Document of The World Bank

FOR OFFICIAL USE ONLY

Report No: 46573-PH

International Bank for Reconstruction and Development

Program Document

FOR A PROPOSED

FOOD CRISIS RESPONSE DEVELOPMENT POLICY OPERATION (DPO)

UNDER THE GLOBAL FOOD CRISIS RESPONSE PROGRAM

IN THE AMOUNT OF $200 MILLION

TO

THE REPUBLIC OF THE PHILIPPINES

December 1,2008

Human Development Sector Unit Sustainable Development Sector Unit East Asia and the Pacific

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

AAA ADB ASEAN

AusAID

BAS BSP CAR CAS CCT CEA CFAA

COA CPAR CPI DA D A C DBM DepED DILG

DOF D O H

DPL DSWD

EU FA0 FIELDS

FIES

(Exchange Rate Effective as of October 30,2008) Currency Unit

US$l.OO = 49.01 PHP (Philippine Pesos)

GOVERNMENT FISCAL YEAR January 1 to December 3 1

ABBREVIATIONS AND ACRONYMS

Analytical and Advisory Activity Asian Development Bank Association o f Southeast Asian Nations

Australian Agency for International Development Bureau o f Agricultural Statistics Bangko Sentral ng Pilipinas Capital Adequacy Ratio Country Assistance Strategy Conditional Cash Transfer Country Environmental Analysis Country Financial Accountability Assessment Commission on Audit Country Procurement Assessment Review Consumer Price Index Department o f Agriculture Development Assistance Committee Department o f Budget and Management Department o f Education Department o f Interior and Local Government Department o f Finance Department o f Health

Development Policy Loan Department o f Social Welfare and Development European Union

Food and Agriculture Organization Fertilizer, Infrastructure and irrigation, Extension and education, Loans Family Income and Expenditure Survey

GPPB GPRA IBRD

IDF

IFC IMF JBIC LDP LGU MDGs M F O

MT M M T MTEF MTPDP NEDA NFA NGAS NPL

NSCB OECD

PB S PDF

PER P F M PhP

P M T

Government Procurement Policy Board Government Procurement Reform Act International Bank for Reconstruction and Development Institutional Development Fund

International Finance Corporation International Monetary Fund Japan Bank for International Cooperation Letter o f Development Policy Local Government Un i t Millennium Development Goals Major Final Output

Metric Ton Mi l l ion Metric Ton Medium-Term Expenditure Framework Medium -Term Philippine Development Plan National Economic and Development Authority National Food Authority National Government Accounting System Non-Performing Loan

National Statistical Coordination Board Organization for Economic Cooperation and Development Paper on Budget Strategy Philippine Development Forum

Public Expenditure Review Public Financial Management Philippine Peso

Proxy Means Test

FOR OFFICIAL USE ONLY

FMIS Financial Management Information System RORO Rol l on Ro l l O f f FSP Food for School Program TA Technical Assistance GDP Gross Domestic Product UN United Nations GFRP Global Food Response Program UNDP United Nations Development Program GNP Gross National Product USAID United States Agency for International Development GOCC Government Owned and Controlled V A T Value Added Tax

GOP Government o f the Philippines WFP World Food Programme Corporation

Vice President: James W. Adams (EAPVP)

Sector Director: Emmanuel Jimenez (EASHD)

Co-Task Team Leader: Carolina V. Figueroa-Geron (EASRE)

Country Director: Bert Hofman (EACPF)

Task Team Leader: Jehan Arulpragasam (EASHD)

This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties. I t s contents may not be otherwise disclosed without Wor ld Bank authorization.

REPUBLIC OF THE PHILIPPINES FOOD CRISIS RESPONSE DPO

TABLE OF C O N T E N T S

I. 11.

111.

IV.

V.

VI.

INTRODUCTION COUNTRY CONTEXT AND DEVELOPMENT CHALLENGES A. Recent Economic Developments B. Macroeconomic Policies C. D. E. THE GOVERNMENT’S PROGRAM AND POLICY RESPONSE A. B. Food Price Stabilization C. Domestic Food Production Support BANK SUPPORT TO THE GOVERNMENT’S PROGRAM A. Links to CAS B. C. Analytic Underpinnings D. E. Lessons Learned THE PROPOSED OPERATION A. Overview of Operation B. C. D. Pillar 111: Improving Targeting E. OPERATION IMPLEMENTATION A. Poverty and Social Impact B. Environmental Aspects C. Fiduciary Aspects D. Disbursement and Auditing E. R i s k and R isk Mitigation

Rice Policy in the Philippines The Rice Crisis and I t s Impact Macroeconomic Outlook and Debt Sustainability

Social Protection Programs and Measures

Relationship to Other Bank Operations

Collaboration with IMF and Other Donors

Pillar I: Emergency Social Protection Measures Pillar 11: Improving Policy Coordination in Social Protection

Pillar IV: Establishing a Conditional Cash Transfer Program

ANNEXES Annex 1: Annex 2: Annex 3: Annex 4: Annex 5: Annex 6: Annex 7: Annex 8:

L e t t e r of Development Policy Policy Matrix IMF L e t t e r of Assessment Simulating the Impact of Inflation on Poverty 2008 Government Programs to Address the Food Crisis Fiduciary Assessment Statement of Loans and Credits Country at a Glance

1 3 3 3 5 6 10 13 13 15 18 20 20 20 22 22 24 25 25 26 29 30 32 35 35 38 39 40 41

45 53 56 57 60 62 68 70

L i s t o f Figures, Tables and Boxes

Figure 1 Figure 2 Figure 3 Figure 4 Figure 5 Figure 6

Table 1 Table 2 Table 3 Table 4 Table 5 Table 6 Table 7 Table A1 Table A2 Table A 3 Table A4

B o x 1

Real GDP Growth, 2001-2007 Tax Revenues, 2001-2008 Phi l ippine Rice Product ion and Consumption, 1978-2005 Rice E x p o r t Price o f Thai 100B, 2004-2008 Price Increases, 2005-2008 Rice Pr ice Stabilization Effects

Per Capita Rice Consumption, 2000-2004 Internat ional Comparison o f Rice Production, 2005 Domestic Retai l Pr ice o f Wel l -Mi l led Rice, 2006-2008 Impac t o f Increase o f Input Costs o n Paddy Prices Med ium-Term Macroeconomic Framework, 2006-2012 Simulated Impac t W i thou t the 10% Reduction in the Pr ice o f Rice Impac t o f Improv ing the NFA Dist r ibut ion Pr ice Increase between 2007 and 2008 f o r select goods Income and Expenditure Shares by Quintile, 2006 Simulated Effect o f In f la t ion o n Poverty Simulated Effect o f In f la t ion Among Various Populat ion Groups

Global Factors Behind the Ris ing Cost o f Rice

3 4 5 8 8 16

5 6 7 9 11 35 36 57 58 59 59

7

The Philippine Food Crisis Response DPO i s being prepared by a team task managed by Jehan Arulpragasam (EASHD), co-task managed by Carolina V. Figueroa-Geron (EASRE), and consisting of John Factora (EAPVP); Lynnette Perez, Eduardo Banzon, Jamele Rigolini, Rashiel Velarde, Rosechin Olfindo, A. Juliana Williams (EASHD); Maria Loreto Padua (EASSO); Swati Ghosh, Karl Kendrick Tiu Chua, Yasuhiko Matsuda, Abigail Barbara Sanglay (EASPR); Fabrizio Bresciani, Felizardo Virtucio, Jr. (EASRE); Agnes Albert-Loth, Cecilia Vales (EAPCO); Kristine May San Juan and Cesar Banzon (EACPF). Special thanks to the valuable advice and inputs from Christine Richaud (OPCCE); Rahul Raturi, Steven Schonberger (EASRE); Bert Hofman, Maryse Gautier (EACPF); and Minneh Kane (LEGES).

REPUBLIC OF THE PHILIPPINES FOOD CRISIS RESPONSE DPO

Borrower

Implementing Agencies

Amount

Terms

Tranching

Description

Benefits

Partnerships

Risks

Operation ID

Republic o f the Philippines

The Department o f Finance i s the primary liaison with the World Bank on budget support operations but policy dialogue, implementation, and monitoring and evaluation w i l l be undertaken with the Department o f Social Welfare and Development.

The proposed operation would provide US$200 mil l ion in program assistance from IBRD.

Fixed Spread Loan in U S dollars, with 10-year grace period and payable over 25 years with level repayments.

The operation i s a single tranche operation that w i l l fully disburse upon effectiveness.

The DPO aims to support the Government o f the Philippines in addressing the challenges o f high food prices in the short and medium term, particularly b y supporting measures to strengthen social protection and safety nets to protect poor and vulnerable households. The operation recognizes the Government’s policy and institutional interventions in improving social protection for the poor and in stabilizing domestic rice prices. The operation also responds to the Government’s request for quick disbursing budget support to help finance higher than the programmed expenditures for food-crisis- related expenditures.

The key benefit expected from the program i s improved social protection programs to protect the poor and vulnerable populations.

The World Bank has worked closely with AusAID, the IMF, USAID, ADB, UN agencies including FA0 and WFT, the EU, the Government o f Japan and other key development partners. Donor coordination has been through the Philippine Development Forum (PDF), which had a special event on the food crisis in August 2008, as well as through the UN Food Security Steering Committee. The DPO reforms, coordination o f activities and policy dialogue, and possible related T A have been discussed at these venues.

The operation and the Government’s reform program are subject to disruption based on several risks: 8 Fiduciary and reputation risks remain despite improvements in the overall fiduciary environment

in recent years. Despite a rapid increase in demonstrable reforms and a continued Government commitment, corruption and weaknesses in the governance framework remain impediments to development. The window of opportunity for reforms wi l l narrow as the country nears the May 2010 elections which typically entail aversion to politically sensitive reforms, unavailability o f key decision makers, and politically-motivated policy pronouncements. Weak institutional framework and coordination problems could pose delays and implementation issues o f the ambitious CCT program nationwide, exacerbating poverty mitigation efforts.

8

8

P113492

I. INTRODUCTION

1. The proposed Food Crisis Response Development Policy Operation (DPO) for US$200 million seeks to support the Government of the Philippines address the challenges of high food prices in the short and medium term, particularly by supporting measures to strengthen social protection and safety nets to protect poor and vulnerable households. The operation recognizes the efforts b y the Government to stabilize the price o f rice, the country’s staple food, and to provide immediate assistance to the country’s poor and vulnerable populations. I t also supports intermediary steps to improve the efficacy o f social safety net programs. The proposed DPO i s a stand-alone, single tranche operation that i s being prepared under the Wor ld Bank’s Global Food Response Program (GFRP) facility. I t responds to the Government’s request for quick disbursing budget support to help address unbudgeted expenditures stemming f rom rising food and fuel prices and the slowing economy. The fiscal impact o f the food and fuel prices i s estimated to be around 1 percent o f GDP-and i t i s on this basis that the government revised i t s plans mid-year from one o f achieving a balanced budget position for 2008 to one of a fiscal deficit o f that order. The proposed DPO would be financing a portion of the higher financing deficit. Over the medium- term, the Bank intends to continue the policy dialogue with Government to encourage a deliberate and coordinated approach to managing the on-going food price increase, to reduce the likelihood and impacts o f future price spikes in particular by supporting the development o f a social protection program and help to improve medium to long-term agricultural productivity. The Bank w i l l deepen i t s support to the Government in this area with a future investment operation aimed at helping implement the Government’s new Conditional Cash Transfer (CCT) program.

2. The recent sharp rise in the price of rice has exposed the vulnerability of the Philippines to global food shocks. The Philippines has, on average, imported about 10 percent of i t s rice consumption and i t i s the single largest rice importer in the world. Whi le the domestic retail price o f rice has stabilized, i t i s expected to remain high in real and nominal terms in the medium to long-term and well above the low level reached at the start o f the decade. Domestic policies aimed at rice self-sufficiency has sought to protect domestic rice growers but has kept prices high and rice less accessible and affordable to poor Filipinos who comprise about one-third of the total population. For them, food comprises about 60 percent of household expenditures, o f which rice accounts for a third - making the poor particularly vulnerable to price shocks. I t i s estimated that the poverty headcount increased by 3.6 percentage points on account o f rising food prices. Government efforts to protect the poor through social protection schemes to date - including a large rice subsidy program - have been compromised b y design weaknesses, mistargeting, significant leakage, misallocation o f resources, and weak, fragmented institutional arrangements. This operation focuses on supporting Government reforms aimed at addressing these issues.

3. The proposed operation provides a policy complement to the Bank’s regular lending and Analytical and Advisory Activity (AAA) program under the current Country Assistance Strategy (CAS) and across several sectors, including social protection, agriculture and rural development, human development sectors, and macroeconomic policy. In particular, on the policy lending side, the proposed DPO both benefits from achievements to date of the program supported by the ongoing series o f Development Policy Loans and contributes towards achieving their objectives. In particular, the priority o f maintaining the tax effort-which i s a pillar o f the potential DPL 2-in order to accommodate expenditures to address the impact o f high food prices

1

has been critical in the dialogue for the DPO; the Government, with Bank support, has resisted popular pressure to reduce the VAT rate, particularly on fuel and other petroleum products. At the same time, since the proposed DPO supports measures to strengthen the targeting system for social protection expenditures, i t would contribute to the overall DPL objectives o f fiscal consolidation and enhanced governance through more efficient allocation and increased transparency o f government expenditures over the medium term including a phase out o f inefficient programs as the CCT gets on-stream. The DPL2 also has a social inclusion pillar with milestones and the proposed DPO would be furthering that agenda.

4. The DPO supports measures the Government has recently taken to address the challenges described above, focusing in the area of social protection. They reflect policy and institutional reforms that have been deliberated within Government but have gained greater traction in the face o f high food prices and the need for better targeted social protection programs. The 9 prior actions also reflect agreement wi th Government over the criticality o f these measures in achieving short to medium-term results, strong ownership b y stakeholders, and the likelihood of ful ly implementing the reforms in a timely manner consistent with the Government’s budgetary needs and planning cycle.

5. While the Bank is intensively engaged in policy dialogue with Government on food policy reform, this operation supports long-term food policy reform only to the extent that it i s part of the social protection agenda. Given the complexity o f the reform agenda and i t s political economy, consensus on meaningful long-term reforms w i l l take time to develop. Hence, the Bank’s engagement strategy in this area i s through technical assistance and continuous policy dialogue and advice, rather than through this more rapid GFRP operation. However, the Bank and Government recognize that the advancement of social protection policies supported in this operation w i l l facilitate moving on the difficult agenda o f rice trade reforms and phase-out o f untargeted rice subsidies going forward. The Bank w i l l continue to engage Government, through i t s AAA and policy dialogue, on strategic options for reform in this complex area.

2

11. COUNTRY CONTEXT AND DEVELOPMENT CHALLENGES

7% - 6% - 5% - 4% -

3% - 2% - 1 % - 0% -

A. Recent Economic Developments

6. The Philippines has seen strong economic growth in recent years. GDP growth which averaged 5.4 percent during 2003-2006, reached 7.2 percent in 2007, the highest growth in three decades (Figure 1). Although following the global trend, growth moderated to 4.6 percent in the first half o f 2008, net factor income from abroad continued to boost GNP, which grew b y 5.7 percent during the period. (Paragraph 27 discusses the implications o f the recent global turmoil on the macroeconomic outlook for the Philippines).

7. Inflation also remained muted until the first half of 2008. Headline CPI inflation during 2003-2006 averaged 5.3 percent and in 2007 fel l to an average o f 2.8 percent. In the first half o f 2008, however, inflation increased sharply to 7.7 percent-and peaked at 12.5 percent in August-reflecting the increase in food and fuel prices as well the depreciation o f the peso-before falling in September.

Figure 1. Real GDP Growth. 2001-2007

8. Performance of the external sector has also been strong, peaking in 2007. A balance o f payments surplus equivalent to 6 percent o f GDP was achieved in 2007-the highest in more than 10 years. High remittance inflows (US$14.4 billion) far outweighed the slowdown in exports, turning a large trade deficit into a healthy current account surplus o f 4.4 percent o f GDP. At the same time, net capital inflows were positive, aided by stronger portfolio investment (US$3.1 billion) and other investment (US$1.6 billion) inflows. As a result, international reserves climbed by almost 50 percent to US$33.8 bi l l ion (5.9 months o f imports) b y year end and further on to USs36.7 bi l l ion in June 2008.

9. The strong reserve position enabled the country to pre-pay close to US$3 billion in foreign debts last year, of which US$1.1 billion came from the public sector. Total external debt in 2007 fel l to 38.1 percent o f GDP from 45.4 percent o f GDP in 2006’.

B. Macroeconomic policies

10. The strong growth performance can be broadly attributed to significant fiscal consolidation since 2003, which has resulted in enhanced macroeconomic stability and improving investor confidence. The extent o f fiscal reform has been impressive. National

Based on the authorities’ definition of external debt which excludes “monitored private accounts” but which nevertheless meets standard definition o f external debt. I f monitored private accounts are included, the total external debt stock would increase b y US$10.7 billion, resulting in a debt to GDP ratio of around 43.3 percent in 2007.

3

government deficit was reduced from 4 percent o f GDP in 2002 to 0.2 percent o f GDP by end- 2007; national government debt-to-GDP ratio similarly fe l l f rom 80 percent o f GDP in 2004 to about 56 percent. The consolidated public sector position was balanced in mid-2006 and recorded a surplus o f 0.6 percent o f GDP in 2007.2 Moreover, the non-financial public sector debt dwindled from over 100 percent o f GDP in 2003 to below 65 percent o f GDP.

11. In 2005, the government made the difficult decision of expanding the coverage of the Value Added Tax (VAT) and increasing i t s rate from 10 to 12 percent. T o protect the poor, most items in the poor’s consumption basket remained untaxed. The VAT reform has improved tax revenues. From 13 percent o f GDP in 2005, tax revenues improved to 14.3 percent in 2006.

12. Although the tax effort fell below expectations in 2007, it improved significantly again in the first half of 2008. Some slippage in tax administration efforts led to below- targeted tax revenues o f 14 percent o f GDP in 2007, though the inability to meet this target did not jeopardize the goal towards achieving fiscal balance given the proceeds f rom accelerated p r i~a t i za t i on .~ The renewed tax administration reforms by the Bureaus o f Internal Revenue and Customs initiated in late 2007 appeared to have helped the

Figure 2. Tax Revenues, 2001-2008

I 2001 2002 2003 2004 2005 2006 2007 2008’

* as of rrid-year 2008

Source: Bureau of Treasury, Department of Budget and Management

Government meet i t s monthly collection targets so far in 2008. Tax revenues in the first half o f 2008 rose to 14.6 percent o f GDP4 (Figure 2). However, the recent passage o f a law that reduces the tax l iabi l i ty o f individual taxpayers and reassigns some 500 large taxpayers f rom the purview o f the Large Taxpayers Service to regional offices could dampen some o f the positive effects o f the recent tax administration reforms.

13. Progress has also been made in public expenditure management and the medium term expenditure framework reform. In 2007, the Paper on Budget Strategy (PBS) was prepared for a second year in a row which detailed key policy issues in the priority sectors o f education, health, public works and highways, agriculture, and science and technology. The 2008 budget was based on the Paper on Budget Strategy and Forward Estimates that were used to calculate “allocable” fiscal resources to be distributed among priority sectors on the basis o f the PBS recommendations.

14. Prior to the global turmoil, decade-low interest rates and lower spreads due to fiscal

* The surplus would have been much higher had i t not been for the central bank’s 1.4 percent o f GDP deficit due to losses induced by the peso appreciation.

The authorities’ presentation o f the fiscal accounts includes privatization as an above-the-line item (i.e revenue source).

These reforms included the scaled-up use o f third party information to detect tax evaders and non-registrants, and controlling smuggling (notably o f petroleum and cars).

4

consolidation also provided the Government more flexibility in increasing capital and social spending. Interest payment b y the national government fe l l in 2007 b y 1.1 percent o f GDP to 4 percent o f GDP. In 2007, primary spending increased for the first time in 5 years f rom 12.2 to 13.2 percent o f GDP, with a notable increase in capital outlays f rom 0.6 percent o f GDP to 2.9 percent o f GDP. The primary surplus o f almost 4 percent of GDP helped trim the national government's debt from 63.8 percent of GDP in 2006 to the 56 percent o f GDP in 2007 as noted above. Two o f three major credit rating agencies have maintained their stable outlook on the Philippines while the third has upgraded i t s outlook on the Philippines to positive from stable, citing the country's improved fiscal performance and stable macroeconomic fundamentals.

Indonesia Thailand Vietnam

15. The Government's monetary policy stance has been appropriate. With inflation breaching the Central Bank's original and revised targets, policy rates have been hiked several times already in 2008 to contain inflation. Most recently in October the Monetary Board left key policy rates unchanged in view of the improved inflation outlook and expected slowdown in the real economy.

612 612 599 580 524 467 450 431 438 323 704 697 691 702 665

C. Rice Policy in the Philippines

16. One of the priority goals of the Medium-Term Philippine Development Plan for 2004-2010 i s "to make food plentiful at affordable prices." Rice i s the staple food for over 80 percent o f the population, contributing as much as 65 percent o f the calorie intake. Among the poorest households, rice accounts for a third o f food expenditures and about 20 percent o f total household spending. Reflecting the Philippines' higher per capita income, rice consumption per capita i s lower compared to Indonesia and Vietnam (Table 1). However, unlike in other countries, Philippine per capita rice consumption has been growing, driven b y a large and growing share o f the poor relying on rice as a staple.

Table 1. Per Capita Rice Consumption, 2000-2004

Source: UNDP (2005) and FAOSTAT (2007) 17. Rice consumption has been consistently greater than production, and self reliance based on domestic production has yet to be achieved for a sustained period of time (Figure 3). For the past decade, the country has had to import about 10 percent o f i t s total consumption from international markets, making i t

Figure 3. Philippine Rice Production and ConsumDtion. 1978-2005

the biggest rice importer in the world. While population growth has averaged 2.3 percent per year since 1990, rice production grew at 1.9 percent. Rice production i s l ow in absolute and relative terms; rice yields in 2005 averaged 3.6 tons per hectare while Indonesia and Vietnam achieved yields o f 4.5 and 4.8 tons per hectare, respectively. The Philippines also has the smallest area planted with r ice compared to i t s neighbors and as a whole, arable land endowment per person are substantially lower than countries in mainland Southeast Asia (Table

I I Source: BAS ( 2007)

5

2). Another disadvantage i s geography; the country i s the first landmass along the Pacific typhoon belt and i s buffeted b y numerous typhoons each year, making rice production difficult and risky.

Production (million tons) Area (million ha.) Yield (tondha.)

Philippines Indonesia Thailand Vietnam 14.6 54.1 23.9 35.9 4.1 11.9 9.2 7.4 3.6 4.5 2.6 4.8

18. Despite the country’s apparent comparative disadvantage in rice production, Philippine policy makers have pursued a policy of rice self-sufficiency in the name of food security. This has introduced conflicting policy goals involving increasing the incomes o f rice farms while providing consumers access to affordable rice at the same time. Furthermore, there has been a desire to achieve a measure o f stabilization in producer as well as consumer prices through government intervention in the trade and management o f buffer stocks. On the production side, the Government has sought to encourage domestic rice production through: (i) market price support through import protection vis-&vis quantitative restrictions and import tar i f fs (currently at 40 percent); (ii) public expenditure for production support (including fertilizer and seed subsidies irrigation post-harvest facilities and other infrastructure); (iii) rice procurement by the National Food Authority (NFA) which i s the sole entity allowed to import rice and regulates rice trading. On the consumption side, the Government has sought to improve accessibility o f rice to the poor through (i) price stabilization through imports and stock releases; (ii) a large subsidized rice program through NFA. The net effect o f the rice self sufficiency policies during the past pre-food cr is is years - to be discussed in greater length in subsequent sections - has been high domestic prices and less consumption due to import tariffs (until recently, domestic retail prices about 50 percent more than world prices), decreased producer efficiency due to artificial incentives o f protection, and tremendous fiscal pressure given the operations o f the NFA. Furthermore, the NFA’s monopoly control over rice administration inevitably enhances the opportunities for rent-seeking behavior. Lastly and more generally, having a single, dominant importer o f rice has made the country less nimble and less ready to respond to the dynamics o f the international market, as was evidenced b y the rice crisis in the f i rst half o f 2008.

D. The Rice Crisis and its Impact

19. The global price of rice had been manifesting an upward trend, rising steadily by 64 percent from 2001 to 2007 (Box 1). In early-2008, however, world rice prices soared far above what would be expected based on the fundamentals o f supply and demand, nearly tripling from December 2007 to April 2008. The sharp spike in global r ice prices in March-Apri l 2008 was prompted b y rice export restrictions in several countries, followed b y large purchase tenders by the Philippine Government that became worried about depleting stocks, hoarding b y local traders, long-lines for the country’s staple, and the potential for social unrest. In mid-March, the Philippines signaled that i t would import 2.1 mi l l ion tons in 2008 instead of the 1.6 million tons originally announced. Towards the end o f March, there were reports that the country’s import

6

demand might reach 2.7 mi l l ion tons. The Philippines also announced future tenders even before earlier tenders had been completed, adding more demand pressure on the market which had seen supply dwindle as a result o f hoarding and export restrictions. All told, the Philippine tenders contributed to driving the global price o f rice from US$385 per metric ton in January 2008 to US$567 in March and close to US$l,OOO per metric ton in April (Figure 4)5.

September October November

Box 1. Global Factors Behind the Rising Cost of Rice From 2001 to 2007, world rice prices rose gradually but steadily b y 64 percent (inflation-adjusted in US dollars). This episode marked the first time since World War I1 that world rice prices increased for six straight years, suggesting the impact o f long-term structural factors. Recent World Bank studies suggest that the rise in world food prices stem primarily from rising energy costs and increased biofuel demand. The former has occurred directly through higher fuel costs in agricultural production (for example fuel costs for machinery, irrigation systems and transport), and indirectly, because energy i s a major input in the production o f fertilizers and agricultural chemicals, which in turn are essential inputs in crop production. Rice, in particular, i s fertilizer-intensive. Increased biofuel demand has also contributed to the overall surge in world grain prices. The impact o f biofuel use on rice prices i s less direct than for other grains or oilseeds, since rice i s not used for biofuel production and rice land i s not easily switched to other biofuel crops. However the surge in wheat prices i s being reflected in rice prices because wheat and rice are substitutes in consumption and imports. Based on the historical relationship between wheat and rice prices since 1990, the high level o f wheat prices in early 2008 would suggest rice prices around US$600 a ton, up from US$326 in 2007. (Mitchell, 2008). That however i s rather less than the further rise in rice prices to over US$l,OOO in April 2008, for which recent changes in trade policies are more o f a factor. Source: “Rising Food Prices in East Asia: Challenges and Policy Options ”, World Bank, May 2008

23.71 25.74 I 34.59 I 23.50 23.46

20. Higher world prices of both food and oil were initially muted by the strong peso appreciation by nearly 20 percent in 2006-07 and the Government’s rice price stabilization policy. The latter has been pursued through intervention in the trade and management o f buffer stocks. However, the combined impact o f rising international food and fuel prices on domestic inflation began to take a to l l in early-2008, Table 3. Domestic Retail Price of Well-Mil led Rice, when inflation breached the Central 2006-2008

25.70 338g6 25.49

December 23.54 I 25.53 Average 23.56 1 24.72

Bank’s 4-5 percent target, compared to the ten-year l ow o f 2.8 percent during 2007 (Figure 5). Inflation peaked at 12.5 percent August 2008 as the domestic price o f rice spiked upward b y 34 percent in June. The average retail price o f well- mil led rice rose from an average o f PhP24.72 per kilo in 2007 to PhP38.76 per k i lo in July 2008 (Table 3). Fuel prices, especially diesel o i l prices increased sharply in the second quarter, prompting the Government to gradually remove the tariff rate on o i l and to ask oi l companies to cross-subsidize

Month

diesel oil. However, while both food and energy prices were rising, food accounted for a far larger share o f core inflation, at 47 percent, compared to about 7 percent for energy. Without

’ While the data on world prices i s from FAO, the Philippines fourth tender in mid-April 2008 actually exceeded US$l,OOO per metric ton (at US$1,100 per metric ton).

As o f the 2”d week o f October 2008.

7

respite f rom the rising prices o f basic commodities, prices o f other goods also began to rise, pushing inflation to double digits b y June and eroding consumers’ purchasing power. From June to August 2008, the Central Bank hiked up policy rates by a total o f 100 basis points-among the highest in the region.

the V A T . In her annual State of the Nation Address in July 2008, President Arroyo spoke o f the benefits o f maintaining the expanded value-added tax (EVAT) which not only has strengthened economic management, but provides PhP6O bi l l ion in revenues to pay for programs to help poor and vulnerable Filipinos cope with soaring food and o i l prices. The Government’s stance was in spite o f the popular opposition to the VAT, especially the 12 percent VAT on petroleum products which have been

21. T h e Government took action to stabilize domestic food prices while also enhancing safety nets. In a bid to stabilize prices, the Government, at the advice o f the Wor ld Bank among others, suspended a large rice tender, initiated bilateral deals and procured domestically to secure rice stocks. I t also allowed temporary changes to the rice importation regime. T o mitigate the

Figure 5. Price Increases, 2005-2008 (January 2005= 100)

Source. CEZC D U ~ U

likely effects On poverty’ the Government I Figure 4. Rice Export Price of Thai 100B, 2004-2008 I scaled-up or initiated social safety net programs, including a large increase in the existing rice subsidy program. The Government announced that i t was prepared to sacrifice i t s original balanced budget target in favor o f increased spending o f up to 1 percent o f GDP (roughly PhP75 billion) to address concerns over the food crisis and i t s impact on the poor, as well as the risk o f economic slow-down. As part o f i t s enhanced expenditure program, the Government committed to also undertake I Source: USDA, FA0

I I

reforms to in the area o f social safety nets.

23. B y August 2008, the sense of crisis and panic had dissipated but the price o f rice and food crops in general i s expected to remain at high levels (compared to the pre-crisis period) over the medium term. The domestic retail price o f rice has stabilized considerably, f rom a peak month-on-month increase o f about 17 percent in April 2008, i t decelerated to only

8

0.9 percent in July 2008 (Table 3). Retail prices contracted by 5.3 percent (month-on-month) in August 2008. Preliminary data for October 2008 shows that the domestic retail price o f well milled rice has continued to decline reaching the level o f PhP33.88 per ki lo. In this regard, domestic prices have followed the same trend o f the global price o f rice which (if using Thai rice prices as proxy) has come down substantially from i t s peak in Apri l-May 2008, although in the medium-term, this i s expected to remain at levels well above those prevailing before the onset o f the crisis

cost % price % cost I t e m Share increase increase

Fertilizer 0.16 27.68 4.32 Seeds 0.07 53.00 3.86 Pesticides 0.05 5.30 0.28 Other Costs 0.03 10.00 0.31 Labor 0.56 14.20 7.99

24. The widely shared projection of continued high food prices, both domestic and global, i s based on higher input costs of agricultural production. Labor costs have increased b y over 14 percent, fuel (for machinery, irrigation systems and transport) by over 21 percent, and fertilizers and agricultural chemicals b y about 28 percent (Table 4). Among food crops, rice, i s particularly fertilizer intensive. I t i s expected that fuel and fertilizer prices w i l l continue to r ise and minimum wages wil l , in turn, l ikely keep pace with higher food prices. All told, i t i s estimated that the cost o f producing a ton o f rice has increased by almost 20 percent between January 2006 and M a y 2008.

However, paddy’s profitability w i l l progressively decline as cost of production continues to increase. Moreover, b y procuring r ice on the international markets at high prices and subsidizing domestic prices, the Government absorbs the difference

Machinery and fuel

Total cost per ton of paddy

0.13 21.40 2.68 through substantial financial losses. While consumer prices are stabilized,

1 .oo 19.44 the policy o f subsidized domestic

26. The rise in food costs, combined with rising fuel prices, i s estimated to have contributed to a sharp increase in poverty despite strong economic growth. Both urban and rural poverty increased between 2003 and 2006, the last year in which this data i s available (Family Income and Expenditure Survey, 2006). The increase in the minimum wage in June 2008 was below the increase in the consumer price index (the food index in particular) in the succeeding months thereby reducing the real income o f the non-rich (Figure 5). Opinion surveys

9

have reported an increase in both the self-rated poverty (from 50 percent in March 2008 to 59 percent in June 2008) and hunger incidence (from 15.7 percent in March to 16.3 percent in June 2008). Furthermore, the April 2008 unemployment rate increased to 8 percent f rom 7.4 percent a year ago according to the latest labor force survey. But the over-riding factor behind the poverty increase i s the high vulnerability to food price shocks. Household expenditure data reveals that an average household spends 41 percent o f total expenditures on food while the poorest households spend about 60 percent on food, o f which a third i s consumed on rice. More broadly speaking, the 18 percent increase in al l food items b y July 2008 may have increased poverty by 3.6 percentage points, equivalent to about 3 mi l l ion people (Annex 4).

E. Macroeconomic Outlook and Debt Sustainability

27. Clearly, macroeconomic prospects have become more adverse in 2008 and even more so in 2009 but the situation should remain manageable. With the exception o f a handful o f banks, the banking system as a whole was mi ld ly affected by the financial turmoil given their small holdings o f sub-prime-linked securities (0.2 percent o f total assets) and exposures to the collapsed Lehman Brothers (0.3 to 0.4 percent o f total assets). Overall exposure to structured products i s estimated at about 2 percent o f total banking sector assets. Philippines’ key vulnerability to the most recent wave o f turmoil in the global financial markets arises f rom i t s s t i l l relatively high stock o f public sector debt. About half o f Philippines foreign currency denominated debt i s held b y foreign investors, and about one-third by domestic banks. This makes the domestic banks’ portfolios quite vulnerable to global re-pricing o f r isks and interest rate increases. However, the banks appear to have sizable cushions to weather the shocks-with relatively high capital adequacy ratios (CAR) and low non-performing loan (NPL) ratios. Overall, the economy i s in a relatively strong position to weather the uncertainties brought about by the recent turmoil given the fiscal reforms and current account surpluses o f the last few years. These have served to improve investor confidence and boost the level o f international reserves.

28. Following the trend in the global economy, Philippine economic growth i s expected to ease to about 4.0 percent in 2008 and further to 3.0 percent in 2009, before rising again in 2010, global conditions permitting. While the growth in remittances i s l ikely slow in the second half o f 2008, growth in remittances for the year as a whole i s l ikely to average 9.5 percent, helping to buoy the economy (Table 5). Nonetheless, weaker domestic demand-given the much higher rate of inflation expected at about 10 percent this year, and falling exports of key products such as electronics, coupled with a sharply rising import bill, are expected to limit growth this year. The growth in remittances i s expected to slow further to 4.0 percent in 2009 as i s the growth o f exports, dampening growth prospects for 2009.

29. The country’s current account surplus i s projected to be sustained. Remittances grew by 17.2 percent in the first half o f 2008 and as noted above w i l l l ikely grow at around 9.5 percent for the full year. Given this, the current account would remain in surplus despite the larger trade and income deficits estimated at about 8.3 percent o f GDP in 2008. Portfolio investments are l ikely to decline slightly in 2008 but the capital and financial accounts are not expected to turn into deficits. Reserves are estimated to reach US$36.6 billion or about 5.4 months o f imports in 2008 and 5.1 months of imports in 2009.

30. The public sector’s fiscal position i s expected to remain manageable while the

10

government undertakes counter-cyclical measures to protect the poor and sustain growth. In M a y 2008, the government announced i t s intention to postpone budget balance to 2010 and instead increase spending to counteract the effects of the global slowdown and higher prices. Measures announced include a new CCT program, cash transfers to electricity l i fel ine users (Le. consumers of less than 100 k w h of electricity per month), cash subsidies to the elderly who have no regular income or access to social security, rice subsidies, fertilizers and seed subsidies, and school feeding programs, among others (Annex 5). The budget deficit i s now expected to reach 1.2 percent of GDP in 2008, and given the deteriorating external environment and expected slowdown in growth, to increase further to 2.1 percent o f GDP in 2009.

3 1. Containing the overall fiscal deficit target hinges on achieving the programmed tax effort of at least 14.1 percent of GDP in 2008 and 13.6 percent of GDP in 2009, given an expenditure program of about 17.0 percent of GDP (the revenue balance coming f rom non- tax revenues and privatization). In the absence o f new tax policies that would increase collection, the government would need to rely on improved tax administration. The consolidated public sector position i s l ikely to post a mild deficit o f 0.7 percent o f GDP in 2008, reflecting the increase in NFA subsidies. While the NFA deficit i s projected to reach 0.6 percent o f GDP, surpluses are expected in the financial, pension and local governments to mitigate the deficit in NFA and national government.

32. Public sector debt as a share of GDP i s expected to fall further in the medium-term. From over 100 percent o f GDP in 2003, the non-financial public sector debt i s estimated to fa l l below 60 percent o f GDP in 2008 and reach 50 percent o f GDP by 2012. In the last f ive years, the primary surplus has gradually increased from a deficit to 4 percent o f GDP in 2007. The recent increase in interest rates and spreads (which have recently spiked at over 800 basis points but may be expected to come down over the coming months as the uncertainty in the global financial markets subsides) and lower economic growth are l ikely to slow down the pace o f debt reduction, though a reversal i s not expected.

33. Overall, the macroeconomic policy stance has been appropriate and responsive and the macroeconomic outlook remains robust and adequate for the proposed DPO operation.

Table 5. Medium-Term Macroeconomic Framework, 2006-2012

2006 2007 2008 2009 2010 2011 2012

GDP growth CPI inflation (average) Exchange rate (PI-IPAJSD) Sovereign spreads (EMBIPLUS) Merchandise export growth Merchandise import growth Remittances (transfers) growth FDI (billions of dollars) Portfolio investment (billions o f dollars) International reserves (billions o f dollars) International reserves (months o f imports) Privatization receipts (billions o f pesos)

5.4 6.2

51.3 154

15.6 10.9 15.9 2.8 3.0

23.0 4.3 5.8

11

7.2 2.8

46.1 206 6.0 8.1 5.9

-0.5 3.1

33.8 5.9

90.6

4.0 10.0 46.0 550 3.8

12.5 9.5 0.5

-0.2 36.6 5.4

29.6

3.0 8.5

49.0 500 2.0 1.9 4.0

-0.5 0.3

35.4 5.1

15.0

4.1 5.5

51.0 460 3.8 4.5 5.0 0.3 0.6

35.4 4.8

20.0

4.5 4.0 53.0 400 4.4 6.0 6.0 0.6 0.9

36.0 4.6

15.0

5.0 3.5

53.0 350 4.9 7.3 7.0 0.9 1.2

38.2 4.6

10.0

(Percent of G D P ) Gross domestic investment Current account Gross national savings Trade deficit Tax revenue Expenditure National Government balance NG balance (net o f privatization) NG primary balance Consolidated public sector balance National government debt Non-financial public sector debt External debt

14.3 4.5

18.8 -5.7 14.3 17.3 -1.1 -1.2 4.1 0.2

63.8 73.9 51.4

14.8 14.5 14.0 14.4 4.4 1.5 2.1 1.6

19.2 16.0 16.1 16.0

14.0 14.1 13.6 13.8 17.3 17.0 17.2 17.0 -0.2 -1.2 -2.1 -2.0 -1.5 -1.6 -2.2 -2.2 3.8 2.8 2.1 1.8

55.8 53.4 51.5 49.5 63.4 58.4 56.3 54.3 43.3 40.1 38.2 36.2

-5.7 -8.3 -8.1 -8.2

0.5 -0.7 -1.5 -1.2

14.7 1.2

16.0 -8.7 14.0 16.8 -1.9 -2.1 1.6

-1.1 47.3 52.1 34.3

14.9 0.8

15.6 -9.1 14.2 17.0 -2.1 -2.1 1.1

-1.1 44.1 49 .O 32.4

Source: GOP for historical, World Bank for projections

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111. THE GOVERNMENT’S PROGRAM AND POLICY RESPONSE

34. The Government’s response to the food crisis can be grouped in three categories: (a) social protection programs and measures; (b) food price stabilization; and (c) domestic food production support. Each one entails an immediate and medium-term response, aiming broadly to mitigate the effects o f the crisis through interventions to stabilize rice (and fuel) prices through new and expanded social safety net programs and measures targeting the poor and vulnerable; and through programs to assist farmers cope with higher production costs stemming from rising fuel and fertilizer prices.

A. Social Protection Programs and Measures

35. I t i s estimated that about 3 million additional people fell below the poverty line in 2008 relative to 2006, due in large part to high food prices (Annex 4). The Government took immediate measures to scale up existing social safety net programs and to initiate new ones (Annex 5).

Immediate Resvonse

36. The Government resorted to increased social protection through programs they had already allocated additional funds to in the 2008 budget. In 2008, increased budget allocation was given to a major transfer program in the form o f Food-for-School (FSP) f rom PhP2.8 bi l l ion in 2007 to PhP3.3 billion. The PhilHealth SponsoredIndigent Program, the government’s main vehicle to extend health services to the poor, also received more support. The national government’s contribution for the poor through the PhilHealth Indigent Program was increased from PhP2.9 billion in 2006, enough to cover about 70 percent, to PhP3.5 bi l l ion b y 2007 and 2008 to increase coverage to up to 90 percent o f eligible households.

37. In addition, the Government allocated more funds during the course of the year to a series of safety net programs. An estimate o f the spending on existing and new programs to contend with the food (and fuel) crisis over and beyond the amount allocated in the 2008 budget i s PhP 69.4 bi l l ion (US$1.4 b i l l i ~n )~ . As o f October 2008, the Department o f Social Welfare and Development (DS WD) was allocated approximately US$122 mi l l ion (PhP6 billion) in supplementary funding for social protection programs, above and beyond what was originally allocated in the 2008 budget’. Many o f these allocations were decisions made at the level o f Cabinet and through pronouncements o f the President, including in the State o f the Nation Address. This reflects an explicit effort to scale up social assistance in the face o f mounting distress. The programs that benefited from scale-up funds included food, nutrition and breastfeeding programs and other social protection programs aimed at assisting poorer households (Annex 5).

’ World Bank staff estimates. The Government has estimated that in 2008 budget allocation to programs that address the food crisis i s about PhP 72.7 bi l l ion (US$ 1.5 billion), including other forms o f assistance to NFA such as parantees and cash advances to cover operating costs.

have actually been received by the DSWD. As o f November, a total o f PhP5.5 billion, or about 92 percent o f the PhP6 bi l l ion funding allocated i s known to

13

38. The most significant transfer program, however, has been the rice subsidy program through the NFA. Despite the sharp increase in retail prices of rice from P25.84 per kilogram in January to PhP38.76 per kilogram in July 2008, NFA continued to provide subsidized rice primarily at PhP18.25 (and slightly higher quality rice at PhP25) per ki lo. The rice i s sold through accredited outlets. The NFA also sells rice and other basic commodities directly to consumers through mobile Roll ing Stores operated and deployed by the NFA in depressed and far-flung areas where there are no other NFA accredited rice outlets. The 2008 cost o f this subsidy program (computed as the financial cost o f this program) i s estimated to possibly be as high as PhP60.9 bi l l ion (US$1.2 billion)’.

39. The NFA rice subsidy program, however, i s poorly targeted and under-covers the poor. Currently, the NFA rice i s accessible in many public markets and neighborhood stores and anybody can buy the rice, without need for being pre-qualified. Evidence shows that i t i s not well-targeted to the poor. Based on the FIES 2006, NFA rice accounted for only 13 percent of the total spending on rice by the poorest quintile. Moreover, about 40 percent of NFA rice i s not consumed b y the poor. Only 3 1 percent of the total consumption o f NFA rice goes to the poorest quintile. The richest 2 quintiles accounted for 16 percent o f total NFA rice consumed in 2006. T o improve targeting o f NFA rice in Metro Manila, the Government undertook a rapid effort this year, as rice prices escalated, to issue “Family Access Cards” to poor households in the city. While the method used to identify the poor has been less than optimal (relying on local government officials to identify the poor), to date some 270,000 such cards have been issued. The Government has pronounced i t s intention to limit the sale o f subsidized rice in Metro Manila before the end o f the year to only those households which have been provided with an access card. The subsidized r ice would also be available in accredited stores only.

Medium-tern Program

40. T h e rice price crisis has increased the attention of Government decision makers on the need to develop improved and more cost-effective social protection measures to the badly targeted rice subsidy. I t has generated an important debate about alternatives to a system that i s recognized to continue to pose a severe fiscal drain and add to the Government’s contingent liabilities. In particular, the crisis has reinforced the need to (i) improve targeting of social safety net spending; and (ii) accelerate the roll-out o f a cash transfer system, such as CCT.

41. During 2008, the Government launched a pilot conditional cash transfer program (Pantawid Pamilyang Pilipino Program, or 4Ps) that focuses on supplementing the income of the poorest households in selected municipalities while also supporting their human capital development. Program planning was initiated in 2007 based on successful experiences in Lat in American counties, and launched in February 2008 in four pilot municipalities in the Philippines. In response to the food crisis, the government decided to accelerate the CCT program to r o l l i t out to 320,000 beneficiary households b y the beginning o f 2009. Households who qualify for

Estimated based on the Department o f Finance’s assumption o f 2.4 mil l ion metric tons of rice imports in 2008, purchased at US$940 per metric ton, including freight costs, and sold at PhP18.25 per kilo.

14

the program w i l l get an annual transfer o f PhP9,OOO (US$184) to a maximum o f PhP15,OOO (US$306) (an estimated annual average o f PhP12,OOO (US$245) per household) for 5 years on the condition that their children attend school and visit health clinics for regular check-ups.

42. The proxy means test (PMT) that i s used to select household beneficiaries of the 4Ps i s regarded by Government as a possible unifiednational household targeting model to ensure that programs are received by their intended beneficiaries. The Government i s actively seeking to adopt this targeting system as the national targeting scheme that i t would use for multiple national programs aimed at targeting the poor. Moreover, i t i s interested in accelerating i t s roll-out nationwide, recognizing that a targeting scheme would provide an alternative to the current, expensive and inefficient rice subsidization scheme through NFA. I t i s recognized that improved targeting can reduce the leakage o f NFA rice and potentially reform NFA’s role in the rice market. Alternatively, the option o f using targeted cash transfers to poor households to replace subsidized rice in the market, once a targeting system i s in place, i s now actively being contemplated. Such a move would address a number of issues and distortions in the realm o f food policy (below).

B. Food Price Stabilization

43. Speculation, panic and rapid price increases in the international rice market have begun to affect the Philippines by late 2007. Rice retail prices increased by 50 percent between January and July 2008. There was reported panic buying and hoarding by households.

Immediate Response

44. Faced with the sharp spike in rice prices, the Government sought to dampen adverse speculation to stabilize prices. The NFA (in charge o f farmgate price support and retail price stabilization) released i t s stocks especially to the areas that showed the most price increase. At the same time i t also sought to further build up i t s inventory mainly by large-scale buying from the international rice market.

45. However, the manner in which the NFA conducted i t s rice import tenders may have exacerbated the volatility of the international market. Beginning February 2008, the NFA signaled that i t would import 2.1 mi l l ion tons in 2008 instead o f the 1.6 mi l l ion tons earlier announced, and further, that i t would be wil l ing to pay a substantial price premium for the additional rice. The NFA has bought, so far, a total o f 2.3 mi l l ion metric tons o f r ice at prices that sharply increased in the first quarter. I t s price offer reached a peak o f US$1,100 per metric ton in April 2008.

15

46. When the government realized that it was contributing to the global rice market's volatility, i t suspended a large rice tender and initiated bilateral deals with Japan and Vietnam to strengthen its rice stocks. The suspension o f the tender was bolstered in part by the Government's upward revision of i t s crop projections by nearly 400,000 tons. In July 2008, the Government was able to secure a Japanese pledge to ship 200,000 tons o f surplus imported

contingency agreement o f r ice f rom Thailand which provides for up to 300,000 tons o f rice at a "friendly

A month rice to the Philippines." earlier, the Philippines also reached a

Figure 6. Rice Price Stabilization Effects, 2005-2008 1 mw I____.,..._._-.....llll_...._____.l_il__...__ ..i_l..." ~

46w -

4 w - /\ 3sw - :i '\%I

Fr

W M . __ _ _ government-to-government sale price" if the Philippines were to experience

." 2sw 2

~ s s s s ~ q ~ s s s s s s s s s s t s s n e 4 i 2 sg: : $ c

isw 1 shortages. N o rice has yet been imported under this agreement, though. B y July sw

metric ton in M a y 2008, about US$835 per metric ton in July 2008 and further down to US$787 per metric ton in August 2008. Domestically, while NFA-subsidized rice remained the same at PhP18.25 per kilo, the increase in the retail price o f well-milled rice has decelerated starting June 2008 and reached a high of PhP38.76 per k i l o in July 2008. I t has since declined to PhP33.88 during the 2"d week o f October 2008 (Table 3).

47. Moreover, temporary changes to the rice importation regime, including larger quotas for private importers, were allowed. The NFA Board drew up a temporary mechanism to relax the (40%) tariff rates on rice in February 2008 and to allocate rice import quotas to the private sector. The temporary mechanism went into effect in March 2008 with the NFA's issuance o f the general guidelines on the participation o f farmers' organizations and the private sector in general for 163,000 metric tons o f rice, and in April and M a y 2008, for 200,000 metric ton, subject to payment o f a service fee o f P2.00 per k i l o instead o f the 40 percent regular tariff. The aim was to allow greater private sector participation in the importation o f rice rather than relying solely on the NFA. The incentive, however, failed to trigger a significant response from private sector importers, since world rice prices then were higher than domestic prices." In April 2008, the Government announced the temporary lifting o f the 300,000 rice import quota set aside for the private sector, but there have been no significant takers o f this offer so far from the private sector.

48. At the height of the food crisis, the Philippines also proposed the establishment of a global rice reserve which it introduced in the FAO-sponsored Food Summit in Rome in June 2008. The proposal i s s t i l l under "study" though unlikely to get broad endorsement. The Philippines also called for an emergency Association o f Southeast Asian Nations (ASEAN) meeting on r ice as part of the G8 meeting in Japan. Currently, ASEAN i s pi lot ing a regional r ice

lo This deal has not been completed yet. l1 At the end, the amount o f rice tendered by private tenders was relatively small at 69,400 metric tons and was limited to high quality rice.

16

reserve mechanism which would need buy-in f rom Thailand and Vietnam in order to become ful ly operational. Such an institutionalized collective approach between the major rice producers and consumers could play a crucial role in defusing future market disruptions.

Medium-term Prowam

49. Under World Trade Organization (WTO) agreements, the country i s due to lift i t s quantitative restrictions on rice trade by 2012. Increasing the number of players in the rice market, along with the lower trade protection should lead to better food security. The significant presence of the private sector in rice trade multiplies the sources o f strategic stocks and supply o f rice, thus, laying the foundation for more price stability in the medium-term. Competition, likewise, favors efficiency and more consumer-friendly prices. A better private sector response may be expected as global rice prices continue i t s downward trend towards levels below domestic prices provided the government establishes a conducive investment environment. This includes the removal o f the ad hoc nature o f private sector participation in rice trade, considerable lowering or removal o f tar i f fhervice fees, and the simplification o f import procedures.

50. The updated 2004-2010 Medium-Term Philippine Development Plan (MTPDP) explicitly supports the eventual transfer of rice trade to the private sector. I t endorses the following bill which seeks to restructure the NFA towards more focused operations:

National Food Authority (NFA) Reorganization Act is to further rationalize the grains sector trading. The ultimate purpose is to restructure the NFA to separate its regulatory and proprietary finctions. NFA shall grant ministerial import permits for rice to all applicants, subject to the payment of all taxes and duties. The passage is envisioned to efSect the implementation of NFA activities consistent with its mandate.

51. The difficulties faced by the Philippines’ food policy regime in contending with the recent food crisis (including market uncertainties over rice prices, difficulties in securing imports, the fiscal burden of NFA subsidies and operations) appear to have renewed interest on the part of the Government to move toward the objective of a market-oriented approach to food security. Discussion on these issues has been the focus o f recent Cabinet- level meetings and technical meetings as well as at the Special Philippine Development Forum event held in August 2008 to discuss this issue (Section IV). Policies under consideration include reforming the role o f NFA to only manage buffer stocks but to maintain them to insure against r i sks associated with. As discussed above, social protection alternatives to the current untargeted rice subsidies are being developed as well, ranging f rom improved targeting o f rice to the poor with the existence o f a new poverty household targeting system, to replacing rice subsidies altogether wi th a cash-based subsidy to poor households. These important discussions are consistent wi th the medium-term imperative to liberalize rice trade further in l ine with WTO arrangements and the Government’s own medium term development plan.

52. Recognizing the political and operational challenges of undertaking food policy reforms, the Government and the Bank have agreed to actively continue their current partnership of policy analysis and dialogue in this area. The Government has requested the Bank to provide technical assistance and policy advice in a number o f areas, including the development of a Strategic and Operational Roadmap for food pol icy reforms focused on

17

necessary interventions and their sequencing; pilot-testing a cash transfer program for farmers affected b y eventual food policy reforms; constituency-building for reforms; and the installation and mainstreaming o f a Monitoring and Evaluation system for Agricultural Policies in order to assess implementation and impact o f eventual food policy reforms.

C. Domestic Food Production Support

53. There is scope for further increasing domestic agricultural productivity. Domestic rice production has historically been able to meet only about 90 percent o f domestic consumption. Productivity may be enhanced through higher rice yields and b y expanding cropping areas through delivery o f better irrigation services. Philippine rice yields are lower than those o f Indonesia and Vietnam. Moreover, irrigation coverage i s only 46 percent o f the total potential irrigable areas in the country12.

Immediate Resvonse

54. The crisis reinforced the Government’s focus on increasing domestic food production. I t held a multi-stakeholders Food Summit in Clark Field, Pampanga on April 3, 2008 in order to gather inputs and mobilize support to address the food crisis. During the summit, President Gloria Macapagal-Arroyo announced the launching of the “FIELDS” (Fertilizer, Infrastructure and irrigation, Extension and education, Loans, Dry ing and other post- harvest facilities, and Seeds) program package to encourage further domestic production in rice, corn, livestock, fisheries and high-value crops. The proposed budget allocation for this program in 2009 amounts to what would be a doubling o f the Department Agriculture’s (DA) previous budget allocation.

55. The Government accelerated spending on support to agricultural production during the course of 2008. In 2008, the Government doubled i t s budget allocation for the FIELDS program to PhP 5.4 bi l l ion from PhP 2.7 bi l l ion in 2007.13 Spending was prioritized for irrigation, farm-to-market roads, dryers, fertilizer and seed subsidies, and extension services. The DA had distributed 4.5 mi l l ion 250-peso fertilizer discount coupons to local government units (LGUs), o f which 1.6 mi l l ion had been distributed to farmers under i t s joint fertilizer subsidy program with LGUs. The Government also subsidized seeds to farmers. T o further encourage rice farmers, the NFA adjusted i t s paddy support price f rom PhP12.00 to PhP17.00 a k i lo and provided farmers an additional cash transfer equivalent to one bag o f petroleum-based fertilizer for every 50 sacks o f paddy sold to the NFA.

56. However, governance concerns and targeting undermine the effectiveness of input subsidies. Fertilizer distribution was at the center of a 2004 political scandal involving questionable dispositions made by congressmen through whom the fertilizers were channeled and more recently, Commission on Audit (COA) findings unearthed incidences o f leakages in the DA’s fertilizer program involving local government officials. Further, fertilizer subsidy i s

There were 1.4 mil l ion hectares irrigated out o f 3.1 mil l ion hectares o f total irrigable farmlands as o f December 2006. l3 The FIELDS program i s essentially an acceleration and scaling up o f existing production programs o f the government, rather than consisting o f new measures or emergency (time-bound) measures.

18

targeted at the most productive areas in the Philippines, where farmers are least l ikely to be credit-constrained and where fertilizer availability i s not the critical constraint.

Medium-term Program

57. The Government’s official policy with regards to food production remains that of striving for rice self-sufficiency. The DA’s Rice Self-sufficiency Plan, aims to make the country rice self-sufficient by 2010. Through the FIELDS program, i t aims to do so by focusing on technological interventions to improve yields, including improved irrigation, improved seeds, integrated crop management, continued research and development and delivery o f extension support service.

58. The Bank continues to engage Government on the merits of focusing on food security rather than self-sufficiency, and on investment in public goods for productivity enhancement. Various technical analyses have shown that the policy o f rice self-sufficiency, in fact, undermined food security. Further, the pol icy o f stabilizing consumer prices undermined the increase in farm gate prices, thus, squeezing farmers between sharply increasing input costs and moderately increasing production prices. The 2007 Agriculture Public Expenditure Review (AgPER), for instance, ascertained that Filipinos spend more on but consume less rice than i t s neighbors due to this policy. As a result, i t was estimated that the Philippines bore a net annual welfare loss o f about PhP60 bi l l ion for the period 2000-2005. Studies have also stressed the importance of investments in public goods for agriculture (such as irrigation and access roads) rather than the provision o f inputs that can be accessed b y farmers through the market. The FIELDS program would be more effective in promoting long-term food security i f i t focuses more on the delivery o f public goods and services in agriculture.

59. The Government i s taking some important steps to enhance i ts focus on improving productivity through investment in critical public goods. The Government i s undertaking efforts to refocus i t s public spending to stimulate productivity increase through investment in public goods such as farm-to-market roads, post harvest facilities, and upgrading i t s agricultural research capacities. This agenda i s supported b y the Bank’s Diversified Farm Income and Market Development Project. In addition the Government i s also undertaking an irrigation sector reform program, also to be supported by a Bank investment operation. I t i s also furthering i t s agenda to improve agricultural productivity by working to foster increased public-private partnerships in agriculture wi th a view to enhancing private investment in agriculture and enhancing international and local trade.

19

IV. B A N K SUPPORT TO THE G O V E R N M E N T ’ S P R O G R A M

A. Links to CAS

60. A CAS Progress Report was completed in FY08. The CAS Progress Report reaffirmed the strategy laid out in the 2006-2008 Philippines CAS, and extended the strategy through FY09. The CAS Progress Report reaffirmed the two objectives o f the CAS as economic growth and social inclusion, and the two levers (which contribute to achieving growth and social inclusion) as fiscal stability and good governance.

61. While this emergency operation under the Global Food Crisis Response Program (GFRP) operation was not envisioned in the CAS, it i s aligned wi th the overall objectives of the 2006-2008 Philippines CAS. Through this operation, the Bank i s supporting the Government’s efforts at poverty reduction, as well as social inclusion and social stability, b y supporting measures to alleviate the impact o f food price increases on poorer households. Moreover, the measures supported by the operation, particularly wi th regard to improved and more transparent targeting, aims to improve the governance in the social protection area.

62. Even with this proposed emergency operation, lending for the FY08-09 period i s expected to remain well below the indicative envelope of US$1.7 billion under the revised base case indicated in the C A S Progress Report. In FY08 total lending was US$245 million. The Bank’s Philippines program i s scheduled to deliver up to US$SOO mi l l ion in FY09, excluding this operation, but including a Development Policy Loan (DPL) operation which i s currently under discussion. Net disbursements are expected to remain negative and exposure i s expected to continue to decline in the Philippines. Indeed IBRD exposure in the Philippines declined from a peak o f US$5.53 bi l l ion in FY95 to US$2.88 bi l l ion in FY06 as a result of negative net disbursements f rom the Bank14. Reflecting recent and projected investment and policy lending commitments, annual disbursements are projected to average around US$300 mi l l ion over the next three years. But with principal repayments to IBRD averaging about US$400 mi l l ion during the same period, net disbursements would remain negative and exposure would continue to decline in the absence o f a substantial series o f continuous policy-based lending. IBRD exposure satisfies current Bank guidelines, given also the Philippines heavy reliance on borrowing f rom global capital markets in recent years. Total external debt i s projected to fa l l from 43.3 percent o f GDP in 2007 to less than 36.2 percent in 201015.

B. Relationship to Other Bank Operations

63. Bank operations.

This GFRP operation benefits f rom i ts close link to several other ongoing Wor ld

First, on the agenda of sustained fiscal consolidation and macroeconomic stability, the Bank i s providing ongoing support through i t s National Program of Support for Tax

In FY07, exposure increased marginally primarily as a result o f the First Development Policy Loan (DPL1) and 14

disbursement from several large projects. l5 Based on authorities’ definition of external debt.

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Administration Reform (NPSTAR) project which aims to improve tax administration and the ongoing DPL series. The Second Development Policy Loan (DPL2) supports (i) macroeconomic and fiscal stability; (ii) governance and anti-corruption; (iii) investment climate and infrastructure; and (iv) social inclusion, although triggers are defined only in the first three areas. There has been significant progress on the broad reform program covered b y the DPL series. The anticipated reforms have already been undertaken in the investment climate and infrastructure areas. There have also been significant improvements in tax administration and considerable progress in budget transparency. The proposed GFRP DPO benefits f rom the achievements to date under the program supported b y the ongoing series o f Development Policy Loans (DPLl and 2) and contributes towards achieving their objectives. In particular, the priority o f maintaining the tax effort which i s a pillar o f the DPL2-in order to accommodate expenditures to address the impact o f high food prices has been critical in the dialogue for the DPO; the Government has resisted popular pressure to reduce the VAT rate, particularly on fuel and other petroleum products. At the same time, since the proposed DPO supports measures to strengthen the targeting system for social protection expenditures, i t w i l l contribute to the overall DPL objectives o f fiscal consolidation and enhanced governance through more efficient allocation and increased transparency o f government expenditures over the medium term. The DPL2 also has a social inclusion pillar with milestones and the proposed DPO would be furthering that agenda.

Second, on the agenda of social protection and targeting, the Bank i s working on developing a project to support the development o f the Government’s national poverty household targeting system and the nascent CCT program to develop a longer term system to respond to food price and other shocks as part o f the Government’s Social Welfare and Development Reform agenda. In so doing, the Bank i s already providing the Government wi th technical assistance related to improving targeting and developing i t s CCT program. These are critical elements both to the short and longer-term responses to price shocks. The Bank’s support in this area through an investment operation i s seen b y the implementing agency as critical support for sound implementation o f this program and agenda in the medium-term. The issues o f household transfer programs and targeting are also relevant to such programs supported by the Department o f Health (e.g. the PhilHealth Indigent Program) and the Department o f Education (e.g. the Food for School Program). The reform agenda in education i s supported b y the Bank’s Basic Education Sector Reform Agenda (BESRA) project, and the reform agenda in health i s supported b y the Bank’s National Sector Support for Health Reform (NSSHR).

Third, on the agenda of food policy and agriculture, the Bank has several investment projects aligned to support Government, particularly in i t s efforts to improve productivity with a view to increasing food security. Bank projects a im at (i) redirecting Government efforts towards the sustainable and effective provision of public goods (e.g. irrigation, post-harvest facilities, market information, etc.) rather than relying on long-term subsidization o f inputs; (ii) strengthening the delivery o f support services through local government units (Mindanao Rural Development Project 11 ) while strengthening the Department of Agriculture in i t s role, after decentralization, as a regulatory and planning agency for the sector (National Program Support for Diversified Farm Income and

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Market Development Project); and (iii) promoting farm level productivity, especially in the small farm sector (Mindanao Rural Development Project I1 and Second Agrarian Community Development Project). Coherently wi th the goal of rationalizing and improving the efficiency o f centrally provided services and o f reinforcing LGUs in service delivery, an adaptable program loan (APL) for a Participatory Irrigation Development Project i s currently being prepared. This project w i l l substantially improve the delivery o f irrigation services to farmers in key rice producing areas, thereby supporting rice yield growth in the medium to long-term.

C. Analytic Underpinnings

64. This GFRP Development Policy Operation draws upon analytical work undertaken by the Bank and others. In i t s analysis o f the current Philippines food situation, i t draws on ongoing analytical work and policy dialogue on the rice sector, as wel l as the Agriculture Public Expenditure Review (AgPER) completed in 2007. The AgPER recommended that ideally (i) a food security policy be adopted; (ii) rice trade be liberalized; (iii) the NFA be l imited to i t s buffer stocking function for emergencies; and (iv) savings be channeled to productivity enhancing public goods. The work continues to be the basis of ongoing policy dialogue with government in the area o f food policy. This operation also draws on analytical work and pol icy notes undertaken in the area o f social protection and targeting, including consultant studies under ASEM and PHRD grants, undertaken to inform the Government and the Bank on the issues of improved targeting. I t also draws upon the Bank’s AAA program on Inclusive Growth underway in the Philippines. The Bank, in collaboration wi th AusAID, i s also providing the Government with Technical Assistance on strengthening Governance and Anti-Corruption in i t s CCT program design. The EU may also consider further support to Government on the social protection and food policy agenda.

D. Collaboration with IMF and Other Donors

65. The Bank and the Fund continue to collaborate closely in areas of common interest. Views on macroeconomic and structural pol icy priorities are closely aligned between the two institutions. Specifically, on the issue o f the current food price crisis and Government response, the Bank and the Fund have been in close consultation and have provided coordinated pol icy advice. The Fund’s Post Program Monitoring program terminated at the end o f 2006 and the Fund stays engaged in the Philippines through a regular Surveillance program. The most recent IMF Article IV Mission (November 2008) found fiscal and monetary pol icy to be compatible with the Government’s macroeconomic framework. The Fund views the macroeconomic situation as stable, and has publicly expressed views that the Government’s planned modest fiscal deficit in reaction to the current economic situation i s manageable and should be complimented by sustained tax effort and wel l targeted spending to the poor. I t views the authorities’ tightening monetary pol icy as appropriate given the r isks o f increased inflation. The last Article I V IMF Consultation Mission to the Philippines was in November 2008. (See IMF Letter o f Assessment in Annex 3)

66. The Government convened a special session of the Philippine Development Forum (PDF) on August 20,2008 to explain and garner the support of i ts development partners on i t s response to the food and fuel price crisis. At the special PDF event, the Secretary of

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Finance explained the centrality o f the Government in maintaining i t s strong effort on revenue collection as part o f i t s response to the crisis. The Secretary o f Budget Management explained some o f the programs that have been additionally funded to address the food and fuel price shock. The Undersecretary o f Social Welfare and Development reported on efforts being taken in the area o f social protection, while the Secretary of Agriculture addressed the Government’s efforts at supporting producers wi th a view to enhancing productivity. Participants included representatives from Government, bilateral and multilateral development agencies as well as other selected non-government organizations. PDF partners indicated their broad support for the Government’s efforts, particularly in the areas o f fiscal discipline and continued revenue effort as well as in the important strides being made in the area of social protection. Whi le commending the Government for i t s programs in agriculture and i t s efforts in boosting agricultural productivity, partners noted that with the implementation o f a modern social protection system, the need for short-term programs linked to rice price stabilization and rice distribution w i l l diminish over time. Development partners offered assistance to implement critical reforms including rationalization o f NFA’ s functions and the trade regime, which would address the longer-term food pol icy agenda.

67. Several PDF members have provided focused support to Government. They include analytical and advisory activities in the areas o f social protection (e.g. AusAID) and food policy (e.g. AusAID support to the 2007 AgPER and to a study on the NFA; joint USAID-Wor ld Bank short-term policy advice support on the food crisis). In terms o f food production support, a joint delegation from the Food and Agriculture Organization (FAO), International Monetary Fund (IMF), International Fund for Agriculture Development (IFAD), and the Wor ld Food Programme (WFP) met with the World Bank and the PDF Working Group on Sustainable Rural Development regarding i t s mission to assist the GOP identify investment support initiatives to address the food crisis.

68. The Bank has also coordinated with other agencies on food security issues through regular meetings of the Food Security Steering Committee. The Committee i s convened b y the United Nations Resident Coordinator (Secretariat), and includes the FA0 (co-chair), WFP (co-chair), IMF, IFAD, International Rice Research Institute, United Nations Children’s Fund, World Bank, Asian Development Bank, and International Federation o f Red Cross and Red Crescent Societies. The Committee meets on a monthly basis and has been an important forum for information sharing on the impacts o f food price increases and actions being taken and planned. I t also aims to build a common understanding and identification o f impediments to achieving national food security wi th a view to recommending key measures to address food security.

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E. Lessons Learned

69. context, including the ongoing DPL operation, as well as f rom other GFRP operations to date.

This GFRP Operation draws upon lessons learned to date, particularly in the Philippines

Support for reform measures where there is commitment at the highest-levels of Government. Given the strength o f the Executive branch, successful and sustainable policy actions require the buy-in of the Cabinet and, in most instances, o f the President. This operation has thus sought to support measures where Cabinet level discussions and decisions have been made. Likewise, the Development Pol icy instrument has been used to capitalize on i t s role as a catalyst on cross-Departmental issues that called for Cabinet level decision-making.

Build on ongoing Government programs and efsorts. Past experience with Development Policy Lending has shown the importance o f building on and supporting Government programs. Especially given the need for a quick response to the request o f the Government o f Philippines for access to GFRP financing, i t i s important to support ongoing Government efforts for reform, even i f nascent. Indeed new reform agendas, especially at the sectoral level, benefit f rom the support and pol icy dialogue related to a Development Pol icy Operation.

Recognize the sequencing issues related to dealing with the food price crisis by supporting practical short-term measures while helping to put into place reforms that wi l l equip Government to better address such issues in the medium term. The GFRP framework document and the Bank’s work to date supporting countries to contend with the food price crisis has shown the need to support short-term measures to allow fast response, such as the scaling up o f existing programs in the short-term, even if such programs may not be deemed optimal for the long-term. Rather, the program should also support Governments toward launching more sustainable programs over the medium term. Moreover, sequencing considerations themselves have guided this operation to address strengthened social protection reforms now, in order to better be able to address more difficult food policy reforms in the medium term.

Acknowledge the need for sustained support for the policy agenda beyond this operation. Experience from the Philippines and elsewhere signals that while Development Policy Lending can be crit ical to supporting a reform agenda, i t needs to be complemented b y ongoing support. In this case, in the areas social protection as wel l as food policy, the Bank i s committed to continuing i t s support for reform with multiple instruments, including investment lending, AAA and Technical Assistance in partnership with others.

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V. THE PROPOSED OPERATION

A. Overview o f Operation

70. The proposed Food Crisis Response Development Policy Operation (DPO) aims to support the Government o f the Philippines address the challenges o f high food prices in the short and medium term, particularly by supporting measures to strengthen social protection and safety nets to protect poor and vulnerable households. The operation focuses on the Government’s policy and institutional interventions in the area o f social protection aimed at mitigating the impact o f this and future such shocks on the poor. I t supports and builds on the Government’s decisive actions to move forward quickly on this agenda. Apart f rom the policy dimensions o f the DPO, the operation also responds to the Government’s request for quick disbursing budget support to help finance higher than budgeted food-crisis-related expenditures.

7 1. This operation supports both short-term emergency measures that Government took to immediately mitigate the impact o f the rice price shock on consumers, as well as the steps taken to put into place an improved social protection system to cushion the poor f rom such shocks in the future. In the short-term the Government took immediate measures to try and stabilize the increase in domestic rice prices while i t also took measures to scale-up existing social protection programs as well as measures to improve their effectiveness with a view to protecting poorer households from the rice price shock. At the same time, the rice price shock reinforced the Government’s commitment to build a more effective and sustainable social protection system for the poor. This has been reflected in decisive steps the Government has taken to put into place an improved targeting and social protection program to address such shocks in the future. While the DPO i s a stand-alone, single tranche operation, the Bank intends to continue the policy dialogue with Government over the medium-term to encourage a deliberate and coordinated approach to improve social protection and to reduce the likelihood and impacts o f future price spikes. This effort w i l l be reinforced through Technical Assistance (TA) provided with partners, such as AusAID currently, as wel l as through a planned Wor ld Bank investment operation to further support Government efforts in this area.

72. While the Bank i s also intensively engaged in the policy dialogue w i th Government on options fo r more effective and efficient food policies, th is operation supports the long- term food policy reform to the extent that i t i s par t o f the social protection agenda. Reforms in food policies are complex f rom a political economy standpoint, and consensus on meaningful long-term reforms w i l l take time to develop. Nevertheless, the crisis has increased the openness o f the Government to actively engage with the Bank in mapping out and preparing the way for the eventual implementation o f these reforms in the medium-term. Thus, the Government and the Bank have agreed to continue their engagement on the food pol icy reform agenda, through instruments such as AAA, technical assistance, pol icy dialogue and advice. Beyond this GFRP operation, the Bank w i l l continue to support the reform agenda through existing and planned investment operations for improving agricultural productivity and pursuing critical food policy reforms. There i s prospective funding under the EU-financed TA facility under the GFRP for these continuing engagements on food pol icy reforms, in addition to investment operations which reinforce effective public expenditure management and focus on

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Government’s role in provision o f investments for public goods. Moreover, the Bank and Government partners agree that the advancement o f social protection policies supported in this operation w i l l facilitate moving on later wi th the difficult agenda o f rice trade reforms and the eventual phase-out o f untargeted rice subsidies.

B. Pillar I: Emergency Social Protection Measures

73. The Government undertook decisive actions to address the sharp increase in food prices in the domestic market which was perceived as increasing poverty and vulnerability of households and as potentially resulting in social instability. To this end, the Government took actions, with significant budgetary implications, to (i) lower and stabilize domestic food prices in the short-term while (ii) implementing programs to mitigate the short-term impact o f high food prices on poorer households.

Objective 1: Lowering and stabilization of domestic food prices in the short term,

74. Rice retail prices had increased by 50 percent in the first half of 2008. As noted above, food price increases are estimated to have increased poverty incidence by 3.6 percentage points. Moreover, while Government felt the need to replenish i t s r ice stocks before the onset o f i t s lean season (to ensure sufficient rice for food balance purposes as wel l as for domestic rice price stabilization), i t also realized that resorting to i t s conventional approach o f international rice tenders was driving up international rice prices. In the face o f announced export restrictions b y a number o f countries, supply on the market was scarce.

75. Hence the Government undertook several measures that aimed at stabilizing domestic prices. First, in M a y 2008, i t decided to stop resorting to large rice tenders in i t s bid to increase i t s domestic stocks. Rather, as a temporary measure, i t sought out bilateral deals to increase i t s imports and stocks, including wi th Japan and Vietnam. Second, i t also made quick albeit temporary changes to i t s rice importation regime in M a y 2008, including the issuance o f guidelines allowing larger quotas for private importers and rescinding the 40 percent tariff on rice for private import (with a service fee o f PhP2.00 per kilo). Third, wi th i t s increased imports, the NFA also took measures to release i t s buffer stock in the domestic market wi th a view to containing domestic prices. I t accelerated i t s stock release in the lean season after June 2008 resulting in the gradual decline o f domestic retail prices after July 2008, during the lean season when rice prices normally increase due to seasonality factors.

Prior Action I: Government temporarily refrained from purchasing rice through international rice auctions and temporarily lifed restriction on private sector imports of rice.

Short-Term Outcomes and Next Steps

76. In the short-term, these actions contributed to a decrease in domestic (and international) rice prices. As noted in Section V1.A below, i t i s estimated that the Government’s policies, in combination, kept domestic prices approximately 10 percent cheaper than the international price during the r ice spike in the first half of the year. Moreover, these actions contributed to reducing domestic retail prices by about 12.6 percent between i t s peak

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average price during the month o f July 2008 and the 2nd week o f October 2008. I t also contributed in part to the winding down of international prices by approximately 20.6 percent between the peak average international price in May 2008 and in September 2008.

77. The food crisis has raised awareness among many in Government about the inefficacies inherent in the current food policy regime. Yet, as discussed in Section 111, there are challenging political economy issues that make wholesale reform in the area o f food policy difficult in these next years before the next general election. Nonetheless, in the medium term, the Government i s committed to looking for ways to move on a pol icy reform agenda that would allow for more cost-effective and less distortive ways to ensure stability o f domestic markets. For example (related to prior actions below), the Government i s seeking alternative means to protect the poor f rom such shocks in a more targeted way, without a heavy reliance on providing NFA subsidized r ice for this purpose. A key benefit would be the more effective use o f public resources.

Objective 2: Mitigation of short-term impacts of high food (and fuel) prices on poor households.

78. Given the aforementioned spike in food and other prices, Government needed to act urgently to address the situation. While there were no reports o f food riots, media and public attention was heavily focused on the issue o f the rise in food consumer prices, especially o f rice. This coincided with various surveys and polls issued over the course o f the year that demonstrated that rising prices were indeed a major issue in the view o f the population and that poverty and hunger were on the rise.

79. In the short-term, the Government realized that it needed to increase spending to household subsidies and transfers to mitigate the impact of the increase in food and other prices. The Government and the President were early to recognize the escalation o f prices and to consider increasing spending in 2008 to existing and easy-to-implement transfer programs. While some o f these programs have been recognized to be sub-optimal in terms o f efficiency, the imperative to protect poorer households f rom the short-term price shock appropriately called for measures to increase transfers and subsidies to these households as fast as possible. This was best done by deploying funds in the 2008 budget to supplement existing programs and other easy-to-implement transfer programs that would be aimed at poorer households.

80. The Government increased spending on implicit and explicit subsidies and transfers during the course of 2008. The largest such increase was through the maintaining o f a constant subsidized price for rice for the poor through i t s rice consumer subsidy program, administered b y NFA. Despite long-term issues regarding the mandate and governance o f NFA (see Section 111), and the need for improving targeting o f i t s subsidized rice, NFA played an important social and political role during this crisis b y maintaining some rice in the market at a constant PhP18.25 per kilo. Bank staff calculations estimate that the implici t consumer subsidy increased to PhP32.1 bi l l ion (US$ 0.6

The implied increase in the implici t subsidy on r ice was significant.

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billion) in 200816. I t should be noted that much o f this spending i s reflected off-budget in the increased NFA deficit.17 In addition, the Government allocated additional funds from i t s “unprogrammed funds”, carry-over funds and contingency funds, including the President’s Social Fund, to augment numerous subsidy and transfer programs (See Annex 5). These included additional funds for fertilizer cash-discount coupons to r ice farmers, electricity subsidy for poorer life-line consumers, an enhanced school feeding program, and expediting the implementation o f the CCT program.

Prior Action 2: The Government has scaled-up subsidies and transfers to poorer households in response to the food price crisis and increased spending, over and beyond the originally allocated 2008 budget, to the rice subsidy program, nutrition and feeding programs and other social protection programs aimed at assisting poorer households.

81. In addition, the Government took action to try to improve the effectiveness and targeting of some of i ts more substantial social protection programs. Acting on studies critical o f the poor targeting o f two o f i t s larger programs - subsidized NFA rice and the Food- for-School Program (FSP), the Government took action to try to improve targeting of these schemes. For the FSP that has been in existence since 2005, the Government i s aiming to tighten targeting - by improving geographical targeting and reducing leakage. The FSP now aims to prioritize the 20 poorest provinces and the 100 poorest municipalities according to the Small Area Estimates; and only the poverty “hot spots” in urban areas as deemed b y Department o f the Interior and Local Government (DILG).

Prior Action 3: Operational Guidelines for the Food for School Program for the school year 2008-2009 approved by the Cabinet Secretaries of Department of Health, Department of Education, Department of Social Welfare and Development, Department of the Interior and Local Government, and Department of Agriculture.

Short-Term Outcomes and Next Steps

82. Short-term impacts of high food prices to households are expected to be mitigated by the increased budget and off-budget allocation for social assistance programs during 2008. I t i s estimated that some additional PhP 69.4 bi l l ion (US$ 1.4 billion)’* has been made ~~~

l6 Computed as the price difference between the c i f value o f Vietnam 25% broken in the second quarter o f 2008 and the weighted price o f NFA rice, which i s currently available at P18.25 and P25.00, multiplied by the estimated distribution o f 1.9 MMT o f NFA rice in 2008. l7 Indeed, very little o f the rice subsidy i s captured in the budget. Some o f i t shows up as a subsidy to NFA (PhP2 billion). There i s also an entry for tax expenditures subsidy, which just off-sets NFA’s exemption from paying customs duties. The bulk o f the operating losses (resulting primarily from the difference in NFA’s buying and selling prices, as well as i t s operating costs) are reflected as NFA deficit. I t i s financed by NFA borrowing and hence adds to contigent liabilities (since NFA i s a Government Owned and Controlled Corporation whose debt i s guaranteed by the Government). While the share o f NFA contingent liabilities i s currently manageable (estimated at 1.4% of total consolidated public sector debt in 2007), the growth in such liabilities points to the unsustainability o f the current policy regime. ’* Some o f these allocations have been approved but not yet released. The financial cost o f the NFA program i s a World Bank estimate and i s off-budget.

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available in 2008 for programs directly aimed at increasing income transfers to poorer and more vulnerable households affected by the price crisis (Annex 5). As noted, the biggest among the transfers was that o f the subsidized rice program. That program alone i s estimated to have mitigated the increase in poverty due to the rice price increase this year by about 1.4 percentage points (Section VI).

83. The revised Food-for-School Operational Guidelines are expected to more effectively ensure that the budget spent on the Food-for-School Program reaches the poor. The new Operational Guidelines for the Food for School Program (FSP) w i l l immediately be implemented b y the Department of Education (DepEd) and the DSWD. I t i s expected that, as a result, the inclusion error (of non-poor) should decline dramatically f rom levels as high as 60 percent in the past years, allowing more subsidized rice to appropriately be made available to poorer households. This w i l l be reflected in improved geographical targeting o f the program with an increased share o f the FSP budget allocated to the 20 poorest provinces (Section VI).

84. Moving forward, the Government has expressed i t s intention to assess major existing social protection programs with a view to reallocating and/or consolidating programs where appropriate. The Government intends to improve the effectiveness and cost efficiency o f i t s social protection programs, in particular, with the roll-out o f i t s national targeting system. This ongoing dialogue i s taking place both in the context o f the reforms in the area o f social protection, led b y the reform agenda of the DSWD, as wel l as in the context o f discussions around the Government’s Budget Strategy Paper. The Bank i s fully engaged in this discussion, both through i t s AAA program as wel l as an investment operation under preparation.

C. Pillar 11: Improving Policy Coordination in Social Protection

Objective 3: Improved policy coordination and institutional arrangements for social protection.

85. The lack of policy coordination in the area of social protection i s a fundamental issue in the Philippines. Indeed the Government has been criticized by the opposition and in the general public debate for what i s perceived to be reactive and ad hoc responses to the food crisis. T o date, there has been no single agency or body with the institutional mandate to cover social protection as a whole. Whereas there i s a range o f subsidy and transfer programs to households and marginalized groups in the Philippines, these programs are administered across a multiplicity o f agencies and in an ad-hoc manner. Programs and their implementation are fragmented. This has prohibited adopting a systematic strategy for addressing the r isks and vulnerabilities specific to the Philippines. As a result, i t has made more difficult the development and implementation of a more coherent and coordinated social protection response to the food crisis. Moreover, i t also impedes improving the efficiency o f spending on social protection, which w i l l l ikely require re-allocating spending from one less optimal program to more effective programs (because i t would imply re-allocating funding across agencies based on program efficacy wi th respect to social protection considerations, for which no single agency has an institutional mandate).

86. A n important step toward improving the delivery of social protection would be to improve policy coordination in social protection policy by assigning the institutional

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mandate for this. A key step was taken in this direction in 2007, when the Government’s Social Development Committee o f the National Economic and Development Authority passed a national definition o f social protection and the types of programs covered therein. The needed next step in this agenda was the assignment o f responsibilities or institutional mandate for policy coordination for social protection. Such a mandate for coordination o f social protection programs would be important to better ensure that programs are effectively addressing the r isks of shocks such as the current food price shock.

Prior Action 4: President issued A 0 No. 232-A on July 28,2008, establishing a National Social Welfare Program and assigning coordination responsibilities to DSWD.

Short-Term Outcomes and Next Steps

87. As an immediate outcome, the Government has established an institutional framework for the enhanced delivery of social protection programs, with a view to reducing fragmentation and overlap, while enhancing coordination. The initial Administrative Order (AO) No. 232 established the National Social Welfare Program, identified agencies that fa l l under this Program, and designated a lead agency and Cabinet-level post to head this program. The original A 0 did not designate who would be responsible for operational coordination o f the sector. However, on July 28, 2008, an Amended A 0 No. 232-A was passed b y the President which specifically assigned the coordination responsibilities o f the National Social Welfare Program to the DSWD, which i s an appropriate allocation o f responsibility.

88. The next steps would entail developing an operational social protection strategy and work-plan and organizing agencies within the cluster. The expected results entail a more rational allocation o f responsibilities and resources, such that resources are allocated to programs that best address the actual r i sks and vulnerabilities o f the Fi l ipino population. Over the longer term, such an inter-agency program would be expected to lead to reallocation o f resources across programs to scale-up more effective social protection programs relative to less effective programs.

D. Pillar 111. Improving Targeting

Objective 4. Improved Targeting of Poor Households.

89. The lack of a national household targeting system limited the Government options to address the spike in food prices. The Philippines currently lacks a household targeting system that i s used across the country. The food crisis precipitated active discussion within the Government as to how best to help poorer households. I t was recognized that the lack of a household targeting system l imited the options to deal with shocks such as the current food price shock. As a result, there i s increasing interest in developing such a system to address future shocks.

90. In addition, a standardized and transparent household targeting system can improve the governance, transparency and credibility of Government programs intended to support poor households. The current lack o f such a system has resulted in the proliferation

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o f transfer programs which tend to have their own household targeting systems. For many o f these programs, both the criteria for geographical and household targeting are not transparent or standardized. As a result, program targeting has been used for political purposes. This has tended to weaken the general credibility of Government programs aimed at targeting the poor, to the further detriment of getting support for poverty reduction programs. The establishment o f an objective targeting system based on clear and transparent criteria can go a long way in improving governance and credibility in this sector, in addition to the technical efficiency gains in public expenditure and poverty reduction.

91. The Government developed a PMT methodology for identifying the poor earlier this year. This system i s based on objective criteria, utilizing multi-dimensional variables to explain poverty, rather than relying on a subjective determination of poverty which i s prone to distortion. The developed methodology includes the necessary survey questionnaire and data-entry software as well as a PMT model for identifying poorer households. This methodology has been piloted in four municipalities and two cities in conjunction wi th the new C C T program that the Government i s developing.

92. The Government is committed to creating a database of poor households in about 140 poorer municipalities and 10 cities by the end of 2008. This effort i s being undertaken on a priority basis to identify poor households for coverage under the new CCT program that the Government intends to launch in these municipalities and cities. A commendable effort i s underway to survey, encode, and use the PMT to identify poor households in these selected poor municipalities and cities. The work i s underway and being undertaken in four batches through the end o f the year.

93. In addition, the Government has expressed i ts desire to expand this targeting database to eventually cover the entire country and result in a database of poor households in the country. While discussions are s t i l l underway as to how this work i s to be rolled out over the course o f the next year or two, i t was deemed critical to allocate budget for this important task in 2009. The Government has decided to prioritize the roll-out of the targeting system to the 20 poorest provinces and municipalities wi th a poverty incidence greater than 60 percent.

94. The growing consensus within Government on the priority for such a household poverty targeting system and database will lead to the allocation of budget for this important task in 2009. The President’s Budget, now submitted to Congress, includes an allocation for targeting.

Prior Action 5: Issuance of a Department Order on Adopting the National Household Targeting System for Poverty Reduction for DSWD Social Protection Programs and Services.

Prior Action 6: Establishment of a database of over 200,000 poor households covering 83 municipalities.

Prior Action 7: Inclusion in 2009 President’s budget of adequate funding for expanding database to cover at least the 20 poorest provinces in 2009.

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Short-Term Outcomes and Next Steps

95. These actions wi l l resul t in the establishment o f a national household poverty targeting system. This i s eventually expected to allow for the better targeting o f a variety o f existing safety net programs, as well as the more extensive roll-out of new programs such as the CCT. I t w i l l also allow for the future emergency targeting of poor households through cash transfers in the case o f shocks such as the current price and fuel shocks. Moreover, i t can be used for the targeting of other national programs intended for poor households, such as for example the Indigent Program o f subsidized health insurance for the poor through Philippine Health Insurance (PhilHealth).

96. The Government i s actively encouraging key Government Owned and Controlled Corporations (GOCC) such as PhilHealth and NFA that have programs targeted to poor households to adopt the PMT-based national household targeting system for their social protection programs. A Cabinet-level Economic Management meeting asked that GOCCs adopt the national household targeting system for their programs. Moreover, they have entered into discussion with these agencies to cost-share, with the national Government, the roll-out o f such a system throughout the country.

97. Importantly, such a household targeting system i s expected to provide the Government w i th the vehicle to re-direct more inefficient subsidies that are not well- targeted to the poor (such as the NFA rice subsidy) to more targeted programs and possibly cash-based programs in the future. The existence of an alternative targeting system i s seen as an important step toward providing a viable political exit strategy for Government f rom the badly targeted NFA rice subsidy program and i t s concomitant high operating costs and contribution to contingent liabilities. For example, the Government i s exploring the possibility o f gradually phasing out subsidized NFA rice in areas where the establishment and implementation o f the PMT-based poverty targeting system might allow for a cash transfer to the poor instead. I t i s anticipated that the targeting system w i l l be expanded nationwide over time. This important policy action, supported b y this operation, demonstrates the linkage between the Government’s current reform program on social protection and i t s planned food subsidy policy reform in the medium term.

98. The development o f a national targeting database i s expected to have significant impacts by directing scarce resources to the poorest households. This could both increase the benefits to poorest households, having a greater impact in reducing poverty incidence and severity as well as allowing for cost efficiencies (Section V1.A). The effectiveness o f the targeting system (of this and other programs) i s planned to be assessed by including appropriate questions regarding program coverage in the next national household survey.

E. Pillar IV. Establishing a Conditional Cash Transfer Program

Objective 5: Improved impact, efficiency, and efficacy o f social protection programs through a comprehensive CCT program.

99. The Government sees the potential o f a CCT Program, as being the back-bone to a medium-term social protection and poverty reduction strategy that would reduce the r i s k

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of the current food crisis and future such shocks to households welfare. A CCT program w i l l provide an income supplement to poorest households which w i l l help protect them from the shock o f increased food prices and other household level shocks. Moreover, a CCT program conditions the cash transfer on “co-responsibilities” that ensure households do not sacrifice human capital development o f their children due to such shocks. Indeed, an articulated concern at the level o f the Cabinet i s that recent food price shocks may be the cause o f recent trends resulting in the falling primary net enrollment rate.

100. The Government has decided to launch a CCT Program, Pantawid Pamilyang Pilipino Program, or “4Ps”. The Philippines CCT program aims to improve the l iv ing conditions and human capital investment of poor households by increasing subsistence income among the poorest, while ensuring that children 6-15 years o ld regularly attend school (85 percent attendance), and that children 0-5 years o ld adhere to the Department o f Health’s (DOH) protocol for infants and young children, including completion of the vaccination immunization schedule and regular growth monitoring. An additional focus, aimed at supporting the Government’s policies to reduce the high maternal mortality rate, w i l l ask pregnant women to adhere to regular pre-natal and post-natal check-ups in addition to delivering their babies in facilities with the oversight o f a skilled health care professional. There w i l l also be a focus on improving nutrition wherein mothers and parents are required to attend seminars on nutrition and breastfeeding.

101. The Philippines CCT program i s being launched and i s expected to reach some 320,000 households in about 140 poorest municipalities and 10 cities by the end of 2008. For beneficiary households, the cash subsidy would provide important mitigation for the increase in food prices. The CCT program i s estimated to provide an average cash transfer o f PhP12,OOO (US$245) per year per household. This represented approximately 20 percent o f average household income among the poor (based on latest household survey data o f 2006). Given the average food price increase o f 18 percent between July 2007 and July 2008, the average CCT cash transfer represents nearly twice the impact o f the food price increase for poor households.

102. I t i s critical that, for the sustainability of the program, there be a dedicated line item for it in the 2009 budget, with adequate funding to cover the program at the scale designated by Government. While the Government’s decision to undertake an init ial CCT program at the scale o f 320,000 households i s welcome, the CCT program under i t s current design i s a multi-year commitment to households. Preparation for this program came through the supplementation in 2008 o f previously approved funds on the basis o f a decision to augment this program as a response to the food crisis and the poverty problem. However, i t s sustainability requires an adequate budget allocation for 2009, along wi th a concomitant increase in the DSWD’s budget ceiling to undertake this program on a multi-year basis.

Prior Action 8: Adoption and launch by government of a CCTprogram using a PMT- based national household targeting system.

Prior Action 9: Inclusion in 2009 President’s budget of adequate funding for scaling up and sustaining the CCT program for 320,000 households.

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Short-Term Outcomes and Next Steps

103. The Philippines’ new CCT program i s expected to cover the initially planned scale of about 320,000 households in some 140 municipalities and 10 cities by the beginning of 2009. In the short-term, the cash transfer i s expected to significantly mitigate the impacts o f the food price shock on these households in some o f the poorest municipalities in the country. Over the medium-term, the program i s also expected to result in benefits in terms o f educational outcomes (e.g. school attendance, enrollment, completion) and health indicators (e.g. health visits, pre-natal and post-natal care and assisted chi ld birth delivery).

104. The implementation and success of the CCT program wi l l be closely monitored and evaluated for potential scale-up as the potential back-bone of a modern social protection system for the Philippines. While this program i s nascent, close monitoring and impact evaluation o f this program i s planned. Authorities are aware that, i f successful, the CCT program could potentially replace other subsidy and transfer programs as a flagship social protection and poverty reduction program for the country.

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VI. OPERATION IMPLEMENTATION

A. Poverty and Social Impact

105. The proposed operation and the measures it supports, wi th i t s focus on social protection and safety nets i s expected to have positive impacts in mitigating the poverty and social impacts o f the food crisis. Most importantly, the measures supported by the operation are expected to mitigate poverty and social impacts through: (i) lowering the price o f food (particularly rice), through price stabilization interventions and the provision o f subsidized r ice to poor households; (ii) improving the targeting o f existing subsidies to the poor; and (iii) launching a CCT program. Although at a high fiscal cost, the Government intervention in these areas has arguably also helped contain any social r isks that might have led to food riots or political instability due to the large increase in food prices.

106. The Government’s policy actions that lowered the general price o f r i ce in the domestic retail market relative to the world price during the most acute period o f this crisis are estimated to have mitigated the increase in poverty incidence by approximately 1 percentage point. During the peak o f the crisis, the Government’s policy of protecting the domestic rice market and making more rice stocks available on the domestic market through importation and release o f existing buffer stocks helped mitigate the increase in domestic retail prices. I t i s estimated that the general domestic retail market price o f rice was approximately 10 percent below what i t would otherwise have been (as proxied b y wor ld market prices)”. Analysis would indicate that had this mitigation not taken place and had prices risen by another 10 percent, poverty incidence would have increased nationally by an additional 1 percentage point (or close to an additional 0.9 mil l ion people would have fallen into poverty) (Table 6).

Table 6: Simulated Impact Without the 10% Reduction in the Price o f Rice Poverty Magnitude Simulated Impact*

Incidence, o f Percentage Point Change Change in the Number 2006 (%) Poor, 2006 in Poverty Incidence o f Poor

Urban 19.5% 8,064,2 10 +0.7 284,090 Rural 45.9% 19,530,100 +1.4 590,400

Total 32.9 % 27,594,310 +1.0% 874,490 * No income effects assumed. Source of data: FIES 2006

107. In addition, negative poverty and social impacts o f food price increases were mitigated to the extent that the Government provided subsidized rice to consumers. As noted earlier, with the increase in world prices, the implici t subsidy provided by Government to consumers who accessed subsidized NFA rice increased dramatically. I t i s estimated that in 2008, the implici t subsidy from NFA would amount to as much as PhP32.1 bi l l ion (US$0.6

Computed based on the c i f value o f imported Vietnam 25% broken in the second quarter o f 2008 and the observed 19

domestic retail price o f regular rice during the same period.

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billion)20. Most o f the subsidized rice i s sold at PhP 18.25 per kilogram. In contrast, regular mil led rice was at PhP32.30 per kilogram in the second quarter o f 2008 and the estimated world price was at PhP 36.04 per kilogram. As mentioned earlier, the targeting o f NFA subsidized r ice to the poor i s not particularly efficient. Nevertheless, access to the subsidized rice, while coming at a huge fiscal cost, would have had positive poverty and social benefits. Even if the total implici t subsidy through NFA had been equally distributed to al l households in the country, whether r ich or poor, i t i s estimated that this action itself would have reduced poverty incidence b y 1.4 percentage points and the income gap by 0.8 percentage points (Table 7).

Baseline Mean Household Poverty Income gap (% Poverty (HH) Income Incidence (Pop) o f Poverty Severity (%

All H H s 172,730 32.9% -30.5% 4.2%

Impact of Transfer* to Overall Poverty

Change in HH Pct point Change in National Income** Poverty I IncomeGap I Poverty

108. Steps being taken to improve targeting of subsidies to poor households will improve the poverty reducing impact of subsidies as well as the cost efficiency of these programs designed to help the poor. The operation supports measures (i) to improve geographic targeting, which i s currently used for programs such as the FSP, as wel l as (ii) to improve household targeting, which can be used for cash or rice transfers.

(%)

0 Measures to improve geographic targeting of the FSP program i s expected to better focus benefits of this program to the poor. The FSP program has had a high leakage rate to non-poor households, mainly as a result o f i t s bias towards including areas in the National Capital Region (NCR), which has the lowest poverty incidence among al l the regions in the Philippines. Better geographical targeting using available poverty estimates at the municipal level, as i s being put into place with new operational guidelines, would cover 76 percent o f the poor, with savings estimated to be PhP465 mi l l ion o f the DepEd’s PhP750 million budget for the FSP in 200721. Alternatively, assuming a revenue-neutral scenario, such improved

Incidence I Severity

2o Computed based on the price difference between the c i f value o f Vietnam 25% broken in the second quarter o f 2008 and the weighted price o f NFA rice, which i s currently available at PhP18.25 and PhP25.00, multiplied by the estimated distribution of 1.9 M M T o f NFA rice in 2008. 21 I t was estimated that based on the original targeting rules for the DepEd’s FSP - using the income classification o f municipalities and the Food Insecurity and Vulnerability Information Mapping System (FIVIMS) - 62 percent o f the municipalities targeted were not the poorest municipalities. I f targeting had been based solely on Small Area Estimates o f poverty at the municipal level, the program would reach an additional 38% o f poor municipalities.

All H H S

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1.1 -1.4 -0.8 -0.4 All Poor H H s 10.9 -4.7 Rural Poor HHs 16.7 -6.4 Decile 1 H H s 57.1 -1.7

-3.1 -1.3 -4.2 -1.7 -2.8 -0.9

targeting would improve poor households’ benefit f rom the program from PhP6.00 a day to PhP15.00 a day, or additional 114 days o f free NTA rice22.

More importantly, putting into place an accurate household targeting system will also greatly benefit the poor if i t i s used to distribute the benefits of existing programs (such as subsidized NFA rice) or new programs (such as the CCT). For example, as noted above, the current implici t subsidy through NFA would reduce poverty incidence by 1.4 percent and the income gap b y 0.8 percent i f the subsidy were equally transferred to al l households. If, wi th the existence o f a targeting system, the same aggregate subsidy was targeted and distributed only to rural poor households, poverty incidence could be reduced b y as much as 6.4 percent and the income gap b y 4.2 percent (Table 7). Alternatively, the Government could achieve the same poverty reduction impact o f i t s current subsidy program at a substantially lower cost. The Government’s actions to put into place such a system can significantly improve the efficacy and poverty reducing impact o f i t s social assistance programs to deal with such shocks.

109. The conditional cash transfer (CCT) program being put into place using a proxy means test household targeting mechanism i s expected to have significant impacts in reducing poverty and improving human capital outcome of children in beneficiary areas. Moreover, the establishment o f such a program allows for the temporary scale up o f cash transfers (either on a conditional or unconditional basis) in the future in response to crises such as the current one. The CCT program provides an average annual transfer o f PhP12,OOO (US$245) to households with children below 14 years o f age and enhance poor household expenditures by 20 percent, thereby allowing to mitigate shocks s i m i l a r in magnitude to the current food price crisis. The CCT program i s expected to have a substantial impact in reducing poverty in the municipalities where i t i s currently being rol led out. Whi le municipal-specific impacts cannot be computed, i t i s indicative to note that calculations show that i f the CCT program were expanded to cover poor, eligible households in the poorest 20 provinces, for example, i t would decrease poverty incidence in these provinces by 5 percentage points23. The conditionalities associated with the program are expected to yield additional major benefits. First, the probability o f school attendance o f children of beneficiary households in the 20 poorest provinces would increase b y 1.5 percentage points. Second, the C C T program i s expected to improve health and nutrition outcomes b y ensuring that, at least, 80 percent o f the pregnant women in target poor households avail o f pre- and post-natal care f rom skilled health attendants, while their children (aged 0-5 years old) avail o f health protocols on immunization and other health preventive services.

110. For the food policy agenda, poverty and social impact analysis i s a primary consideration guiding decisions on sequencing that are implicit in this operation. Liberalizing the food pol icy regime i s a complex and politically dif f icult agenda, especially in the few years before the national election. This i s a reform agenda that many have been trying to make headway on without success in the last decades precisely because o f the difficult political

22 Computation based on a total o f 596,939 beneficiaries reached b y the DepEd’s FSP in 2007. 23 Based on average annual cash transfer o f PhP12,OOO per household, covering the 1.2 mil l ion poor households in the 20 poorest provinces would require a commitment o f PhP14 bi l l ion per year (US$300 million).

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economy context inherent in these reforms. Both the opening up o f the import regime and the reforms o f NFA to limit the huge fiscal deficits inherent therein w i l l result in losers among rice consumers, rice producers, traders, and politicians. I f alternatives are to be considered, and they are, then the challenge i s whether and how the budgetary resources implici t to the current rice price stabilization policy can be better deployed to help the key potential losers to whom politicians are understandably sensitive. These are the poor rice consumers and net rice producers who would stand to lose. The Government, the Bank, the donor community and other stakeholders recognize that there needs to be solutions to this conundrum before the food policy agenda can be tackled head-on. Hence, resulting f rom this poverty and social analysis, inherent in the Bank’s strategy i s a multi-pronged approach.

First, this operation i s supporting the Government with putting into place a targeting system for poor consumers. At an important Cabinet-level meeting, i t was recognized that having such a targeting system in place was a priority first step in order to reduce the inefficient budget allocation to the current consumer subsidy on rice. The Bank’s assessment i s that the existence and implementation o f an effective targeting scheme could reduce the quantity o f rice handled b y NFA, thus diminishing i t s role over time, or that a targeting system could eventually be used to replace the rice subsidy wi th a cash subsidy. I n either case, the view is that the social protection agenda supported by this operation is in fact a critical f i rst step to addressing the food policy agenda which had been quite a dificult policy agenda to pursue for the past decade.

Second, and consistent with a realization that i t i s not an analysis o f issues in the food policy arena that i s needed but practical solutions that allow this agenda to get traction, the Bank i s shifting i t s AAA efforts in this area to discuss options on how to properly sequence pol icy reform implementation along with attendant advocacy measures. For example, the Government i s l ikely to need options to offer transition programs for affected farmers, should the rice price regime be liberalized (and indeed i s circumscribed in moving on this agenda until such options exist). In moving forward, the Bank w i l l focus i t s AAA on providing technical assistance and policy advice in articulating these sorts o f practical “solutions” for Government consideration to allow for eventual pol icy action on the food pol icy agenda, and the Bank i s actively seeking partnerships wi th other development partners to do so. Indeed the food crisis has raised awareness among some key policymakers on the need to seek out such solutions.

At the same time, populist backlash to the crisis has also included calls for more protectionism and the need for self-sufficiency, pointing to the additional importance o f continued public debate and engagement on these issues to formulate a consensus for action.

B. Environmental Aspects

11 1. T h e activities that this Development Policy Operation supports, with i t s focus on social protection, are not expected to have any significant environmental impacts. The emphasis on improved targeting of safety nets as wel l as improving household welfare through cash transfers and consumer subsidies w i l l have insignificant environmental effects.

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112. The Government has in place reasonable environmental safeguard systems. The country has extensive laws on environmental management, one o f which i s the Philippine Environmental Impact Assessment (EIA) Act which requires the conduct o f Environmental Assessment and securing an Environmental Compliance Certificate for new projects. The Bank has recently conducted a country safeguards systems review which indicates that country’s policies on Environmental Assessment (EA) and Indigenous Peoples’ (IP) are comprehensive and reasonable compared to internationally-accepted standards, including the Bank’s operational policies on safeguards.

113. The Bank, in its CAS, i s striving to mainstream environmental and social aspects into its portfolio. T o do so, i t i s working to ensure that environment and social sustainability are addressed as cross-cutting concerns for sustained economic growth. Likewise, environmental management and social development are being institutionalized as key aspects in the national government, local government, and private sector platforms o f the current CAS. The Bank’s support in strengthening the government’s environmental policy and program implementation and i t s relevant institutions i s being reinforced with the conduct o f the Country Environmental Analysis (CEA). The CEA i s aimed at helping the government develop a strategy to prioritize i t s environmental plans, programs and projects and to promote good environmental management. The CEA, which engages with multiple stakeholders, covers the key environment focus areas: institutions for environmental management, environmental degradation, air pollution, water and sanitation, climate change, coastal and marine resources, forestry, and land management.

C. Fiduciary Aspects

114. A number of weaknesses remain in the Philippines’ public financial management (PFM) system, but over the last several years, the Government has implemented several reform programs to strengthen various aspects of PFM. Aspects o f the PFM covered in these efforts range from budget formulation (introduction o f a medium-term expenditure framework as part o f the annual budget process) to accounting (adoption o f the New Government Accounting System (NGAS) and roll-out o f the electronic version o f i t (EGAS)) and audit (use o f a risk- based approach to audit). These reform efforts have been spearheaded by different central oversight agencies and implemented in some line departments. Given the complexity o f the Philippines’ PFM system and the generally l ow institutional capacities o f the government, implementation o f these reforms has moved slowly and unevenly across the public sector. The Fiduciary Assessment in Annex 6 discusses these issues in detail. I t concludes that known weaknesses in public financial management continue to be gradually addressed through the PFh4 reform program. Although the pace o f implementation has been slow, the trajectory o f reform i s in the right direction and the Government continues to demonstrate a commitment to the task o f completing the planned reforms in public financial management.

1 15. This operation supports enhancement of governance and transparency, particularly in the area of social protection. Subsidies and transfers are often subject to fraud, error and corruption. Mis-targeting of subsidies intended for the poor, whether intentional or not, results in the ineffectiveness o f subsidy programs and public expenditure in general. This operation aims at strengthening the governance and transparency o f the Government’s social protection programs. In particular, the adoption and roll-out o f an objective, transparent, and credible proxy

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means test based household targeting system i s a big step forward in improved governance and transparency of social protection programs. Likewise, measures to support the institutional policy coordination are intended to improve governance o f the social protection “sector”. Meanwhile, the adoption o f a CCT program has been shown in other countries to improve overall governance in the sector. CCT programs rely heavily on increasing accountability of households in meeting health and education “co-responsibilities”, increasing the accountability o f government to deliver services, and improving the transparency and oversight o f social protection programs, including through improved MIS and audit systems. The Bank i s currently supporting this agenda through a Governance and Anti-Conuption Technical Assistance task to support the CCT program. This agenda w i l l be furthered by a Bank investment loan being prepared to support the CCT program and i t s governance.

D. Disbursement and Auditing

116. Borrower and Credit Amount. The borrower i s the Republic of Philippines and this operation i s a single-tranche loan for US$200 mi l l ion that would be made available upon loan effectiveness, as all policy actions supported by the loan would have been completed prior to final approval.

117. Disbursement Arrangements and Use of Funds. The loan amount wi l l be disbursed into a Deposit Account in U S Dollars at the Central Bank (Bangko Sentral ng Pilipinas) that forms part o f the Philippines’ official foreign exchange reserves. Prior to disbursement, the Government o f the Philippines (the Borrower) would provide to the Bank a copy o f written instructions issued to the Bangko Sentral ng Pilipinas for conversion o f the foreign exchange amount o f the loan into local currency and that an equivalent amount be credited to an account o f the Government available to finance budgeted expenditures. After disbursement o f the loan, the Borrower would ensure that the equivalent Peso amount o f this loan amount i s promptly accounted for (in Philippine Pesos) in the Borrower’s budget system in the General Fund, and thereby be available to finance budget expenditures. The Borrower would provide to the Bank a written confirmation within 30 days o f disbursement o f the loan that this accounting has been completed, with supporting details.

118. Disbursements of the loan will not be linked to any specific purchases and no procurement requirements have to be satisfied. The proceeds o f the operation would not be used to finance expenditures excluded under the Loan Agreement. If, after being deposited in a government account, the proceeds o f the grant are used for ineligible purposes as defined in the Loan Agreement, the Bank w i l l require the Recipient to either: (a) apply the corresponding amount to eligible purposes, or (b) refund the amount directly to the Bank. The Bank w i l l retain the right to seek an independent audit o f the Deposit Account b y an auditor acceptable to the Bank, to seek reassurance on the accuracy o f the information relating to transactions from this account that was provided b y the Borrower, and that funds in this account were not used to finance expenditures excluded under the Loan Agreement.

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E. Risk and Risk Mitigation

119. The achievement of the objectives of this operation i s subject to several risks. These risks, discussed below, are considered acceptable in the context o f proposed mitigation measures. The Philippines continues to exhibit strong macroeconomic fundamentals despite the worsening financial turmoil. Although borrowing costs and spreads have increased significantly in recent weeks, these have mainly reflected increased global risk aversion rather than declining confidence in the Philippine economy per se. In fact, the substantial reduction in borrowing costs and spreads over the past years up until the financial turmoil i s indicative in part o f market perceptions o f the reduced risk o f lending to the Philippines. T w o o f three major credit rating agencies have maintained their stable outlook on the Philippines while the third has, prior to the financial turmoil, upgraded i t s outlook on the Philippines to positive f rom stable, citing the country’s improved fiscal performance and stable macroeconomic fundamentals.

(i) Macroeconomic and Fiscal Risks

120. Macro-fiscal risks have increased in recent months but should remain manageable. As discussed in the macroeconomic outlook section, the public sector’s fiscal position, which i s the main driver o f macroeconomic stability, i s expected to remain manageable despite the projected temporary increase in the national government’s deficit. From over 100 percent o f GDP in 2003, the non-financial public sector debt i s estimated to fa l l below 60 percent o f GDP in 2008 and reach 50 percent o f GDP b y 2012. The pace o f debt reduction, however, has become slower due to the projected increase in interest rates and slower growth. The Philippines’s relatively high level o f public debt relative to other emerging countries points to the need for continued fiscal consolidation over the medium term.

121. Critical to sustaining this macro-fiscal outlook i s the sustainability of tax revenues. The improvement in tax revenues over the past few years has had a critical impact on investor confidence and has played a key role in enhancing Philippines’ ability to weather external shocks compared to the pre-2005 period. I f the tax effort falters again, investor confidence could evaporate. While there was a strong performance on tax effort, which increased by 0.8 percent o f GDP in the f i rs t half o f 2008, sustaining the improved performance w i l l be challenging in 2009. An increase in exemptions from income tax (effective July 1, 2008), the lowering o f the corporate income tax rate f rom 35 to 30 percent (as mandated by the 2005 tax reform law), and tax exemptions from the recently legislated personal equity and retirement law wil l al l tend to lower tax collections. T o mitigate the revenue risk, the government has stepped up tax administration reforms, including third party check o f taxpayer information and the renewed emphasis on the ‘Run after Tax Evaders’ (RATE) program. The Bank’s National Program Support for Tax Administration Reform Project (NPSTAR) project i s also supporting the tax administration reform. Legislation on excise taxes and rationalization o f investment incentives, which aims to increase revenues, i s pending in Congress.

122. The monetary authorities have appropriately responded to inflationary pressures by raising rates. The Central Bank increased policy rates in June, July and August 2008 b y a total o f 100 basis points-amongst the highest in the region. The tightening stance o f the Central Bank i s considered appropriate in light o f inflationary expectations resulting f rom higher food and fuel prices and increases in core inflation.

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(ii) External Risks

123. While i t s open economy makes the Philippines vulnerable to a prolonged global economic slowdown, to date it has strengthened the economy’s resilience. In recent years the economy has benefited from booming Chinese and recovering Japanese demand, ample global liquidity that has brought down borrowing costs for al l emerging markets, and rapidly growing remittances. As a result, the external account gradually strengthened wi th respectable current account surpluses and higher levels o f international reserves in recent years. Given the strong macroeconomic foundation, the sub-prime induced volatility in 2007 and the succeeding slowdown in the U S economy in 2008 fol lowing the financial turmoil have not so far substantially affected the Philippine financial system. However, the performance o f the real sector to date, notably through merchandise exports and foreign investment inflows, has taken a bigger toll. A prolonged slowdown in external demand or greater volatility amongst the major currencies would adversely impact both exports and remittances, which in turn could adversely impact private capital flows. And while the external debt stock has declined very significantly since 2005, there are s t i l l substantial external amortization payments coming due which make the Philippines more vulnerable to the tighter credit conditions now prevailing in global capital markets. At the same time, the integrated economy and experience with past episodes o f volatility have instilled a greater sense o f discipline in the country’s financial managers that has fostered more responsible financial policies in recent years. In particular, the recent fiscal adjustment has improved the country’s ability to cope wi th external shocks relative to the pre- 2005 period.

(iii) Risk to Reforms Supported by the Operation

124. There are several risks to the specific reforms supported by the operation.

Weak institutional capacity is likely the greatest risk to proposed reforms in the area of social protection. Weak institutional capacity to take on ambitious agenda o f reforms in social protection i s a risk. In particular, institutional capacity i s required to undertake roll-out o f targeting system and o f the CCT program. This risk w i l l be mitigated b y the recruitment o f additional staff at DSWD. Furthermore, mitigation measures include TA being provided to D S W D and a potential investment loan to increase support to these key elements o f the agenda o f reform in social protection.

Institutional coordination across Government Departments is particularly important for the cross-cutting agenda of social protection. The lack o f adequate coordination among agencies in social protection has been an area o f weakness in the past and w i l l be a risk for reforms in the future. Institutional coordination i s important in terms o f appropriately allocating budgets across programs. The increased attention o f the over-sight agencies to this agenda and the creation o f an inter-Departmental National Social Welfare Program are intended to mitigate this risk. Coordination i s also important in the implementation o f specific programs. For example, the national household targeting system w i l l require collaboration among government agencies that may use such a system. The CCT program requires close coordination among i t s implementing agency (DSWD) and the partner agencies that provide social service supply (DepEd and DOH). The proper functioning o f the program’s inter-agency National Advisory Committee i s critical to

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coordination in this regard. Likewise, in moving the agenda o f food pol icy reform forward, i t i s expected that the central oversight agencies (such as Department o f Finance and Department o f Budget and Management) w i l l need to work in tandem with the DSWD, DA and NFA.

Political manipulation of targeting and subsidy programs supported remains a risk requiring ongoing mitigation. The Philippines has a history o f using transfer and subsidy programs for political ends. The upcoming election in 2010 heightens this risk. At the same time, the program i s supporting targeting that i s specifically aimed at removing subjectivity at the level o f household targeting. Hence i t i s aimed at mitigating this risk o f political manipulation o f targeting and subsidy programs. Moreover, third-party monitoring of programs such as the CCT i s also intended to mitigate this risk. The Bank’s support for the implementation o f the CCT, through TA and a future investment loan, w i l l also mitigate this r isk. A particular area o f vulnerability i s the choice o f geographic areas selected for program implementation. This risk w i l l be mitigated b y public disclosure o f the rules or criteria for prioritizing new geographic areas to be covered by programs such as the CCT and FSP.

(iv) Fiduciary Risks

125. While fiduciary weaknesses remain substantial, the Philippines has made important progress in the last several years. (Annex 6). The CFAA and the PEFA reports identified important weaknesses in budget management and accounting. The Bank i s working on mitigating some o f these r isks through i t s continued work and technical assistance to the Department o f Finance, Department o f Budget Management and the Commission o f Audit. The DPL series has continued to support this agenda, including procurement reform, as have the Bank’s sector reform projects (National Programs o f Support) that work directly wi th line agencies in improving country systems.

(v) Political Risks

126. Reform progress i s vulnerable because of significant opposition to the administration. Over the past three years, there have been three failed attempts to impeach the president over various corruption allegations and two attempted coups by rebel soldiers. Recent public opinion polls have shown deteriorations in the trust ratings o f the President and the administration. In addition, frequent management changes at senior levels in government have slowed the resolution o f some policy issues. On the other hand, lower ratings may have recently increased the administration’s resolve to focus on poverty and social issues. Some o f the impetus for action following the food price shock may be seen in this context.

127. A related political risk to the program i s possible resistance to the Administration’s program by the Congress. Indeed, several elements supported by this operation lead to commitments in the budget to be submitted to the Congress at the end of August. Sustainability o f reforms w i l l be contingent to Congressional support and passage o f the budget. While opposition groups are l ikely to contest the administrations’ budget proposals, the Congress i s largely supportive o f the administration and o f social measures, which helps to mitigate this risk.

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128. Indeed the larger political risk to the longer term reform agenda commenced by this Administration i s the expected change in administrations with elections in 2010. This risk points to the need for reforms to have visible and measurable results by the time o f the election so that a new government would feel compelled to continue the efforts. Planned impact evaluation and program assessment studies w i l l be important, as wi l l be building a broad stakeholder consensus for sustaining the reform agenda.

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Annex 1. Letter of Development Policy

Letter of Development Policy

20 November 2008

As you know, the Philippines has been among the hardest Tiit counlsies in the regior.1 by the recent s h q increases in international fwd pr

this w e period. Foal comprises 60 percent o f t thus, these price increases have poverty, It has undermined 5 ~ r ga investments in promating growth and in protecting thc p a r and vulnerable households.

O G ~ prices increased by 18 p

st household’s total expenditures, of Filipinos falling into ed the budget aIIotred for

year-on*year by July 2007; md the: price of nce, our increased by some 57 percent over

ainly increased the num poverty reduction and s

This tet ter of Development Policy highlights the Govempncnt’s response to stabifize the price of rice md BO provide immediate assistance to the country’s poor’and vulnerable sectors, particularly by suppofling nmsures to strengthen social protectiorr mtnd safety nets against &mre shocks, In my letter, dztcd June f 9, 2008, she Philippine Goveriiment requested financial assistance from the World Bmk to sustain our ef€orts jn mitigating the adverse impacts of the Food crisis.

We appreciate the Wo~ld Bank’s positive me Program (GFRP) facif n tire etnergency nature o

e to out request for assistance under trust that this Iom wil l be approved the Ciubal Food R

as SBon as possibl sectors.

Macroeconomic and Fiscai

Following stronger economic gmwh in recent years-averaging 5.4 percent tn 2003- rmmce decelerated in owdown and rising oil

taltces from ov~rseas Filipino workers, howwer, hiwe

2006 and peaking at 7.2 percent in 2007-Philippine econo the first half o f 2068 to 4.6 percent in Imt: with the global bco and food prices. Strong inflows of re

.continued to boast domestic consurnptim.

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Before the onset o f the food crisis, inflation had been falling in the last three years, aided in part by the strong peso, Headline inflation during 2003-2006 averaged 5.3 percent

.and in 2007 fell to 2.8 percent, In 2008, the spike in the ernational prices of food and fuel has begun to impact thc domcstic economy. Combined with the effects of peso depreciation, yew-to-date inflation peaked at 12.5 percent in August beforc falling slightly ih September to reach a ycu-to-date inflation nf9.2 percent.

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Thie Governmcnt”~ efforts towards fiscal consolidation since 2003 resulted in enhanced macroeconomic stability and improvcd invcstor ’ confidence, The National Government deficit was reduced from 4 percent of GDP in 2002 to 0.2 percent o f CDP in 2007; national government debt-to-GDP ratio siniilarly fe l l from 80 percent of CDP in 2004 to about 56 percent in 2007. Thc consolidated public sector position was balanced in mid- 2006 a d recorded ti surplus o f 0.5 percent o f GDP in 2007.

Thc value-added &x rcform initiated in 2005, which expanded the VAT coverage and increased the rate from 10 to 12 percent, and the renewed tax administration reforms by the Bureaus o f Internal Revcnuc and Customs have improved tax revenues from 13 percent of GDY in 2005 to 14.6 percent of GDP in the first half of 2808.

The Government has also made progress in public expenditure management and the medium term expenditure framework refom. Moreover, until recently, the decade-low

.interest rates and lower spicads due to fiscal consolidation have provided the Government more flexibility in increasing capital and social spending.

However, the combined sharp rise in international food and fuel prices have adversely affected the Government’s fiscal position and to the glob$ food shock. In light o f this development, the Government revised i t s 2008 fiscal framework from achicving a balanced budget and allowed a modest deficit o f P7.S Billion or 1% o f GDP.

ewisc exposed the vulnerability o f

With the aim of stabilizing domestic food prices and protecting the vulnerable, the Government allowed temporary changes to the rice importation regime, including suspending the large rice tenders, initiating bilateral deals, and procuring domestidally to secure rice stocks. To mitigate the likely effects on poverty, the Government initiated and scaled-up social safety net programs, including a large increase in the existing rice subsidy program.

The Philippine Government also resisted calls to rcpeal the reformcd value-addcd tax (KVAT), particularly the 12 percent VAT 011 petroleum products. President Arroyo, in her annual State o f the Nation Address in July 2008, maintained her stance on the RVAT-in spite of the popular opposition--% it provides PW6Q billion in revenues to pay for programs to help the poor md vulnerable Filipinos cope with soaring food and oil prices.

The immediate actions taken by thc Govcrnmcnt have generated favoreble results and dissipated the sense o f crisis and panic among Filipinos. Over the medium-term, however, the price of rice aiid food crops in general i s expected to remain higher tlxw pre-crisis levels, thereby increasing the need for financial assistance to sustain and strengthen Govemmcnt’s efforts, particularly on the area of social protection.

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Social Praiection

Over thc past year, the Government has ken undertaking work to strengthen i ts social protection system. With the onset o f the food crisis, the Covement i s c stcederate its efforts to help thc poorest and most vu~neribk fdrnilies. In addition to several immediate short-tern measures to address the sharp increases in food prices, the Government has also been working on putting into place a sounder social protection systcrn to dcal with this crisis now, as well w with future shocks of this type.

Lowerinz and stabilization of ~ r i c o s , 8nc area we felt compelled to take inmediare action OR this year was to lower and stabilize the upward spiral o f food and r ice prices. The Government took action to this end by refraining from purchasing rice through international rice auctions and temporarily lifted restriction on private sector imports of rice; and released domestic buffer'stock.

'

Gi;en the soaring retail prices of rice in the first ha l f of 2008 and the upcoming lean harvest season that w& likely lo exacerbate the price increase, the Government felt the need to replenish i ts rice stocks to ensure sufficient rice for food balance as well as for domestic rice price stabilization. As we recognized that our regular process to procuring rice through international tenders was exacerbating international prices, we decided to temporarily abstain frum procurement through international tcnders. In May 2008, the Government sought out bilateral deals (including with Japan and Vietnam) to increase i ts imports and stocks instead o f resorting ta h g e rice tenders, It also made quick albeit temporary ctmges to its rice irnportaiion regime in May 2008, inchding the issumce,of guidelines allowing larger quotas for private importers and rescinding the 40 percent tariff on rice for private import, Moreover, with i ts increased imports, the National Food Authority @FA) has also taken measures to release its stocks in the domestic mstrkct to contain domestic prices,

In the short-tcm, these actions contributed to a decrease in domestic rice prices. The 'combined efforts by the Government kept domestic prices cheaper than the international price during the rice spike in the first half of 2008. Moreover, these actions contribyted to reducing domesiic revail prices by about 10.4 percent between i ts peak average price during the month of August 2008 and the 2nd week of September 2008.

Despite difficult challenges faced by the Govenunent in advancing food policy refonns, we are committed to looking for ways to move on this policy reform agenda that would allow for more cost-effective targeted subsidies to the poor, less distodive ways to ensure stability ofprices and stocks in the domestic rice markets for the benefit o f consumers, and for more efficient public interventions in supporting greater agricultural productivity.

Mitimtion o f shorf-term irnnacis o f high food and fuel srices on the mor. The Government has been very concerned about the short-term impacts o f high food and fuel p r i m on tho poor. As rncntioned earlier, the Government announced i ts readiness to forego its initial deficit target and accommodate a deficit of up to 1 percent of GDP specifically with the intention of help addressing the social and economic crisis due to increased gIobal prices. A s part of this action, the Government has scaled-up subsidies and transfers to poorer households in response to the food price crisis and incrcased spending, over and beyond the

47

originally allocated 21108 budget, to the rice subsidy program, nutrition and feeding programs, and other social protection programs aimed at assisting poorer households,

In t'hc short-term, the Governlent increased spending to household subsidies and trmsfcrs to mitigate thc inipact of the increase in food and other prices by deploying funds in the 2008 budget to supplement existing pmgrams and other easy-to-implement transfer programs that would be aimed at poorer households. The Govement providcd additional funds and assistance to support and augment numerous subsidy and transfer programs totaling. about PW 72.7 billion (US$ I .6 billion).

The rice subsidy program administered by NFA accounted for the targest among the transfers. Other important safery-net programs announced or under implementation by the Government include fertilizer assistance and subsidies to farmers, improvement o f irrigation facilities, and training under the Fertilizer, Irrigation, Extension work, Loans, Dryers, and Seeds (FIELDS) Program; food subsidies to mitigate hunger and improve learning capabilities such as Pood-for-School Program and Breakfast Feeding Program; electricity subsidy for poorer life-line consumers under Puntawid Kuryente Program; and expediting the

'irnplernkntation of the conditional cash transfer (CCT) program, the Fm?crwJd Farnit.yang Pilipin0 Progrm.

To cffcctivcly ensure that the budget spent on the program reaches the poorl the Governlent took action to improve the effectiveness and targeting of the Food-for-School Program, which resulted in prbritization of the 20 poorest provinces and the 100 poorest rnunicipalitics in the Philippines and only the poverty "bot spots" in urban areas o f Metro Manila identified by the National Anti-Poverty Commission (NAPC).

ImgrminP nolicy coardinafion in saciaigrotecrion. The food crisis only underlined to us the need for improved policy cwrdination in the area of social protectjgn, where programs me administered by muhipIe agencies, As a result, the President establislied the National Social Welfare P ~ ~ ~ T T I , an inter-agency program that clusters ingether (hose that directly address the impact of the adverse global environment, and assigned the coordination to Department of Social Welfare and Development (DSWD) and the Social Security System (SSS) administrator as the Chairman af the policy-level group.

The Government, starting with DSWD, would like to assess major existing social protection programs with a view to reallocating and/or consolidating programs where &appropriate. DSWD i s taking the tcsd in imphcnting the reform agenda in the area of swial. protection, wbkh consists o f other govcnunent agencies such as Department of Health, Government Service Insurance System, and the SSS,

t

The next steps would entail developing an operational social protection strategy and work-plan ,and organizing agencies within the cluster. The expected results entail a more rational allocation of' responsibilities and resources, such that resources are aflomted to programs that best address the actual risks and vulnerabilities of tltc Filipino population, Over the longer term, such an inter-agency program would hc expected to lead to reallocation of resources across programs to scale-up more effective social protection programs relative to less effective programs.

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. A critical component o f our agenda to help thc poor i s place a more comprehensive, accurate, md objective targeting system that wou truly paor households. DSWD is impkementing measures to improve targeti househalds for its social protection programs and s e ~ i c c s . Specifically, it adopted the National Household Targeting System for Poverty Reduction and i s establishing a database of

*poor households (which already covers over 386,896 poor households in over 2 cities and 83 municipalities). The Government has included in the 2009 President's budget, aiready submitted to Congress, allwzttion o f adequate funding to expand ?he database $0 cover at least thc 20 poorest provinces in 2009.

Thrz National: Household Targeting System for Poverty Reduction aims to provide a unified approach to targeting poor households across social protection programs. Because it is baed on dear: and transparent criteria, it cm help improve governance, transparency, and credibility of Government programs intended td supp poor households in addition to the technical efficiency gains in public exhnditure and p

In relation eo the targeting system, the Government developed ew&r this year a proxy mems test (PMT) methodology for identifying the poor, which i s based on objective criteria and utilizes multi-dimensional variables to explain poverty, The PMT methodology has been piloted in municipalities and two cities and has been used to create a standafdized database o f poor households, which would cover about 140 poorer municipalities and 10 cities by the end of 20023. This initiative i s being underlaken in conjunction with the planned implementation o f the CCT program in these areas.

In addition, the Government p l a ~ l ~ to expand this targeting database to eventually cover the entire country and result in a database of paor households in the country. While discussions are st i l l underway as to how this system will be rolled out over the coursc at" the next year or two, i t was deemed critical to atlacate budget for this important tmk in 2009, when we intend to ensure that at least the 20 paorest provinces m completely covered in the poverty database.

Thc National Household Targeting Sysiern for Poverty Reduction i s expected to allow for the bemr targeting o f a variety of existing safety net programs, as well as the possibility for the more extensive roll-out o f new programs. I t will also allow for the future emergency targeting of poor housebids th~ougfi cash transfers in the case o f shocks such as the current price and fuel shocks. Moreover, it cas be used for the targeting of other national programs intended for paor households, such as for example the Lndigent Progrnm of subsidized health insurance for the poor through Philippine Health Insurance (PhilEiealtfi).

"The Government has thus also actively encouraged key Government Owned and Controofkd Corporations (GOCC> such as the NFA and PhilHealth that have programs targeted to poor households tu adopt the PMT-based national household targeting system for their s d a l protection programs. A Cabinet-level Economic Management meeting asked that GOCCs adopt the national household targeting system far their programs, Importantly, such a

'household targeting system i s expected to provide the Government with the vehicle to re- direct more inefficient subsidies that arc not weli-targeted to the poor to.niore targeted programs and possibly cash-bed subsidy programs in the hture.

49

The develaprnent o f a national targeting database i s expected to have significant impacts by directing scarce resources to tho poorest households, This could both Increztse the hencfits to poorest households, having a greater impact in reducing poverty incidence and severity as well as: allowing for cost eficimcies. The effectiveness af h e tmgcting system (of this and other prugrams) is planned to be assessed by including appropriate questions regarding program coverage in the next national household survey.

* Even before the food crisis exacerbated the plight o f the poor and mlnerabk, the Government recognized thc desirability of launching a GCT program. A CCT program i s seen as a vehicle to supplement the income of the poorest households while also increasing incentives and resources o f these househotds to invest in the human capital of their children, Our Government indeed sees it a5 an essential element in our campaign to improve educational md health outcomes, I t bccomcs all the marc important in lighl ofthc price and income shocks being faced by these households now.

As mentioncd earlier, the Govement adopted and lauiiched Pantawid Pamilyang Pilipitto Program (4Ps) this yew. This program aims to increase subsiskcncc incamc among the poorest and, at the same time, helps improve the: living conditions and human capital investment' o f . poor households, CCT bencficialry households are chosen by the PMT rncthodology and are required to comply with conditions related to education (e.g. school ittendancc, cnrollment, completion) and health (e.g. health visits, pre-natal and post-natal care and assisted child birth delivery), The CCT progam i s expected to reach some 320,000 households in abqut 140 poorest municipalities and 10 cities by the end of2008.

Already, about 200,743 households out o f the encoded 386,896 poor households have received their first payment under the program. For beneficiary households, the cash subsidy would provide important mitigation for the increse in food priccs, The GCT program i s estimated to provide, an average cash transfcr of PhP12,OOO per year per household, which i s approximately 20 percent of average hnvsehald incame among the poor. The CCT cash transfer i s expected to more than compensate beneficiary households for the food price increases &cy have had to face this year.

Indeed, in the short-term, the CCT.program i s expected to significantly mitigate the impacts of the fond price shock on these households in some o f the poorest municipalities in the country. Over the medium-term, the program is also expected to result ia b&efits in terms o f educational outcomes and health indicators. Given that i t uses internationaj best practices, the CCT progrm could potcntiaily replace other subsidy and transfer programs EB a flagship social protection and poverty reduction program for the country.

Food Policy

The recent food crisis has also highlighted critical iong-standing but politicalty difficult policy issues involving the supply side aspects o f food security. The .Governlent recognizes that ref0 s in thcsc areas are needed but are better addressed in a more systematic and sustained manner in ahc long term. Hence, we look forward to continuing ow collaboration with the World Bank in the area of investments for agriculturai productivity, policy advicc and technical assjStancc on food policy refom. In particular, we welcome further collaborative engagcments with the Bank to hctp us chart and implement a strategic

50

operational roadmap that would minimize the social costs of these important food policy * re forms.

We believe that there i s still scope to increase the productivity of‘ domestic rice production which will then render us less vulnerable to the vagaries o f the international marker. We are cunentiy only irrigating 46 percent of our irrigable lands and ow €ut1 yield potentjal has yet to be tapped, To this end, the Govement is increasing its support to the Department of Agriculture’s FIELDS program which refers to the critical. inputs needed to enhaice agriculrural production atid productivity. There a e on-going Bank-financed programs that support a nmber o f these thrusts but we would, welcome additional support that wilt increase and help facus public resources to the most strategic investments, while at the same time, encouraging and enabling more private sector investments in the agriculture SeCtOr.

Jrnpurtantly, we see that some of the key reforms in the area of social protection, supported here by the Bank, may also be critical initial steps for embarking in future reforms in the area of food policy, In particular, the existence o f an alternative targeting system i s seen as an important step toward providing a viable alternative option to support the poor, compared to the current NFA rice subsidy and stabilization program. This NFA program has been contributing to an increase in our consolidated public sector debt, with debt f i ~ m c i n g o f $the annual NFA deficits resulting from our rice subsidy and stabilizaxtion pol the Government is exploring the possibility o f gradually phasing out subsidized NFA rice in areas once the establishment and impfenentation of the PMT-based poverty targeting system of rhe poor i s in place. ‘This could be used for targeted cash transfers in Lieu o fcomodi ty subsidies. In the interim, the poverty targeting system could be us$ m target NFA rice, thus lessening leakage, import requirements, and the extent of the costly deficits incurred by the rice subsidy and stabilization program, while more effectively and directly heiping the poor.

Copidusion

IR conclusion, hlr. President, my Governeat is focused on ensuring that poor Filipinos are protected from the extraordinary shocks that are buffeting our country, Of course we recognize that taking appropriate nieasures to erisure macroeconomic stability is of priraniuunt importance in this regard, and we continue to act in this area. In addition we are enhancing our attention to underding appropriate actions to protect the poor through efforts in the area of social protection. We have appropriately taken short term actions to protect the poor during this crisis year in 2008, bur we are also putting into place measures that will improve ow ability to protect the poor and respond 10 such crises. The steps we have taken to strengthen institutional coordination, improve targeting, and pur into place a CCT program are key clements of that response. Moreaver, we are actively considering options for improving our food policy stance in the futurc.

Onbehalf o f thc Coverrunent of the Philippines, ter me convey our appreciation o f rhe personal role you have pIayed in incressing global attention and response to the food crisis. In particular we thank you for the continued support of she World Bank in the Philippines. We

5 1

trust we can count on the World Bank’s continued support, through financial assiszance as we11 as the technical and policy advice, on these importanr ateas o f macro onomic and fiscal p d i ~ y , smial protection policy, and food policy.

,

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Annex 3. IMF Letter of Assessment

56

Annex 4. Simulating the Impact of Inflation on Poverty

Region Ilocos

The recent price hike in food prices hurt the net purchaser o f food across the globe. In the Philippines, although the population spends a large chunk o f their income on food, majority o f the poor are in the agricultural sector producing main food products as well so that the net impact o f the food price increase on poverty may not be so obvious. I t is, therefore, useful to quantify about how much impact price changes would have on poverty in the Philippines.

Food, beverage Light, Fuel Regular Overall & tobacco & Water Mil led Rice

11.4 16.3 9.0 65.1

We undertake a direct impact analysis to simulate the effect o f inflation on poverty by exploiting the information contained in the latest Family Income and Expenditure Survey (FIES). The FIES, conducted every three years by the NSO, contains household level data on family income sources, such as income from agricultural activities and transportation, as well as detailed expenditure items, including spending on all food items, rice, and fuel. We also use consumer price indices (CPI), farmgate and retail prices o f rice at the regional level to capture the spatial heterogeneity in inflation. Regional CPI data, collected monthly by the NSO, have separate indices for food, beverage, and tobacco and fuel, light, and water. Regional farmgate and retail prices o f rice are available monthly from the Bureau of Agricultural Statistics. The price changes calculated from these data used in the simulation are reported in Table Al .

Zamboanga Peninsula Northern Mindanao Davao SOCCSKSARGEN NCR

B y using the FIES 2006, we assume that income and spending patterns o f households now are as they were in 2006. We also assume that there i s no substitution between goods, which implies that (i) households do not switch less expensive commodities with more expensive ones, and (ii) the composition o f the menu for the poverty l ine remains unchanged. This i s admittedly a strong assumption and so i s used in assessing the impact o f shocks or reforms only in the short-term, before economic agents are able to make adjustments and behavioral changes. In the face of limited data, this assumption could be useful to give us an idea of the upper bound o f the impact o f inflation on poverty.

20.3 26.0 18.6 52.4 15.3 20.7 12.0 65.5 14.9 21.8 7.1 53.7 16.3 21.1 15.4 34.6 8.6 13.1 (4.5) 67.7

CAR ARMM

Philippines Caraga

11.9 18.3 5.4 66.7 17.2 21.8 23.5 56.7 22.2 30.6 17.0 59.3 12.3 17.8 5.5 58.3

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To simulate the impact o f inflation on poverty, suppose that the poverty line i s initially given by z. If the price o f everything increased by x, then the amount o f money one needs to maintain the consumption at the poverty l ine i s z(Z+x). Now, suppose instead that only the price o f food increased by x. Then, under the assumption o f no substitution, the amount o f money one needs after the increase in the food price w i l l be zs(Z+x)+z(l-s), where s i s the share of food expenditure in the poverty line. In a similar manner, we can compute the poverty l ine after the increase o f other goods, such as fuel.

When one sells food, one benefits from higher food prices. The net effect o f price increases in specific commodities, say rice and fuel, w i l l depend on how much people earn from and spend for them. Hence, it i s also important to take into consideration this “income effect.” Again, we shall ignore the substitution between production processes so that the agricultural output remains unaffected by higher food prices. Under this assumption, we can calculate the new income level after the food price increase. That is, suppose that initial income level i s initially given by y . If the price o f food increased by x, then the income one receives after the inflation i s yt( l+x)+y( l - t ) , where t i s the share of income from selling food. Capturing the income effect i s a challenge because we do not exactly have the share of income from selling food, t, in the FIES. We then used the share of income from agricultural activities (farming, fishing, and poultry-raising) and income from transportation to total income in the FIES to approximate the income effect of price increases in all food commodities and fuel, respectively.

Table A2 shows the income and spending patterns o f the population by income quintile in 2006. The bottom quintile get 30% o f their earnings from agricultural entrepreneurial activities, which includes farming and gardening, fishing, and poultry-raising, where the upper two quintiles get less than 5% o f their earnings. Meanwhile, food comprises 60% o f the bottom quintile’s total spending and about one-third (21.4%) o f their food expenditure i s spent on rice. In general terms, Filipino households spend more on food than earn from food production. This suggests that high food prices w i l l have a negative impact on overall poverty. Transportation, both as a share o f income and expenditure, i s higher for the upper income groups so increases in the price o f fuel i s also expected to hurt them more.

5 -Highest I 3.3 31.3 7.5 6.5 All 8.1 I 2.6 I 41.4 7.6 1 5.7

Source: FIES 2006

Table A3 shows the simulated impact o f inflation on poverty. We looked at the effect o f inflation both with and without the income effect o f price increases (1) on all food commodities, (2) on fuel only, and (3) on both food and fuel. In all three scenarios, we simulated the effect o f a 10% price increase as well as the actual price change between July 2007 and July 2008, when food inflation was highest.

The increase in food prices has a large effect on poverty because the price change was particularly large between 2007 and 2008 (18%). If we do not account for the income effect, poverty would have increased to 38.6% from 32.9%, or an additional 4.8 mill ion poor people (Table A3). The increase in the price o f rice alone would account for the additional 3.9 mill ion people who w i l l succumb to poverty. The effects of the increase in energy prices on i t s own appear relatively limited, with a 10% increase in fuel prices would s t i l l increase poverty to 33.3%, or an additional 360,000 poor people. However, i t s compounding effect on food prices would mean an additional 5.1 mill ion people who wil l fall into poverty.

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If we take into account the offsetting effects o f inflation, the impact on poverty i s reduced. Then again, we see that the increase in poverty resulting from the actual increase in food prices i s higher among households in the urban areas compared to those in rural areas, and also higher among non-agricultural households compared to agricultural households.

Poverty Incidence Increase in Magnitude

Poverty Incidence Increase in Magnitude

Recall, however, that our calculations are made under the assumption o f no substitution. If we take substitution into account, the negative effect on poverty incidence would have been smaller, because people, for instance, can switch from expensive food to less expensive food without necessarily reducing the nutritional content.

No Y-effect With Y-effect Actual P Inc. 10% P Inc. Actual P Inc. 10% P Inc.

2007-2008 (July) 2007-2008 (July) Price Increase in ALL FOOD Items

38.6% 36.1% 36.5% 34.9% 4,774,073 2,681,477 3,027,064 1,7 17,166

Price Increase in FUEL only

33.4% 33.3% 33.2% 33.2% 398,498 359,004 254,545 227,925

However, this does not mean that the current rapid inflation i s o f no concern. As we saw from this exercise, the rapid increase in food prices would severely hurt the net purchasers o f food. This means that urban poor i s the most at-risk from increasing food prices.

Poverty Incidence Increase in Magnitude

Price Increase in FOOD & FUEL 39.0% 36.5% 36.8% 35.2%

5,083,046 2,989,405 3,261,550 1,921,802

Population Group

Official Impact on Poverty of Actual Price Increases in Poverty Al l Food Fuel Food& Fuel

Incidence Items Prices Only Combined

(I) By Agricultural Indicator Agricultural HH

Non-Agricultural HH 65.4% 21.9%

66.8% 66.1 % 67.5% 26.3% 22.1% 26.4%

(2) By UrbadRural Area Urban Rural

ALL Philippines

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19.5% 23.2% 19.7% 23.3% 45.9% 49.5% 46.3% 49.9%

32.9% 36.5% 33.2% 36.8%

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Annex 6: Fiduciary Assessment

Background

1. Funds from this operation w i l l provide general budget support to the Government o f the Philippines. This note provides an assessment o f the fiduciary r isks with respect to use o f these funds. The assessment of the fiduciary aspect o f this Food Crisis Response Development Policy Operation draws upon several studies on PFM and accountability that have been completed recently, both internally within the Bank and by development partners.

PFM Reform

2. The quality of the Philippines’ public financial management (PFM) has been assessed and documented extensively in a number of reports produced by the Bank and other development partners such as IMF since the late 1990s. At the present, Budget execution and caswfinancial management remain areas o f weakness in the Philippine PFM, as confirmed in the most recent IMF technical assistance report (2008). The Bank’s Public Expenditure and Financial Accountability (PEFA) assessment report (2007) provides a comprehensive review o f the full PFM cycle and other key dimensions. As such, this fiduciary assessment draws primarily from this PEFA report, as well as from additional information gleaned from other recent sources.

3. A number of weaknesses remain in the Philippine PFM, but over the last several years, the Government has implemented several reform programs to strengthen various aspects of PFM. Aspects of the PFM covered in these efforts range from budget formulation (introduction o f a medium-term expenditure framework as part of the annual budget process) to accounting (adoption of the New Government Accounting System (NGAS)) and audit (use o f a risk-based approach to audit). These reform efforts have been spearheaded by different central oversight agencies and implemented in some line departments. Given the complexity o f the Philippines’ PFM system and the generally low institutional capacities o f the government, implementation o f these reforms has moved slowly and unevenly across the public sector. As a result, the PEFA assessment report points to a number o f weaknesses such as:

o Limited budget credibility largely due to extensive in-year budget reallocations without congressional authorizations and the absence o f public reporting on in-year budget execution

o Unreliability o f the Annual Financial Reports due to material overhnder-statements (although annual audit reports o f individual agencies are believed to be more accurate)

o Relatively weak oversight and reporting of fiscal risks arising from operations o f government ownedcontrolled corporations (GOCC)

o Weak internal control and audit functions in line agencies.

4. PFM system:

The PEFA report also identifies the following areas of relative strength in the Philippines’

Reasonably comprehensive budget, limited extra-budgetary operations or unreported government operations

Incipient effort to introduce a medium-term expenditure framework into the annual budget process

Strengthened legal framework regarding procurement and a credible program o f reform implementation

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o Comprehensive annual audit practices, although legislative oversight/follow-up o f audit findings i s virtually non-existent.

Implementation History of PFM reforms in the Social Sector

5. The Bank initiated the Social Sector Expenditure Management Projects (SEMP I & 11) to support the Government in addressing significant weaknesses in governance and corruption. While governance and corruption were recognized as problems throughout government, a survey in the mid- 1990s found that the health and education sectors were perceived as among the most corrupt government departments. In the late 1990s, all of the Bank-financed projects in the social sector were either rated unsatisfactory or at risk o f unsatisfactory outcome, due largely to the weaknesses in procurement, financial management, and implementation capacity (SEMP 11, ICR report, April 29, 2008). Based on the above findings the Bank initiated the Social Sector Expenditure Management Projects (SEMP I & II), which supported the Departments o f Education (DepEd), Health (DOH), and Social Welfare and Development (DSWD), to promote core fiduciary and governance reforms.

6. As a result, Departments of Health (DOH), Education (DepEd), and Social Welfare and Development (DSWD) have seen some improvements in financial management partly through the success of Bank-funded Social Expenditure Management Projects (SEMP I & 11). Prior to the SEMP 11, financial management in these three departments was entirely manual and accounts were rarely fully reconciled. The project supported full operationalization of electronic New Government Accounting System (eNGAS) in the Central Offices of DSWD and DOH, and partial implementation in the DepEd Central Office. DepEd also benefited from the deployment o f the Basic Education Information System (BEIS), now used to assess relative resource requirements o f the schools nationwide and determine budget allocations for deployment o f teachers, purchase of textbooks and school furniture, and construction o f new classrooms to properly allocate DepEd’s limited budget to areas with the greatest need. SEMP I1 also facilitated involvement o f civi l society groups in monitoring procurement in DepEd (textbooks) and D O H (drugs).

7. The Bank continues to support DepEd and DSWD, two agencies that are responsible for most of the social protection programs that the proposed operation supports, as well as D O H in strengthening their capacities in financial management. The Bank and AusAID are providing technical assistance to DepEd whereby the former supports continued strengthening o f financial management, including additional deployment o f eNGAS, specific actions to address irregularities and anomalies found in COA audit reports, and strengthening o f the Agency’s internal audit capacity; and the latter supports development and implementation of a DepEd-specific internal control standard. The health sector receives considerable donor support, primarily from EU, USAID and the Bank, that i s used to strengthen financial management capacity. The EU i s currently planning to conduct a PEFA assessment o f selected local governments, which are responsible for an important part o f health service delivery.

Procurement Reform

8. The 2007 Country Procurement Assessment Report (CPAR) shows that there has been distinct progress in the area of public procurement since the passage of the Government Procurement Reform Act (GPRA) in January 2003 and i t s implementing rules and regulations in September of the same year. The CPAR, using the OECD-DAC Baseline Indicator System, found the procurement risk at the national agency level as moderate, and in the LGU level as high.

9. The most visible progress has been made in the area of procurement reform. The 2007 Country Procurement Assessment Report (CPAR), using the OECD-DAC Baseline Indicator System, found the procurement risk at the national agency level as m~derate. ’~ To further mitigate the remaining r isks, the Government, led by the Government Procurement Policy Board (GPPG), has begun implementing certain

24 Procurement-related fiduciary r i sks at the local level were assessed as high.

63

measures with assistance from development partners (ADB, JBIC, AusAID, USAID, EU and the Bank) such as:

o Legally mandated involvement o f c iv i l society observers in observing the bidding process and submitting observers’ reports to the Heads of Agencies

o Increased use o f electronic procurement, through the Philippine Government Electronic Procurement System - currently more than fifty percent (50%) o f all procuring entities are posting their notices of bids and awards in the system

o Use o f standard bidding documents and forms (since 2004) and the Generic Procurement Manuals (since June 2006) to guide rule-bound implementation o f procurement transactions, including for projects funded by ADB, JBIC and the Bank.

10. with assistance from development partners (ADB, JBIC, AusAID, USAID, EU and WB).

Agreed measures to address the system’s weaknesses are now being implemented by the GOP,

o An empowered Government Procurement Policy Board (GPPB), established in 2003, i s overseeing the GPRA’s implementation to make sure that the transparency, efficiency, economy and accountability principles o f the law are carried out

o Civi l Society Observers are mandated by law to be present as observers in al l key steps o f the bidding process. A number o f reform minded civi l society organizations are now involved in observing the bidding process and submitting observers’ reports to the Head o f Agencies, with copies to the GPPB and the Ombudsman’s Office, the office that investigates and prosecutes grafters in the civi l service. Statistics showed increased in the number o f procurement cases under prosecution

o Public procurement system i s linked to the budgeting system through the Annual Procurement Plans, which i s mandated to be the supporting papers for the formulation o f all agencies’ annual budget

o As the law mandates the nationwide use o f electronic procurement, through the Philippine Government Electronic Procurement System, more than fifty percent (50%) o f all procuring entities are now posting their notices of bids and awards in the system making the process transparent and accessible to the public

o Procurement organizations, such as the Bids and Awards Committees, Technical Working Groups, and other supporting procurement units in each agency are functioning and accountable

o Standard bidding documents and forms were issued for mandatory use in 2004 to define the procurement rules and guide the procurement staff and the bidders in going through the bidding process, as well as define the contractual relationships o f the procuring entity and the winning bidder. On the other hand, the Generic Procurement Manuals (GPMs) were issued in June 2006 to guide the procurement staff o f the agencies and LGUs on the detailed steps, their roles, responsibilities and accountabilities, including the sanctions against irregularities and anomalies. Both the bidding documents and GPMs were harmonized with the multilateral banks (ADB, JBIC and WB) and are being used in foreign assisted project procurement.

11. Although the legal and regulatory framework i s adequate and a credible program of reform implementation i s in place, there are challenges that remain recorded in the CPAR. The Government,

64

Development Partners and Private/Civil Society Organizations using the Philippine Development Forum Sub-working Group on Procurement as vehicle, have agreed on major remaining challenges to the effective implementation o f the procurement law. These include effective monitoring o f compliance with the law and the implementing rules and regulations, enforcement o f these rules and regulations by way o f stronger sanctions against irregularities and anomalies, and strengthening o f procurement capacities, especially at the sub-national level. The Government’s reform action plan includes the following measures to address these remaining challenges.

o Implementation of a communication strategy to create awareness amongst the citizenry on the new public procurement system, i t s anti-corruption features, and the need for them to get involved in monitoring contract implementation

o Stronger monitoring the procurement performance o f national agencies and local government units, through the e-procurement system and implementation of a good record management system in all agencies and LGUs

o Strengthening capacity towards creating a cadre o f procurement professionals in the civi l service, where procurement officers w i l l have a career stream in the c iv i l service

o Stronger enforcement o f the sanctions and penalties for irregularities and anomalies through the implementation of the policies on Internal Audit applying international standards o f auditing as called for by the Law on Internal Audit

o Measuring the impact o f the reforms in terms o f adding value for money and reducing graft and corruption in the public procurement system through the regular assessment o f procurement performance using the Agency Completion Performance Indicators following the OECD-DAC Baseline Indicator system.

Accounting, Reporting and Auditing on Budget Execution

12. Despite ongoing efforts, there are significant challenges remaining in accounting, reporting and auditing functions in the public sector, including the incompatibility o f the expenditure classifications used for budgeting and accounting purposes and limited effectiveness o f COA audits in deterring financial irregularities. On the accounting side, the manual New Government Accounting System (NGAS) has been rolled out to the 5,000 odd reporting agencies at both the national and the local levels. This has brought about some standardization in accounting practices. The electronic version o f the New Government Accounting System (eNGAS) has been implemented in several agencies, although i t s full roll-out i s behind the original schedule. DBM has been contemplating a project to develop a comprehensive financial management information system (FMIS), and ADB i s planning to provide TA in this area to identify needs and prepare an F M I S reform road map.

External Audit

13. A joint WB-ADB mission in 2003 agreed with the Commission on Audit (COA) concerning some areas to be harmonized in auditing financial management of donor projects. Those areas include: (i) auditors’ terms o f reference; (ii) assessment of the financial management capability o f prospective borrowers/grant recipients; and (iii) financial management reports to be submitted by borrowerdgrant recipients. A Technical Working Group composed o f representatives from ADB, JBIC and the Bank prepared drafts for each of these items. To support the harmonization efforts among Development Partners to enhance public financial management of Government (in particular, in the area o f the reform agenda for the Commission on Audit), the Bank has provided an IDF grant to strengthen the capacity and effectiveness o f COA. The above mentioned grant includes development and adoption o f a results-based integrated audit methodology and a risk-based audit approach in the audit o f ODA projects and government agencies,

65

consistent with applicable international standards o f auditing (ISA) and other relevant generally accepted auditing standards.

Internal Controls and Internal Audit 14. Particular areas of concern from the fiduciary point of view are the adequacy of the internal control standards and the effectiveness of the internal audit functions in the public sector. The PEFA assessment report noted the current weaknesses in these areas. However, the Government has already begun addressing these weaknesses by preparing a national internal control standard (to be piloted in selected agencies) and implementing a program to strengthen internal audit capacities in line agencies. In accordance with the Internal Audit Guidelines prepared with Bank assistance, the Government has completed mapping o f internal audit functions, assessed the quality o f selected internal audit units and produced an Internal Audit Manual following the International Standard for the Professional Practice o f Internal Auditing.

Governance and Anti-Corruption

15. A National Anti- Corruption Program o f Action has been completed with inputs from a range o f stakeholders, and action has been taken in some key areas, such as strengthening the Office o f the Ombudsman, the establishment o f Anti Graft Units in a number o f agencies, and l i f e style checks o f civi l servants. The Bank and AusAID are providing technical assistance to DSWD to develop a comprehensive anti-conuption plan for the agency. The activities supported include design and initial implementation o f a national targeting system, which can be used to determine allocation o f various social protection programs (including those outside DSWD) in a way that minimizes fund leakages due to errors, fraud and corruption.

The government has made some moves on the anti-corruption front.

Collaboration with IMF

16. The Government of the Philippines cooperates closely with the IMF within the framework of regular Article I V consultations. Overall, the IMF i s satisfied with the medium-term framework and the sustainability o f current macroeconomic policy (IMF 2007 Article IV Consultation).

Risks and Risk Mitigation

17. Fiduciary risks. As indicated above, the Public Financial Management System o f the Philippines has recently improved, but i t s t i l l remains fraught with risk. These risks include a variety o f weaknesses, including budget execution, cash management, financial reporting, and oversight functions.

18. Risk mitigation. Although progress has been slow and uneven, the Government has addressed many o f the weaknesses. One concrete plan that should bear fruit over the medium term i s regularization o f internal control standards and internal audit units in line agencies and the strengthening o f the capacity and effectiveness o f COA. Possible new TA to strengthen cash management by the Bureau o f the Treasury i s being discussed. Progress has been made in the three social sector departments (DSWD, DepEd, DOH), compare to the rest o f the public sector, and the Bank and other development partners (AusAID, EU) are actively engaged in supporting reform efforts in these departments.

Conclusion

19. Known weaknesses in public financial management continue to be gradually addressed through the PFM reform program discussed above. The Development partners are actively engaged in this process. Key elements of the reforms are supported by the DPL triggers and initiatives supported by development partners. However, much remains to be done, and i t w i l l take time to realize the full impact o f these reforms. In the meantime, some fiduciary risks may possibly arise for t h i s operation. Although the pace of implementing the planned reforms has been somewhat slow over the past year, the trajectory o f reform i s in the right direction and the Government continues to demonstrate a commitment to the task o f

66

completing the planed reform in PFM. Taking this into consideration, the Bank assessment team does not propose putting in place additional fiduciary arrangements for t h i s operation.

DISBURSEMENT A N D AUDIT ING

20. Borrower and Loan Amount. The borrower i s the Republic of Philippines and this operation i s a single-tranche loan o f US$ 200 mill ion that w i l l be made available upon loan effectiveness, subject to all policy actions supported by the loan being completed prior to Board presentation.

21. Disbursement Arrangements and Use of Funds. The loan amount w i l l be disbursed into a Designated Account (DA) in U S Dollars that forms part o f the Philippines’ official foreign exchange reserves at the Central Bank (Bangko Sentral ng Pilipinas). Prior to disbursement, the Borrower w i l l provide to the Bank a copy o f written instructions issued to the Bangko Sentral ng Pilipinas for conversion o f the foreign exchange amount o f the loan into local currency and that an equivalent amount be credited to an account of the Government available to finance budgeted expenditures. After disbursement o f the loan, the Borrower w i l l ensure that the equivalent Peso amount o f this loan amount i s promptly accounted for (in Philippine Pesos) in the Borrower’s budget system in the General Fund, and thereby be available to finance budget expenditures. The Borrower w i l l provide to the Bank a written confirmation within 30 days of disbursement o f the loan that this accounting has been completed, with supporting details.

22. Disbursements of the loan will not ,be linked to any specific purchases and no procurement requirements have to be satisfied. The proceeds o f the operation w i l l not be used to finance expenditures excluded under the Agreement. If, after being deposited in a government account, the proceeds o f the loan are used for ineligible purposes as defined in the Loan Agreement, the Bank w i l l require the Recipient to either: (a) apply the corresponding amount to eligible purposes, or (b) refund the amount directly to the Bank.

23. The Bank will retain the right to seek an independent audit of the Designated Account (DA) established in the Central Bank (Bangko Sentral ng Pilipinas) by an auditor acceptable to the Bank; to seek reassurance on the accuracy o f the information relating to transactions from this account that was provided by the Borrower, including accuracy o f exchange rate conversions; and that funds in this account were not used to finance expenditures excluded under the Agreement. The Government o f the Philippines w i l l furnish to the Bank as soon as available, but in any case not later than six (6) months after the deposit o f the single tranche loan amount into the foreign currency Designated Account, a certified copy o f the audit report, o f such scope and in such detail as the Bank shall reasonably request.

24. Bangko Sentral ng Pilipinas (BSP). The annual financial statements o f the Bangko Sentral ng Pilipinas are audited by the Commission on Audit (COA) and are available in the COA website. COA has issued an unqualified audit opinion for the 2006 entity financial statements o f BSP. The 2007 audit report i s being finalized by COA.

67

Annex 7: Statement of Loans and Credits

Difference between expected and actual

disbursements Original Amount in US$ Millions

Proiect ID FY Puruose IBRD IDA SF GEF Cancel. Undisb. 0ri.g. Frm. Rev'd

PO79935 2008

P101964 2007

PO84967 2007

PO96174 2007

PO75464 2006

PO94063 2006

PO64925 2006

PO79661 2005

PO79628 2005

PO73206 2005

PO70899 2004

PO75184 2004

PO66397 2004

PO66076 2004

PO77012 2003

PO73488 2003

PO71007 2003

PO69491 2002

PO57731 2001

PO48588 1999

PH- Natl Rds Improv. & Mgt Ph.2

Support for Tax administration Reform

Mindanao Rural Dev. Project - Phase 2

PH-Nat'l Prog Supt for ENV & NRMP

PH-NP Support for HNP

PH-NP Support for Basic Ed

LOCAL DEV & INV PH-SUPPORT FOR STRATEGIC

PH-MANILA SEWERAGE 3

PH-2ND WOMEN'S HEALTH & SAFE MOTHERHOOD

PH LAND ADMINISTRATION AND MANAGEMENT I1

PH LAGUNA DE BAY INSTITUTIONAL STRENGTHE

PH: Diversified Farm Income & Mkt. Devt

PH-Rural Power Project

JUDICIAL REFORM SUPPORT PROJECT PH KALAHI-CIDSS PROJECT

PH - ARMM Social Fund

PHSecond Agrarian Reform Communities Dev

PH-LGU URBAN WATER APL2

PH-MMURTRIP

PH-LGU FINANCE & DEV.

232.00

11.00

83.75

50.00 110.00

200.00

100.00

64.00

16.00

19.00

5.00

60.00

10.00

21.90

100.00

33.60

50.00

30.00

60.00

100.00

0.00

0.00

0.00 0.00

0.00

0.00 0.00

0.00 0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00 0.00 0.00

0.00

0.00

0.00 0.00

0.00

0.00 0.00

0.00 0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00 0.00

0.00

0.00 0.00

0.00 0.00

0.00 0.00

0.00 0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00 0.00

0.00 0.00 0.00

0.00 0.00

0.00 0.00

0.00 0.00

0.00 0.00

0.00

0.00 0.00

0.00

0.00

0.00

0.00 0.00

0.00 0.00 0.00

15.00

0.00

0.00 40.00

232.00

10.60

80.90

46.00

91.68

128.84

99.59

45.73

15.12

14.30

3.07

32.68

0.86

12.06

28.30

4.16

7.87

8.23

12.62

8.65

0.00

3.68

8.15

8.50

12.24

58.84

-1.98

22.98

3.55

4.62

2.94

21.01

-3.18

11.46

28.30

4.16

7.87

22.61

12.62

48.65

0.00

0.00

0.00 0.00

0.00 0.00 0.00

0.00 0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00 3.09

5.33

5.59

8.65

Total: 1,356.25 0.00 0.00 0.00 55.00 883.26 277.02 22.66

68

PHILIPPINES: STATEMENT OF IFC’s Held and Disbursed Portfolio

In Millions of US Dollars

Committed Disbursed

IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan

2001

2002

2000

2005

2002

2005

1998

2002

2005

200 1

2005

2004

1998

1989

1993

1992

2004

2000

200 1

2003

2004

2000

1993

1993

200 1

2005

1992

2000

1998

2000

2003

1995

1994

1994

AEI

APW Trade

Alaska Milk

Asian Hospital

Bahay Financial

Balikatan HF

Banco de Oro

Cepalco

Drysdale Food

Eastwood

Eastwood

Filinvest

Filinvest Lan...

Globe Telecom

H&Q PV 111

H&QPV-I

H&QPV-I1

Holcim Phil

LARES

MFI MEP

MNTC

MWC

MWC

Mariwasa

Mindanao Power

Mirant Pagbilao

PEDF

PLGIC

Pilipinas Shell

PlantersBank

Pryce Gases

S TR A D C 0 M

SVI

Sua1 Power

Walden Mgmt

0.86

0.00

0.00

3.30

0.00

0.00

0.00 15.78

4.31

13.53

12.50

17.73

43.69

20.00

0.00 0.00

0.00

0.00 22.00

0.00 36.33

29.84

30.00

10.89

0.00

3.00

1.50

0.00

0.00 0.00

13.34

6.85

0.00

18.29

0.00

0.00 0.00

0.62

0.00 0.16

1.89

6.03

0.00

0.00

0.00 0.00 0.00

0.00 0.00

0.94

0.15

0.08

1.97

2.70

0.11

0.00 0.00

14.96

0.00

2.22

0.00

0.00

0.00 1.56

0.00

0.00

0.00

2.00

0.00

0.03

0.02

0.00

0.65

0.00 1 .oo 0.00

34.31

10.00

0.00

0.00

0.00 0.00

0.00 0.00

0.00

0.00

0.00

0.00

0.00 0.00

0.00 0.00

0.00

0.00

3.52

0.00

0.00 0.00

1.50

0.00 2.32

1.70

0.00 0.00

0.00

0.00

0.00

0.00

0.00

0.00 0.00 0.00 0.00

0.00 0.00

1.87

0.00 0.00

0.00

0.00 0.00

0.00 0.00

0.00

0.00 0.00

0.00 0.00 0.00

0.00

0.00 0.00

0.00

0.00

0.00 0.00 0.00

5.82

0.00 0.00

23.88

0.00

0.00

0.86

0.00 0.00

3.30

0.00 0.00

0.00

0.00 4.31

13.53

0.00 17.73

21.84

0.00

0.00

0.00

0.00 0.00

0.00

0.00

36.33

29.84

0.00 10.89

0.00 3.00

0.75

0.00

0.00

0.00 13.34

6.85

0.00 18.29

0.00 0.00

Equity Quasi Partic.

0.00 0.00 0.62

0.00 0.16

1.89

6.03

0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.94

0.15

0.08

1.97

0.00

0.11

0.00 0.00

14.96

0.00

2.22

0.00 0.00 0.00 1.56

0.00

0.00 0.00

0.00 0.00

0.03

0.02

0.00

0.65

0.00 1 .oo 0.00

32.13

10.00

0.00

0.00

0.00 0.00

0.00

0.00 0.00

0.00 0.00

0.00

0.00 0.00

0.00 0.00 0.00

0.00

3.52

0.00

0.00

0.00

1.50

0.00 2.32

1.70

0.00 0.00

0.00 0.00

0.00

0.00 0.00

0.00 0.00

0.00 0.00 0.00

0.00

0.00 1.87

0.00

0.00

0.00 0.00

0.00 0.00

0.00 0.00

0.00

0.00 0.00

0.00 0.00 0.00 0.00

0.00

0.00 0.00

0.00

0.00

0.00

5.82

0.00

0.00 23.88

0.00 Walden Ventures 0.00

Total portfolio: 303.74 35.44 55.00 31.57 180.86 30.74 52.82 31.57

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic

2001 PEDF 0.00 0.00 0.00 0.00

2002 Eastwood 0.00 0.00 0.00 0.00

Total pending commitment: 0.00 0.00 0.00 0.00

69

Annex 8. Country at a Glance Phi/@.yiri es

Total debt outstanairiy and disbumc! IBRD IDA

IBRD IDA

Offcia1 grants ClfBEcial creditors Fwtafe creebmrs

Portblia equip{ (net infiatvs) W d d Bank prcgram

Conimilments Dlsl,unmeinS Fnnapal repayments Net Raia In:erest pa)nieiits Net transfers

Total debt & e w e

Colrnpositian atnet resource flow

1986

C8 3 3

13 O 2 0

-5 I

1986

4,842 91 9 751

2,672 5,041

869 839

1 a4

1985

7,702 5,868 1834

-1.321 44% 954

2a s -1,242

2,459 2Q 4

I986

28,204 3,017

02

298% 4C6

1

4oi; 106 2% 127

0

151 197 175 27

2% -213

1996

7 5 7 7

12.9 3 7 0 3

1996

211,543 9,9as 2,423

17,O 31,8

1,576 3,OCB

111,472

1996

33,490 41,314 -7,824

3,232 541

-4,001

1 1,773 18 2

1996

44,OCl 4,666

103

5,375 766

3

247 -55

2,166 1,517 2, lCl

528 457 426

2.3 343

-312

2005

7 6 6 4

15 0 -0 3 -2 7

2005

40,263 28,476

2.309 38 945. 48.038 1 876 6.281 8.828

M05

4,788 53.901 -9,113

-294 11.391

1,984

428 -2.41C

I 8.494 55 1

2005

61.527

197

9 %93 499

2.885

a

i 43 -1503

1,117 1132 1.461

9s. 12s 383

-253 125

-379

2006

6.2 5 2

I S 2 t 3

-1 1

2006

4 6 . m 31,144

2006

533,561 59,185 -7,624

-543 13.189

5,C22

-1 253 -3,769

22,967 58 3

2006

91: 196

524 a

0 132 390

142 400

-258

I li I

Inflattoli Yi.1 ‘0

8 6 4 2 0

01 05 C3 Cd 3 131

Export and import levels (US$ mill,)

CD.C:D -r

Cuwent accoilnt balance to GDP (%)

3 - r

Composidon of 2005 debt (US$ mtll.)

A ’,E65 6 1.j? __ c 387 3 B 39’

The Wwld Bank Group This tairle was prepred Iiy’ countrj unit staff. figures may differ frmi athes World Bank puBisSred data 9,293’07

70

1

2

4

6

7

11

14

17

18

19

20

2122

16

23

2425

27

31

39

42 46

47

49

54

75

59

62

65

66

71

73

74

76

81

80

77

7879

63

3

5 9

10

8

12

13

15

28

29

30

26

32

33

34

35 36

37

38

40

41

43

44 45

48

50

51

52

53

55

56

5861

64

68

69

70

60

67

72

57

ZAMBOANGA CITY

ICAR II

III

IV-A

V

IV-B VI VII

VIII

IX X

XIII

XI

XII

ARMM

NCR

Iligan

PasigQuezon

Lucena

ViracBatangas

BoacMamburao

Romblon

Santa Cruz

Antipolo

BalerPalayan

TarlacIba

MalolosBalanga

Trece Martires

Laoag City

ViganBangued

Tabuk

Ilagan

Cabarroguis

BontocLagawe

BayombongLa Trinidad

Lingayen

Kabugao

Basco

Puerto Princesa

Pili

Sorsogon

Daet

MasbateCatarman

BoronganCatbalogan

Naval

Maasin

Bacolod

Dumaguete Siquijor

Tagbilaran

Mambajao

Surigao

San Jose

Tandag

Tubod

Prosperidad

TagumNabunturan

MatiKidapawan

Digos

Isulan

Marawi

Malaybalay

OroquietaDipolog

Ipil

IsabelaCity

Jolo

KaliboRoxas City

San Jose deBuenavista

Jordan

Alabel

Kabuntalan

PanglimaSugala

Zamboanga Shariff Aguak(Maganoy)

Sultan Kudarat

San Fernando

Tuguegarao

BaguioSan Fernando

Legaspi

Tacloban

Cebu

Butuan

DavaoCotabato

Cagayande Oro

Iloilo

Pagadian

Koronadal

Calapan

Calamba

MANILA

MALAYSIA

Celebes Sea

Moro

Sulu Sea

Leyte Gulf

Visayan

Sea

Mindoro Strait

SibuyanSea

Phi l ippine

Sea

Babuyan Channel

Luzon Strai t

Gulf

DavaoGulf

MindanaoSea

BatanIslands

BabuyanIslands

PolilloIslands

LubangIslands

Catanduanes

TicaoSibuyanTablas

Busuanga

SemiraraIslands

CuyoIslands

Culion

Linapacah

Dumaran

Bugsuk

Balabac

Cagayan Sulu

Tawi-Tawi

Sulu

Basilan

Mindanao

CamiguinSiquijor

Negros

Panay

Bohol

Cebu Leyte

SamarMasbate

Marinduque

BuriasMindoro

Palawan

Luzon

Dinagat

Siargao

Sarangani

20ºN

10ºN

5ºN125ºE

120ºE

125ºE

IlocosIlocos NorteIlocos SurLa UnionPangasinan

Cordillera Admin. Reg.AbraApayaoBenguetIfugaoKalingaMountain Province

Cagayan ValleyBatanesCagayanIsabelaNueva VizcayaQuirino

Central LuzonAuroraBataanBulacanNueva EcijaPampangaTarlacZambales

National Capital Reg.

CALABARZONBatangasCaviteLagunaQuezonRizal

MIMAROPAMarinduqueMindoro OccidentalMindoro OrientalPalawan*Romblon

BicolAlbayCamarines NorteCamarines SurCatanduanesMasbateSorsogon

Western VisayasAklanAntiqueCapizGuimarasIloiloNegros Occidental

Central VisayasBoholCebuNegros OrientalSiquijor

Eastern VisayasBiliranEastern SamarLeyteNorthern SamarSamarSouthern Leyte

Zamboanga PeninsulaZamboanga del NorteZamboanga del SurZamboanga SibugayZamboanga City

I1234

CAR56789

10

II1112131415

III16171819202122

NCR

IV-A2324252627

IV-B2829303132

V333435363738

VI394041424344

VII45464748

VIII495051525354

IX555657---

Northern MindanaoBukidnonCamiguinLanao del NorteMisamis OccidentalMisamis Oriental

Davao Reg.Compostela ValleyDavao del NorteDavao del SurDavao Oriental

SOCCSKSARGENNorth CotabatoSaranganiSouth CotabatoSultan Kudarat

CaragaAgusan del NorteAgusan del SurDinagat IslandsSurigao del NorteSurigao del Sur

Autonomous Reg. inMuslim MindanaoBasilanLanao del SurMaguindanao**Shariff KabunsuanSuluTawi-Tawi

X5859606162

XI63646566

XII67686970

XIII7172737475

ARMM

767778798081

**Shariff Aguak (Maganoy) andSultan Kudarat serve as co-capitalsof the province.

*Executive Order 429, May 23, 2005,provides for the transfer of Palawanprovince (#31) from Region IV toRegion VI; Administrative Order 129holds EO429 in abeyance until animplementation plan is approvedby the President.

PHILIPPINES

0 50 100

0 50 100 Miles

150 Kilometers

IBRD 33466R3

NOVEMBER 2008

PHIL IPPINESSELECTED CITIES

PROVINCE CAPITALS

REGION CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

RAILROADS

PROVINCE BOUNDARIES

REGION BOUNDARIES

INTERNATIONAL BOUNDARIES

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, o r any endo r s emen t o r a c c e p t a n c e o f s u c h boundaries.