Document of The World Bank ONA PROPOSED LOAN TO THE FOR

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank PROJECT APPRAISAL DOCUMENT ONA PROPOSED LOAN IN THE AMOUNT OF US$100 MILLION TO THE REPUBLIC OF THE PHILIPPINES FOR Report No: PH KAPITBISIG LABAN SA KAHIRAPAN-COMPREHENSIVE AND INTEGRATED DELIVERY OF SOCIAL SERVICES (KALAE-CIDSS) PROJECT Environment and Social Development Unit East Asia and Paciflc Region August 23, 2002

2 CURRENCY EQUIVALENTS (Exchange Rate Effective August 1, 2002) Currency Unit = Peso PhP51.15 = US$1 US$1 = PhP51.15 FISCAL YEAR January 1 - December 31 ADB APL ARMM BAP CAS CAU CIDSS COA CODE DBM DBP DENR DILG DOF DPWH DSWD EA GOP IA IP IRA KALAHI KDP LBP LGU MOU NAPC NEDA NGO OM O&M PANAMIN PMO PO RPMO SOE TWC WBOM ABBREVIATIONS AND ACRONYMS Asian Development Bank Adaptable Program Loan Autonomous Region of Muslim Mindanao Barangay Action Plan Country Assistance Strategy Contract Administration Unit Comprehensive Integrated Delivery of Social Services Commnission on Audit Caucus of Development NGO Networks Department of Budget Management Development Bank of the Philippines Department of Environment and Natural Resources Department of Interior and Local Government Department of Finance Department of Public Works and Highways Department of Social Welfare and Development Environmental Assessment Govemment of Philippines Implementation Agency Indigenous People Internal Revenue Allotment Kapit Bisig Laban sa Kahirapan (Linking hands in the fight against poverty) Kecamatan Development Program, Indonesia Land Bank of the Philippines Local Govemment Unit Memorandum of Understanding National Anti Poverty Commission National Economic Development Authority Nongovenmmental Organizations Operations Manual Operation and Maintenance Presidential Assistance for National Minorities Project Management Office People's Organization Regional Project Management Office Statement of Expenditures Technical Working Committee World Bank Office in Manila Vice President: Country Manager/Director: Sector Manager/Director: Task Team Leader/Task Manager: Jemal-ud-din Kassum Robert Van Pulley Zafer Ecevit Cyprian F. Fisiy

3 PHILIPPINES KAPITBISIG LABAN SA KAHIRAPAN-COMPREHENSIVE AND INTEGRATED DELIVERY OF SOCIAL SERVICES (KALAHI-CIDSS) PROJECT CONTENTS A. Project Development Objective Page 1. Project development objective 2 2. Key performance indicators 2 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 2 2. Main sector issues and Government strategy 3 3. Sector issues to be addressed by the project and strategic choices 4 C. Project Description Summary 1. Project components 6 2. Key policy and institutional reforms supported by the project 9 3. Benefits and target population Institutional and implementation arrangements 12 D. Project Rationale 1. Project alternatives considered and reasons for rejection Major related projects financed by the Bank and other development agencies Lessons learned and reflected in the project design Indications of borrower commitment and ownership Value added of Bank support in this project 17 E. Summary Project Analysis 1. Economic Financial Technical Institutional Environmental Social Safeguard Policies 26

4 F. Sustainability and Risks 1. Sustainability Critical risks Possible controversial aspects 30 G. Main Conditions 1. Effectiveness Condition Other 31 H. Readiness for Implementation 31 I. Compliance with Bank Policies 32 Annexes Annex 1: Project Design Summary 33 Annex 2: Detailed Project Description 36 Annex 3: Estimated Project Costs 41 Annex 4: Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary 42 Annex 5: Financial Summary for Revenue-Earning Project Entities, or Financial Summary 48 Annex 6: (A) Procurement Arrangements 49 (B) Financial Management and Disbursement Arrangements 57 Annex 7: Project Processing Schedule 65 Annex 8: Documents in the Project File 66 Annex 9: Statement of Loans and Credits 67 Annex 10: Country at a Glance 69 Annex 11: Environmental and Social Safeguards 71 MAP(S) Philippines: KALAHI-CIDSS Project Provinces

5 PHILIPPINES Kapitbisig Laban sa Kahirapan-Comprehensive and Integrated Delivery of Social Services (KALAHI-CIDSS) Project Project Appraisal Document East Asia and Pacific Region EASES Date: June 11, 2002 Team Leader: Cyprian F. Fisiy Sector Manager/Director: Zafer Ecevit Sector(s): Other social services (100%) Country Manager/Director: Robert V. Pulley Theme(s): Other social development (P), Project ID: P Decentralization (S), Other accountability/anti-corruption Lending Instrument: Specific Investment Loan (SIL) (S) Project Financing Data [X] Loan [ Credit [ ] Grant [] Guarantee [ Other: For Loans/Credits/Others: Loan Currency: United States Dollar Amount (US$m): 100 Borrower Rationale for Choice of Loan Terms Available on File: Z Yes Proposed Terms (IBRD): Fixed-Spread Loan (FSL) Grace period (years): 8 Years to maturity: 20 Commitment fee: 0.85 Front end fee (FEF) on Bank loan: 1.00% Payment for FEF: Capitalize from Loan Proceeds Initial choice of Interest-rate basis: Auto. Rate Fixing by period 6 months Type of repayment schedule: [X] Fixed at Commitment, with the following repayment method (choose one): level [ ]. Linked to Disbursement Conversion options: [X]Currency [X]Interest Rate [X]Caps/Collars: Capitalize from Loan Proceeds Financing Plan (US$rm): Source Local Foreign Total BORROWER IBRD Total: Borrower: REPUBLIC OF THE PHILIPPINES Responsible agency: DEPARTMENT OF SOCIAL WELFARE AND DEVELOPMENT Address: Department of Social Welfare and Development, Quezon City, Philippines Contact Person: Corazon Juliano-Soliman, Secretary Tel: Fax: Dinky@miss.dswd.gov.ph Estimated Disbursements (_Bank FY/US$m): FY Q ,.2098 Annual Cumulative Project implementation period: 6.5 years Expected effectiveness date: 12/02/2002 Expected closing date: 06/30/2009 CCS PAD F- R. ZMOO

6 A. Project Development Objective 1. Project development objective: (see Annex 1) The objective of the Project is to assist the Borrower in strengthening local communities' participation in barangay govemance, and developing their capacity to design, implement and manage development activities that reduce poverty. This objective establishes a strong link between improved local govemance and poverty reduction. This goal is pursued through three interlinked activities: i. Empowerment of communities: this involves participatory planning, implementation, and management of local development activities. It fosters an engagement with govemment at all levels to access, influence, and manage resources to meet community priorities. ii. Improvement of local governance: this is pursued by strengthening formal and informal institutions to become more inclusive, accountable, and effective. iii. Provision of grants for community investment programs: by matching needs with limited resources in a competitive manner, communities and Local Government Units (LGUs) will be engaged in a demand-driven process of problem solving. The limited project grant resources will farther trigger better local resource mobilization, effective community ownership of investments, and induce the type of behavioral change required for long-term sustainability of such investments. 2. Key performance indicators: (see Annex 1) * Proportion of LGUs (municipalities) that have institutionalized the participatory strategies and technical assistance introduced by the project to assist community organizations/barangays reduce poverty. * Proportion of community organizations/barangays with well-defined and functioning operational and financial procedures that promote people's participation. * Proportion of LGUs that assist participatory planning and management of subprojects by barangays. * Improved poverty indicators in project barangays compared to without-project barangays. * Improved human development indicators in the target barangays. Ultimately, these indicators will contribute to meeting the Millennium Development Goals (MDGs) for the Philippines. B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: R (IFC/R ) Date of latest CAS discussion: June 4, 2002 The objective of the Bank's proposed Country Assistance Strategy is to assist the Government of the Philippines (GOP) in pursuing its overarching objective of "winning the war against poverty." This strategy calls for rapid growth and the empowerment of the poor to participate fully in development. The - 2 -

7 KALAHI-CIDSS Project will contribute to this broad strategy by enhancing the planning and implementation capabilities of communities, in particular in procurement, financial management, and project implementation. It will complement other Bank assistance that focuses on improving investments in human resources (education and health), ensuring the poor have access to productive resources, and supporting efficient provision of other basic services. The project will also contribute to strengthening the organizational and financial capacity of local actors, such as barangays, and the poor in particular. Core design features of the project will reinforce the proposed Country Assistance Strategy by promoting good and effective govemance with a focus on: (i) keeping a tight "firewall" against graft and corruption in projects; (ii) improving citizen access to information; (iii) promoting civil society participation in budget formulation and monitoring, and institutionalizing citizen feedback on quality and access to government services; and (iv) strengthening public sector rules and capacity. The KALAHI, which stands for Kapit-Bisig Laban sa Kahirapan or 'linking arms m the struggle against poverty,' is both a program and the primary poverty fighting framework of the Arroyo administration. It is constructed on the follo,wing five pillars: (i) asset reform (redistributing physical and resource assets to the poor, especially land and credit); (ii) human development services (access to basic education, health and nutrition, shelter, potable water, sanitation and electricity); (iii) employment and livelihood activities (boosting agriculture and fisheries activities and providing seed capital to micro and small businesses of the poor); (iv) participation in the governance of basic sectors (strengthening political participation and cultural expression); and (v) social protection and security against violence by reducing the risk and vulnerability of the poor to the immediate effects of economic shocks and disasters. 2. Main sector issues and Government strategy: Poverty situation: Widespread poverty continues to be a challenge in the Philippines. Initial estimates of the national poverty incidence show that the proportion of poor households increased from 31.8% in 1997 to 34.2% in The aggregate number of households below the poverty line in 2000 reached a high of 5.2 million and absolute poverty is over 40% in 8,of the 16 regions in the country. Poverty is a predominantly rural phenomenon in the Philippines. The rural poor constitute about 44% of the rural population and account for almost three-fourths of the poor in the country. Most of the rural poor are engaged in agriculture (about 63%), with rice, corn, coconut farmers, and fisher folk comprising the majority. The severity of rural poverty is the greatest among the landless workers and small farmers who make up a large part of the rural population. The 1997 East Asian financial crisis and the subsequent El Nifno phenomenon further exacerbated the economic situation by causing a reduction in the average living standards of Filipinos and an increase in the country's poverty incidence. These structural and exogenous factors have contributed in delaying a quick economic recovery. Average GDP growth in the last three years has been less than 3%. With a population growth rate of 2.32 per annum and the prospect of a robust economic recovery appearing uncertain in the very near future, the incidence of poverty is rising again. Official sources cite unemployment at 11% and underemployment at 21 % in the last quarter of Worsening poverty has had serious consequences on the economic, political and social fabric of the Philippines. The present administration perceives a strong linkage between high levels of absolute poverty and the persistence of civil unrest and armed conflict in certain parts of the country. It has declared the fight against poverty to be the long-term solution to its fight against armed conflict

8 The structural fundamentals of the Philippines economy have impeded previous attempts to fight poverty. Changes in the Philippine economy have not always led to improvements in the distribution of wealth due to historically embedded patterns of asset distribution. At the institutional level, the government continues to invest in strengthening its institutional foundations with the aim of achieving sustainable poverty reduction outcomes. The structural and bureaucratic requirements for a strong developmental state, based on good govemance and driven by economic policies that would bring about broad-based growth and poverty reduction, are not yet fully in place. Previous poverty reduction programs: Past administrations were not short on measures or programs that sought to address the problem of poverty. These measures culminated with the Ramos Administration's 1997 enactment of the Social Reform and Poverty Alleviation Act (RA 8425), aimed at complementing the Economic Recovery Agenda and addressing broader structural patterns of poverty in the country. Among these programs was the 1998 Comprehensive Integrated Delivery of Social Services (CIDSS), which has emerged as a viable technology in assessing the minimum basic needs of communities, but has been less successful in meeting those needs. CIDSS coverage has been quite limited and poorly funded, and its concentration on social services has made it largely a top-down welfare program. As both an upgrade on CIDSS and an improvement on KALAIi, KALAHI-CIDSS will provide "investment" type assistance that is situated within the KALAHI framework and builds on the CIDSS technology by deepening and broadening its outreach. It will differ from the CIDSS by introducing: (i) an open menu for selection of project activities; (ii) the selection of sub-projects through an inter-barangay competitive forum; (iii) community management of development resources including community contracting; (iv) arrangements to ensure full transparency; and (v) an enhancement of the facilitation process. It will also shift the unit of reference for basic planning and implementation of activities from the household to the barangay. 3. Sector issues to be addressed by the project and strategic choices: (a) Conceptualframework The conceptual underpinnings of this community approach to development and poverty reduction are threefold. The first establishes the context in which communities can be empowered to manage their assets, lives and livelihoods in ways that restore their sense of responsibility and human dignity (i.e. the emancipatory dimension of development as opposed to social engineering). The second focuses on how cornimunities and social networks link into the policy and administrative structures of the state, particularly by strengthening the linkages between communities and their local government units. The third establishes a development model that uses investment programs as a platform to promote representation and accountability, and to reduce poverty. The demand-driven, open menu, approach to investment is at the center of this project, it empowers communities to decide and act, while curbing the top-down planning approach inherent in social engineering models. The,KALAHI-CIDSS will adopt people-centered approaches to problem solving. It will foster the movement of actors from being mere "subjects" who are passive beneficiaries of state assistance, to becoming active citizens with rights and responsibilities who take control of their destinies. At an institutional level, the project design will take into account the ways in which unequal access to political and economic decision-making processes affect access to and control over resources by the poor. This focus on the flow of power in decision-making processes is expected to identify the current obstacles and suggest new ways of dealing with winners and losers in the development process

9 (b) Project Principles In order for the goals of the investment to be achieved, the core project principles must be adhered to by all participating municipalities and barangays. The mnemonic construct of "LETS-CIDSS" facilitates the easy internalization of these principles and stands for: * Localized Decision-Making. All deliberations and decisions on subprojects are taken at the barangay level and at the inter-barangay forum. * Empowering and participatory. KALAHI-CIDSS will coordinate processes to ensure that communities, with the assistance of technical experts, prioritize development needs, and make decisions on how resources are used. * Transparent. Every aspect of project decision-maling will be known to the community and municipal players. Every amount spent and all decisions taken will be publicly announced and made availablel on information boards, and through the independent monitoring of NGOs and media groups. * Socially inclusive. The whole community, not just a few families, has the opportunity to be involved in the, planning and decision-making process. Special efforts will be taken to ensure a gender-balanced and active participation of the poorest segments and minorities in the barangay. * Competitive. Participating barangays will submit proposals to the inter-barangay forum for selection. All barangays have equal chances to access project funds based on the feasibility of proposed activities. * Institutional capacity-building for good governance. Institutions working in the barangay and municipality LGUs, NGOs, media, and POs will be encouraged to join in project planning, implementation, and maintenance. * Demand-driven poverty reduction. Options for community-driven projects are based on an open menu. Communities will prioritize their development needs, design activities, seek technical expertise and make inforned choices on how resources are used for sustainable poverty reduction. * Simple. All decision-making, financial procedures and components of the project will be kept simple for all players to easily understand and become fully involved in the project. * Sustainable. Viable long-term operations and maintenance plans must be set up prior to project implementation. At the municipal level, local governments will be encouraged to adopt participatory community-driven planning approaches. (c) Operational Mechanisms The core mechanisms of the project are: (i) a very fast system of direct cash transfers from a national Special Account to the barangay, where village representatives hold a collective bank accounts; (ii) a tiered system of technical and social facilitators to support existing CIDSS staff, NGOs, and the villages themselves; (iii) open project menus; (iv) a process for technical review of sub-project proposals that entails no veto or decision-making powers; (v) support for barangay management of procurement, financial management, and project implementation; and (vi) full transparency through a program of disclosure and independent civil society monitoring. These processes are designed to support the following core project components. -5-

10 C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): The twin goals of empowerment and good governance, which lie at the center of this investment, are the critical building blocks for poverty reduction sustainable development. These goals will be achieved through community preparation of sub-project components based on the following five pillars: a. A robust facilitation framework where the primary goal is to ensure the inclusion and participation of poor and marginal groups and minimize gender bias during implementation. The demand-driven, multi-stakeholder competition envisaged should push communities to become more cohesive and to rebuild their solidarity, the basis for mobilizing social capital. There 'is always the risk of elite capture, especially as it pertains to the mobilization of social capital for private gain. A risk management framework included in the design will expressly address this concem. Also, in the project implementation manual will set out the procedures to guard against official coercion on sub-component selection and/or the selection of contractors and procurement. b. Direct fund flows to beneficiary communities should revamp local decision making, build the institutional capabilities of barangays to acquire and manage assets, and establish accountability and transparency in the management of the common good. This departure from standard practice builds on the CIDSS experience. c. A conflict resolution framework that provides institutional mechanisms for dealing with conflict is necessary, as it is recognized that the project will be implemented in regions of the country that are in pre-conflict, conflict, or post-conflict situations, especially the non-armm areas of Mindanao. In addition, competition for limited resources between and within culturally-diverse communities has the potential to increase, social tensions. To this end, appropriate contextual adaptations will be introduced during project implementation, while maintaining the integrity of project principles discussed above. d. An Anti-corruption strategy that will include ex ante measures based on information flows, disclosure rules, and other aspects of social control as well as ex post mechanisms (such as audits, suspensions, legal action, etc.) deemed commensurate with the violation. In addition, the project manual will include a detailed mitigation plan for detecting and acting upon cases of corruption. The anticipated outcome is to contribute to ending a culture of impunity. e. Consistent with the national policy requiring cost sharing for devolved activities, cost sharing with local communities and LGUs will be required for participation in the project. Contributions from communities may be in cash or kind, and LGU engagement will include contributions in staff time, fixed assets and other forms. Project components The KALAHI-CIDSS project components include: A. Barangay Grants 1. Carrying out community development sub-projects, including investment in economic and social infrastructure, environmental conservation measures and capacity building, through the provision of grants to Barangays. -6 -

11 2. Carrying out audits of the records, accounts and financial statements of expenditures relating to the implementation of community development sub-projects. B. Implementation Support 1. Mobilizing local communities to participate in the Project through provision of technical assistance by facilitators and community organizations. 2. Strengthening the capacity of local communities and local government units to initiate, plan and implement, manage and supervise Barangay Sub-projects, through the provision of technical assistance, training :and workshops. C. Monitoring and Evaluation Strengthening the capacity of the National Project Management Office and local communities to monitor and evaluate implementation of the Project and Barangay Sub-projects respectively through the development of baseline data and a computerized management information system. Componrfent Indicative! Bank- % of %losts "o6i, of financing Bank- (US$M) Total (US$M) financing Community Block Grants Implementation Support Monitoring and Evaluation Total Project Costs Front-end fee Total Financing Required Component 1: Community Grants The project will assist communities (barangays in the selected municipalities) through a facilitated participatory planning process to develop sub-project proposals, that will be selected at a competitive inter-barangay forum comprising of all participating barangays. This process is expected to take four to six months. Proposals for sub-projects will be based on an open menu supplemented by a negative list of activities with adverse environmental and social impacts not allowed under the project (see Section E.7.2). Apart from micro-finance or other activities involving on-lending-of project funds, the community will be able to choose any activity it agrees is important for its development, be it economic infrastructure such as roads, bridges or irrigation facilities, social service infrastructure such as a school or clinic, water supply and sanitation facilities, environmental conservation measures such as watershed management, or capacity building. The chosen activity must qualify as an investment item and not a consumption item. Communities will be also be able to coordinate among themselves on activities that would benefit from joint planning (e.g. provision of water supply, road, bridge). The development of sub-project proposals will involve an assessment of needs in relation to existing assets, resources, and capacities (see Section E.5 on the sub-project cycle).with the assistance of municipal facilitators a joint proposal by adjoining barangays may be submitted to the inter-barangay forum. Within each municipality, there will be three cycles of project preparation and selection, open to all barangays. The number of barangays per municipality varies considerably (with an average of 24), and in larger municipalities, there may be two or more inter-barangay forums during each cycle to select sub-project proposals from different clusters of barangays. Since the funding allocation per municipality - 7 -

12 may not allow for sub-project implementation in all barangays, the selection will be competitive, and the inter-barangay forum will decide on the sub-project proposals that will receive funding.. While the inter-barangay forum consists of both community representatives and technical advisors, only the community representatives can approve a subproject proposal. Community cost contribution towards both the investment and O&M costs will be one of the selection criteria at the inter-barangay forum. The Philippines CIDSS and the Indonesian Kecamatan Development Program (KDP) have found that the overall community contribution is higher when not fixed in advance, but when it is considered as one of the criteria in the competitive selection process. Since this may favor the more well-off barangays, the size of community contribution would need to be supplemented and weighed against other sub-project criteria such as poverty focus, operation and maintenance plan, and a rationale in terns of the benefits a sub-project provides to the community at large (as opposed to a selected few). Community contracting: Selected subprojects will be implemented through community contracting. The barangay project implementation team selected by the community will manage the implementation of a particular sub-project, and will, if required, employ outside contractors selected through competitive bidding. Grievance redress: As elite capture, both at the barangay and municipal level, is a key risk in the proposed project, a grievance redress mechanism will be developed to provide segments of a community or entire communities with an avenue for complaints if bypassed or marginalized in the sub-project planning and selection process. This grievance redress mechanism will be independent of the project implementation set-up and the LGU structure. Its composition and mode of functioning will be determined during loan appraisal. Civil society monitoring together with the rules of full transparency required under the project, will provide a supplementary check on elite capture. Component 2: Implementation Support The very essence of the project lies it its ability to mobilize communities and other institutional stakeholders to initiate, plan, implement and manage subproject components chosen by them. To achieve this goal of the project, this component includes aspects of (i) social mobilization and community organizing, and (ii) capacity building and technical support. (i) Social Mobilization and Community Organizing This involves a multi-level and multi-stakeholder organizing, socialization, and facilitation process to ensure that consistency with project principles is achieved. Social mobilization and community organizing are cross-cutting activities of the project happening at all stages of the project cycle-from its inception and area targeting, social marketing, information dissemination and sharing, community organizing, participatory community planning, sub-project preparation, municipal competition, project implementation, project monitoring and the preparation and completion of project reports. The project will recruit and train community facilitators in each region to undertake information dissemination at the community level, mobilize and support community volunteers regarding participation in sub-project planning and implementation, and facilitate the involvement of the community in identifying, planning, and implementing subprojects. In addition, community facilitators will liaise with municipalities regarding technical and other inputs to the community, consultants providing training to the communities, and help facilitate the inter-barangay forums. Facilitators will be - 8 -

13 employed on time-bound contracts, and will not automatically be absorbed into the LGUs at the closing of the project. Instead, the project will have created a pool of skilled personnel and future leaders of the community who could be employed in other development projects, whether implemented by GOP or by NGOs. To this end, facilitators will be provided training in development planning and management, conflict resolution, intra- and inter-barangay mediation, quality reviews, poverty assessments, etc. The detailed training program and training infrastructure for facilitators is under preparation. (ii) Capacity Building for Local communities and LGUs Technical Assistance will be provided to create capacity through training at the community level regarding such tasks as project planning, contracting, construction supervision, O&M, bookkeeping and financial management to members of the Barangay development councils and volunteers. The communities will also receive technical assistance from the municipalities regarding assessment of the technical feasibility of subprojects, project design and budgeting. Training will therefore also be provided at the municipal level to technical staff (e.g. Planning & Development Officer, Social Welfare Officer, Engineer, etc.) to strengthen their capacity to support the barangay level activities and undertake monitoring. A training needs assessment together with a training plan, training manual, and curriculum for different types of training and target audiences will soon be finalized. Given the number of guiding principles and project manuals being prepared during preparation, the parties (i.e. GOP and the Bank) have agreed to field test these new processes and procedures in one municipality before final rollout. The field test will start in July Component 3: Monitoring and Evaluation Monitoring will be designed to provide for a continuous learning and adjustment of the project approach and will involve: (i) participatory monitoring by communities based on self-defined indicators; (ii) internal monitoring of inputs, process, and outputs by the Project Management Office (PMO); (iii) independent external monitoring and evaluation by consultants; and (iv) civil society monitoring by NGOs and the press. A computerized management infornation system (MIS) will be developed to enable internal input, process, and output monitoring, and an analysis of project impacts. Baseline data for impact monitoring will be established early during project implementation when beneficiary barangays have been selected through the process of inter-barangay forums, and mid-term and terminal surveys will be undertaken subsequently. The poverty mapping study is ongoing and will generate useful baseline indicators. 2. Key policy and institutional reforms supported by the project: The Investment Coordinating Council (ICC) of the Philippines requires that local governments provide about 50% of the cost of devolved activities for ODA financing local govermnent unit projects. This 1996 policy on "Cost Sharing Scheme for the Financing of Local Government Projects" is part of a broader issue on the devolution of power to LGUs. Although the project endorses the concept of cost-sharing as a fundamental requirement for local ownership, it should be pointed out that this is not strictly an LGU support project; it is community driven. Cost sharing, should be at variable rates to reflect the ability of each community to contribute. The percentage of community contribution will also provide a good measure of commitment during the inter-barangay competitive forum. This would allow both rich and poor communities within the selected municipalities to maximize their contributions to leverage project funds. The wider policy implication involves thinking through the role of the central government in the overall poverty reduction strategy of the administration. To prescribe a 50% local contribution for the -9-

14 KALAHI-CIDSS would unduly punish the less affluent, and by definition, poorer communities, thereby perpetuating existing inequalities. The CIDSS approach has always applied the principle of instituting cost sharing arrangements with beneficiary communities without specifying the limits. The KALAHI-CIDSS will adopt the CIDSS approach. LGU contributions will be welcome and expected (in terms of staff time, land contributions, and other forms of cost sharing) but the Community Driven Development (CDD) nature of the project should remain as the guiding principle. 3. Benefits and target population: In fulfilling its main objectives, the project is expected to have a number of direct and indirect benefits depending on the type of subprojects chosen by beneficiary communities. The immediate and direct. benefits are likely to include: (i) new and rehabilitated infrastructure, built at a lesser cost to government due to higher local contributions; and (ii) improvement in the delivery of basic services. In addition to these immediate benefits, the investments are also expected to have a longer term impact as a result of the facilitated participatory planning exercise, which is expected to lead to improved govemance through the empowerment of local communities to become active participants in the planning of local development activities. While the immediate investments are expected to contribute towards a reduction of poverty, it is the empowerment of local communities and their ability to influence local government structures that will set the scene for sustainable poverty reduction. Key to this longer-term outcome is the basic project approach of working within the existing LGU structures, but to do so with modified and more inclusive procedures supported by facilitation. Target population While national in scope (with the exclusion of the areas covered by the ARMM Peace and Development Social Fund), the KALAHI-CIDSS project will cover one-fourth of all municipalities in provinces where the incidence of poverty is above national average of 33.7%. This represents an initial estimate of 5,378 barangays in 193 municipalities in the 40 provinces in the country, constructed from most recent poverty data (Table 2). Further poverty mapping exercises at the municipal level in the 40 provinces are being conducted to establish a master poverty list. The final selection of participating municipalities will be determined through a stakeholder consultation process, involving the Project Management Office, representatives of the provincial government and municipalities, and civil society. The ranking and selection of the potentially eligible municipalities will further take into account self-selection of municipalities through their expressed commitment to comply with specific project principles and requirements. Allocations to the selected municipalities will be proportional to the population size. The project will also cover approximately 20 poor urban barangays/communities. The participating urban poor communities will be selected from the urban centers of each region (14 regions) and Metro Manila. The decision to identify the barangay instead of the city as a unit of intervention in urban areas is a result of the sheer size of the urban population. In most cases, the population of an urban barangay is equivalent to that of a rural municipality. All sitios (neighborhoods) of selected urban barangays will be eligible to participate in the KALAHI-CIDSS project

15 Table 2: KALAHI-CIDSS Proposed Target Areas egion Poverty Trotal Numbe Total Number Number of INumber of Total [ve. Bgy / Target Target rovince Incidence lof Househldr of Poor Municipalties arangays ClDSSJMun Mun Bgys '.Families) Households juic _ iareas AR Il fgao ,346] 13, t.province ,721] 11, I l 28 egion IV 3 tomblon ,720 23, uezon , , Driental Mindoro ,322 52, arinduque ,921 13, Region V 7 Masbate ,945 77, Albay ,640 99, amarinesnorte ,574 38, _= Catanduanes ,019 15, amarinessur ,172 97, Sorsogon ,191 40, egion VI 13 ncilo , , I ~apiz j , , egros Occidental , , Guimaras ,4651 9, r Region VII 17 Bohol , , Siquijor ,351 6, Cebu , , NegrosOriental , ,164_ 20 _ egion vm _ 21 astemsamar ,032 38, _ ortbem Sarnar ,410 44, _ d Samar ,255 47, j Leyte , , iliran ,907 8, outhem Leyte ,894 22, Region IX 27 boangadelnorte , , boangadelsur , , [ A_ 254 egion X 29 naodel Norte ,092 50, isamis Occidental ,901 38, A ukidnon 33.5J 201,753 67, J isamisoriental ,042 40, egion XI 33 D , , Oriental , , _ I Sarangani ,896 43, SouthCotabato ,418 67, NorthCotabato , , ultankudarat ,461 35, Region XmI Caraga 39 Agusandel Sur ,637 50, [ del Norte , , ] 41 I-I11-. l l

16 Current financial projections indicate that municipal allocations will range from a low of US$ 69,000 (PhP3.5-million) to a high of US$ 225,000 (PhP13-million) per year. Selected municipalities will be required to confirm by a due date that they will enter into a Memorandum of Agreement (MOA) with the implementing agency, the Department of Social Welfare and Development (DSWD) to: * Pass a resolution amending existing procedures to accommodate project principles and approaches. These include, inter alia, participatory planning of community development, selection of subprojects through inter-barangay forums, direct transfer of funds to communities, community management of project activities, transparency in planning and financial management, and civil society involvement in monitoring; * Deploy and train existing staff to enable them to provide technical assistance to barangays (information dissemination, organize meetings of all barangays to review, rank and select sub-project proposals, hold monthly problem-solving meetings with beneficiary communities, provide technical assistance when requested and conduct required monitoring); * Contribute towards project costs (this would include staff time, land contributions, compensation for land acquisition, etc.). 4. Institutional and implementation arrangements: The implementing agency (IA) is the Department of Social Welfare and Development. The project implementation stucture agreed between the GOP and the Bank mission will comprise: 1. A technical working committee drawn from agencies represented on the steering committee. The technical working committee will be responsible for development of technical. manuals and coordination between technical support services at the field level. 2. A mainstreamed PMO with the core organic staff from the DSWD and contractual staff hired to fill strategic gaps. 3. The participatory planning, implementation and monitoring at the provincial, municipal and barangay levels will be facilitated by contracted community facilitators at each of these levels. Facilitators at the barangay level will be assisted by local volunteers. Participating communities will also procure technical assistance on a competitive basis from LGUs, other government agencies, or the private sector. Procurement of goods and services will be undertaken in accordance with Bank guidelines and independent audits will be conducted in accordance with GOP and Bank policies. Project Coordination. The project implementation structure will consist of an inter-agency steering committee for policy and coordination functions comprising NEDA, NAPC, DSWD, DILG, MOF, DBM, and four NGO representatives. The NGO representatives should be select among NGOs represented on the NAPC. The Committee should provide policy guidelines on poverty targeting, set goals for the implementing agency, and assure institutional convergence on poverty reduction outcomes. The National Steering Commnittee (NSC) should also ensure a continuous review of the project's contributions to the achievement of the Social Reform Agenda (SRA) goals, and its linkages to the economic recovery agenda. Regional Management. At regional level there will be a core group of 15 staff working largely on the project as part of RPMO. The regional management will be responsible for prioritizing the poorest provinces in the region based on poverty indicators, providing assistance to provincial level consultants, training trainers, and launching the KALAHI-CIDSS project in the region

17 Role of Provinces. The provinces will play an important role through (i) provision of data for the ranking of municipalities; and (ii) their provincial development plans, which will provide the funding for higher order infrastructure investments to support those at the community and municipal levels. Role of Municipalities. Similarly, the municipalities will play an important role in this project through (i) monitoring; (ii) problem solving at regular inter-barangay assembly meetings with beneficiary communities; (iii) provision of technical services on request; (iv) support for community investments through complementary municipal development planning; and (v) auditing and accounting reports. These provisions will be contained in a Momerandum of Agreement (MOA) signed by all participating municipalities with the project. The MOA will require that all activities submitted by the barangays to the inter-barangay forum be automatically included in the municipal development plan (MDP). The municipality may fund some of the unfunded sub-projects and it will take up strategic planning at the municipal level to complement the bottom-up planning initiated at the barangay level. Inclusion of barangay sub-projects in the MDP is the appropriate way to safeguard the sustainability of these investments, by including them in the annual budgets of the LGU. However, it is the exclusive role of the inter-barangay forum to choose which barangays and projects will receive grants. To enable the municipalities to fulfill the above-mentioned roles, capacity building in terms of project planning, implementation, operations and maintenance, financial management, etc. will be provided under the proposed project. D. Project Rationale 1. Project alternatives considered and reasons for rejection: Altematives considered were: (i) project scope defined as one municipality per Congressional District; (ii) use of NAPC as the lead implementation agency; (iii) use of the CIDSS approach for project implementation; (iv) use of project funds for micro-credit activities; (v) focusing exclusively on the poorest households; (vi) compulsory community contribution as a fixed share of investment costs; and (vii) using an Adaptable Program Loan (APL) as the project instrument. These were rejected for the following reasons: A: Project scope (i) Defining the project scope as one municipalty per Congressional District was rejected, as it would: (i) introduce political considerations and emphasis in the design; (ii) base the coverage on an entity that is neither a unit of administration nor a unit for national poverty data, and (iii) increase implementation and supervision costs as it does not have an administrative structure that could support the project. Instead, targeting will be based on an objective poverty ranking of provinces, and a proportionally higher coverage of municipalities in the poorest provinces. B: Institutional set-up (ii) Use of NAPC as the lead implementing agency was rejected, as NAPC is primarily a policy formulation agency and the designated institution for poverty monitoring, rather than an entity for implementing projects and programs. DSWD was chosen as the implementing agency as it has for a number of years been implementing national programs under the Social Reform Agenda (SRA) including the CIDSS. The choice of DSWD as the implementing agency has the full support of NAPC, and NAPC has agreed to co-chair the Steering Committee with DSWD

18 C: Project approach and components (iii) Use of CIDSS approach, based on the MBN, for project implementation was rejected, as it focuses on vulnerable households and sub-groups rather than on the community (barangay) itself as a unit of intervention. Bank funding for the CIDSS will be reallocated to the KALAHI-CIDSS once the project becomes effective and the ongoing three-year CIDSS cycle in participating barangays has been completed. In selecting project sites during the first year of implementation, the project will choose areas with CIDSS infrastructure and technologies to ensure some early wins, while social preparation is being undertaken in non-cidss areas. (iv) Use of project funds for micro-credit activities was rejected because: (i) the coverage of existing micro-finance institutions is too thin to enable national coverage; (ii) the eligibility criteria for accreditation of the Land Bank of the Philippines (LBP), which is the main financial institution serving rural areas, are too rigid to be satisfied by newly established micro-credit and self-help groups; (iii) the viable unit of analysis for micro-finance activities, the business unit, is not the intended unit of reference for the project; and (iv) direct implementation of this component would require a level of facilitation and monitoring which would over-extend the implementation set-up of the proposed project. In addition, DSWD wanted to keep the project design of the KALAHI simple, and wanted to pursue micro-credit activities through other funding windows available to the Department. (v) Focusing exclusively on the poorest households as is done in both CIDSS and KALAHI was rejected, because the focus of the proposed project is to empower local communities at the level of the barangay and municipality through a modified and more inclusive planning processes of local development activities that benefit the community at large. However, selection of specific sub-project proposals for funding will factor in equity and inclusiveness criteria. (vi) Compulsory community contribution as a fixed share of investment costs was rejected because, (i) it would favor the more well-off barangays in the competitive inter-barangay selection process, and (ii) experience from the CIDSS and the Indonesian KDP has demonstrated that the resulting overall community contribution is highcr when not determined in advance, but considered a criteria for sub-project selection. However, to avoid favoring the more well-off barangays, the size of community contribution would need to be supplemented by other criteria such as the conmmunity's need for a particular investment, number of poor people to be benefited by the proposed subproject, etc. A final set of criteria for sub-project selection will be determnined during appraisal. D: Choice of Bank instrument An Adaptable Program Loan (APL) was rcjected as the choice of Bank instrument for this operation, because the project will not include a pilot phase. The experience gained by CIDSS and lessons leamcd from other comparable projects are considered a sufficient basis for initiation of large-scale implementation from thc time of project cffectiveness. In addition, there are no major policy changes envisaged in the project. 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned)

19 Table 3: Project Ratings Latest 8uWrvlmlon Sector Issue Project (PSR) Ratings (Bank-financed projects only Implementation Development Bank-financed Progress (IP) Objective (DO) Beneficiary participation in irrigation Second Communal Irrigation S S management Project Operation and maintenance Second Rural Roads Project S S (closed; ICR done) Improvement of education quality Third Elementary Education S S Project Poverty reduction Mindanao Rural Development Project Local institutional capacity; Operation Second Rural Roads Project S S and Maintenance (closed; ICR completed) Realigning role of DENR, LGU Environment and Natural S S capacity building, community Resources Sector Adjustment involvement in natural resource Loan management Water resources planning and Water Resources Development S S management; watershed management Project Targeted poverty reduction Agrarian Reform Communities S S Emergency Post-Conflict Recovery; SZOPAD Social Fund Project S S poverty alleviation Tackling the nexus butween poverty Community-Based Resource U S and natural resource management Management Agricultural and rural finance Agricultural Credit Project S S (completed) and Rural Finance Project Agricultural and rural finance Second Rural Finance Project S S Agricultural and rural finance Third Rural Finance Project S S Increasing access to potable water First Water Supply and S S Sanitation Project (closed; ICR done) Other developmentagencies Emergency recovery USAID-Emergency Livelihood Recovery Program Emergency recovery UNDP-Emergency Assistance for Development of Basic Services, Livelihood and Job Creation Program for MNLF Soldiers and their Families Targeted Area Development; poverty European Union: Southern focus, micro-project financing Mindanao Agricultural Program LGU Institutional Capacity CIDA: Local Govenmment Support LGU Capacity Building USAID: Governance and Local Democracy (GOLD) Project Farmer Linkage with Agri-business; USAID: Growth with Equity in enterprise developmrent Mindanao (GEM) Project, IP/Do Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

20 3. Lessons learned and reflected in the project design: Project design should be simple and flexible, and goals must be realistic and precise. In order to cope with the Philippines' economic, ethnic, and religious variability project design should be simple and flexible and avoid a large number of unrelated components. Project formats and procedures will be designed to meet World Bank procurement, financial management, and project quality standards. Involving the Commission on Audit (COA) during the design phase of an innovative investment program reduces the risk of not auditing unanticipated documents during implementation phase. Community participation in project planning and during implementation is essential. Community participation lowers costs and improves quality. There are high returns to increasing women's and indigenous peoples' participation because of the improved effectiveness and sustainability of project benefits. Efforts must therefore be made to ensure their active participation in the formulation and implementation of programs. Working with NGOs and Civil society. Successful community-driven projects require clear guidelines on the roles, and responsibilities of government, implementing agency, NGOs, and the community. Local political commitment is essential to ensure sustainability, however, ensuring the autonomy of the inter-barangay forums created to decide on specific projects is essential to avoid unsolicited political interference. Arrangements for infrastructure maintenance must be set up from the beginning. While supervision of site designs and the quality of construction materials improves project quality noticeably, but maintenance of physical infrastructure often remains unsatisfactory due to cost and lack of technical skills. The need to implement a self-sustaining system for operation and maintenance is necessary to avoid dependency on government funds. Therefore, the requirement of technically viable 0 & M plan for all funded subprojects and the establishment of earmarked O&M funds, financed from the user associations' service fee collection, and trust funds, financed from amortization payments by communal schemes are vital for sustainability. Dole-out Mentality: One constraint to investment activities is the large variety of grant-based schemes set up by the government to disburse funds into poor remote communities. This may influence repayment rates negatively due to lack of familiarity with repayment. When interest rates either fall significantly below or move well above prevailing market rates, serious implementation problems have emerged - above market-rates resulted in slow disbursement, while below-market rates led to concentration of credit to relatively wealthier and larger clients. Supervision and monitoring are important. They need to include a combination of internal monitoring by project and government staff, regular supervision by Bank staff, independent external monitoring by consultants and by NGOs and media, and community self-assessments. The monitoring system should be designed as a learning system, which makes use of insights derived from monitoring to address problems in project design and implementation. 4. Indications of borrower commitment and ownership: Throughout project preparation, the borrower has demonstrated strong ownership of the project objectives and design, as indicated by the following actions: * High level members of the administration, including the Secretaries and Under Secretaries of DSWD, NAPC and key congressman visited the Kecamatan Development Project (KDP) in

21 Indonesia to learn lessons for the design of this project; * The Team Leader of the KDP was invited to Manila to present the project to the Cabinet, Congress and civil society actors. At each occasion, reactions were positive regarding the applicability of key features from the KDP to a comparable project in the Philippines; * Extensive consultations on project principles and design are ongoing. During the identification and preparation missions, the Bank interacted with high level staff from DSWD, DELG, NEDA, DOF, DBM, COA and NAPC, who have requested that project preparation be fast tracked. The Bank team also met with LGUs at the regional, provincial, municipal, and barangay levels, and the various stakeholders have expressed commitment to the objectives and key design features of the project; * Civil society organizations representing both of the national NGO coalitions have expressed a desire to become actively involved in project preparation and implementation, through information sharing and regular consultations; * DELG has endorsed the project approach to achieve improved local governance by working within existing structures, employing modified, more inclusive, and facilitated processes, and the idea that the communities themselves will manage funds for local development; * DOF and the DBM have accepted the principle of direct transfer of funds for sub-projects from the project special account (SA) to community project accounts; * In the November 2001 meeting, the President of the Philippines requested World Bank President James D. Wolfensohn to fast track preparation of the project, as it will be the main instrument to implement the anti-poverty strategy of her administration; * Last, but not least, the implementing agency, DSWD has mobilized a strong project preparation team headed by an Undersecretary. This team has independently prepared it project document paper, which forms the main input for this PAD and has mobilized high quality TA to fill in design gaps. This project has been endorsed by GoP's ICC Technical and Cabinet Committees. 5. Value added of Bank support in this project: After the seven years of, the CIDSS experience, the GOP has deemed it appropriate to introduce a broader community-driven program, with national coverage, that fills the gaps left by the CIDSS. To implement a program that does not only target vulnerable households within the community but the entire barangay itself, the GOP has sought to avail itself of the type of support, global knowledge, and outreach that the Bank can provide. This has been demonstrated by the extensive learning trips undertaken by various stakeholders in the Philippines, including Cabinet Secretaries and Undersecretaries, oversight agencies and representatives of civil society, to Indonesia to learn some of the innovations in investment design introduced by the KDP. The Bank is therefore fulfilling its dual mandate of serving as a knowledge Bank and providing critical resources for poverty alleviation. The Bank's innovative design contribution is the introduction of new ways of working with local institutions, including the LGUs. The project is also introducing a new fund delivery mechanism that will allow resources to flow directly to the barangay, whose sub-project was selected at the inter-barangay forum. This approach will empower communities to plan, implement, and manage Investments at the barangay level. The anticipated outcome of this approach is to have a strong demonstration effect that could rapidly produce spillovers to other non-participating municipalities. This will assist in institutionalizing new ways of thinking about accountability and governance at the local level

22 E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): * Cost benefit NPV=US$ million; ERR = % (see Annex 4) O Cost effectiveness 0 Other (specify) In lieu of providing a discussion Strengths, Weaknesses, Opportunities, Threats (SWOT) or a Cost Effective Analysis, the economic and social returns study performed has attempted to provide a more rigorous economic analysis through the calculation of conservative estimates of the benefits, costs, and the Economic Internal Rate of Return (EIRR) for the Project based on realistic assumptions and plausible scenarios. The difficulty involved in undertaking an analysis of this type was primarily due to the key strength of the Project design, i.e., the Project will be effective through implementation of a decentralized demand driven "open menu" approach to subproject selection. That is, while the total overall Project costs have been estimated based on the financing sources and budgeted allocations, the benefits that can be quantified are difficult to estimate given that the types of infrastructure investment subprojects will not be known with certainty until after the Project is underway as these specific decisions will be made at the local level by empowered communities. The methodology employed to work around this inherent uncertainty was as follows. Generic types of subprojects were analyzed based on conservative assumptions governing its base unit benefits and costs, beneficiaries, and life cycle. Furthermore, three different benefit realization scenarios were employed to reflect differences in the institutional development and governance abilities of the beneficiaries concerning subproject planning, construction, and implementation. From the quantifiable expected net benefits, each type of subproject was analyzed as being economically feasible with an EIRR above the minimum 15% threshold across the three different benefit realization scenarios. To understand the types of subprojects that the local communities would seek to implement, similar projects in the Philippines were researched. The differences and relevant points in terms of comparison to the KALAHI-CIDSS Project were discussed. After careful consideration, the distributions of types of subprojects in the existing Comprehensive Integrated Delivery of Social Services (CIDSS), Special Zone of Peace and Development (SZOPAD) Social Fund, and Agrarian Reform Development Communities Project (ARDCP) were used as the basis for the distributions used in the analysis. Additionally, a fourth distribution was generated based on the relative estimated Net Present Value of each of the generic subprojects, i.e., informed communities with a number of infrastructure needs may be inclined to maximize their investment and choose the type of subprojects higher NPVs. The analysis thus consisted of three benefit realization scenarios against four subproject distributions creating a matrix of twelve possible ELRRs for the overall Project. The range in the EIRRs was from 28.65% to 32.42%. Clearly, regardless of the differences in subproject distributions, the overall Project will be economically feasible. Furthermore, given the conservative nature of the estimation of the generic subprojects and the fact that some stated project goals or benefits cannot be readily quantified, the likely overall return to the Philippines will be higher than that the estimated EIRRs. 2. Financial (see Annex 4 and Annex 5): NPV=US$ million; FRR = % (see Annex 4) Financial control measures of the Project (See Annex 5: Financial Control Measures for details): -18 -

23 Community and LGU participation - The preparation and selection of projects at the inter-barangay forum is based on a competitive allocation of available funds. The competitive element is designed as a social control measure as it involves the participation of the barangay and LGU representatives in the approval process. Allocation of Grant Funds - The process of allocating funds to each municipality should ensure an optimization of funds allocated to a sub-project. Control on sub-optimum usage of funds would trigger the reallocation of funds to better performing municipalities where funds are needed. A report monitoring the use of resources will be generated by the regional office and further consolidated at the National Project Office. Public posting of project finances - Posting in public places of the amounts available, as well as the progress of the project in terms of its financial and physical accomplishments, should bring greater community awareness of the project. This ensures transparency and discourages corruption. Training and guidance - To ensure that community and project staff have adequate capability to implement the project, trained facilitators will be provided, as well as hands on training, including the Financial Management requirements of the Project. Written guidelines - A Financial Management Manual will delineate guidelines on policies and procedures as well as reporting formats. This will improve consistency and shared standards. For further details, see annex 4. Fiscal Impact: Two questions conceming social transfers programs are: * What is the overall fiscal impact? * Are there any methods for cost recovery? While these appear to be two separate questions, they are in fact related as the discussion in this section attempts to frame a single answer for both. For all infrastructure projects, beneficiaries should contribute, either in cash or in-kind. This is especially true for this form of community level participatory approach. In-kind forms of contributions typically take the form of land or the cost of unskilled labor used for rehabilitation, new construction, or O&M. However, since proper O&M is increasingly viewed as vital to long-term sustainability, beneficiaries should be responsible for covering the O&M costs of infrastructure projects by putting in place cost recovery mechanisms. Such cost recovery mechanisms could take the form of user fees for barangay irrigation and potable water supply projects and tolls for barangay roads. Given the grant nature of the project there is no provision for direct cost recovery to the agency at the national level. Any fees to be collected from small scale infrastructure investments are made at the local level and should be earmarked for proper O&M activities. Additionally, the structure of such user fees should be priced to ensure that the necessary funds for O&M are raised and that the infrastructure is not used to degree beyond its designed capacity. Such "overuse" as in the classic "tragedy of the commons" will undermine the envisioned long term benefits of the investment. Even when there is no direct cost recovery, there is indirect cost recovery. The theoretical argument for this is that sound infrastructure investment increases the productivity of existing capital and labor in the -19.

24 economy, similar to technological improvements. While productivity gains are difficult to quantify, they are viewed as the real factor necessary for economic growth and development. Economic growth and development imply an increase in the magnitude of activities and transactions, and structural changes that allow informal economic activities to become formal. These provide the government with greater opportunities for taxation. To this end, the overall beneficial fiscal impact of the Project will likely be far greater than the initial fiscal cost, although this also depends on the effectiveness and efficiency of the government's tax collection regime. Nonetheless, in principle this is the "multiplier" argument for infrastructure investment by the government at the national level. 3. Technical: Given the small scale nature of the infrastructure anticipated, there are no substantial design challenges. The technical manuals for small scale infrastructure have been prepared to facilitate community involvement in the assessment, delivery, and management of such infrastructure. The objectives are (a) to provide the community with guidelines and tools for reporting, control and monitoring ongoing sub-projects for quality control and timeliness in implementation; (b) to provide project management with the tools for technical reviews and quality control; (c) to provide guidelines for operations and maintenance of infrastructure projects; and (d) to provide guidelines on environmental screening. 4. Institutional: By focusing on and strengthening the link between the barangay and the municipality, the project will be broadening the base for participation, especially for weak and marginal members of the community who tended to be left out of earlier generation of social engineering endeavors. Communities, LGUs (barangay, municipal and provincial), DSWD Regional offices and other line agencies, civil society organizations and media are groups critical to the success of the project. Their specific roles are defined in the operations manual (vol. 1) of the project. The ongoing institutional mapping exercise will further clarify the institutional setup and decision points in the system. Specifically, the mapping will: (i) identify key local level institutions (in different local cultural contexts) that can play a positive role in the program; (ii) assess the capacity of these institutions and recommend critical capacity building interventions to support community demands for assistance; (iii) ascertain the cluster of stakeholders who could exercise potential veto powers on the implementation of sub-project components and articulate a strategy for dealing with such actors; and (iv) recommend roles and coordination arrangements among the different groups of stakeholders. 4.1 Executing agencies: The main operational focus of DSWD, the implementing agency, has been on social welfare activities. This project will provide a unique opportunity for DSWD to shift its focus to hard core developmental activities and become fully the department of social welfare and development, as the name implies. To accomplish this goal, DSWD is being restructured to include more task-oriented managers with project implementation skills. What follows in the next section are the core skills required to implement the project. 4.2 Project management: A mainstreamed National Project Management Office (NPMO) will be established to assume responsibility for the overall management of the KALAHI-CIDSS Project. The NPMO will be staffed by current DSWD staff and consultants contracted to fill strategic gaps. The NPMO will be headed by a National Project Director who will be supported by the following: * Project Manager - 20-

25 * Administrative Officer * National Finance and Procurement Specialist(s) * Community Organizing Specialist * Community Infrastructure Team * National Livelihdod Specialist * Human Resources Team * Training Team * Research and Development Team * Monitoring and Evaluation Team * Complaints Action Officer The major functions of the National PMO include: (i) acting as the secretariat to the National Steering Committee; (ii) planning and coordinating project implementation for all the regions; (iii) monitoring and tracking project performance; (iv) resolving administrative and management issues; etc. The full list of attributes are presented in the Project Operations Manual. Regional PMO The Regional Project Management Office (RPMO) will provide oversight on project implementation in the regions. The RPMO, which will be headed by the DSWD Regional Director, will be comprised of the following: * Regional Finance Specialist * Regional Procurement Specialist * Regional Community Organizing Specialist. * Regional Community Infrastructure Specialist * Regional Livelihood Specialist * Regional Training Team * Regional Monitoring and Evaluation Team The Area Coordinators, Community Facilitators, Roving Bookkeepers and Municipal Documentation Officers - who are all municipal employees- and barangay-based - shall be under the supervision and control of the RPMO. The primary functions of the RPMO are centered around project coordination, supervision and reporting functions, and grievance resolution. The detailed attributes of the RPMO are contained in Projects Operations Manual. 4.3 Procurement issues: The procurement for civil works and small infrastructure by the project management team, complemented by the community participation, will utilize enhanced local shopping procedures. Simplified formats, which are consistent with the Bank's fiduciary responsibilities, are being prepared and will be reviewed and cleared by the assigned procurement specialist. These formats will be consistent with the following procurement principles: a. for sustainability of projects with future maintenance and operation, enable beneficiary communities to be contracted to implement their sub-projects by community force account; b. meet social objectives of the project by awarding small contracts to individuals and/or enterprises from beneficiary communities and grass-root NGOs, to enable the community to benefit from contracts for providing services, works and goods; c. allow use of local know-how, technology and materials by employing local technicians, specifying materials and adopting technologies often used by communities; for examples schools

26 could use thatched roofs constructed by local artisans; and d. adopt labor-intensive and other appropriate technologies in order to use community labor. The detailed procurement plan is included in annex 6a below. 4.4 Financial management issues: Although lacking in sophistication, the financial control system in the community projects for the most part is effective in limiting leakages or in detecting leakages when they occur. The system is based on checks and balances in funds withdrawals, detailed bookkeeping and records of expenses, and periodic inspections in the field. The formal system is complemented by the communities' social control mechanisms designed to ensure transparency. Of course, the capacity of the different barangays to manage these systems will vary, but for the most part the differences can be remedied through hands-on training and follow-up. In areas where the CIDSS has already laid the foundation, the foundations for such accountability will already be in place and the project will build on it. This is not to say that malfeasance will not occur, when it occurs, it is relatively easy to detect, and sanctions should be swift and effective to prevent any widespread contagion effects. See annex 6b for details on Financial Control Measures. 5. Environmental: Environrmental Category: B (Partial Assessment) 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatrnent emerging from this analysis. Environmental issues in the project would relate primarily to impacts caused by small scale infrastructure construction. The environmental impacts caused by such activities are not expected to be significant. The project has designed a negative list of prohibited investments that includes activities with adverse environmental impacts. The project will use an environmental screening procedure that identifies prohibited projects (e.g. community roads into protected areas). Mitigation of negative impacts from sub-projects that are not on the negative list will be addressed through standard operating procedures, which are built into project manuals and training programs. 5.2 What are the main features of the EM? and are they adequate? The impacts caused by any particular sub-project will be limited, and will be covered by the standard operating procedures in project manuals. The negative list of prohibited projects will ensure that serious negative environmental impacts will be avoided. A framework for assessing cumulative impacts will be established to support the guidelines. See annex 10a for environmental guidelines. 5.3 For Category A and B projects, timeline and status of EA: Date of receipt of final draft: Proposed actions: The main action proposed is to conduct an Environmental Analysis, which will review lessons from the Indonesian KDP and the CIDSS to assess what environmental issues have arisen during implementation, and reflect these findings in the project manuals and training modules. 5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms of consultation that were used and which groups were consulted? During project preparation a total of three consultations have been held with the national level NGO coordination forums of CODE (two meetings) and the Convergence Coordination (one meeting). No issues regarding negative environmental impacts caused by the proposed project were raised at these meetings. These consultations are ongoing and will be intensified during project implementation

27 5.5 What mechanisms have been established to monitor and evaluate the impact of the project on the environment? Do the indicators reflect the objectives and results of the EMP? N/A 6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. Social issues related to the project objectives include: (i) avoiding elite capture, gender-based marginalization, and exclusion of the poor and vulnerable groups in the identification and prioritization of barangay issues and project planning and management; (ii) working with formal institutions such as the Barangay Development Council and the Municipal Development Council, while broadening the space for citizens to participate in planning and allocation of local government development resources; and (iii) optimizing the amount of investment per cycle in order to generate interest of barangays to compete for sub-project resources. 6.2 Participatory Approach: How are key stakeholders participating in the project? Stakeholder participation is the central element in the project design. This participation will take place at a number of different levels. First, various central government, LGU, and civil society actors will be involved in a stakeholder consultation for the selection of target municipalities. Second, during the intra-barangay project identification and preparation process, different stakeholders from the community will be involved in the negotiation and preparation of a sub-project proposal for presentation at the inter-barangay forum. Third, the selection of sub-projects for funding at the inter-barangay forum will involve representatives of the various barangays, civil society, and technical staff from the municipality. Fourth, he implementation process will involve monitoring both by the beneficiaries themselves, RPMO, and by civil society entities (NGOs and the press). Finally, conflict management will involve an independent grievance redress mechanism. 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? Consultations on the proposed project have been held with the country'sn two major NGO coalitions, and will continue throughout the project design phase. During implementation, NGOs will be contracted to provide training to community facilitators and volunteers, and where NGOs are present in the target areas, they may also be recruited as facilitators at the barangay and municipal level. Finally, NGOs not directly involved in the project will be invited to undertake (voluntary and unpaid) monitoring of project activities to provide an extemal check on elite capture and corruption. 6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes? Central to the success of the project is empowering communities to define their needs and priorities, design activities to address them, negotiate for resources, implement the project, and manage the resources effectively. The main elements of the sub-project cycle, which constitutes the framework for these activities, are as follows (see Exhibit 1.2.): * In selected municipalities, the process will be initiated by a meeting with representation from all barangays to provide information about the project approach, ground rules for participation, criteria for sub-project preparation and selection, and sanctions for non-compliance with the ground rules. * The project facilitators will undertake an information dissemination and mobilization campaign

28 in each of the barangays to ensure that all households are aware of the project and the barangay launch meeting, where the preparation of a sub-project proposal will be initiated. At this community wide meeting, representatives will be chosen for the inter-barangay forum and for a team which will lead the preparation of the sub-project proposal. * To provide the basis for a discussion of needs and priorities, a barangay situation assessment will be conducted by the preparation team assisted by the facilitator. The assessment will involve a mapping of households/hamlets served by existing facilities and social services, the presence of indigenous minority groups etc. This information will be presented at a barangay wide meeting as an input to the identification of priority needs and a decision on a sub-project proposal to address one of these needs. Following this decision, a preliminary project proposal with a tentative cost estimate and commitment regarding the level and forms of community cost contribution will be developed (with technical assistance from the LGU as required). The proposal and its commitments regarding community contributions will be endorsed through a community wide meeting. * Sub-project proposals will be selected for funding through an inter-barangay meeting. The outcome of this meeting will be communicated to the community at another barangay level meeting,. If the barangay sub-project proposal has been selected for funding, a team will be selected to manage the implementation of the sub-project (the composition of this team may be identical to or different from that of the team that prepared the sub-project proposal). The team will receive training regarding project planning, contracting, construction supervision etc. * The next step is the technical preparation of the sub-project which may involve engineering designs and a detailed budget. This may require technical assistance either from the LGU or from the private sector. The community will open a bank account, and any community cash contribution that has been committed, will have to be deposited before project funds are released. * At the completion of implementation of a sub-project involving civil works, an evaluation of the construction quality and the process will be undertaken by the villagers before the completed works are commissioned. * The municipality will conduct monitoring on the operation and maintenance as required, and provide back-up support to barangays having difficulties. Gender Dimensions: To enhance gender balance during sub-project preparation and implementation, the social mobilization effort will place particular importance to the inclusion and participation of women and other disadvantaged groups within the community. The active participation of women shall be encouraged in a variety of ways: * Gender balance will be a consideration in the recruitment and deployment of area coordinators and community organizers; * Core leaders and members of the various barangay teams must include a significant number of women; * The community profile shall include gender-differentiated data; * Training of area coordinators and community facilitators shall include gender training and facilitating the active participation of women and marginalized groups in social mobilization, project planning, implementation and evaluation; * Monitoring shall include the investigation of gender issues and require gender dis-aggregation as well as a breakdown by poverty group; and - 24-

29 * Attendance lists -f barangay and inter-barangay meetings shall provide gender and poverty breakdown. 6.5 How will the project monitor performance in terms of social development outcomes? Built into the design is a strong monitoring and evaluation component involving both internal monitoring of implementation progress, beneficiary monitoring, independent external monitoring and evaluation by a consultant, and external monitoring by volunteers from civil society and the media. The monitoring system will be designed to promote learning and adjustment of the project approach and activities. To this end, a management information system will be designed to track implementation progress, identify issues and bottlenecks, and provide data for the analysis of impacts, results, and problems. The management information, system will utilize data provided by independently contracted and voluntary civil society monitors. 6.6 Land acquisition and Involuntary Resettlement The project will comprise sub-projects that provide small scale infrastructure to beneficiary communities (barangays), and which will only require limited land acquisition. No involuntary resettlement is anticipated. Since the project is demand driven, and subproject proposals are developed through a participatory planning process at the community level and finally selected through an inter-barangay meeting, the land acquisition impacts cannot be assessed in advance. Land acquisition under the project will therefore be based on a Resettlement Policy Framework agreed between the client and the Bank. The Framework draws upon experience from comparable Bank funded projects in the Philippines. The Framework will be translated into local languages, and its provisions integrated into the Project Implementation Manuals. Land for sub-projects will be furnished either as voluntary donations, as govemment land free of claims (e.g. from squatters or encroachers), or acquired after payment of compensation at replacement value. To ensure that sub-project implementation does not deprive individuals of land and other assets in the guise of voluntary donations and in the name of the "common good", procedures are established to (i) verify that voluntary donations are indeed voluntary, (ii) provide compensation at replacement value to individuals, who are not prepared to donate land for a particular sub-project, and (iii) provide an avenue for grievance redress. The Resettlement Policy Framework is attached in Annex 1 Ic. 6.7 Indigenous People's issues In 1997, the Philippine Congress passed Republic Act (RA) 8371 entitled Indigenous People's Rights Act, which uses the term 'indigenous peoples' as the collective label for non-christian and non-muslim ethnic groups in the Philippines. Although RA 8371 provides a good basis for identifying indigenous peoples, the proposed project will use the definition provided in OD 4.20 to include "social groups with a distinct social and cultural identity that makes them vulnerable to being disadvantaged in the development process." Because of the varied and changing contexts in which indigenous peoples are found, no single definition can capture their diversity. In particular geographical areas, indigenous peoples or indigenous ethnic communities can be identified by the presence in varying degrees of the following characteristics: * a close attachment to their ancestral territories and the natural resources in these areas; * self-identification and identification by others as members of a distinct cultural group; * an indigenous language, often different from the national language; * presence of customary social and political institutions; and, * primarily subsistence-oriented production

30 This definition of 'indigenous peoples' would not apply to non-indigenous ethnic minorities such as Chinese, Indian, and American. Moreover, the concerns of indigenous peoples are primarily met through the design of the project itself, and the project will ensure compliance with the Philippine Indigenous People's Rights Act of 1997 and the OD 4.20 on Indigenous Peoples through an Indigenous Peoples Strategy (see Annex 1 lb). This strategy aims at achieving the twin policy objectives of ensuring (a) the informed participation of indigenous peoples in the activities of the KALAIH-CIDSS, so that they are in a position to receive culturally compatible social and economic benefits, and (b) that indigenous peoples are not adversely affected during the development process. The project design elements that define the strategy to address indigenous peoples concerns include (i) the presence of indigenous peoples as one of the criteria for area targeting, (ii) the facilitated participatory planning process at the community level, (iii) the open sub-project menu that allows indigenous groups to develop proposals that address their specific concerns, (iv) sub-project proposal formats which provide baseline data on indigenous groups for subsequent monitoring of inclusion and access to project benefits, and (v) grievance redress arrangements that provide an indigenous minority within a particular barangay with an avenue for complaints if bypassed or marginalized in the sub-project planning or selection process. 7. Safeguard Policies: 7.1 Do any of the following safeguard policies apply to the project? P,olicy,. '... A.licbiIitJ ' Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) * Yes U No Natural Habitats (OP 4.04, BP 4.04, GP 4.04) U Yes * No Forestry (OP 4.36, GP 4.36) U Yes * No Pest Management (OP 4.09) U Yes * No Cultural Property (OPN 11.03) Indigenous Peoples (OD 4.20) Involuntary Resettlement (OP/BP 4.12) Safety of Dams (OP 4.37, BP 4.37) Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)* U Yes * No * Yes (9 No * Yes U No (U Yes * No (U Yes *No (9 Yes 0 No 7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. The project will use an environmental screening procedure to assess negative impacts from proposed sub-projects. Land acquisition for sub-projects will be undertaken in accordance with an agreed Resettlement Policy Framework. Both the environmental screening procedure and the provisions of the Resettlement Policy Framework will be incorporated into the Project Implementation Manual. The concerns of indigenous peoples are addressed through the design of the project itself, which comprises mechanisms that constitute an Indigenous Peoples Strategy (see Section 6.e above). Certain types of investments with negative environmental or social impacts cannot be undertaken and are hereby included in a negative list of prohibited investments. A negative list of sub-project investments and expenditures is as follows

31 * Weapons, chainsaws, explosives, pesticides, insecticides, herbicides, asbestos, and other potentially dangerous materials and equipment * Fishing boats (beyond the weight limit set by the Philippine Bureau of Fisheries and Aquatic Resources) and related equipment * Civil works in or that affect protected areas * Purchase of or compensation for land * Micro-credit and livelihood activities which involve on-lending of Project funds * Maintenance and operation of facilities that have been the subject of civil works financed by proceeds of the Loan * Activities that have alternative prior sources of committed funding * Recurrent Government expenditures, including salaries * Civil works for govermnent administration or religious purposes * Political and religious activities (including rallies) and facilities and materials related to such activities * Activities that employ children below the age of 16 years * Activities that exploit an individual or individuals * International travel * Consumption items Compliance with the safeguard provisions and the negative list will be ensured through internal input, process, and output monitoring, independent external monitoring by consultants and civil society entities, and by Bank supervision missions. (b) If application is still to be determined, describe current or planned efforts to make a determination. 8. Business Policies 8.1 Check applicable items: Financing of recurrent costs (OMS 10.02) Cost sharing above country 3-yr average (OP BP 6.30, GP 6.30) Retroactive financing above normal limit (OP BP GP 12.10) Financial management (OP BP 10.02) Involvement of NGOs (GP 14.70) 8.2 For business policies checked above, describe issue(s) involved. F. Sustainability and Risks 1. Sustainability: Core sustainability issues are addressed at the following two levels: (a) all sub-project proposals submitted at the inter-barangay forum for selection must have a viable operations and maintenance plan; and (b) sub-project proposals submitted at the inter-barangay forum will also be integrated into the municipal development plan. This two-prong approach provides the basic framework for long term sustainability of investments. 27 -

32 2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1): Risk Risk Rating Risk Mitigation Measure From Outputs to Objective Weakening of government commitment M On-going policy dialogue and supervision and to poverty alleviation monitoring of project progress in terms of impact on the poor. Political instability M Government would be encouraged to stay on course with new policy initiatives that are inclusive. Macroeconomic reforms not M Ongoing policy dialogue implemented seriously Financial sector weakness continues M Ongoing policy dialogue From Components to Outputs Poor supply response due to insecurity S and related uncertainty. Elite capture of benefits which is the S To guard against this risk, a number of most serious risk of the entire project measures could be put in place. (i) Mechanisms This can take place at different levels, that are not susceptible to political especially if the project is used as an manipulation for identifying and targeting the instrument to attract voters through poor at LGU levels, as well as the poorer disbursement of development largesse sections within identified communities. (ii) rather than a focused poverty alleviation Arrangements to ensure effective and timely effort. flow of funds from the Borrower/Client to the beneficiary communities. (iii) Mechanisms defining sub-project planning cycles in ways that promote effective participation of the poor in the identification, planning, implementation (community contracting and/or supervision), monitoring of program activities and management of O&M funds. (iv) Mechanisms for measuring effective service delivery either from LGUs, private sector entities or both. (v) Mechanisms for enhancing the empowernent of citizenship through community-built accountability procedures and effective information sharing. (vi) Identification of channels for conflict management/grievance redress. (vii) Monitoring and evaluation process which includes the tracking of resources flows to beneficiaries and the engagement of civil society. Lack of motivation and weak S Assist the Government in capacity building and implementation capacity institutional reform. Provide technical assistance. Keep project design simple and provide intensive supervision. Assist the Government to design a system for monitoring progress in implementation. Program

33 orientation at all levels. Strong media campaign. Civil society vigilance. Development of advocacy role for leaders (speakers forum), Strict selection and training of program workers at all levels. Report card on cooperation by public representatives for due acknowledgement. Invitation to public representatives to attend community deliberations. Strengthen capacity for budget management and monitoring at all levels. Creating an incentive framework for aligning local level policies and priorities with national policies and directives. Input costs rise significantly S Monitor the market and keep information flowing to the community so that it can purchase inputs from the cheapest source The application of the open menu S Close supervision and orientation approach as outlined above fails to materialize Overall Risk Rating S Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk) Possible Controversial Aspects (Project Alert System): Risk Type of Risk Risk Rating Risk Minimization Measure Role of LGUs G S Dialogue and orientation Fund Flow G S Policy dialogue and orientation Type of Risk - S (Social), E (Ecological), P (Pollution), G (Govemance), M (Management capacity), 0 (Other), Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk) Project risks include: (i) the creation of a parallel delivery mechanism for basic services; (ii) frequent changes in the LGU leadership which may affect existing arrangements forged by KALAHI-CIDSS with LGU officials; (iii) perception of the dole-out nature of KALAHI-CIDSS from the national government; (iv) possible social tension and conflict arising from competition for limited funds between and within culturally-diverse barangays; (v) possible elite "capture" of the benefits of the project; and (vi) project sustainability and exit strategy. Parallel delivery mechanism. With the creation of PMOs at various levels and the relatively direct manner by which funds are transferred to the barangay, there are concerns that the system might bypass the traditional delivery channels. But local government units - provincial municipal, and barangay - are expected to play important roles in the project, affirming the government's goal of decentralization. In addition, they will receive capacity building support and technical support through the project. KALAHI-CIDSS will therefore result in the strengthening of local level institutions, whether formal or informal, as it will heavily promote the active participation of the LGU units and barangay members in the project

34 Changes in the local political leadership. Given a tenure of only three years for LGU officials, there is concern that frequent changes in the leadership of the LGUs might result in the victory of unsympathetic officials to KALAHI-CIDSS. While these frequent changes do pose some degree of uncertainty, it will not unduly risk the entire project given that: (i) decisions on what projects to support are made by the barangay members themselves; (ii) it would be imprudent for any political leader to object to an anti-poverty project without suffering the loss of support from his constituents; and (iii) KALAHI-CIDSS will cover the 40 poorest provinces of the country excluding non-armm provinces where a targeted intervention is being prepared to address context specific issues. Perception of "dole-out" In the past, most poverty alleviation projects have been viewed as additional resources (for dole-outs) by LGU officials from the national government. KALAHI-CIDSS will be different - not a dole out but a hands-up - because the types of activities it will fund will involve cost-sharing from the community. Small infrastructure projects, for example, will require counterpart contributions from the barangay or group of barangays in cash or kind. Potential negative impacts of competition. Despite the safeguards mentioned in the Critical Risks matrix above, there are outstanding concerns that the competition for limited funds may increase exclusion and tension between culturally-diverse communities. To this end, it has been agreed that the project will be implemented in phases, starting small, learning from experience, and building the lessons into gradual scaling up and expansion. The project will be implemented during the first phase in 11 municipalities (one per region), prior to full-scale implementation in 199 municipalities. In-depth monitoring and supervision of project implementation, especially of the inter-barangay competition, will be undertaken to assess the success of mechanisms to promote inclusion and participation of culturally diverse groups. Based on lessons learned, design modification will be undertaken, if appropriate, before full roll-out. Elite "capture" of benefits. Of all the concerns, this is the most difficult to handle as evidenced by previous poverty reduction projects in the country and elsewhere. The KALAHI-CIDSS design provides a response to this risk in the form of: (i) capability-building activities for the barangay members (i.e., so-called "social preparation"); (ii) encouraging active participation of the barangay members; (iii) ensuring the transparent nature by which business transactions under the KALAHI-CIDSS are undertaken; (iv) ongoing M&E work at different levels; (v) working arrangement with a network of local journalists to report on incidences of graft and corruption; and (vi) the creation of Complaints Offices to look into grievances and irregularities that cannot be resolved internally by the community (including filing of legal cases against corrupt officials or members). Sustainability. At inception, sustainability is already built-in to the KALAHI-CIDSS project because of its social preparation and capacity-building activities for the community. Every investment activity will have its own operations and maintenance component and an appropriately constituted sub-committee responsible for its management. 3. Possible Controversial Aspects: The area of controversy was about the imposition of at least 50% cost sharing arrangements with LGUS and local communities. Consistent with project principles, the parties agreed that cost-sharing is essential to the project as it demonstrates client ownership of the investments. However, it is understood that the project will not impose a fixed percentage of contribution

35 G. Main Loan Conditions 1. Effectiveness Condition * The National Steering Committee will have finalized, according to procedures acceptable to the Bank, the selection of the first eleven (I 1) municipalities in the Project Provinces that will participate in the Project. * A special order will have been issued by the Undersecretary, DSWD, setting out the responsibilities of the National Project Management Office. * A special order will have been issued by the Undersecretary, DSWD, setting out the responsibilities of the Regional Project Management Office. * The Project Implementation Manual, acceptable to the Bank, will have been adopted by the National Steering Committee. 2. Other [classify according to covenant types used in the Legal Agreements.] * Borrower will maintain the National Steering Committee: with functions, responsibilities and resources satisfactory to the Bank. * Borrower will maintain the Technical Working Committee: with functions, responsibilities and resources satisfactory to the Bank. * Borrower will maintain the National Project Management Office within DSWD and the Regional Project Management Offices, all with functions, responsibilities and resources satisfactory to the Bank. * Borrower will ensure that all participating municipalities sign a Memorandum of Agreement with the Project committing to abide by the rules and principles of the project. * Borrower will ensure that the sub-projects are selected and implemented in accordance with the policies and procedures set out in the Project Implementation Manual. * Borrower will maintain policies and procedures adequate to enable it to monitor and evaluate project performance on an ongoing basis, in accordance with agreed indicators, and annual implementation reports will be provided to the Bank not later than six weeks after the end of the fiscal year. H. Readiness for Implementation D 1. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation b) Not applicable. 1] 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation. z 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. 1] 4. The following items are lacking and are discussed under loan conditions (Section G):

36 1. Compliance with Bank Policies El 1. This project complies with all applicable Bank policies. O 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies. Cyp tp. Fisiy Zafer Ecevit Robert V. Pulley Team eader - 32-

37 Annex 1: Project Design Summary PHILIPPINES: Kapitbisig Laban sa Kahirapan-Comprehensive and Integrated Delivery of Social Services (KAL;AHI-CIDSS) Project Key Performance Data Collection Strategy Hierarchy of Objectives Indicators Critical Assumptions Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission) Improving local govemance * Improved governance as Analysis based on MIS data & Macroeconomic stability is evidenced by % of participating baseline; maintained; Reducing poverty LGUs that have implemented Independent impact evaluadon Political situation remains stable; Improve quality of life of the poor the participatory strategies and I m e technical assistance introduced NGO & media reports; Civil conflict is contained; by the project to assist community NAPC reports; Project activities are implemented in conflict areas; organizations/barangays reduce poverty; * Improved poverty situation in the beneficiary barangays; * Improved human development indicators in the beneficiary barangays; Project Development Outcome / Impact Project reports: (from Objective to Goal) Objective: Indicators: Empowerment of local communities Empowerment indicators Analysis based on MIS data & Peace and order problem is through improved participation in local govemance and involvement in * % of barangays that have baseline; beine; manageable the design and implementation of adopted KALAH[-CIDSS Periodic socioeconomic surveys No natura calamities poverty reductionprojectsrtioipaofy barantiays:wt poverty reduction projects partirto of pramtices Municipal records Municipaltrecords No political intervention resulting tn elite capture or politization of project planning and barangay records community forums management teams External evaluation study established through Use of sanctons on bad LGU community meetings NGO & media reports performers (>90% of target), NCIP reports o % of barangays with r sub-projects proposals Complaints reports endorsed at community Participatory community reports meeting (>90% of target), o % of barangays with sub-projects for which community contributions were provided as committed (>80% of target), o % of barangays with sub-projects with adequate funding arrangements for O&M (>80% of target). * Barangay Development Plans that integrate the community needs articulated through the barangay mapping and situation analysis (> 60% of target). Governance indicators % of LGUs (Municipalities) that honor signed MOAs and assist participatory management of sub-projects by barangays: o Number of barangays assisted by LGUs with technical support for sub-project planning and

38 implementing (>80% target) o % of LGUs that conduct monitoring of sub-project planning and implementation (>80% of target), * Sub-projects are selected for funding by the Inter-Bamangay Forum based on negotiated prioritization instead of barangay entitlements (>70% of target) * Project transparency requirements complied with in sub-project prepamtion, selection, and implementation (>80% of target) * Sanctions enforced in cases of non-compliance with project rules (90% of cases) Poverty reduction * Improved poverty indicators in project barangays compared to without-project barangays * Improved quality of life indicators in project barmngays compared to without-project barangays Output from each Output Indicators: Project reports: (from Outputs to Objective) Component: 1. Community Grants Community Grants provided: PMO MIS data Targeting not captured by elite 2. Capacity building and Capacity building and implementation support Implementation support provided: * Information on project approach provided to stakeholders at regional, provincial and municipal levels, * Balanced gender composition of community and area facilitators, * Planned number of community facilitators and area coordination teams recruited, * # and type of trainings to * % of barangays with Annual surveys No undue political interventions sub-projects implemented at technical standards and within Technical audits Complementary investments budget (>80% of target). NGO & media reports undertaken by LGUs * % of barangays with sub-projects that meet basic NCIP reports financial reporting standards in Complaints reports FM&A manual (>80% of target) Special studies * % of sub-projects where flow of Bank supervision funds was timely (>80% target) * target population benefitting Project component status reports from sub-projects (>80% target) Participatory community reports facilitators (>90% of target), * 1* and type of trainings provided

39 for LGU staff (>90% of target) * # and type of training/technical support provided for community volunteers/ brgy development committees (>90% of target) 3. Monitoring and Evaluation MonItorIng and evaluation conducted: * Intemal computerized MIS established and reporting conducted as scheduled by all levels, * Extemal monitoring consultant engaged and functioning, * Participatory beneficiary monitoring functioning, * Civil society involved in monitoring, * Financial audits conducted, * Grievance redress arrangements established and grievances resolved, * Monitoring results used for leaming and adjustment of project activities and/or approach Project Components I Inputs: (budget for each Project reports: (from Components to Sub-components: component) Outputs) Figues in USS million Bsnk GOP Others Perfornance audit reports WB, GOP an others provide adequate 1. Community grants hfnancial reports funds fud ontm time 2. Capacity building and I. u n n ro Independent audit reports Quality project staff and facilitation is available implementation support Project MIS data Administrative efficiency is improved 3. Monitoring and Evaluation Technical audits Exchange mte rmains stable

40 Annex 2: Detailed Project Description PHILIPPINES: Kapitbisig Laban sa Kahirapan-Comprehensive and Integrated Delivery of Social Services (KALAHI-CIDSS) Project 1. The KALAHI-CIDSS adopts a community-driven approach to development and poverty reduction by (a) empowering communities to manage their assets, lives and livelihoods in ways that restore their sense of responsibility and human dignity; (b) strengthening their social networks and linking them up with policy and administrative structures of the state; and (c) promoting representation and accountability, at different levels of the decision making pyramnid. The community nature of this investment identifies the barangay, as the unit of analysis, and not sub-groups or individuals within the barangay. Given its focus on the community as a functioning entity, the project is design to operate within existing institutional structures but to change processes within those structures. Given its community-centric focus, most of the investments will either by public or common goods. 2. To respond to the stated goal of the creation of public value, investment options shall be based on an "open menu" as constrained by a negative list. Under this "open menu" scheme, barangays can request funds from the Project to construct infrastructure, such as roads, bridges, water supplies and sanitation facilities. The project therefore consists of the following three components: (a) Community Block Grants, (b) implementation support, and (c) monitoring and evaluation. (a) Community Block Grants ($90.6m) 3. The project will assist communities (barangays in the selected municipalities) through a facilitated participatory planning process to develop sub-project proposals, that will be selected at an inter-barangay competitive forum comprising all participating barangays. This process is expected to take four to six months. 4. Proposals for sub-projects will be based on an open menu supplemented by a negative list of prohibited activities with adverse environmental and social impacts (see Section E.7.2). Apart from micro-finance or other activities involving on-lending of project funds, the community will be able to choose any activity it agrees is important for its development, be it economic infrastructure such as roads, bridges or irrigation facilities, social service infrastructure such as a school or clinic, water supply and sanitation facilities, environmental conservation measures such as watershed management, or capacity building. The chosen activity must qualify as an investment item and not a consumption item. Communities will be also be able to coordinate among themselves on activities that would benefit from joint planning (e.g. provision of water supply, road, bridge). The development of sub-project proposals will involve an assessment of needs in relation to existing assets, resources, and capacities (see Section E.5 on the sub-project cycle). 5. With the assistance of municipal facilitators a joint proposal will be submitted to the inter-barangay forum. Sub-project selection will be competitive and will take place through an inter-barangay forum with representation from the participating barangays. 6. Within each municipality, there will be three cycles of project preparation and selection, open to all barangays. The number of barangays per municipality vary considerably (with an average of 24), and in larger municipalities, there may be two or more inter-barangay forums during each cycle to select sub-project proposals from different clusters of barangays. Since the funding allocation per municipality may not allow for sub-project implementation in all barangays, the selection will be competitive, and the inter-barangay forum will decide on the sub-project proposals that will receive funding.. While the - 36-

41 inter-barangay forum consists of both community representatives and technical advisors, only the community representatives can approve a subproject proposal. 7. Community cost contribution towards both the investment and O&M costs will be a selection criteria at the inter-barangay forum. The Philippines CIDSS and the Indonesian Kecamatan Development Program (KDP) have found that the overall community contribution is higher when not flxed in advance, but when it is considered as one of the criteria in the competitive selection of sub-project proposals. Since this may favor the more well-off barangays, the size of community contribution would need to be supplemented by other sub-project criteria such as poverty focus, operation and maintenance plan, and a rationale in terms of the benefits a sub-project provides to the community at large (as opposed to a selected few). A finai set of criteria for sub-project selection will be determined during project preparation. 8. Community contracting: Selected sub-projects will be implemented through community contracting. The barangay project implementation team selected by the community will manage the implementation of a particular sub-project, and will, if required, employ outside contractors selected through competitive bidding. 9. Grievance redress: Since elite capture, both at the barangay and municipal level, is a key risk in the proposed project, a grievance redress mechanism will be developed to provide segments of a community or an entire community with an avenue for complaints if bypassed or marginalized in the sub-project planning and selection process. This grievance redress mechanism will be independent of the project implementation set-up and the LGU structure. Its composition and mode of functioning will be determined during project preparation. Civil society monitoring together with the rules of full transparency required under the project, will provide a supplementary check on elite capture. (b) Implementation Support (US$ 5.4 million) 10. The very essence of the project lies it its ability to mobilize communities and other institutional stakeholders to initiate, plan, implement and manage subproject components chosen by them. To achieve this goal of the project, this component includes aspects of (i) social mobilization and community organizing, and (ii) capacity building and technical support. (i) Social Mobilization and Community Organizing 11. This involves a multi-level and multi-stakeholder organizing, socialization, and facilitation process to ensure that consistency with project principles is achieved. Social mobilization and community organizing are cross-cutting activities of the project happening at all stages of the project cycle - from its inception and area targeting, social marketing, information dissemination and sharing, community organizing, participatory community planning, sub-project preparation, municipal competition, project implementation, project monitoring and the preparation and completion of project reports. 12. The project will recruit and train community facilitators from the different regions to undertake information dissemination at the community level, mobilize and support community volunteers regarding participation in sub-project planning and implementation, and facilitate the involvement of the community in the identification, planning, and implementation of sub-projects. In addition, the community facilitators will liaise with the municipality regarding technical and other inputs to the community, liaise with consultants providing training to the communities, and help facilitate the inter-barangay foruns. Facilitators will be employed on time-bound contracts, and will not be absorbed

42 into the LGUs at the closing of the project. Instead, the project will have created a pool of skilled personnel and future leaders of the community who could be employed in other development projects, whether implemented by GOP or by NGOs. To this end, facilitators will be provided training in development planning and management, conflict resolution, intra- and inter- barangay mediation, quality reviews, poverty assessments, etc. The detailed training program and training infrastructure for facilitators will be developed as part of project preparation. Implementadon / Veriflcatiem perl and Maintenance Data Gathering and Training :Community Profiling.lhtinsttutonal / Project Mapping *Generate Investment Ideas Inter-Barangpy Forum *Confirtnaian of Projects and Cost *Selesson of Vcification Team _7C. Barangay Asembly.Expansion of Project Preparation Tcam :*Validation of Profiles, Maps, Plans *Pritrization of Projects Technical Planning and Traling/Barangay Feedback *Detailed Plans edtaioed Cost Estimates amd Counterparts *Report on Conduct of Inter-Bamngay Forum.Selection of Implementation Team Proposal Preparation and Training *Proposal Writing *Training on Project Preparation *Identificatton of Intemal Resoaurces lnter-barngay Forum.Presentation of Proposals.Rating of Proposals BarangayAssembly *Select/Confirm Projects *Confirm Cosuterparts *Select Representation Team (ii) Capacity Building for Local communities and LGUs 13. Technical Assistance will be provided to create capacity through training at the community level regarding such tasks as project planning, contracting, construction supervision, O&M, bookkeeping and financial management to members of the Barangay Development Council and volunteers. The communities will also receive technical assistance from the municipalities regarding assessment of the technical feasibility of sub-projects, project design and budgeting. Training will therefore also be provided at the municipal level to technical staff (e.g. Local Chief Executive, Planning & Development Officer, Social Welfare Officer, Engineer) to strengthen their capacity to support the barangay level activities and undertake monitoring. A training needs assessment together with a training plan, training manual, and curriculum for different types of training and target audiences is being developed as part of project preparation. 14. Given the number of guiding principles and project manuals being prepared during preparation,

43 the parties (i.e. GOP and the World Bank) have agreed to field test these new processes and procedures in one municipality before final rollout. (c) Monitoring and Evaluation (US $3 million) 15. Monitoring will be designed to provide for a continuous learning and adjustment of the project approach and will involve: (i) participatory monitoring by communities based on self-defined indicators; (ii) internal monitoring of inputs, process, and outputs by the Project Management Office (PMO); (iii) independent extemal monitoring and evaluation by consultants; and (iv) civil society monitoring by NGOs and the press. A computerized management information system (MIS) will be developed to enable intemal input, process, and output monitoring, as well as an analysis of project impacts. Baseline data for impact monitoring will be established early during project implementation when beneficiary barangays have been selected through the process of inter-barangay forums, and mid-term and terminal surveys will be undertaken subsequently. Other studies relating to govemance and poverty will be detailed during Summary of the KELAII-CIDSS Monitoring and Evaluation System No. Instrument Data Sources Implementing Agency I Management Monitoring and MIS PMO staff Reporting of inputs, process & outputs.- 2 Baseline survey and follow Poverty mapping study and panel data subsequent survey instruments Independent survey firm & NAPC (longitudinal and cross sectional) 3 Participatory monitoring & Qualitative assessment of Participating barangays, POs, and evaluation beneficiaries based on self-identified other community groups indicators 4 Impact & effectiveness Impact indicators and other MBN PMO, NAPC, NGOs, and other monitoring tools independent survey firm 5 Technical Audits Engineering Assessments PMO, Independent consultants, I m unicipal engineers 6 Annual Financial Audits MIS and Financial records COA & Independent auditors 7 Periodic case studies & learning PMO records, community feedback, PMO, WB supervision, NGOs, events and surveys. students and consultants. Independent newspaper accounts * Media & NGOs 8 Supervision Systematic and random selection of WB, independent consultants, roject sites NGOs 9 Complaints and resolution * Complaints processing channels * PMO complaints system and system at municipal, regional and independent ombudsman. national levels. * Independent media & NGOs * Newspaper accounts & reporting

44 Annex 2b: Estimated Project Costs Philippines: KALAHII-CIDSS Pr oject Project Cost By Component Local Foreign Total US$ US$ US$ million million million 1. Community Block Grants Implementation Support Monitoring and Evaluation Total Baseline cost Physical contingency Price contingency Total Project cost' Total Financing required i: Identifiable taxes and duties are 0 (US$ m) and the total project cost, net of taxes, is 182 (USS m). Therefore, the project cost sharing ratio is XX.XX% of total project cost net of taxes. By Component: Project Component I - US$ million 90.6 Project Component 2 - US$46.20 million 7.0 Project Component 3 - US$ 2.60 million

45 Annex 3: Estimated Project Costs PHILIPPINES: Kapitbisig Laban sa Kahirapan-Comprehensive and Integrated Delivery of Social Services (KALAHI-CIDSS) Project Local Foreiln Total' Project Cost By Componehnt L,U$rniiipn US,$milion,US.$milion Community Block Grants Implementationr Support Monitoring and Evaluation Total Baseline Cost, Physical Contingencies Price Contingencies Total Project Costs Front-end fee Total Financing Required Local, ' Fo'reign Total Project Cost By'-Oategory. USV$h'piliion US$million US4niui,on Goods Works Services Training Incremetal Operating Cost Unallocated Total Project Costs Front-end fee Total Financing Required Identifiable taxes and duties are 82 (US$m) and the total project cost, net of taxes, is 100 (USSm). Therefore, the project cost sharing ratio is 100% of total project cost net of taxes

46 Annex 4: Cost Benefit Analysis Summary PHILIPPINES: Kapitbisig Laban sa Kahirapan-Comprehensive and Integrated Delivery of Social Services (KALAHI-CIDSS) Project Introduction: Poverty in the Philippines is a predominantly rural phenomenon affecting landless workers and small plot farmers. The KALAHI-CIDSS Project represents the primary framework of the Government of the Philippines (GOP) to alleviate poverty in rural communities and improve local governance. It is envisioned as a USD$ I 82million program over six years commencing in December 2002, partially financed through a USD$ 100 million World Bank loan. Project Objectives: The overall objective of the Project is to empower communities through enhanced participation in barangay govemance and involvement in the design, implementation, and management of economic development activities. The vehicle for these development activities is the provision of grants for community investment programs in small scale infrastructure sub-projects. These sub-projects will produce tangible communal goods with associated quantifiable economic benefits that reduce poverty. Additionally, these sub-projects will each serve as an individual pilot project to foster institutional strengthening and capacity building of the local implementing barangay by enhancing their planning and implementation capabilities in procurement, financial management, and project implementation. These characteristics of governance have been proven to be strongly linked to improving the long-term social welfare of the local community. Project Background: While relatively innovative in approach, the KALAHI-CIDSS Project builds upon other projects which exhibit a similar operational framework, namely:, the Village Infrastructure Project (VIP) I & 2 in Indonesia, the Kecamatan Development Project (KDP) 1 & 2 in Indonesia, and the Comprehensive Integrated Delivery of Social Services (CIDSS) Project in the Philippines. Each of these projects has sought to increase social welfare through the issuance of block grants to local communities for small scale infrastructure development sub-projects. In each of these projects, local communities are given the opportunity to decide for themselves among a range of types of sub-projects to pursue through a demand driven "open-menu" format. The local communities are responsible for developing the sub-project, implementing it, and finally ensuring for its proper Operation and Maintenance (O&M). Collectively, these projects have had varying levels of success and can be viewed as providing a basis for what can be expected to result from the KALAHI-CIDSS Project. Similar to these other projects, KALAHI-CIDSS emphasizes the following principles in its design: * Community Participation and Empowerment * Transparency * Funding Prioritization (based on sub-project feasibility) * Sustainability through Locally Based O&M Problem Identification and Approach: Due to the design which employs a demand driven "open menu" approach, it is not easy to -42 -

47 quantify the benefits and costs of the KALAHI-CIDSS Project ex ante. With an "open menu" project framework, it is impossible to know with precision which investment proposals will be pursued by local cormmunities, and then which ones will actually receive funding. Thus, with such a project there are inherent uncertainties in attempting to perform a traditional economic analysis, namely: 1. The benefits and costs of each individual sub-project stemming from the localized planning, design, construction, implementation, O&M, and utilization; and 2. The actual distribution of the types of sub-projects to be selected by the local communities across the entire Project. Nonetheless, a sound analytical methodology based upon conservative assumptions was carried out, making use of available data from ongoing and past projects of a similar physical nature in the Philippines. Profiles of generic sub-projects were modeled for estimating "expected" benefits and costs per sub-project. Similar ongoing projects in the Philippines were used as benchmark distributions to deternine the percent of the Project budget that would be distributed across the generic sub-projects.- These benchmark distributions across representative sub-projects are displayed in Table 4.1 below. Table 4.1 Benchmark Distributions for KALAHI-CEDSS sub-project Type Distribution I Distribution II Distribution m Distribution IV (CIDSS-based) (SZOPAD-based (ARCDP-based) (NPV-based) Classrooms 15% 30% 5% 2.5% Barangay Health Stations 15% 10% 5% 10% Level II Water Systems 20% 15% 10% 20% Level I Water Systems 7.5% 5% 5% 2.5% Road Rehabilitation 7.5% 5% 30% 15% Road Regravelling 7.5% 5% 25% 7.5% Post Harvest Facilities 10% 20% 5% 15% CIS Rehabilitation 10% 5% 5% 10% CIS Construction 7.5% 5% 10% 17.5% Main Assumptions of the Analysis: a. Operations and Maintenance (O&M) costs are constant throughout the sub-project life cycle. b. Full payment of O&M costs is necessary for full benefit realization. c. Benefits cease immediately after expiration of designed sub-project life. d. Representative sub-projects of one type are assumed to be identical to all others of the same type. e. Three different benefit distribution scenarios (A, B, and C) are presented to reflect varying degrees of the local communities' ability to implement the sub-project. See Table 4.2 below. f. Distribution of sub-projects proposed by local communities are expected to follow the experiences of similar projects in the Philippines such as the Comprehensive Integrated Delivery of Social Services (CIDSS) Project, the Agrarian Reform Communities Development Project (ARCDP), the SZOPAD Social Fund Project

48 Table 4.2 Expected Benefit Realization Scenarios Year I Year 2 Year 3 Year n Scenario A 100% 100% 100% 100% Scenario B 85% 100% 100% 100% Scenario C 50% 85% 100% 100% sub-project Types Considered: The EIRRs for each sub-project given below reflect the value calculated under Scenario A, full benefit realization in Year 1. Under the Scenario B and Scenario C, the EIRRs for each generic sub-project were lower. a. Communal Irrigation Systems (CIS) - Rehabilitation b. Communal Irrigation Systems (CIS) - Construction c. Production and Post-Harvest Facilities d. Road Rehabilitation e. Road Regravelling f. Level I Water Supply g. Level 11 Water Supply h. Barangay Health Stations i. Basic Education Facilities (a) & (b): CIS - Rehabilitation and Construction Irrigation improvement under the project is to be geared towards either rehabilitating existing schemes which are no longer fully functional, or in the construction new schemes. The returns from irrigation will vary considerably depending on the types of crops planted; the analysis assumes that the base crop is paddy. The rationale for this is that paddy is the primary traded crop in country and is also used by the small scale farmers for subsistence. The impact of irrigation improvements is assessed through a simple model which only considers the improvement in yield and cropping intensity. A conservative estimate of sub-project benefits is produced since the model does not attempt to consider gains from: * Increases in area of land under cultivation * Improvements in cropping patterns * Crop substitution (high value crops for low value crops) The following EIRR estimates were: CIS - Rehabilitation 19.3% CIS - New Construction 18.4% (c) Production and Post-Harvest Facilities The construction of production and post-harvest facilities in the project strives to give the small scale local community farmer a better farmgate price of their paddy by transferring the monopolistic power of the local private production and post-harvest facility operator to the local community. The model assumes that the establishment of such monopoly power is due to capital

49 constraints. A conservative estimate of sub-project benefits is produced since the model does not attempt to consider gains from the increases in the Cropping Intensity Index with the project, i.e., that the farmers would attempt to grow more when receiving a higher price. The estimated EIRR was 34.2% (d) & (e) Road Rehabilitation and Regravelling The primary road construction in the project is likely to be very minor and short sub-project barangay or "farm-to-market" roads which will link the barangay center to the provincial or national road system. In most cases, investment in these roads will comprise regravelling or rehabilitation in an attempt to improve the surface and/or make "all'weather" roads which would make the roads passable by normal vehicles year round. In the absence of such roads, agriculture must be pulled by carabao carts or carried by people. The analysis of these roads focuses on the transport cost savings for agriculture. The following EIRR estimates were: Road Rehabilitation 33% Road Regravelling 34.9% (f) & (g) Water Supply Systems I & II Safe potable water is a necessary public good and yet a major concern in the outlying poor rural areas. Without sustainable safe potable water there is increased social health costs due to lower productivity from higher worker mortality and morbidity. Additionally, in rural areas there is a cost incurred based on the water fetching time for segments of the populace. Instead of attempting to calculate the benefits from better productivity or time cost savings, the model employs a Willingness-To-Pay approach based on a Philippine case study used in the (draft) NEDA Manual on Project Evaluation. The following EIRR estimates were: Water Supply Level I 19.06% Water Supply Level II 35.9% (h) Barangay Health Stations As in the case with improved water supply systems, better health facilities benefit the community through greater worker productivity. Similar to the water supply model, the model employed here is based on a Philippine case study used in the NEDA Manual on values of Willingness-To-Pay for better access to health facilities. The estimated EIRR was 52.6% (i) Basic Education Facilities While basic education is widely perceived by most societies as being key to economic development and social progress, the economic value of education remains difficult to pinpoint. The model employed assumes that with more education facilities, more children will remain in school longer. Using regression data based on the Philippine experience, a value to these -45-

50 additional years of education was estimated. The estimated EIRR was 16.4% Summary of Directly Measurable Benefits and Costs The model was run using: * The "generic" sub-projects as representative of the types of sub-projects that will be built; * The three benefit realization scenarios; and * The percentage of total project funding appropriated per sub-project based on the four benchmnark distributions, i.e., the three historical sub-project distributions of CIDSS, SZOPAD, and ARDCP, and one constructed distribution based on the relative NPVs of the generic sub-projects. Only using directly quantifiable benefits, the estimates of the overall Project EIRR ranged from 28.65% to 32.42%, see Table 4.3 below. This result corresponds with the lower bound findings from the Village Infrastructure Project (VIP) and Kecamatan Development Project (KDP), both of which are ongoing in Indonesia and similar in objectives and implementation. Table 4.3 Summary of Estimated Project EIRRs Across Benchmark Distributions and Benefit Realization Scenarios Distribution I Distribution II Distribution 111 Distribution Iv (CIDSS-based) (SZOPAD-based) (ARCDP-based) (NPV-based) Scenaio A 32.22% 29.87% 32.42% 32.40% Scenaio B 32.10% 29.77% 32.29% 32.28% Scenario C 30.85% 28.65% 30.98% 31.03% Exogenous Factors Which May Affect Project Expected Benefit Realization Given the inherent uncertainty with this form of project, it may prove that there are exogenous factors which could undermine the assumptions and/or affect the expected economic return. These could include: * Elite capture, where the wealthy control the sub-project process for their own benefit and community wide benefits are not realized. * Corruption, where local contracts for sub-project related work are issued based on kickbacks and expected lower costs from local labor and material are not realized. * Embezzlement of funds for O&M or other disruption of O&M funding preventing necessary annual sub-project O&M work. * Skewness in terms of sub-project selection, i.e., communities predominately select only one or two types of sub-projects distorting the expected distribution of funding across sub-projects. * Delay in sub-project implementation due to lack of understanding of procedures, inability of the local communities to become motivated to attain grants for sub-projects, and/or funds disbursement issues

51 Concluding Remarks The intent of attempting a cost-benefit of analysis for this demand driven open menu project was to give the decision makers a more rigorous estimate of the economic return than a cost effective or SWOT analysis could provide. Given the inherent uncertainty associated with design of the Project, the methodology employed has sought to be as comprehensive as possible. Conservative assumptions and actual -data from ongoing similar projects in the Philippines were used as the basis for Project fund allo'cations across sub-projects and the unit values for deriving the return to the types of representative sub-projects. These values and assumptions can be reviewed in the full economic analysis on file with the Project documents. Indirect benefits or those that could not be readily quantified such as those from community empowerment, institutional strengthening, and capacity building were not specifically included in the analysis. For these reasons, as well as the use of conservative estimates of quantifiable factors, the findings are believed to be on the low side of the economic returns which will be realized when the Project is implemented. [For projects with benefits that are measured in monetary terms] Benefits:.,sent Value,f Flows Fiscal Im-pact Economic Financial Analysis` Analysis.,_i Taxes t Subsidies Costs: Net Benefits: IRR: If the difference between the present value of financial and economic flows is large and cannot be explained by taxes and subsidies, a brief explanation of the difference is warranted, e.g. "The value of financial benefits is less than that of economnic benefits because of controls on electricity tariffs." Summary of Benefits and Costs: Main Assumptions: Sensitivity analysis I Switching values of critical items: -47 -

52 Annex 5: Financial Summary PHILIPPINES: Kapitbisig Laban sa Kahirapan-Comprehensive and Integrated Delivery of Social Services (KALAHI-CIDSS) Project Years Ending Year1 I Year2 Year3 Year4 r Year5 Year6 Year7 Total Financing Required Project Costs Investment Costs Recurrent Costs Total Project Costs Front-end fee Total Financing Financing IBRD/IDA Govemment Central Provincial Co-financiers User Fees/Beneficiaries Other Total Project Financing Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Total Financing Required Project Costs Investment Costs Recurrent Costs Total Project Costs Front-end fee Total Financing Financing IBRD/IDA Govemment Central Provincial Co-financiers User Fees/Beneficiaries Other Total Project Financing Main assumptions:

53 Annex 6(A): Procurement Arrangements PHILIPPINES: Kapitbisig Laban sa Kahirapan-Comprehensive and Integrated Delivery of Social Services (KALAHI-CIDSS) Project Procurement 1. Guidelines. Procurement of goods and works, and consultant services funded wholly or partly by Bank Loan will be carried out in accordance with Bank procurement guidelines ("Guidelines for Procurement under IBRD Loans and IDA Credits" of January 1995 revised January and August 1996, September 1997 and January 1999, and the "Guidelines for Selection and Employment of Consultants by World Bank Borrowers" of January 1997 revised September 1997 January 1999 and April 2002). 2. There are areas of conflicts between the procurement procedures of the Republic of the Philippines and provisions, which are acceptable to the World Bank. These include, but are not limited to: * two-envelope system is mandatory for procurement of works and goods; * price negotiation is resorted to in case the winning bid exceed the budget ceiling whereas the Bank Guidelines will allow only reasonable reduction in scope and quantity; * pre-qualification or eligibility screening of contractors is practiced whereas the Bank considers pre-qualification only to be necessary for large or complex works and not applicable for small contracts envisaged under this project; * prior registration, licensing and/or other government authorization is required prior to submission of bid, however this should be a required condition for signing the contract; and * insufficient documentation of the bidding opening process. A procurement side letter will be issued by the Govemment, on the same date as signing of the Loan Agreement, detailing procedures to be followed to ensure compliance with the Bank's procurement guidelines. 3. Summary of Procurement Capacity Assessments: Assessments of the procurement capacities of the Department of Social Welfare and Development (DSWD), which is the implementing agency of the project, and a sample of three communities were carried out in accordance with the Office Memorandum from the Manager of OCSPR, dated August 11, The assessment involved a review of the procurement policies and procedures adopted and implemented in the department, and how it actually implemented procurement for SEMP I and other Bank and/or locally funded projects. On the other hand, the Bank's Country Procurement Assessment Report (CPAR) for the Philippines was completed in June 2002, where the general risk assessment for the country is rated average. The general findings of the assessment of DSWD conform to those of the CPAR's. 4. In general, the laws, rules and regulations relating to procurement being implemented by DSWD adhere to the principle of competition and are intended to promote economy, efficiency and transparency. However, certain laws, procedures and regulations may not fully support economy, efficiency and transparency in procurement. Some of them are within the authority of the department to amend, and these have been identified with the technical assistance provided to DSWD and were implemented under SEMP I. Waivers have been provided to ensure that procurement under Bank-financed projects is consistent with Bank policies and these waivers form part of the Loan Agreement. The procurement capacity of DSWD was assessed to be good and the risk rated average. DSWD, in all areas of the Assessment has been rating satisfactory, including the those realting to govemance issues. In terms of qualified procurement staff, it has qualified procurement staff currently -49 -

54 working in the Central Office and in various projects. However, for this Project, the Assessment emphasized the need for DSWD to hire additional qualified procurement staff at the Central and Regional Offices to manage the procurement process. It was discussed and agreed that these staff will be hired prior to effectiveness. 5. It is not possible to assess the capacity of each of the community (estimated at 3,600 nationwide) that will be implementing the community sub-projects component. Moreover, these communities will not be identified prior to project effectiveness. Hence, the assessment was based on a limited sample of three communities, in particular those that were part of the field testing activity. The objectives of the assessment, which are to have a general picture on how communities are organized and carry out their procurement, have been met. The procurement capacity of each community is expected to be low and the risk for the Bank was assessed to be high. In particular, the assessment found: (a) lack of capacity to procure large amount of contracts beyond $2,000; (b) no established procurement policies and procedures; (c) Barangay Treasurer normally performs procurement function; (d) procurement complaint mechanism not in place; and (e) no record keeping system. 6. Project Procurement Responsibilities: The responsibilities for each step in the procurement process are described in detail in the Procurement Manual. Briefly, the-roles of each group or unit in the process are: a. DSWD Central Office (CO) will handle procurement of contracts covered by components other than Community Grants. These are: (a) capacity building and implementation; and (b) monitoring and evaluation. It is responsible for keeping and revising the Procurement Manual to suit the needs of the Project. Overall monitoring of procurement progress will be done at CO with inputs from the Regional Office and various communities. All reporting requirements on procurement will be prepared and submitted by the CO to the Bank It will be responsible for approving community grant that are valued more than the threshold of the Regional Office as defined in the Procurement Manual. b. DSWD Regional Office (RO) will be responsible for: (a)procurement orientation and training of community members,(b) assist the community in organizing its procurement structure; (c) assist the community in the preparation of their procurement plan; (d) supervise the procurement process at the community level; (e) monitoring and reporting the progress of procurement to CO on regular basis. Each RO will hire or designate a dedicated Procurement Officer who will perform these functions. c. Community members will all be responsible for completing the sub-project funded by the community grant category. Once the subproject proposed by a community has been given priority status, the following are organized: i. Procurement Team, consisting of least three member will be designated through simple voting process involving all members. The Team will handle the procurement of the sub-project following the procedures established in the Procurement Manual. It is responsible for preparing the Procurement Plan assisted by the DSWD Regional Procurement Officer and ensuring that the plan is implemented on time. ii. Barangay Sub-Project Management Committee (BSPMC) is likewise designated through simple voting by all members of the community. This Committee will approve the recommendation of the Procurement Team and will recommend to the Barangay Captain to implement the subproject. 7. Action Plan to Improve Procurement Capacity: As agreed with DSWD, the following actions will - 50-

55 be undertaken on the timneframe specified. a. Prior to Loan Negotiation (scheduled in Mid August, 2002): * Revise the Procurement and Infrastructure Manuals, incorporating the following changes (to be done by August 15,2002): a. Procurement regulations updated to EO 40 Standards (done as of July 31, 2002); b. Indicate procurement training for communities, DSWD central and field offices staff, auditors and interest civil societies(done on August 15); c. Clear procedures for addressing contractual disputes (done as specified in the Procurement and Infra Manuals); d. Clear process for addressing complaints from various groups (done as specified in the Procurement and Infra Manuals); e. Forms of contracts per method of procurement should be appended, with appropriate guidance for completing the forms (done); f. Only those procurement and consultancy selection methods identified herein should be incorporated in the Manuals (done); g. Appropriate thresholds for review and approval should be indicated (done); h. Fixing of responsibility and accountability of staff and unit or groups in each step of the Procurement process and contract implementation (done); i. Provide for a record keeping system in the barangay/community level (done as indicated in the Manuals). * The Procurement Plan for packages to be handled by DSWD during the first year of implementation (received by the Bank on August 2, 2002). * Agree on the provisions of the Procurement Side Letter (agreed during negotiation). b. After the fleld testing (scheduled in December, 2002): * A structured training/familiarization program on procurement for all stakeholders; * Training of procurement staff for the first batch of communities; * To simplify, and avoid inconsistency, merge the Procurement and Infrastructure Manuals into one Procurement Manual, after project field-testing; * Summarize and shorten the Procurement Manual into few pages and translate into local dialects, after project field-testing. * A international procurement specialist should be on board for three months every year of implementation to provide training workshops on CDD procurement; also, a local procurement specialist will be hired to provide advise and guidance to the PMO; * Incorporate all procurement plans and documents for packages which will be procured during the first year of implementation. c. During the Project Implementation: * Regular monthly reporting of procurement activities submitted to the Bank; * Establishment of standard cost monitoring guide for community sub-projects (January, 2003); * Independent procurement reviews every six months; and * Annual audit by COA should include procurement performance audit. * A qualified procurement officer must be hired or designated in the Regional Offices who should have at least two years experience in community driven procurement (prior to social

56 preparation involving the concerned Regional Office). Procurement methods (Summarized in Table A) Community Grants: $90.6 million dollars are allocated for community subprojects under component A. The subprojects will consist of small scale investment. Proposals for subprojects are prepared by all barangays within the participating municipality and submitted at the inter-barangay forum, held withiri the municipal development council, where the best proposals are selected for fimding. This selection is based on the respective votes of barangays representatives at the forum. No targets are set by the DSWD for minimum or maximum amounts of the grant a barangay or groups of barangays could win for the implementation of sub-project components. The project will finance any item included on the negative list of the project presented in Section 7.2 of the PAD. 8. Community Procurement: The procedures to be followed are those under Section 3.15 of the Procurement Guidelines. This will govern the procurement of community grants under component A. The detailed procedures are described in the Procurement Manual. Essentially, the procedures are simplified selective tender procedures for works, shopping for goods and direct contracts. A brief description of the procedures follows: a. Shopping for Goods and Services - Contracts for goods and services available locally valued at less than $7,500, or equivalent, will be awarded by getting quotations solicited from at least three qualified suppliers on the basis of simplified documents following the fonns required in the Procurement Sub-Manual. To enhance efficiency and remove the inherent risk of compromise, request for and submission of quotations will be in writing. Quotations should be opened at the same time and to the extent possible in the presence of community members. The supplier who offered the lowest price will be awarded the contract. Contracts of goods and services amounting to more than $7,500, or equivalent, or where the aggregate amount provided by a specific supplier to an individual sub-project will exceed $7,500, the Regional PMO will assist the communities with procurement. b. Shopping for Work or Small works Contracts. Contracts for small works amounting to not more than $25,000, or equivalent, shall be procured by obtaining written quotations from at least three qualified local contractors (including NGOs) who would be invited to submit quotations on the basis of simplified quotation forms as specified in the Procurement Sub-Manual. The invitation to submit quotations should be in writing. The invitation shall include a detailed description of the works, including basic specifications, start and completion dates, a basic agreement format acceptable to the Bank, and relevant drawings. Quotations should be opened at the same time and to the extent possible in the presence of community members. As a general rule, the award shall be made to the contractor who offers the lowest price quotation and is evaluated to have the technical capacity for the required work. The Municipal Facilitator (technical) will review the specifications, quotations, and the contract. c. Local Biddingfor goods and works contracts. Contracts for goods amounting to more $7,500, or equivalent, and works, amounting to more than $25,000 will be procured following a simplified open tendering procedure. The process involves limited local advertising by posting notices at strategic places, use of local media such as radio or local newspaper, circulating the notice or reading them out in community meetings or other public gatherings. Simplified standard bidding documents will be included in the Procurement Sub-Manual. The request for bids spells out the work or goods needed, the criteria for selection and the deadline for submission of bids. Bids shall be opened at a public ceremony and evaluated by a committee appointed by the community. Bids are examined to determine whether they meet the minimum

57 specifications mentioned in the bidding documents. Bids that meet the minimum requirement specified in the bid invitation are retained for further evaluation. The bidder who mneets the lowest bid is selected. The award and the amount-of the contract should be announced to all bidders. Contracting will follow the form specified in the Procurement Manual, and will be signed within five days of the announcement. d. Direct contracting/off the shelf purchases. Goods and works that are available only from one source and do not exceed $2,500, or $5,000, or their equivalents, respectively, may be. procured by directly choosing the particular supplier or contractor. To the extent possible the contract price agreed upon should be within local market rates or established estimates using Unit Cost Database. This mrethod requires approval of the community committee to remove the inherent risk of compromnise. e. Community Force Account: Works that are determined to be implemented by the community using its own resources such as skilled and unskilled labor, materials, equipment may be allowed provided it is shown that the community has the resources and capacity to perform the works. Under this method, the community may apply: (a) hiring of laborers following the pakyaw procedure; and/or: (b) direct provision of raw materials or finished product. Detailed procedures and standard forms will be incorporated in the Procurement Manual. 9. Project Procurement at DSWD Central Office: The following procedures will be implemented at the DSWD central office a. Goods estimated to cost $1million consisting of vehicles, computers, spare parts and other equipment, will be procured as follows: i. National Competitive Bidding for contracts estimated to cost more than $50,000 equivalent, up to an aggregate of $0.5million; ii. National Shopping for contracts estimated to cost less than $50,000 equivalent, up to an aggregate of $0.4million; iii. Direct contracting for goods that should be procured from only source, up to an aggregate of $0.1 million. b. Consultants Services: $13.4million dollars, or equivalent, of consultancy services will be financed by the Bank. The amount will be spent to provide capability building and implementation support and as part of monitoring and evaluation component. The methods that will be used are: i. Consultant Qualifications: Training contract amounting to not more than $100,000 or equivalent, up to an aggregate amount not exceeding $5.Omillion, or equivalent, will follow Selection Based on Consultant's Qualification Procedures. This will be resorted to where experience has shown that there are others more qualified to provide specific training than the project team themselves. ii. Individual Consultants: Individual consultancy contract up to an aggregate amount of $4 million, or equivament, shall be selected following Individual Selection procedures in accordance with clauses 5.1 to 5.3 of the Guidelines. Additional specialist skills - for example in public works and water supply engineering - may be needed to provide small inputs during the project implementation. iii. Least cost: Auditing firms and other services pertaining to safeguards and fiduciary activities will be contracted to perform annual audits on a least cost basis. Each contract shall not exceed $200,000, or equivalent, up to an aggregate value of not more than

58 $500,000. Procurement methods (Table A) Table A: Project Costs by Procurement Arrangements (US$ million equivalen ) Expenditure Category ICB NCB Community OTHER TOTAL Participation COST Community Grants _ (0) _ (0) (90.6) (90.6) Consultancy Services and Training (0) (0) (4.0) (4.0) Goods (0.5) (0.5) (1.0) Operating Cost (2.2) (2.2) Unallocated (1.2) (1.2) Front-end fee (1.0) (1.0) (0.5) (90.6) (8.9) (100) -54-

59 Table Al: Consultant Selection Arrangements (optional) (US$ million equivalent) Se Metho-d iljtion Consultait.Servlces ft Expendlture4atjgory, QCBS QL SF5 LCS., CQs S hoter N.BF. TotalCost. A. Firms (0.00) (0.00) (0.00) (0.50) (2.00) (0.00) (0.00) (2.50) B. Individuals (0.00) (0.00) (0.00) (0.00) (0.00) (1.90) (0.00) (1.90) Total I (0.00) (0.00) (0.00) (0.50) (2.00) (1.90) (0.00) (4.40) 1\ Including contingencies Note: QCBS = Quality- and Cost-Based Selection QBS Quality-based Selection SFB = Selection under a Fixed Budget LCS = Least-Cost Selection CQ = Selection Based on Consultants' Qualifications Other = Selection of individual consultants (per Section V of Consultants Guidelines), Commercial Practices, etc. N.B.F. = Not Bank-financed Figures in parenthesis are the amounts to be financed by the Bank Loan

60 Prior review thresholds (Table B) Table B: Thresholds for Procurement Methods and Prior Review' Contract Value '. Contracts'Subject to v. -Tlireshiold, LP rocuremerif-_ Prior eview Expenditure Category. (US$ thousanftds). Method- (WS$ millions 1. Works 2. Goods more than $50,000 NCB $200,000 or more ($0.2) less than $50,000 Shopping Direct Contracting 3. ServicesConsultant Less than $100,000 CQ Firm-$I 00,000 or Less than $200,000 Least Cost more($1.0) Individual Individual-$50,000 or more($1.0) 4. Community Grants Less than $7,500 Shopping for Goods $50,000 or more ($17.5) Less than 25,000 Shopping for Works $7,500 or more Local bidding for Goods $25,000 or more Local bidding for Works Less than 2,500 Direct Purchase for Goods Less than 5,000 Direct Purchase for Works Total value of contracts subject to prior review: $20 million Overall Procurement Risk Assessment Frequency of procurement supervision missions proposed: One every 6 months (includes special procurement supervision for post-review/audits) High Post Review. With respect to each contract for Community Grants, the procedures set forth in Paragraph 4 of Appendix 1 to the Guidelines shall apply in the ratio of 1:5. For Goods and Consultancy servcies to be procured by DSWD, the ratio of 1:10 will apply. 'Thresholds generally differ by country and project. Consult OD "Review of Procurement Documentation" and contact the Regional Procurement Adviser for guidance

61 Annex 6(B) Financial Management and Disbursement Arrangements PHILIPPINES: Kapitbisig Laban sa Kahirapan-Comprehensive and Integrated Delivery of Social Services (KALAHI-CIDSS) Project Financial Mana2ement 1. Summary of the Finaicial Management Assessment The Financial Management (FM) arrangements for the KALAHI - CIDSS Project meet the Bank's minimum requirements. The Project's financial management shall be mainstreamed into the Finance Service Division of the Department of Social Welfare & Development (DSWD). Additional FM staff shall be hired at the Central and Regional Offices as there are no excess staff to handle the additional volume of transactions of the project. The Finance Director shall have overall FM responsibility for the Project while the Management Service Head of each Region will be responsible for the regional FM of the Project. At the Project level, the community Treasurer shall handle the FM of the Project supervised by a Roving Bookkeeper, from the Regional Office who is yet to be hired. At the Central and regional levels, the Project will be using the manual version of the New Government Accounting System (NGAS). At the community level, the project will be maintaining simple cash books and counterpart fund registers with simple report on fund expenditures, project progress and bank balance. The audit of the Project will be done by the State auditor and will cover a sample of the community sub projects. The project will be submitting Financial Monitoring Reports (FMRs) consisting of the financial reports, progress reports and procurement reports. Funds flow directly to the community bank account for its sub project grants from the Central Office Special Account and Counterpart Fund bank account in 3 tranches. The risk that the funds will not be efficiently and effectively used for the attainment of project objectives is Substantial. The inherent risks of the project consists of: the risk of insufficient funding brought about by the tight budget situation of the country and the delayed release of funds to implementing agencies under the present budgetary funds flow system; the risk of improper accounting and reporting due to delays caused by the transition to NGAS; and the risk of inadequate audit due to the transition brought about by the new COA restructured function. The control risks on the project FM are: the risk of inadequate FM staffmg at the Central, Regional and community project levels; the risk of misuse of funds at the community level where funds flow directly to community bank accounts; the risk of inadequate funding due to the lack of budget cover especially for the years with significant increases in funding requirements especially 2004 to 2006 and the high percentage of counterpart funds required; the risk of delayed FMR reporting due to delayed consolidation of fmancials for the large number of sub projects; and the risk of inadequate audit of the Project due to the large numbers of sub projects situated in far poverty stricken areas and inclusion of counterpart fund contribution in the audit. To address these risks, following is the summary of action plans: 1. Insufficient funding - Prepare a budget strategy showing how the funding requirement of the Project will be met. Counterpart funds should be required to be committed prior to project approval. Releases of funds should be tied in with the adequacy of counterpart funds actually contributed.to the Project. 2. Inadequate staffing - Ensure that the additional FM staff required for the project are covered in the budget and are bn board and trained before a sub project is implemented. Initially, The Financial Analyst and Sr. Bookkeeper at the Central Office and the Financial Analyst for the Regions to implement within the first 6months shall be on board prior to effectiveness. The rest of the staffing should be on board within 3 months after effectiveness for the Central Office and at least 6 months prior to project implementation at the Regional level

62 3. Misuse of funds at community level - Ensure effective involvement of comnunity, municipality, and DSWD representatives during project screening, approval, fund releases and financial reporting. Finalize arrangements with the commercial bank on direct funds flow to community projects using its branch network. Adequate FM staffing on all levels. The community treasurer should be properly screened and supervised by the Roving Bookkeeper and the Cormmunity Facilitator. Financial Reporting must be timely. 4. Improper Accounting and Reporting - Proper orientation of FM Staff on NGAS and Bank. policies and procedures. Prepare FM Manual for the project. Work towards the computerization of the fmancials of the Project at an early stage of implementation. Adequate guidance and supervision of Regional and community FM staff. 5. Inadequate Audit - Ensure adequate audit TOR including sampling agreement and counterpart fund audit. Include audit cost in the project budget. Implement a Value for Money audit to be done by an auditor independent of the annual financial audit. The project will be submnitting Financial Management Reports to the bank on a quarterly basis. These are the Sources and Uses of Funds, the Physical Progress Report and the Procurement Report. The formats will be prepared by the Project to be agreed with the Bank. The Department of Finance's (DOF's) initial choice of EBRD Financial Products' tenns for the Project is for a Fixed Spread Loan (PSL) for US$100million 20 years with an 8 year grace and a commitment linked repayment using a level repayment amortization. The Project shall disburse using the traditional SOE based method and will shift to FMR disbursement when it feels confident to do so. A Special Account shall be maintained to as advance funds for the project to be replenished periodically. Annual Audited accounts and the corresponding Management Letter shall be submitted. The Audited Accounts shall consist of the Sources and Uses of Funds, Summary of SOEs and Statement of Special Account. 2. Audit Arrangements Internal Audit The Department does not have an Internal Audit function. External Audit The State Auditor, the Commission on Audit (COA), shall handle the Audit of the Project. COA is the audit institution mandated by the Philippine constitution to audit the books of accounts of the govermment and its instrumentalities. The Audit of COA shall be based on a TOR to be agreed between the COA and the Project. Such TOR shall be agreed with the Bank on or before negotiation. The Audit shall cover the total Project Financials which is composed of both the loan proceeds and the counterpart funds of the national and local government as well as those of the beneficiary communities both in cash and in kind. The audit of COA shall be in accordance with international auditing standards. The Audit Report shall provide separate opinions on the consolidated project financial statements, the operation of the special account and the withdrawals from the loan account made under statement of expenditures. Presently, there are 12 COA Auditors resident in DSWD constituting the team that audits the DSWD Central Office. 10 of these are accounting graduates with 5 of them being CPAs including their Head

63 The 2 others are graduate of business courses. The Regional Offices have their own auditorws in addition to the Central office auditors. COA auditors of LGUs cover Barangays in their audit on a rotational basis. That is, not all Barangays are audited in a year but by rotation from one group of Barangay to another. COA's audit is mainly transaction based and they have yet to shift to risk based auditing. A peer review is being scheduled for COA as part of audit quality review with possible capacity building measures. Starting July 1, 2002, a restructured COA has been implemented. This organizes the audit function of COA into Clusters which are grouped basically into sectors. Projects are better audited in this way since the Head Auditor for a project of a certain sector will just be handled by one Sector throughout the Philippines. This is different from the previous arrangements where the regional and LGU audits report to a Regional Director who is independent of the Agency auditor maldng coordination of audit efforts both in planning and execution very difficult. However, this restructuring would have its transitional difficulties which could cause delay in the submission of audit reports. The present DSWD COA set up of 12 resident auditors is still being changed to adapt to such set up. A strong FM arrangement for the Project will at least ensure timely fmancials and good audit liaison and follow up. A Value For Money (VFM) audit shall be conducted twice during the duration of the Project. One at mid term and a year before project completion. The VFM should be conducted by another auditor, separate of the regular annual audit, to provide further check and balances in the audit of the Project. The 2001 DSWD Audit Report of COA expressed a qualified opinion on the Agency's financial statements with the following exceptions and findings: * Unrecorded property of the Department, which understated the value of Fixed Assets by about Php 300 million. * Differences in the physical inventory and the book balances of the Buildings and Structures account by about Php 59 million * Inclusion in the books of unserviceable Equipment totaling about Php 18 million. * Unliquidated Cash Advances of Php 79 million. * Php 1.3million worth of condemned and demolished building has not yet been dropped from the accounts of the Agency. * Need for a more efficient system of property management * Accumulated audit suspensions (supporting documents not yet provided to the Auditor) of about Php 66 million and disallowances (not complying laws, rules & regulations) of about Php 9 million with settlements (satisfactory clearance of previous suspensions and disallowances) of about Php 40 million. The DSWD management is in the process of instituting measures to rectify the above findings. 3. Disbursement Arrangements Disbursements Arrangements - The Project shall be disbursed over a period of 8 years and will use the traditional SOE-based method. The Withdrawal Applications will be supported by SOEs for: * Barangay Grants; * Goods below $200,000 equivalent per contract; * Consulting firms' contracts below $100,000 equivalent per contract except those awarded on a single source basis; and * Contracts for individual consultants below $50,000 per contract. All other Withdrawal Applications shall be supported by full documentation and signed contracts. The disbursements of the loan shall be for the following categories including the counterpart funds to be provided by the government as follows: (final figures not yet available)

64 (Amounts in Total Loan IBRD loan GOP Local millions) Project eligibility Counterpart Counterpart Categories % Grants % Incremental % Operating Cost Consultancy % Indiv Services 87% Firm _ Goods 1 100% for 1 - foreign & local ex factory; 90% for local goods. Unallocated % Front end Fee 1 1 Total A Special Account (SA) shall be maintained at the Central PMO. The maximum SA allocation shall be equivalent to an average of 3 months' estimated disbursements plus the 2 months allowance for a delayed funds flow under the Philippines government procedures. Initial allocation shall be equivalent to 1/3 of the maximum allocation until the aggregate disbursements in the SA reaches 20% of the total loan allocation for this component. A request for an increase in the SA will be entertained should the allocation become insufficient for the operations of the Project. Allocation of loan proceeds (Table C) Table C: Allocation of Loan Proceeds.Expenditure Category : Anount-inU,S$milli n Financing Percentage Community Subprojects % Implementation Support % Monitoring & Evaluation % Total Project Costs Front-end fee % Total _ Use of statements of expenditures (SOEs): The FMRs required by the Bank as well as those on audit requirements will need to be generated as part of the reports of the Project to be included in the FM Manual. The Financial Plan for the project, Cash forecast and the Daily Cash Position report need to be introduced too. The following FMR shall be submitted: a. Statement of Sources and Uses of Funds - Prepared by each of the Implementing Agencies and submitted to DBM for consolidation. Shows the Receipts and Expenditures by Project Component with columns for the Quarter and for the Cumulative figures. A summary sheet describing the

65 accomplishments by component shall be included in the report. This shall be submitted quarterly. b. Statement of Uses of Funds by Project Activity - Prepared by each of the Implementing Agencies and submitted to DBM for consolidation. Shows the Quarterly and Cumulative comparison of the Plan, the Actual and the Variance for different project components / activities. The total Actual expenditures in this Statement under the Quarter and Cumulative column should agree with the total expenditures under the Quarter and Cumulative column of the preceding Statement of Sources and Uses of Funds. This shall also be submitted quarterly. c. Physical Progress Report - Prepared by each of the Implementing Agencies and submitted to DBM for consolidation. Use the SEMP 1 Physical and Financial Status Report with details by component. This shall also be submitted quarterly. d. Procurement Report - Use the SEMP 1 Annual Procurement Plan with additional column for the forecast and status. This will be submitted on a semi-annual basis. The FMRs shall be submitted quarterly. Special account: The KALAHI-CIDSS is a community-driven development initiative of the GOP intended to reduce poverty in the Philippines. Community projects pose several challenges for responsible fiduciary management as they are highly dispersed, the groups managing them usually lack accounting skills and experience, and they involve thousands of very small contracts, etc. Furthermore, many of the forms and procedures developed for large development operations are simply not appropriate for community programs. How to strike the right balance between the demonstrated advantages of community projects for poverty reduction and the Bank and government's need to ensure that borrowed money is well spent and accounted for is a major challenge. The KALAFH-CIDSS builds on the formats and procedures developed for the KDP and the Village Infrastructure Projects of Indonesia, which have been reviewed by OED. The Project was adapted to the Philippine situation using the Government of the Philippines'(GOP's) CIDSS Project which is similar to KDP. In these projects, forms and procedures were designed to ensure that withdrawals and expenditures could be controlled by a variety of persons, thus providing built-in checks and balances. Because of these measures, financial leaks in the project are limited and relatively easy to detect by a trained inspector. Supporting evidence for the effectiveness of the funds provided is shown by the fact that these projects have produced 20-30% more output than traditional projects in the same sectors. The underlying philosophy of these CCD-type projects is to provide the means by which poor villages can plan and manage their own development activities. In the context of the KALAHI-CIDSS, all activities in the project will a partnership among the villages, the LGUs and a core group of community organizers-cum facilitators, either drawn from the DSWD or hired consultants. The latter will only be hired to fill strategic gaps in the skill mix of DSWD. As large a share of the work as possible is done by the villagers. The existing corps of village volunteers will be reinforced, trained and supported by the project staff as well as by LGU workers and consultants. Where the process interfaces with other government agencies, a project manager from the LGU exercises control; where the activity is carried out by the village, the project technical staff (e.g. engineer) exercise control. Most importantly, the villagers themselves exercise social control of their own barangay implementation team, based on their knowledge of the project, and supported by strict -61 -

66 transparency requirements and procedures. The Financial Process KALAHI-CIDSS begins with a fixed total amount that is assigned to a participating municipality. This amount is standard (depending on the size of the municipality), but is set so that amounts are not too big or too small for projects, and is widely publicized so that all stakeholders know how much total money is available. Within the municipality, the money supports proposals initiated by the barangay assemblies. The allocation of funds to a particular barangay is based on completed designs and budgets drawn up together by the barangay management team, assisted by project TA and approved by the project manager at the municipal level. The project preparation cost estimates also specify the amount of cost sharing expected from barangay, either in kind or in cash, as well as the support from the municipality. This support could be in staff time, land donation and/or acquisition, cash, or all of the above. Once determined, the grant amount of funds provided by the project is never changed, shortfalls should be borne by the barangay and/or the municipality. Communities may actively lobby their Congress People or other stakeholders to augment their potion of cost sharing arrangements. [Footnote: The project will encourage participating barangays to actively seek the involvement of their Congress men and women as a possible fund source to strengthen their cost sharing portions.] How the agreed budget is spent on the physical works may be arnended by all the parties. Upon ratification of the plans by the project manager and responsible party from the barangay, the barangay management team requests an initial advance from the Special Account through the regional project management office, which must be utilized within 90 days. They use a standard administrative format that simply withdraws a standard percentage of the allocated funds. It is signed by the specified barangay representatives and by the project manager at the municipal level. The size of the withdrawal is a standard percentage of the budgeted total. The accompanying documentation for this initial withdrawal submitted to the Bank and to where the barangay has its bank account should include: proof that the project manager and barangay representative are indeed the authorized parties, a copy of the grant agreement with the barangay, and signature samples. The funds are transferred directly into the account of the village implementation team in a local branch of a government or commercial bank. Even though the funds are in their own bank account, the village team cannot withdraw funds without countersigning by the project manager at the municipal level. Both the project manager and the responsible persons from the barangay would have previously submitted their signature samples to the bank, along with proof that they were the authorized persons. In order to obtain the approval of the field engineer, the barangay management team has to produce an acceptable Funds Utilization Plan - a detailed list of anticipated expenditures for the immediate future. The frequency of withdrawals depends in part on physical proximity to the bank from the village, but in principle the amount of cash kept in the barangay is as small as practical. Even when access to the banks is easy, remote branches of banks may require some advance notice to provision for a large withdrawal. Every expenditure made by the barangay has to be accounted for in an Expense Report, which is basically a photocopy of the Cash Book. An adequate receipt is one that has the signature of the person receiving the funds, a clear description of what the expenditure was for, a clear amnount and date. All receipts of materials and services in the Expense Report require the attachment of delivery orders, wherein a designated person notes the items and quantity received, countersigned by the person delivering them. Withdrawals from the bank continue to be made until the first tranche's funds are nearly exhausted. At this point the barangay requests additional funds from the SA, using the same form as above and countersigned by the project manager. This shows both the funds requested and

67 cumulative status. In addition to this request, the project manager requires two other items prior to submitting the request to the national PMO through the regional PMO. The first should be a summary of expenses found in the Expense Report, and the second is a status report signed by the local bank saying how much funds remain deposited from the previous tranche. The full expense report includes a summary of expenses and receipts, including the amount of cash on hand in the barangay. This sheet is backed up with the proof of every expenditure and their associated delivery notes, all of which are glued to blank sheets of paper and bound. One expense report book is prepared for each withdrawal from the SA, but these books stay in the barangay. They can be examined by the facilitator, the project manager or his/her designate, any inspectors, and any person in the barangay who had an interest. Payment of incentive wages is accomplished through the use of Disbursement Vouchers. These are used for any payment to a villager, whether working for at a daily rate or working on a piece rate based on accomplishment. The form for pay based on attendance lists the workers in a particular group (usually around 20 workers, men and women), their attendance, their accrued wages this period, and their signature (or thumb print if they were illiterate) confirming that they had received the given amount of money. Most payment is on a weekly or bi-weekly basis. Payment based on accomplishment also shows the list of workers, the basis for calculating the volume accomplished, the division of payments to each individual (decided amongst themselves), and their individual signatures. All of these payments and rates are posted on publicly displayed signboards. The Cash Book A key to financial control is the requirement that the implementation team maintain an accurate cash book in a standard format, updated daily. The key features of the cash book are that: * the informatibn is maintained in a ledger so that corrections and additions were apparent; * it contains a detailed list of all financial transactions, both receipts and expenses; * expenses are described at the same level of detail as the official receipts, with each expenditure entered into a column corresponding to the sub; * component of the project it corresponded to (including the barangay team's administrative expenses); * all expenses are coded with a simple expense category and listed with the number written on the proof of expense; * two kinds of incoming funds are recorded: from the treasury into the bank, and from the bank into the village treasurer's hands. Balances are calculated using the latter; * merasures, white-out, and obliterating marks are forbidden, so that corrections are visible; * books are closed near the end of each month and books are then signed by four persons: the barangay treasurer, the responsible party, the field engineer, the barangay captain in his/her capacity as controller, and two villagers as witnesses; * a running balance is maintained, with the proviso that the balance cannot be negative. In this way, the books always show the actual status of expenses and cash, without hidden expenses and loans to complicate the understanding of an inspector. Barangay-level meetings are held during implementation to review procurement and expenditures, and all information is posted on public signboards. An accountability meeting is held at project completion for the barangay management team and the facilitators to account for funds and to hand over the project to the village, represented by the barangay development council and the

68 barangay captain. Inspecting - Ex Post Measures The municipal and provincial inspection offices should typically inspect a sample of investments during implementation. They should review the physical works. The Commission on Audit should also audit the accounts at the end of the fiscal year. The modalities for such audits will be worked out during project preparation. Regular inspections should be carried out by other project consultants. Senior engineers at the municipal and provincial levels, should be encouraged to check the quality of the physical works as well as the work practices of the field engineers and consultants. In cases where deficiencies are found with the works or administration, recommendations and instructions should be communicated to the municipal project manager with copies to the regional PMO. An independent inspector should visit project sites at random without any accompanying project officials to crosscheck on all of the above. Conclusions Although lacking in sophistication, the financial control system in the community projects for the most part is effective in limiting leakages or in detecting leakages when they occur. The system is based on checks and balances in funds withdrawals, detailed bookkeeping and records of expenses, and periodic inspections in the field. The formal system is complemented by the communities' social control mechanisms designed to ensure transparency. Of course, the capacity of the different barangays to manage these systems will vary, but for the most part the differences can be remedied through hands-on training and follow-up. In areas where the CIDSS has already laid the foundation, the foundations for such accountability will already be in place and the project will build on it. This is not to say that malfeasance will not occur, when it occurs, it is relatively easy to detect, and sanctions should be swift and effective to prevent any widespread contagion effects

69 Annex 7: Project Processing Schedule PHILIPPINES: Kapitbisig Laban sa Kahirapan-Comprehensive and Integrated Delivery of Social Services (KALAHI-CIDSS) Project Project Schedule Planned Actual Time taken to prepare the project (months) First Bank mission (identification) 10/10/ /22/2001 Appraisal mission departure 06/18/ /25/2002 Negotiations 08/05/ /13/2002 Planned Date of Effectiveness 12/02/ /31/2002 Prepared by: Preparation assistance: Name Bank Unit Borrower Agency Role/Responsibility Cyprian Fisiy EASES Team Leader Bhuvan Bhatnagar EASES Social Scientist Asger Christensen EASES Safeguards/Institutional Joseph Reyes EACPF Financial Management Angelina Ibus EACPF. Civil Society & Gender John Victor Bottini EACIF Operations Scott Guggenheim EASES Senior Advisor Cecilia Vales EACPF Procurement Yogana Prasta EACIF Disbursement Margaret Png LEGEA Legal Counsel Frida Johansen Consultant Poverty Targeting/Analysis David Hill Consultant Economic Analysis Steven Burgess Consultant Operational Manuals Susan Wong Consultant Monitoring and Evaluation Julie Slok Consultant Document Preparation & Gender Anju Sachdeva EASES Document Preparation Soeroso Consultant Infrastructure Design

70 Annex 8: Documents in the Project File* PHILIPPINES: Kapitbisig Laban sa Kahirapan-Comprehensive and Integrated Delivery of Social Services (KALAHI-CIDSS) Project A. Project Implementation Plan Completed B. Bank Staff Assessments C. Other General Project Implementation Manual Sub-Manuals and Supporting Plans: Sub-Manual 1 : Community Organizing Sub-Manual 2 : Community Infrastructure Sub-Manual 3 : Community Livelihood Sub-Manual 4A : KALAHI-CIDSS Project Financial System Sub-Manual 4B : Community-Based Financial System Sub-Manual 5 : Monitoring and Evaluation Sub-Manual 6 : Training and Capacity-Building Sub-Manual 7 : Human Resources and Staffing. Sub-Manual 8 : Community Procurement Manual (All manuals available in electronic version). *Including electronic files - 66-

71 Annex 9: Statement of Loans and Credits PHILIPPINES: Kapitbisig Laban sa Kahirapan-Comprehensive and Integrated Delivery of Social Services (KALAHI-CIDSS) Project 30-Jul-2002 Difference between expected Onginal Amount in US$ Millions and actual disbursements Projed ID FY Purpose IBRD IDA GEF Cancel. Undisb. Orig Frm Revd P PH-2nd Social Eopenditure Management P PH-LGU URBAN WATER & SAN APL P Metro Manila Urban Transport P LAND ADMIN & MANAGEMENT P MMURTRIP-Sicyde Nwk P MINDANAO RURAL DEV 27 s P COASTALMARINE P PH-Firat Natl Rds IruVrove P PH-SOCIAL EXPENDITURE MGMT P PHIL-LGU URBAN WATER & SANITATION PRO P RURAL FINANCE III P PHIL-LGU FINANCE AND DEVELOPMENT PROJ P COMMUNITY BASED RESO P PH-WATER DISTRICTS DEVELOPMENT PROJE P PH-EARLY CHILD DEV P SZOPAD SOCtAL FUND P PH-THIRD ELEMENTARY EDUCATION P AGRARtAN REFORM COMM P WATERRESOURCESDEVE P PH-SECOND SUBIC BAY P PHIL-MANILA SEWERAGE II P TRANS GRID REINFORCE 250, Total:

72 PHILIPPINES STATEMENT OF IFC's Held and Disbursed Portfolio April In Millions US Dollars Committed IFC Disbursed IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 2001 APWTrade All Asia Growth All Asia Manager AllAsiaVen Mgmt Asian Hospital Bataan P/E Drysdale Food Filinvest /90 General Milling H&Q PV III H&QPV-I H&QPV-I[ MFI MEP 0.0o MNTC /72/00 Mariwasa /94 Mindanao Power PIATCO Pagbilao Pilipinas Shell PlantersBank Prycc Gases SME.com STRADCOM Sual Power UPPC Union Cement Walden Mgmt Walden Ventures Total Portfolio: Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic 2001 AEI Eastwood S&R Price APW RI Asian Hospital LTO Project PEDF Total Pending Commitment:

73 Annex 10: Country at a Glance PHILIPPINES: Kapitbisig Laban sa Kahirapan-Comprehensive and Integrated Delivery of Social Services (KALAHI-CIDSS) Project East Lowor- POVERTY and SOCIAL Asia a middle- Philippines Pacific Income Dovelopmeni diamond 2000 Population, mid-year (millions) ,046 Life expectancy GNI per capita (Atlas method, USS) , GNI (Atfas method, USS billions) , Average annual growth, Population (I%) Labor fwce (X GNI Gross per primary Most recent estimate (latest year svailable, ) capita enroilment Poverty (% of population below national poverty line) 37 Urban populatuon (9 oflt alpopulationj Life expectancy at birth (years) Infant mortality (per 1,000 live births) Child mainutrifon (X of children under 5) Access to improved water source Access to an Improved water source ( oafpopulation) Illiteracy (X ofpopulafion age fs+) 5 14 IS Gross primaryenrollment (% of school-age population) PhIlppines Male Lower-middle-lncome group Female KEY ECONOMIC RATIOS and LONG-TERM TRENDS GOP (USS billions) EconomIc ratios Gross domestic investrnentugdp Exports of goods and servicesgd1p Trade Gross domestic savlngslgdp Gross national savingslgdp Current account belance/gdp Domesc Interest payments/gdp savings Investment Total debugop savings Total debt servicelexports Present value of debtvgdp 68.1 Present value of debtlexports Indebtedness (average annual growth) GDP Philippines GDP per capita Lower-middle-income grmup ExPorts of goods and services STRUCTURE of the ECONOMY GrowthofinvestrnentandGDP(%) (16 of GOP) Agriculture Industry lo Manufacturing a Services s Private consumpton s GeneralgovemmentconsumpUion GOO *GOP Im ports of goods and services Growth of exports and Imports I%) (averege annual growth) Agriculture Industry S Manufacturing Services o aa os os 0? Private consumption I: General govemmentoonsumption q3 Gross domestic investrnent Exports Sbnparts Imports of goods and services Note: 2000 data are preliminary estimates. The diamonds show four key Indicators In the country (in bold) compared with its income-group average. If data are missing. the diamond will be incomplete

74 Philippines PRICES and GOVERNMENT FINANCE Domestic dces Inflation (%) (% change) 1T Consumer prices Implicit GDP deflator Govemment finance (% of GOP, includes current grants) o Current revenue s5 S6 97 Be Current budget balance GOP deflator -0CPI Overall surplus/deficit TRADE (US$ millions) Export and Import levels (USS mill.) Total exports (fob).. 8,186 34,210 37,295 *ooo n.a... n.a Manufactures.. 5,706 31,097 33,394 Total imports (cif).. 12, i i d lii i Food , * Fuel and energy.. 1, Capital goods , o Export price index (1995=100) 9s.. 86 as Bs Import price index (1995=100) * Eports 8 Impors Terms of trade (1995=100).. 92 BALANCE of PAYMENTS (US$ millions) Current account balance to GOP (%) Exports of goods and services 7,236 11,430 39,012 41, Imports of goods and services 9,147 13,967 36,767 36,464 i Resource balance -1,911-2,537 2, Net income , s Net current transfers o - Current account balance ,567 6,830 9,225 oo 97 Oa as Financing items (net) 2,794 2, Changes in net reserves Memo: Reserves including gold (USS mnilions).. 2,048 14, Conversion rate (DEC, localius$) EXTERNAL DEBT and RESOURCE FLOWS (USS millions) Composition of 2000 debt (USS mill.) Total debt outstanding and disbursed 17,417 30,580 52,022 51,872 IBRD 926 3,943 4,040 3, IDA G: s 207- Total debt service 2, ,732 6,832, IBRD IDA Compositon of net resource flows Oflicial grants Z302 Official creditors Private creditors ,920 2,138 \ _ Foreign direct invesrtment F. 24.4t5 Portfolio equity World Bank program Commitments A - IBRD E -Blateral Disbursements B -IDA 0- Other multlatera F -Private Principal repayments C -IMF G -Short-tern, Net flows Interest payrnents Net transfers Development Economics 10N3/

75 Additional Annex 11: Environmental Impact Assessment Guidelines dated July 30, 2002 PHILIPPINES: Kapitbisig Laban sa Kahirapan-Comprehensive and Integrated Delivery of Social Services (KALAHI-CIDSS) Project 1. Presidential Decree No (otherwise known as the "Philippine Environmental Policy") is the first policy on Environmental Impact Statement (EIS) System in the Philippines. Effective since 1977, section 4 thereof explicitly requires "all agencies and instrumentalities of the national government, including government-owned and controlled corporations, as well as private corporations, firms and entities to prepare an EISfor every action, project or undertaking which significantly affects the qualil)' of the environment.' 2. The Philippine EIS System was formally established in 1978 by virtue of PD No Reiterating the policy statement under PD 1151, it declared environmentally critical projects (ECPs) and projects within environmentally critical areas (ECAs) as projects which require the submission of an EIS. Section 4 thereof provides that "no person, partnership or corporation shall undertake or operate any in part such declared ECP or project within an ECA without first securing an Environmental Compliance Certifcate (ECC). " 3. The major categories of ECPs and ECAs were identified through Presidential Proclamation No. 2146, series of 1981 The categories were given technical definitions by EMB's predecessor agency, the National Environmental Protection Council (NEPC), through NEPC Office Circular No. 3, series of Since then, the EIS system has undergone several refinements to make it a more effective planning, management, and regulatory tool in addressing environmental problems in the country. The DENR has consistently endeavored to strengthen and tighten the system, by continuously introducing new features and requirements in response to changing economic realities and the growing environmenial consciousness of the Philippine populace. 5. The latest of this effort is DENR Administrative Order (DAO) No. 37 series of 1996 or DAO 96-37, which expressly supersedes DAO 21 series of DAO is an attempt to further streamline the EIS system and to strengthen the processes for its implementation. 6. DAO is elaborated further in the Procedural Manualfor DAO , which is intended to provide a comprehensive guide for proponents and regulators alike. The Revised Second Edition is the latest version of the manual. Scope and Coverage under KALAHI-CIDSS 7. Environmental issues refer primarily to impacts caused by small scale infrastructure construction. The environmental impacts caused by such activities are not expected to be significant. The project has designed a negative list of prohibited investments that includes activities with adverse environmental impacts. The project will use an environmental screening procedure that identifies prohibited projects (e.g. community roads into protected areas). Mitigation of negative impacts from sub-projects that are not on the negative list will be addressed through standard operating procedures, which are built into project manuals and training programs. The following matrix provides a reference point for screening environmental impacts in accordance with the environmental clearance issued by DENR-EMB

76 ACTIVITIES CRITERIA REQUIREMENT Training and institutional none Not covered under the Philippine EIS System assistance Livelihood Activities * Backyard animal farms not exceeding 5,000 heads -Not covered under the Philippine EIS System of birds or 2 sows with 20 pigs -CNC may be issued upon request of proponent (not applicable under KALAHI-CIDSS) * Sari-sari (or coop) store * Organic compost/fertilizer production not exceeding 10,000 (50 kg) bags per annum capacity * Cottage industries Livelihood activities with capacities in excess of the Submission of duly accomplished lee Checkist/s as threshold application for ECC Rehabilitation of roads & with effective expansion of less than 500% Not covered under the Philippine EIS System bridges - CNC may be issued upon request of proponent Rehabilitation of irrigation service area expansion does not exceed threshold system Rehab of other support systems Construction of roads Roads with length in excess of 5 km that will traverse Submission of EIS as application for ECC an area with critical slope (>50%) Roads with length in excess of 20 km if not traversing an area with cridical slope Roads with length in excess of 3 km but less than or Submission of IEE as applicationfor ECC equal to 5 km that will traverse an area with critical slope (>50%10) Roads with length in excess of 15 km but less than or equal to 20 km if not traversing an area with critical slope Construction of roads Roads with length less than or equal to 3 km that will Submission of duly accomplished IEE Checklist as (continuation) traverse an.area with critical slope (>50%) application for ECC Roads with length in excess of 10 km but less than or equal to 15 km if not traversing an area with critical slope Roads with length less than or equal to 10 km if not Not covered under the Philippine EIS System traversing an area with critical slope CNC may be issued upon request of proponent Construction of bridges 2 lanes with length in excess of 200 meters Submission of EIS as applicationfor ECC (Not applicable under 2 lanes with more than 10 spans KALAHI-CIDSS) 2 lanes with length in excess of 100 meters but less Submission of lee as application for ECC than or equal to 200 meters 2 lanes with more than 6 but less than or equal to 10 spans 2 lanes with length in excess of 50 meters but less than Submission of duly accomplished IEE Checklist as or equal to 100 meters applicationfor ECC 2 lanes with more than 4 but less than or equal to 6 spans 2 lanes with length of less than or equal to 50 meters Not covered under the Philippine EIS System CNC may be issued upon request of proponent Construction of Irrigation With service area in excess of 1,000 hectares Submission of EIS as application for ECC System Reservoir storage capacity in excess of 25 million cubic meters Reservoir area (flooded area) in excess of 100 hectares With service area in excess of 700 hectares but less Submission of lee as applicationfor ECC than or equal to 1,000 Reservoir area (flooded area) in excess of 50 hectares but less than or equal to 100 hectares With service area in excess of 350 hectares but less Submission of duly accomplished lee Checklist as than or equal to 700 applicationfor ECC Reservoir area (flooded area) in excess of 25 hectares but less than or equal to 50 hectares With service area of less than or equal to 300 Not covered under the Philippine EIS System I CNC may be issued upon request of proponent These criteria are indicative and will be complemented by an environmental screening procedure, which will take into account investrnents in water supply, buildings, and other structures not included on this list