ANNEX. Aid method / Method of implementation. Trade policy and administrative management 2. RATIONALE Sector context

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1 ANNEX 1. IDENTIFICATION Title EU-Philippines Trade Related Technical Assistance Project 3 (TRTA 3) Republic of the Philippines / Trade Related Technical Assistance DCI-ASIE/2012/ Total cost Total cost: EUR 8,000,000 Aid method / Method of implementation EU contribution: EUR 8,000,000 Government of the Philippines indicative contribution in kind: EUR 975,000 Project approach direct centralised and partially decentralised management with programme estimates Partner for partially decentralised management: Department of Trade and Industry DAC-code 331 Trade Sector Trade policy and administrative management 2. RATIONALE 2.1. Sector context The Philippines is a lower middle-income country within the Association of South East Asian Nations (ASEAN) with a population of 94 million, a Gross Domestic Product (GDP) per capita of EUR 1,512 (2010) and average GDP growth of 4.8 % The Philippines has a strong potential for development in terms of natural and human resources, but overall development has fallen short of potential. The Philippines economy expanded by 7.3 % in 2010, the fastest pace since the mid 1970s, as demand rebounded after the recession. Over the period growth estimates are between 5.2 % and 5.7 %. Also exports and imports recovered in 2010 to precrisis levels with exports reaching USD 51 billion, while imports totalled nearly USD 55 billion. Despite this trade deficit, the current account is and will likely remain 1 positive due to the large surplus on the current transfer account (remittances). Philippine exports are highly concentrated with electronics making up more than 60 % of the total. Services show a EUR 1.3 billion trade surplus, largely due to Business Process Outsourcing. However Foreign Direct Investment (FDI) remains weak and lowest of the ASEAN 6 2, with high corruption, weak infrastructure and foreign investment caps as key restraints. Potential impacts of the 1 Economist Intelligence Unit, Country Report, April ASEAN 6 comprises Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand 1

2 new government Public Private Partnership initiative to stimulate investment (domestic and foreign) remains to be seen. President Aquino's social contract with the Filipino People broadly outlines his political convictions including "for a government that creates conditions conducive to the growth and competitiveness of private business". Over the first eight months of his administration, this manifesto has guided the drafting of the Philippine Development Plan (PDP), the country's comprehensive policy planning document, which was approved by the President in April It outlines among others the need to attract investment, including FDI, through regulatory reforms (e.g. passing a competition law, amend export development act, amend Tariff and Customs Code) and strengthened global competitiveness among others through promoting industry clusters and maximizing opportunities under a globalized environment (e.g. Free Trade Agreements - FTAs). In the area of agriculture the plan calls inter alia for putting in place a coordinated food safety system and creating employment opportunities by exploring new markets for agriculture and fishery products. The Philippine Export Development Plan (PEDP), approved by the President in July 2011, aims at reaching a 39 % export increase by 2013 (compared to levels) and double by It identifies the contribution of the different goods and services sectors to these growth targets. The plan notes the importance of sustainable export growth through among others agricultural (including organic) products. It also suggests negotiating trade agreements with both the EU and the United States. The Philippines became a member of the World Trade Organisation (WTO) in It is a founding member of ASEAN and has committed to further ASEAN integration (ASEAN economic community by 2015, creating a single market). Beginning of May 2011 the Department of Trade and Industry started stakeholder consultations for a bilateral FTA with the EU. Starting EU-Philippines FTA negotiation during the course of the programme is therefore a possibility. The Philippines has fallen behind its ASEAN peers both in terms of export performance (e.g. Philippine's exports to the EU dropping by 35 % between 2000 and 2010 while Thailand, Indonesia and Vietnam showed substantial growth rates) and attracting FDI (see above); the country has benefited less from preferential trade agreements both in terms of number of negotiated agreements and their utilisation compared to key ASEAN competitors 3. Major reasons for the relatively weak performance are the lack of a conducive business environment, weak capacity of agencies in trade and investment and a lack of competition in key areas in the Philippines. Although previous phases of the project built significant capacity in the relevant government departments, many new and more advanced regulatory reforms (e.g. competition framework) launched by the Aquino administration require continued assistance Lessons learnt The Trade Related Technical Assistance Project Phase 2 (TRTA 2) has shown high relevance responding to actual government and private sector needs as confirmed by the Result-Oriented Monitoring (ROM) and the mid-term evaluation. While the actual interventions are quite diverse and spread out over a number of components, the focus on support to international economic integration holds them together. 3 See Kawai/Wignaraja: Free Trade Agreeements in East Asia: A Way Towards Trade Liberalisation, Asian Development Bank Briefs, June

3 Efficiency under TRTA 2 was good and implementation of TRTA 1&2 showed that continued engagement of all levels of the different stakeholders and a strong commitment on director's level was key for successful delivery of results. Also the mid-term evaluation noted that more focus should be given to institutional development and capacity building as compared to isolated training. Continuity in engagements and follow up through key experts is essential in this regard. In both TRTA 1 and TRTA 2 the National Economic and Development Authority (NEDA) has performed well in its management role. However a change of implementing agency to the Department of Trade and Industry (DTI) has been recommended as the project is fully in line with DTI's core mandate within the government administration. It supports their internal efforts and priorities in terms of engaging in international trade negotiations and their internal coordination role with other concerned Departments. An internal review confirmed the strong commitment from DTI, their personal and project management capacity as well as the necessary office infrastructure for the project team. The change for the implementation was requested by the Secretary of DTI and is fully supported by NEDA which will also in the future support implementation in the Steering Committee and pass on management experience. TRTA 2 implementation has yielded positive experiences in keeping budget allocations per component flexible unlike during TRTA 1. The Rapid Response Facility (RRF) was created under TRTA 2 in order to address unforeseen needs (e.g. private sector requests for support on commenting on pending competition draft legislation) and complement the Annual Work Plan activities. It also helped to address legitimate needs clearly linked to the overall objectives by government and non government stakeholders outside the three main beneficiary agencies. External monitors and the mid-term evaluation confirmed the need and relevance of this component Complementary actions The EU regional programmes and particularly the ASEAN Regional Integration Support (ARISE), the EU-ASEAN Economic Partnership Programme, enhancing ASEAN FTA negotiation capacity, the ASEAN Project on the Protection of Intellectual Property Rights (ECAP III) and the EU-ASEAN Statistical Capacity Building Programme (incl. on trade statistics) are important complementary actions. During implementation and establishment of annual work plans close coordination will be needed to ensure consistency, and avoid overlaps. Under the SWITCH-Asia 4 Programme, which focuses on sustainable production and consumption, three grant projects are being implemented in the Philippines and a policy support component is planned for Support to EU Small and Medium Enterprises (SMEs) to access the Philippines market under the Industrialised Country Instrument (ICI+) could materialise subject to budget approval. The Japanese International Cooperation Agency (JICA) has ongoing support for two initiatives at the Bureau of Customs in the area of post-entry audit and customs intelligence, primarily through the deployment of long term Japanese Customs officials. It is also active in the area of investment promotion (Philippine Investment Promotion Plan and to a limited extent in competition policy). German assistance in the area of private sector development and trade will have phased out by the end of The United Kingdom funds a small number of economic projects (e.g. on Public Private Partnerships) under its regional Commercial Diplomacy and Prosperity funds. 4 Sustainable production and consumption programme for Asia 3

4 USAID 5 focuses on private sector development and sub national competitiveness initiatives. While other donors are likely to be engaged on a component level, no other donor will have a similar holistic approach on trade related technical assistance as is foreseen under TRTA 3. TRTA 1 and 2 had a respective budget of EUR 3 and 6.5 million Donor coordination The Philippine Development Forum (PDF) is the official forum between the government and the donor community to coordinate development efforts. The Working Group on Investment Climate, co-chaired by the Department of Trade and Industry and the International Monetary Fund is the appropriate platform to ensure consistency on the Aid for Trade agenda. The Department of Trade and Industry also started a Development Cooperation Framework to stimulate donor buy in for specific Department of Trade and Industry initiatives. The EU delegation has used the above mechanisms to invite development partners to the stakeholder consultation workshops carried out in the course of the formulation phase. Their participation and input during the events helped delineating various efforts (e.g. on competition policy). Donor coordination will be an integral part at all stages of project implementation. 3. DESCRIPTION 3.1. Objectives The overall objective is to contribute to the Philippines' integration into the international and regional trading and investment system, thereby strengthening economic development, inclusive growth and poverty reduction. The specific objective is to enhance the capacity of selected government agencies and private sector organisations to facilitate further integration into the international and regional trading and investment system Expected results and main activities The expected results are as follows and will be achieved through, inter alia, the following indicative activities. Result 1 - Strengthened capacity to successfully implement the Philippines International Trade Strategy Develop research and analytical tools; undertake research (involving academe, government and industry); strengthen research networks; integrate industrial policy research with trade policy research; Develop and implement an advocacy and communication strategy in line with trade policy priorities; Train and mentor government staff, legislators and their staff, including on implementation of international commitments; Inform private stakeholders on opportunities in existing FTAs; Support to Department of Trade and Industry to fulfil its coordinating role in the various trade fora. Result 2 Enhanced capacity to effectively implement competition policy 5 US Agency for International Development 4

5 Prepare studies on competition in selected sectors; Train on competition policy, legal and economic tools of analysis; Mentor and advise on drafting implementing legislation on competition policy; Mentor and advise on inter-agency coordination for competition procedures; Mentor and advise on sector specific analysis. Result 3 Strengthened capacity to develop and implement a National Quality Infrastructure strategy Support consultations with public and private sector, including consumers, on content of a National Quality Infrastructure (NQI) strategy and policies; Support development of NQI strategy and policies; Support drafting of legal issuances implementing the NQI strategy; Support development of advocacy and communication campaign on NQI; Review existing system of market surveillance and support in revisions and adoptions for risk based system, supported by training and mentoring. Result 4 Enhanced capacities to develop and implement sanitary and phytosanitary (SPS) management and control systems in-line with international standards and of producers' to comply with these standards Support Department of Agriculture (DA) Policy Research Service to provide SPS coordination and technical support to DA agencies to upgrade coordination and quality of SPS services; Support the DA ISO technical working group to deliver technical support / mentoring to national and regional laboratories; Support to pilot project upgrading (SPS aspects) production of Bivalve molluscs in-line with EU requirements; Support upgrading of SPS control procedures for feeds and veterinary medicines and residues in aquaculture and livestock; Assess the DA quality seal system and develop actions to strengthen the system. The upgraded system to be pilot tested by developing a registration system for traditional products; support Micro, Small and Medium Enterprises (MSMEs) to be registered with the DA quality seal for Traditional Product. Result 5 Strengthened trade facilitation capacity to comply with the Revised Kyoto Convention and to upgrade National Single Window and Warehousing operations Business process review of the existing cargo clearance system, including "e2m", to identify potential inconsistency with Customs and Tariffs Modernization Act, recommend improvements, including on reducing clearance time; Drafting of relevant (draft) implementing rules, following the adoption of Customs and Tariffs Modernisation Act; Mentoring and training before and during first Authorised Economic Operator (AEO) audits; Assess existing system and provide recommendations for improvements and services of National Single Window (NSW) 2. Result 6 Rapid response to unforeseen technical assistance needs from the public sector and business associations provided Technical assistance activities of unforeseen and urgent needs; Train business associations on innovative trade policy issues; Support EU-Philippines dialogues as agreed under the EU-Philippines Partnership and Cooperation Agreement (PCA) in trade-related areas. 5

6 During the formulation and implementation of the action, due attention will be paid to ensuring consistency, and where needed compliance, with the ASEAN economic integration agenda and any specific commitment taken by the Philippines in this context Risks and assumptions Political instability, deteriorating economic policies and trade protectionism are relatively small macro level risks. The first year of the new Philippine administration shows a clear commitment to continued reform and further international engagement is a key objective. The project assumes an international economic climate which remains favourable to further economic integration. The project assumes that donor coordination will continue both through official donor mechanisms (Philippine Development Forum, the Department of Trade and Industry's Development Cooperation Framework) complemented by ad hoc coordination on specific issues (e.g. with JICA on customs) to ensure synergies between various development efforts. The Department of Justice (Office for Competition) was designated as competent competition authority by the Executive Order (EO) 45 of the President. However currently the legislative branch is also working on a competition bill. While not likely it is possible that the adoption of the house bill would partly contradict the EO 45. While the exact delineation between agencies might still be subject to change, the Department of Justice, for which capacity building is mainly foreseen, will play a key a role. There is a risk that front line working staff might undermine structural and procedural changes at the Bureau of Customs, given their rent seeking opportunities in the current set up. Complementary measures on change management and human resource management need to accompany above mentioned reforms. The Food and Drug Administration (FDA) comes under the Department of Health. Its inclusion under the SPS component, for which the Department of Agriculture will remain the main beneficiary, is a risk with regard to the diverging political interests of these two departments. This risk will be mitigated by supporting joint capacity building and arranging for a inter-agency Memorandum to clarify arising implementation concerns Crosscutting Issues Environmental mainstreaming will be particularly relevant in the field of SPS/agriculture. International/EU best practice in this area shall underpin sustainable production including for exports. It will also play a role in the research agenda for trade policy (e.g. Sustainable Impact Assessments). Project implementation needs to closely monitor gender balance of participants/direct beneficiaries, which proved favorable in previous projects 6. Activities in the area of customs and trade facilitation will be particularly relevant from a good governance and anti-corruption perspective. 6 Main legislation to progress in reducing gender inequality in the Philippines are the Republic Act (RA) 7192 on Women in Nation building of 1992 and RA 9710 Magna Charta of Women of

7 3.5. Stakeholders The Department of Trade and Industry (DTI) is responsible for the implementation and coordination of trade and investment policies as well as for promoting and facilitating trade and investment. DTI is chairing and coordinating the Development Cooperation Forum, created in 2011, which aims at aligning development partners' initiatives with DTI priorities and programmes. DTI is implementing partner for a number of development partners, including JICA, USAID and the World Bank. The Committee on Tariff and Related Matters (TRM), chaired by the Secretary of Trade and Industry advises the President and the National Economic and Development Authority Board on tariff and related matters, coordinates the different agencies' positions and proposes national positions for international economic negotiations 7. The Presidential Order EO45 has designated in June 2011 the Office for Competition under the Department of Justice as the competent authority for competition policy. Given this recent development the office remains small in staff of currently less than a dozen. However given the prioritisation of the pending Anti Trust bill in the legislative branch and increased demand from the private sector (e.g. in telecoms) for government action in this area, the office is expected to grow in staffing with significant capacity building needs over the coming years. The Philippines is a founding member of the WTO. The Department of Agriculture manages the implementation of the SPS agreement. Within the department SPS policies are coordinated by the Undersecretary for Policy, Planning, Research and Regulation under whom the SPS notification authority and enquiry point is placed. SPS measures are implemented through regulatory agencies of the Department of Agriculture and the Department of Health. The main agencies under the DA include the Bureau of Plant Industry, the Bureau of Fisheries and Aquatic Resources, the Bureau of Animal Industry, the National Meat Inspection Service and the Philippine Coconut Authority. Under the Department of Health, the Food and Drug Administration regulates processed food. Given the importance of processed food for exports this agency was also included as a beneficiary of TRTA 3. The Bureau of Product Standards (BPS) is the National Standards Body and the WTO Technical Barriers to Trade (TBT) enquiry point. However the Department of Health and the Department of Agriculture also have some competences on standardisation. The Philippine Accreditation Office is independent of BPS but both are agencies of the Department of Trade and Industry. The national quality infrastructure remains fragmented and the five components (standardisation, metrology, testing, accreditation and certification) are not developed sufficiently enough to meet the requirements of the globalised market satisfactorily. While the Bureau of Customs is the key agency in the area of trade facilitation, the private sector, other agencies (e.g. for export and import permits), and the wider political system (e.g. Congress for pending bill and budget approvals) play an important role. The Philippines became member of the Revised Kyoto Convention in June 2010 committing to its implementation, which has legislative implications as well as procedural at the level of the Bureau itself. 7 TRM members include the Secretaries of Agrarian Reform, Agriculture, Budget and Management, Environment and Natural Resources, Foreign Affairs, Finance, and Labour and Employment, the Governor of the Central Bank, the Chairman of the Tariff Commission, and the Director-General of the National Economic and Development Authority. 7

8 Past experience as well as participation and reaction during identification and formulation, in particular during the stakeholder consultation workshops in August 2011, suggest continued high sense of ownership and interest of relevant agencies. 4. IMPLEMENTATION ISSUES 4.1. Method of implementation TRTA 3 will be implemented under direct centralised management (service contract for technical assistance) and partial decentralised management (complementary activities) through the signature of a Financing Agreement with the Government of the Philippines in accordance with Articles 53c and 56 of the Financial Regulation. The Department of Trade and Industry will be the coordinating agency and will be responsible for the administrative and financial management of the project on behalf the Philippine government. It will coordinate with of all other implementing agencies through the Project Steering Committee and based on interagency working arrangements. It is a public entity subject to audit by a national audit institution. Implementation will be carried out as follows: The Commission controls ex ante all the procurement procedures except in cases where programme estimates are applied, under which the Commission applies ex ante control for procurement contracts > EUR 50,000 and may apply ex post for procurement contracts EUR 50,000. The Commission controls ex ante the contracting procedures for all grant contracts. Payments are executed by the Commission except in cases where programmes estimates are applied, under which payments are executed by the beneficiary country for operating costs and contracts up to the ceilings indicated in the table below. The responsible Authorising Officer ensures that, by using the model of financing agreement for decentralised management, the segregation of duties between the authorising officer and the accounting officer or of the equivalent functions within the delegated entity will be effective, so that the decentralisation of the payments can be carried out for contracts up to the ceilings specified below. Works Supplies Services Grants < EUR 300,000 < EUR 150,000 < EUR 200,000 EUR 100,000 8

9 A Project Steering Committee will be established with the responsibility for policy advice for the project and approve work plans. The Steering Committee will meet every six months, and ad hoc, as required. It will be chaired by the Department of Trade and Industry. Membership will include inter alia representatives of the EU Delegation, the National Economic and Development Authority, the Department of Agriculture, the Department of Foreign Affairs, the Food and Drug Administration, the Office for Competition under the Department of Justice and the Bureau of Customs. Other relevant stakeholders as well as Member States or other donors may be invited when appropriate Procurement and grant award procedures 1) Contracts All contracts implementing the action must be awarded and implemented in accordance with the procedures and standard documents laid down and published by the Commission for the implementation of external operations, in force at the time of the launch of the procedure in question. Participation in the award of contracts for the present action shall be open to all natural and legal persons covered by Regulation No 1905/2006 Development Cooperation Instrument (DCI). Further extensions of this participation to other natural or legal persons by the concerned authorising officer shall be subject to the conditions provided for in Articles 31(7) and (8) DCI. 2) Specific rules for grants The essential selection and award criteria for the award of grants are laid down in the Practical Guide to contract procedures for EU external actions. They are established in accordance with the principles set out in Title VI 'Grants' of the Financial Regulation applicable to the General Budget. When derogations to these principles are applied, they shall be justified, in particular in the following cases: Financing in full (derogation to the principle of co-financing): the maximum possible rate of co-financing for grants is 80 %. Full financing may only be applied in the cases provided for in Article 253 of the Commission Regulation (EC, Euratom) No 2342/2002 of 23 December 2002 laying down detailed rules for the implementation of the Financial Regulation applicable to the General Budget. Derogation to the principle of non-retroactivity: a grant may be awarded for an action which has already begun only if the applicant can demonstrate the need to start the action before the grant is awarded, in accordance with Article 112 of the Financial Regulation applicable to the General Budget. 3) Specific rules on programme estimates: All programme estimates must respect the procedures and standard documents laid down by the Commission, in force at the time of the adoption of the programme estimates in question (i. e. the Practical Guide to procedures for programme estimates). The EU financial contribution covers the ordinary operating costs deriving from the programme-estimates. 9

10 4.3. Budget and calendar The total project cost is estimated at EUR 8,000,000 with financing in full from the European Union. Item 1. Services EU contribution (in EUR) Contracting authority / Paying authority 1.1. Technical assistance 6,100,000 European Commission (Results 1 to 6) 1.2. Evaluation 200,000 European Commission 1.3. Audit 100,000 European Commission 2. Supplies 90,000 Department of Trade and Industry 3. Complementary activities Department of Trade and Industry 3.1. Trainings, workshops, seminars (Results 1 to 6) 800,000 Department of Trade and Industry 3.2. Communication and visibility 150,000 Department of Trade and Industry, European Commission 3.3. Other operating costs (Results 1 to 6) 400,000 Department of Trade and Industry 4. Contingencies 160,000 European Commission Total 8,000,000 The Government of the Philippines is expected to provide a contribution in kind with an estimated value of EUR 975,000. To enable the coordinating agency to effectively implement activities to be covered by the programme estimates, a budget for the procurement of a vehicle, office equipment, IT equipment and other office supplies is foreseen. The operational duration of the project will be 48 months as from the signature of the Financing Agreement. Implementation is expected to start in the 4 th quarter of 2012, following the end of operational implementation of TRTA 2. It is expected that the procurement for the service contract for technical assistance will be launched shortly after the Commission decision during the 2nd quarter of Performance monitoring Regular monitoring will be a continuous process as part of the EU Delegation s responsibilities. Internal monitoring will be the responsibility of the DTI and the local support team. External impact monitoring might be also carried out by independent consultants 10

11 recruited directly by the Commission in accordance with EU rules and procedures on specifically established terms of reference. Project management will be required to define on an annual basis a clear set of quantifiable and verifiable indicators of results, based on the programme s key performance indicators, which will be further refined at the end of TRTA 2. Annual progress reports will not only include these activity-based indicators but also explicitly report on outcomes achieved in each major activity. A project activity database will be established at programme onset and baseline data will be established, where appropriate. The key performance indicators are further specified in the Logical Framework Evaluation and audit External evaluations will be carried out by independent consultants recruited by the Commission, including a mid-term evaluation and a final evaluation at the beginning of the closing phase. The beneficiary and the Commission will analyse the conclusions and recommendations of the mid-term evaluation and take action accordingly. The Commission will inform the beneficiary in advance of the dates foreseen for the external evaluations. The beneficiary will collaborate with the evaluators inter alia by providing them with all necessary information and documentation. The Commission shall appoint, in accordance with EU procurement rules, a reputable external auditor/accountant (i.e. international firm member of an internationally recognised auditing body) to monitor the project s expenditures; to audit on an annual basis the project's accounts for submission to the Commission; to monitor that the segregation of duties between the Authorising Officer and the Accounting Officer is in place and respected. The Implementing Agency will ensure internal control of management operations Communication and visibility Specific funds are earmarked in the budget for communication and visibility purposes. These will be used to undertake appropriate promotional and visibility actions during the course of the programme, based on an overall and annual communication plan. The aim will be to raise awareness of the Programme by key stakeholders, and direct and indirect beneficiaries. Activities will include, but are not limited to, launch events, a web site, press releases, brochures, newsletters and other promotional materials with a view to enhancing effectiveness and visibility. All activities will follow the communication and visibility manual for EU external action and relevant visibility provisions of the Government of the Philippines. The programme will also seek visibility in terms of enhanced Government-led donor coordination in the trade sector in the Philippines. 11