative Order andguidelines defining a new instrument granting property rights overtrees in reforestation areas to community groups contracting forpost-establishment maintenance have also been issued. The CFSA"terms and conditions" contains a provision for the non-waiver ofthe rights of the indigenous cultural communities to their ances-tral domains. In addition, under its Community Forestry Program(CFP) which was launched in late 1989, the DENR has begun imple-mentation of the program at eight sites in 1990; it will seek toadd at least 20 additional sites in 1991, and will submit budgetrequests to Congress based on these targets.

Pending the passage into law of the proposed legislationimplementing the Constitutional mandate on the recognition andprotection of the ancestral domain rights of the indigenouscultural communities, the DENR has initiated activities in thisarea of concern through administrative issuances. Special OrderNo. 31, as amended, and Administrative Order No. 03, as amended,Series of 1990, set up a task force to assist in the delineationof ancestral domains in the Cordillera Administrative Region andrecommend mechanisms for turning over ownership rights and manage-ment responsibility for the resources contained therein. Inaddition to this, all regional offices have been instructed todelineate on maps the various claims of indigenous cultural commu-nities in their areas. Indigenous Community Affairs Desk (ICAD)officers who completed a training on tribal rights will dischargeduties and responsibilities at each regional office, with a majortask of evaluatissg, processing and delineating ancestral domains.This initiative is a concrete acknowledgement by the DENR thatindigenous communities have a strong Constitutional right to theland they traditionally and historically occupy.

(e) SupDort Services on Forest land. DENR recognizes that thepopulation presently residing on public Forest Land is in large

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part there to stay; that earlier policies of ignoring or evictingthem were counterproductive; and that, in the interest of utiliz-ing them as a positive force in resource conservation, it iscrucial that issues of their livelihood, tenure, and necessarytechnical, economic, and social services be addressed by theGovernment. In principle, community services should be providedby the functionally-relevant agencies regardless of where thecommunities are located. In practice, service provision for allagencies continues to be constrained by the existing geographicaldistribution of agency staff, difficulties of redeployment, limit-ed budget for redirection of effort, and shortages of staff withappropriate qualifications. Because DENR's mandate for managementand protection of public resources requires that it promote sus-tainable development of communities residing on public forestland, DENR in the short run will take a lead role in stimulatingand coordinating service provision for such communities. In sodoing, it will actively promote a transition to coordination ofservice delivery by local governments, provision of agriculturalextension by the Department of Agriculture, and provision ofhealth, educational, and other services by the appropriate agen-cies. DENR will continue to make contractual use of NGOs wheneverthe latter have unique skills to offer, but particularly in train-ing, community organizing, local coordination of service delivery,and monitoring of enforcement and reforestation programs; and tothis end will continue to deepen to the municipality level itsprocess of identification and registration of NGOs. In subjectssuch as community organizing or agroforestry, where DENR, DA andDAR have common training requirements, DENR will assist in im-plementing a common training program for regional and local staffof all three agencies.

Integrated Social Forestry (as well as Community Forestry) isDENR's lead program for increasing the sustainability of liveli-hood of communities residing on public forest land. As part ofreorganization, DENR has already taken steps to give ISF newadministrative independence and prominence, and to enlarge andenrich the objectives and capabilities of this program underrecently-issued ISF and CF guidelines. An entirely new categoryof civil service positions (Social Forestry Technicians) has beencreated, and so far about one thousand staff have been recruitedand trained to serve the non-traditional functions mandated by thenew guidelines. A Census of Forest Occupants was carried out in1989 to identify the potential clientele of these programs, and anadvisory task force including non-governmental experts has beenset up to evaluate the preliminary results and take any correctiveactions necessary.

We are pleased with the support the Bank has been extending to theGovernment for the improvement of environmental and natural resource manage-ment. The formulation of all of the above policy reforms and institutionalchanges, as well as related investment programs, has greatly benefited fromthe 1987 Bank-assisted study of sectoral issues (Philippines Environment andNatural Resource Management Stdy.) and the continuous discussions with subse-quent missions. The implementation of the Program will not be easy and the

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Government accordingly welcomes the assistance proposed from the Bank. Welook forward to pursuing our goals and objectives for the sector with vigorand expect that your assistance will greatly enhance our capabilities toachieve these ends.

Sincerely,

[signedl [signed]

Fulgencio Factoran, Jr. Jesus P. EstanislaoSecretary Secretary

Department of Environment and Department of FinanceNatural Resources

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