Validation Report Philippines: Country Partnership Strategy Final Review Validation,

Transcription

1 IN November 2017 Validation Report Philippines: Country Partnership Strategy Final Review Validation, The attached report is circulated at the request of the Director General, Independent Evaluation Department. The report is also being made publicly available. For Inquiries: Marvin Taylor-Dormond, Independent Evaluation Department (Ext. 5953) Nathan Subramaniam, Independent Evaluation Department (Ext. 5730) Marco Gatti, Independent Evaluation Department (Ext. 5094)

2 CPS Final Review Validation Philippines Country Partnership Strategy Final Review Validation, Independent Evaluation Raising development impact through evaluation

3 Validation Report November 2017 Philippines: Country Partnership Strategy Final Review Validation, This document is being disclosed to the public in accordance with ADB s Public Communications Policy Reference Number: FRV: PHI Independent Evaluation: VR-27

4 NOTES (i) The fiscal year (FY) of the Government of the Philippines ends on 31 December. (ii) In this report, $ refers to US dollars. (iii) For an explanation of rating descriptions used in ADB evaluation reports, see ADB Guidelines for the Preparation of Country Assistance Program Evaluations and Country Partnership Strategy Final Review Validations. Manila. Director General Marvin Taylor-Dormond, Independent Evaluation Department (IED) Director Nathan Subramaniam, IED Team leader Team members Marco Gatti, Principal Evaluation Specialist, IED Enrico Pinali, Senior Evaluation Specialist, IED Ari Perdana, Evaluation Specialist, IED Lawrence Nelson Guevara, Evaluation Officer, IED Rosel Isidro-Cajilig, Senior Evaluation Assistant, IED The guidelines formally adopted by the Independent Evaluation Department (IED) on avoiding conflict of interest in its independent evaluations were observed in the preparation of this report. To the knowledge of IED management, there were no conflicts of interest of the persons preparing, reviewing, or approving this report. In preparing any evaluation report, or by making any designation of or reference to a particular territory or geographic area in this document, the IED does not intend to make any judgments as to the legal or other status of any territory or area.

5 Abbreviations 4Ps Pantawid Pamilyang Pilipino Program (Conditional Cash Transfer Program) ADB Asian Development Bank ADF Asian Development Fund ARMM Autonomous Region in Muslim Mindanao ASEAN Association of Southeast Asian Nations BIMP- EAGA Brunei-Indonesia-Malaysia-Philippines East ASEAN Growth Area CAPE country assistance program evaluation CDD community-driven development CCT conditional cash transfer COBP country operations business plan CPS country partnership strategy CPSFR country partnership strategy final review DOF Department of Finance EIRR economic internal rate of return FY financial year GCR Global Competitiveness Report (World Economic Forum) GDP gross domestic product IED Independent Evaluation Department IREM integrated natural resources and environmental management KALAHI- Kapit-Bisig Laban sa Kahirapan (Comprehensive and CIDSS KC-NCDDP Integrated Delivery of Social Service) KALAHI-CIDSS (National Community Driven Development Project) LGFBR local government finance and budget reform LGU local government unit M&E monitoring and evaluation NEDA National Economic Development Authority NGO nongovernment organization NRT net resource transfer NSO nonsovereign operations PBL policy-based lending PCR project completion report PDP Philippines Development Plan PESO Public Employment Service Office PPER project performance evaluation report PPP public private partnership PPTA project preparatory technical assistance PSM public sector management PVR project validation report RCI regional cooperation and integration RRP report and recommendations of the president SAPE SERD SLA sector assistance program evaluation Southeast Asia Regional Department sustainable livelihood approach TA technical assistance

6 TCR technical assistance completion report TOR terms of reference TVET technical and vocational education and training UNDP United Nations Development Programme XARR extended annual review report Currency Equivalents (as of 14 November 2017) Currency Unit Philippine pesos ( ) 1.00 = $ $1.00 =

7 Contents Page Acknowledgments Executive Summary vii ix Chapter 1: Rationale and Context 1 A. Validation Purpose and Rationale 1 B. Country Context 2 C. Government Development Plans in the Context of the CPS D. Country Partnership Strategy and ADB Portfolio 8 Chapter 2: Validation of the Country Partnership Strategy Final Review 13 A. Relevance 13 B. Efficiency 18 C. Effectiveness 23 D. Sustainability 29 E. Development Impacts 31 F. ADB and Borrower Performance 35 G. Overall Assessment 38 Chapter 3: Key Lessons and Recommendations 40 A. Lessons Learned 40 B. Recommendations 42 APPENDIXES Ongoing and Completed Program during the Country Partnership Strategy Final Review Period ( ): Loans, Grants, and Nonsovereign Investment Facilities Ongoing and Completed Program during the Country Partnership Strategy Final Review Period ( ): Technical Assistance Planned Versus Actual Loans to the Philippines Validation Comments on Sector Outcome Achievements Philippines Country Assistance Program Evaluation (CAPE) Recommendations and the Country Partnership Strategy (CPS), Response 63

8 Acknowledgments This validation report is a product of the Independent Evaluation Department (IED) of the Asian Development Bank (ADB). The validation was led by Marco Gatti. Team members were Enrico Pinali, Ari Perdana, Lawrence Nelson Guevara and Rosel Isidro- Cajilig. Gabriele Ferrazzi, Magdalena Casuga, Ma. Isabel Corpuz, and Jonathaniel Principe were the consultants. Valuable inputs and comments at various stages were received from Professor David Jay Green (external peer reviewer), Joanne Asquith, and Tomoo Ueda (internal commenters). The report benefited from the overall guidance of Nathan Subramaniam, Veronique Salze-Lozac'h, Walter Kolkma, and Marvin Taylor-Dormond. For their time and opinions, the team would like to thank the officials and representatives interviewed in the Philippines from the Department of Finance, Department of Interior and Local Government, Department of Public Works and Highways, the National Economic and Development Authority; local government units from the provinces of Leyte, Eastern Samar, Bohol, Misamis Oriental, Palawan, Davao, and Cebu; implementation units; and nongovernment organizations. The team is also grateful to ADB staff in Manila who made themselves available for interviews, as well as to staff from ADB s Philippines country office who provided invaluable inputs and facilitated the field work for this validation. Their inputs strengthened the evidence base for this report. Nevertheless, IED remains fully responsible for the report.

9 Executive Summary Asian Development Bank s country partnership strategy (CPS), was designed to support the Philippines to achieve high, inclusive, and sustainable growth. The CPS promoted four program objectives: (i) improved investment climate and private sector development; (ii) more efficient, effective, and equitable social services delivery; (iii) reduced environmental degradation and vulnerability to climate change and disasters; and (iv) strengthened governance and reduced corruption. From 2011 to 2016, ADB approved a total portfolio of $4.78 billion which were focused on public sector management, education, infrastructure and finance. Overall, the validation assessed the program successful on the borderline, with the ratings of relevant, less than effective, efficient, likely sustainable, and less than satisfactory development impact. Both ADB and borrower performance was assessed satisfactory. The validation provided five recommendations, three strategic and two operational, for consideration in preparing the next CPS. For strategic recommendations: (i) Scale up ADB work in Mindanao; (ii) Support local government units (LGUs) to enhance their financing capabilities; and (iii) Link nonsovereign lending more tightly to CPS objectives. For the operational recommendations, (iv) ADB should consider establishing a local presence in Mindanao; and (v) Weave education sector work more effectively into social protection support. The Independent Evaluation Department (IED) of ADB has validated the country partnership strategy final review (CPSFR) prepared by the Southeast Asia Department for the Philippines country partnership strategy (CPS), The validation assessment relied primarily on information presented in the CPSFR, consultations with ADB staff involved with the CPS preparation and operations, consultations with various stakeholders during independent evaluation missions, critical reviews of relevant project documents, reports (including project evaluation and validation reports) and analysis of available country data. Collection of primary data through the application of a beneficiary survey was also undertaken to support the findings. The validation covers all ADB loans, grants and technical assistance approved for the Philippines during the period 2011 to In addition, this validation also reviewed projects that were approved before 2011 but that were still active and implemented during the validation period. Country Context Solid economic and social development performance in recent years. Over the period , the Philippines gross domestic product (GDP) grew on average by 6.1% a year, outpacing those of most of the Philippines neighbors during the same period. Macroeconomic fundamentals also improved substantially over the period : unemployment fell from 7.3% in 2010 to 4.7% as of October 2016, exceeding the medium-term target of 6.5% to 6.7% by 2016; inflation fell to 1.8% average for 2016, below the Philippines Central Bank s target band of 2.0% to 4.0% for 2016; and

10 x Philippines: CPS Final Review Validation, the national government fiscal deficit in 2015 was 0.9% of GDP, which was also well below the target of 2%. Low competitiveness and high cost of doing business. The World Economic Forum s Global Competitiveness Report ranked the Philippines 57 out of 138 economies in terms of overall competitiveness, setting it back 10 places from the previous year s ranking. The Philippines ranks particularly low in terms of infrastructure competitiveness when compared with its regional peers in Southeast Asia, with its weakest scores being in the quality of air transport and ports. Poverty and inequality. Overall poverty incidence declined from 25.2% in 2012 to 21.6% in 2015, the fastest poverty incidence decline in the last decade. At the subnational level, poverty incidence remains high in the eastern Visayas and central and western Mindanao regions, reflecting wide income and regional inequalities. As an example, the per capita gross regional GDP in the Autonomous Region in Muslim Mindanao (ARMM) is about 20% of the national average. Mindanao as a whole has a very high incidence of poverty. In 2014, the Philippines ranked 115 in the human development index of the United Nations Development Programme, placing it in a group of countries with a medium level of human development. Government Development Plans Philippine Development Plan (PDP), To achieve integrated and coordinated programs and policies for national development, a Philippines Development Plan (PDP) for the period 2011 to 2016 was formulated in With good governance and anticorruption as an overarching theme, the PDP, adopts a framework of inclusive growth, which if sustained, would generate labor demand and reduce poverty. The PDP, centers on five key strategies: (i) boost competitiveness in the productive sectors to generate massive employment; (ii) improve access to financing to address the evolving needs of a diverse public; (iii) invest massively in infrastructure; (iv) promote transparent and responsive governance, and; (v) develop human resources through improved social services and protection. PDP : Midterm Update. Halfway through implementation, the government undertook a midterm review of the PDP in 2014 to make any necessary adjustments in policies, strategies, measures and programs to reflect progress and lessons learned to that point. The update highlights the country s robust economic performance, but also acknowledges remaining challenges, including the slow pace of vital infrastructure development and the high cost of doing business. The persistence of poverty and poor provinces is highlighted, revealing the need to refocus strategic interventions to better address their needs and development potential. PDP A new PDP for the period was finalized in March 2017 to reflect the progress made in the previous period and to set the priorities of the new administration for the medium term. Key education reforms from the previous administration that have a good chance of being continued include the expansion of education, including increasing the duration of basic education from 10 to 12 years and promoting technical and vocational education and training. In terms of social protection activities, the national form of conditional cash transfer (CCT), the Pantawid Pamilyang Pilipino Program (4Ps), started in 2007, is perceived by program stakeholders to have been effective in directing cash to poor households to spur school attendance and use of preventive health care and nutrition services and is likely to be continued with enhanced beneficiary targeting. The National Community Development Project (KALAHI-CIDSS),

11 Executive Summary xi later expanded nationwide under the name KC-NCDDP, provides block grants to communities (barangays) for small-scale infrastructure projects and it is also likely to be continued. The latest PDP also includes an enhanced focus on infrastructure development in the Mindanao Region. ADB Support Country Partnership Strategy (CPS), In 2011, the CPS, was prepared when the Philippines was just commencing its current period of sustained high-level growth and before the devastating effects of Typhoon Yolanda in November Reflecting the priorities of the government and those of ADB s Strategy 2020, the CPS was designed to support the Philippines to achieve high, inclusive, and sustainable growth, focusing on three of the five core operational areas of Strategy 2020: infrastructure, environment, and education. The CPS promoted the following four program objectives: (i) improved investment climate and private sector development ADB would support scaling up of transport and energy infrastructure investments and policy reforms to improve the quality of competition and regulation, enhance fiscal policy and expenditure management, and strengthen legal and judiciary reforms; (ii) more efficient, effective, and equitable social services delivery ADB would increase support for the efficient, effective, and equitable delivery of social services; (iii) reduced environmental degradation and vulnerability to climate change and disasters ADB would provide support in the areas of environment, climate change, and disaster risk management to prioritize strengthening ecosystem functions and the preservation of natural resources; and (iv) strengthened governance and reduced corruption ADB would continue and deepen its efforts to strengthen governance and reduce corruption at country, sector, and project levels. ADB s originally envisaged that it would provide support in five priority sectors: transport, energy, education, agriculture and natural resources, and water supply and other municipal infrastructure and services. Additional support for public sector management was deemed to be crosscutting. These elements were expected to contribute to the overall CPS key objective to help the Philippines achieve high, inclusive, and sustainable growth. The total programmed resource envelope for the period was $2.4 billion. Responding to the government s 2014 midterm review of the PDP, ADB updated its country operations business plan (COBP) by focusing it on four areas: (i) sustainable and climate resilient infrastructure; (ii) good governance and inclusive finance; (iii) inclusive employment and education; and (iv) regional cooperation and integration (RCI). The COBP, also updated the sector objectives for energy, agriculture, natural resources and rural development and public sector management. ADB approved and active portfolio. From January 2011 to December 2016, ADB approved 16 sovereign loan projects totaling $4.32 billion, four nonsovereign loan projects totaling $342 million, 11 grant projects totaling $47 million; and 37 TA projects totaling $73 million. The total approved portfolio was $4.78 million. Of the sovereign loans, a high proportion (64% by number, 69% by amount) utilized programmatic approaches, such as policybased lending (PBL), results-based lending, special assistance loans, and sector loans. In terms of the sectoral allocation, 42% of the approved support went to public sector management, 23% to education, and 11% to finance. Infrastructure received $653 million or 14% of the total

12 xii Philippines: CPS Final Review Validation, approvals during the period. In addition, ADB managed an active portfolio (approved prior to 2011) that included 11 sovereign loans ($1.673 billion), seven nonsovereign loans ($373 million), six grants ($15 million) and 18 TA projects ($14 million) totaling $2.07 billion. Project completion reports (PCRs) and PCR validation reports (PVRs) were completed for only for a small proportion of the projects and programs approved during the validation period of Of the 24 loans approved during this period, only three have had PCRs and PVRs completed for them. This validation incorporates the findings of these evaluations, as well as the findings from ongoing loans approved during the Validation period. Assessment Overall, the validation assesses the ADB Program successful on the borderline. The validation assessed the ADB program as relevant (compared with highly relevant in the CPSFR), efficient, less than effective (compared with highly effective in the CPSFR), likely sustainable, and with less than satisfactory development impact (compared with satisfactory in the CPSFR). The validation also reassessed both the ADB s performance and the Borrower s performance satisfactory (these were not assessed in the CPSFR). The coordination of sector level work to achieve crosssectoral objectives is very important for achievement of ADB developing member countries long-term development objectives and the validation therefore places importance both on the achievement of outcomes at the sector level and on contributions to thematic objectives. The assessments for relevance and development impact gave equal weights to sector level and cross-sector CPS objectives. The validation assesses the ADB program relevant. This criterion assesses the ADB program s strategic relevance to country development needs, sector development constraints, and government policies and plans. The validation finds the support provided under the program to be generally consistent with and responsive to government policies and plans, including the government s 2014 midterm update of the PDP, , which was considered in the preparation of ADB s country operations business plan (COBP), The ADB program exhibits continuity, as is required in areas of reform that are challenging and that demand long-term commitment. This can be seen in the Local Government Finance and Fiscal Decentralization Reform Program, which is now in its second phase. The program also showed adaptability in responding to signals of political support and renewed government priorities. ADB revised its strategy to acknowledge the government s changes to the PDP in To ensure alignment, the CPS shared some results targets from the government s PDP targets. ADB s flexibility was also evident in its response to the devastating impacts of Typhoon Yolanda in late 2013, which had an important transformative effect on the economies in the typhoonaffected areas. The continued reliance on programmatic approaches (including PBL), highlights the CPS s intention to mainstream policy lending to provide holistic programmatic assistance in selected sectors. Despite these positive features, this validation found the following weaknesses in the sector program: (i) some projects in the energy sector were approved although they did not reflect the key priorities of the government; (ii) it took time for projects and programs that were consistent with the mid-course strategy revision to be approved; (iii) there was a loose connection between lending and technical assistance, reflecting in part the late preparation of a knowledge plan; and (iv) delays in implementing some emergency response projects meant that their relevance had diminished by the time they delivered benefits. For the nonsovereign portfolio, ADB focused its efforts on the needs of the

13 Executive Summary xiii private sector in line with the priorities of the government. The portfolio including critical national and local infrastructure projects in (i) energy; (ii) water and sanitation; (iii) transport (toll roads, ports, and mass transit systems); (iv) education; (v) infrastructure finance; and (vi) financing for microbusinesses and small and medium-sized enterprises (MSMEs). However, there were too few operations to cover all the priority areas. With regard to cross-sectoral issues and contribution to thematic objectives, support for inclusive growth is visible in most projects covering all sectors. Following the government s PDP midterm review in 2014, ADB also updated its focus areas and sector objectives in its COBP. Regional cooperation, for example, has been explicitly addressed through activities linked to the Brunei-Indonesia- Malaysia-Philippines East ASEAN Growth Area (BIMP-EAGA) program, which covers the Mindanao region. The ADB program also addressed social development through improved education access and quality, community development programs, and social protection programs, and via its assistance for post-typhoon- Yolanda recovery. The CPS s design framework was aligned with Strategy 2020 and the government s midterm review. Overall, the crosscutting objectives of the CPS are assessed to be relevant. Combining relevance ratings for the sector program and crosscutting work, the validation assesses ADB s program relevant, a notch lower than the CPSFR s highly relevant. The validation assesses the ADB program performance efficient. For the ongoing portfolio, the processing of all loans from approval to effectivity was, on average, 6.9 months, which was in line with the bank average of 7 months. Philippine project loans took longer to process (8.2 months versus the ADB average of 6.7 months) while PBL was processed more efficiently (3 months compared with the ADB average of 8.7 months during the same period, ). The overall disbursement ratio of the Philippine loans has been better than the ADB average for much of the CPS period, although this appears to be more a reflection of the shift of modalities toward PBL and other programmatic lending than of improvements in project implementation. PBL is fast-disbursing and often based on already-achieved policy measures, hence they tend to disburse soon after program effectiveness. Delays in investment project implementation are still an issue and need to be reduced. The three completed program loans were rated highly efficient by both the PCRs and the PVRs. For nonsovereign operations, both coal-fired energy projects carried over from the previous CPS ranked high in terms of economic performance, with the Masinloc Power Plant in Zambales province deemed very efficient. The validation assesses the ADB program performance less than effective. There were shortfalls in achieving project and program outputs and outcomes set out in the design and monitoring frameworks. Capacity development components in certain sectors (e.g., agricultural and natural resources) have seen shortfalls in outputs and outcomes vis-à-vis the envisaged targets. Also, there has been a lack of progress toward achieving some of the sector-level outcomes set out in the CPS. Of the 14 sector-level results framework outcome indicators identified in the CPS, two have been achieved, four are on track to be achieved, four are not on track, three are considered inappropriate, and one was dropped. Overall, only 43% of the envisaged outcomes have been achieved or are on track to be achieved. For example, in the education sector, the sector target of improved access and quality of basic education does not seem to be on track, while in the PSM sector (most prominent in terms of ADB operations) the picture is mixed, with one indicator likely to be achieved, another dropped, and other indicators lacking recent data. On the positive side, most

14 xiv Philippines: CPS Final Review Validation, stakeholders, particularly beneficiaries of community-driven development (CDD) initiatives related to disaster relief and recovery, assessed ADB s overall performance effective or better. For nonsovereign operations, ADB s role was deemed effective in adding to both conventional and non-conventional generation capacity. The validation concurs with the CPSFR assessment of program performance as likely sustainable. The program complemented existing government efforts and supported implementing structural policy reforms and advancing competition policy, regulatory efficiency, public private partnerships (PPPs) in infrastructure, and competitive labor markets. The institutional arrangements and additional financing to carry out the Yolanda Rehabilitation and Recovery Plan were adequate and sustainable after ADB s support. The PCRs and project validations rated two of the three completed loans highly likely sustainable, since many of the reforms under the program were institutionalized and funded by the government. Although the government has shown good commitment to sustain the reforms related to ADB s programs, this has varied across the different areas supported by ADB. Notable successes include ADB s support for the public private partnership initiative. Financing of operations and maintenance has also been advanced through ADB public sector management support that helped the government rethink its approaches to fiscal revenue management, including cost recovery at central and local government. A key initiative is the Local Government Finance and Fiscal Decentralization Reform Program. There are also some initiatives that are not yet completely assured, such as the 4Ps program in the social protection subsector where the change in administration has led to some uncertainty in the government s commitment. Other initiatives show less promise for sustaining ADB s support efforts, as in the agriculture and natural resources sector which has struggled to establish the full commitment of counterpart funding and institutional resources. For nonsovereign operations, all the four projects approved under the CPS, are likely to be sustainable given their on-time performance. The validation assesses the development impact of the CPS program less than satisfactory. The assessment is because only three of the government s six overall targets are likely to be achieved or exceeded. The three targets that are likely to be achieved or exceeded are: (i) improvements in the human development index, (ii) a reduction in the fiscal deficit, and (iii) consolidation of the public sector deficit. The achievements that are lagging are: GDP growth, rate of growth of employment, and poverty incidence. Of these three, GDP growth and rate of growth of employment are not far below their respective targets, whereas poverty incidence results are well below the expected target. Given the importance of the unachieved targets, particularly GDP growth and poverty incidence, the validation assesses that the overall progress towards achievement of these targets is less than satisfactory. Also, given the small size of the ADB program when compared with the Philippines economy, the contribution to GDP growth is at best marginal. Of the three completed sovereign loans, the PCR assessed one as having a satisfactory impact and the other two as having a highly satisfactory impact. The validation report for the latter two loans reassessed the rating to satisfactory, noting that the impact indicators were only partly achieved. Achievements on crosscutting issues have been satisfactory, with progress made in private sector development, good governance and inclusive finance, and inclusive employment and education. Considerably less progress than expected has been made on regional cooperation and integration issues. Combining the development impact results of less than satisfactory for the achievement of overall

15 Executive Summary xv targets and satisfactory ratings for achievement of crosscutting work, the validation assesses the development impacts of ADB s program less than satisfactory. The validation assesses ADB s performance satisfactory. The validation recognizes several positive features of ADB support, as mentioned by the CPSFR. ADB worked hard to align its program and to build a trusting relationship with government that gave it access to reform fields of a strategic and sensitive nature. It coordinated well with the government and other stakeholders in responding to the Yolanda disaster, establishing an extended mission for Yolanda-affected areas in Tacloban, the city most affected by the typhoon. ADB s shift to more programmatic approaches made it easier for it to influence nationwide reforms, while reducing procedural inefficiencies. Increased knowledge sharing in the last half of the CPS period has also underpinned program design. Notwithstanding this generally positive assessment, there were some weaknesses in ADB s performance, including weak supervision of some projects (e.g., the Agrarian Reform Communities Project II), and insufficient tracking of policy loan indicators and key actions to sustain policy dialogue (e.g., the Local Government Finance and Budget Reform Program). The validation agrees with the CPSFR s suggestions on the need for more staff resources to maximize its participation in Philippine Development Forum working groups, increased consultation and partnerships with other stakeholders, and increased coordination in the emerging program in Mindanao. The validation assesses the borrower s performance satisfactory. There were a number of strong points to the borrower s performance, the main one being, as the CPSFR points out, the government s prudent macroeconomic management during the CPS period, which provided it with greater fiscal space to improve the effectiveness of public spending and to address social and equity concerns. The government also responded quickly to Typhoon Yolanda, including mobilizing development partners and ensuring the timely release of loan proceeds. In terms of facilitating the implementation of ADB operations in PSM, the government has shown considerable ownership, flexibility and responsiveness. One area for improvement would be in improving the government s coordination of development partners by using the Philippine Development Forum more effectively. Lessons and Recommendations Lessons. The validation concurs with and provides its comments on the CPSFR s five key lessons: lessons from the national development experiences, lessons from recent ADB support, long-term programmatic support in areas where ADB has a comparative advantage, modalities, and the CPS results framework. The five additional lessons were: (i) continuous support (in terms of capacity building and TA support) over an extended period is key for success; (ii) government ownership in design and use of TA yields better results; (iii) policy-based lending has served the government reform well but it is not always effective, (particularly in addressing regional issues and development constraints that are tied to institutional capacity); (iv) conflict, geography, ethnicity, and culture complicate development efforts (e.g., in Mindanao); and (v) local presence is crucial in undertaking complex operations in difficult circumstances (as in the case of the ADB extended mission for Yolandaaffected areas in Tacloban). Recommendations. The validation offers five recommendations (three strategic and two operational): Strategic Recommendations (i) Scale up ADB work in Mindanao. There is a strong rationale for ADB to scale up its operations in Mindanao. The government is giving heightened

16 xvi Philippines: CPS Final Review Validation, priority to Mindanao in its new PDP. ADB also has a strong relationship with the main agencies in Mindanao gained through its long history and experience of implementing projects in the region. By scaling up operations, ADB would also reinvigorate the activities of the BIMP-EAGA in Mindanao and contribute to ongoing regional integration efforts. Mindanao has great potential for regional cooperation and integration with Brunei Darussalam, Indonesia, and Malaysia, given its geographical proximity as well as links that are rooted in culture and religion. The scaling up would need to pay due consideration to the ongoing conflict and security situation in Mindanao (focused initially mainly in nonconflict areas) and the financial and institutional capacity of Mindanao agencies and the activities of other development partners in the region. (ii) Support local government units (LGUs) to enhance their financing capabilities. To achieve some breakthroughs in support to LGUs, ADB may need to think beyond providing support to nationally-managed lending and ongranting to LGUs, aiming instead to preparing the groundwork for marketbased mechanisms for LGU financing. For instance, ADB could build on the tentative steps taken in the Philippines with municipal bonds which have thus far been limited to private placements. (iii) Link nonsovereign lending more tightly to CPS objectives. The relevance assessment found that nonsovereign operations approved in the CPS period were only loosely linked to the initial and revised CPS objectives, particularly with regard to the poverty reduction and inclusive growth. The public private partnership development undertaken under the public sector management subsector is a good example of how better links can be established. Greater efforts to discern additional opportunities in private sector operations that directly support CPS objectives would make for a stronger overall program. Operational Recommendations (iv) ADB should consider establishing a local presence in Mindanao. Related to the first strategic recommendation to scale up ADB operations in Mindanao, ADB should consider establishing a local presence in Mindanao via a liaison or satellite office reporting to the Philippine country office. Currently, several areas of Mindanao are considered conflict-affected areas, severely impacting ADB s operations. The experience with the extended mission for Yolandaaffected areas indicates that a local presence could be very useful in such difficult situations. In addition, to complement ADB s ongoing capacity development activities in Mindanao, consideration should be given to granting the liaison office a knowledge hub role linked to BIMP- EAGA work. (v) Weave education support more effectively into social protection support. ADB is successfully undertaking important and innovative work to improve the education sector and the social protection subsector, but there is still scope to improve the synergies between these activities. This may call for a greater effort to scale up the public employment service offices and to strengthen JobStart depending on the findings of the impact evaluation. This could provide a bridge between the expanded senior high school enrollment and the job market. Support for the sustainable livelihoods component that is so crucial to the eventual convergence and maturation of social protection and community-driven development initiatives (e.g., 4Ps and KC- NCDDP), could also be more tightly linked to the JobStart initiative

17 CHAPTER 1 Rationale and Context A. Validation Purpose and Rationale 1. The Asian Development Bank (ADB) is preparing a new country partnership strategy (CPS) for the Philippines covering the period 2017 to It aims to align this strategy with the new Philippine Development Plan (PDP) that has been recently finalized by the government. To support the formulation of the new CPS, an evaluation of the current CPS 1 is needed to assess whether the objectives of that strategy were achieved, in terms of actual versus planned project approvals, implementation of the CPS, and portfolio performance. The previous evaluation of the CPS for the Philippines was carried out through a country assistance program evaluation (CAPE) in 2008, 2 but the evaluation of the current CPS is being carried out by this validated CPS final review (CPSFR). The CPSFR was prepared in mid-2016 by the Southeast Asia Department The validation of the CPS final review by IED is mandated under ADB s Operations Manual. 4 An evaluation approach paper (EAP) 5 was prepared in accordance with the March 2015 guidelines, 6 to provide an independent evaluation of the performance of ADB s program, and identify the key issues for evaluation. The EAP set the following objectives of the validation: (i) verify the findings of the self-assessments in the CPSFR, (ii) assess the quality of the final review, and (iii) identify lessons and recommendations to improve the design and implementation of subsequent CPSs. The EAP also provided details on the evaluation approach, methodology and the composition of the evaluation team. 3. This validation has relied primarily on information presented in the CPSFR, consultations with ADB staff involved with CPS preparation and operations, consultations with various stakeholders during independent evaluation missions, 7 critical reviews of relevant project documents, reports (including project evaluation and validation reports), and analysis of available country data. Primary data was collected through a beneficiary survey to support the findings. 1 ADB Country Partnership Strategy: Philippines, Manila. 2 IED Country Assistance Program Evaluation for the Philippines: Increasing Strategic Focus for Better Results. Manila: ADB. 3 The Independent Evaluation Department (IED) received the self-assessed country partnership strategy final review (CPSFR) on 14 June 2016 via a memo dated 6 June 2016, signed by Director General, Southeast Asia Department (SERD) on 10 June ADB Operations Manual, Section A2, para. 5 5 IED Evaluation Approach Paper: Philippines Country Partnership Strategy Final Review Validation. Manila: ADB. 6 Independent Evaluation Department (IED) Guidelines for the Preparation of Country Assistance Program Evaluations and Country Partnership Strategy Final Review Validations. Manila: ADB. 7 An independent evaluation mission was undertaken on September 2016 in Tacloban, Leyte Province, with a field visit to Western Samar Province; on 3 4 October 2016 in Davao City; and on 6 7 October 2016 in Cebu City. Project and sector assessment missions were also undertaken in Naga, Cebu on October 2016 and Cagayan de Oro and Bohol on 16 November Meetings with executing agencies at the national level were also undertaken by the team on September and October 2016.

18 2 Philippines: CPS Final Review Validation, Although the CPS was prepared in 2011, its structure adhered to the 2007 corporate guidelines. 8 In late 2015 the revised CPS guidelines reformed the CPS business process to favor outcomes at thematic and cross sector levels, and to include a clear statement of the CPS objectives. 9 Revised CAPE and CPSFR validation guidelines in the same year placed greater attention on assessing CPS cross-sector objectives. 10 In addressing the effectiveness and efficiency criteria, the CPSFR sought to reflect this shift by gathering the initial sectors of focus in the original CPS under the reworked objectives of the 2014 strategy realignment in the government s updated national plan (see Section C, para. 15). 5. The validation covers all ADB loans, grants and technical assistance approved for the Philippines during the period 2011 to 2016, the validation period. In addition, this validation also reviewed projects that were approved before 2011 but were still active and implemented during the validation period. Lists of the ongoing and completed loans, grants, nonsovereign operations, and technical assistance are provided in Appendixes 1 and The CPSFR did not treat nonsovereign operations separately, and gave them little attention in the analysis or assessment. The validation assessed these operations separately in view of the considerable effort and investment made by ADB to pursue nonsovereign operations, and its anticipated larger role in the future lending mix. B. Country Context 7. Economic performance. The Philippines is a large archipelagic country comprising more than 7,000 islands located in Southeast Asia. Over the period , gross domestic product (GDP) grew on average 6.1% a year. The Philippines annual growth outpaced that of its neighbors Indonesia, Malaysia, Singapore, Thailand and Viet Nam (Figure 1). The Philippines growth outcomes have steadily improved over the past 30 years, with average annual per capita gross national income accelerating from an average of -1% in the 1980s, to 2% in the 1990s, to 4% in the 2000s, and to 2.8% during ADB Country Partnership Strategy Guidelines. Manila 9 ADB Reforming the Country Partnership Strategy Informal Board Seminar. 2 September. Manila. 10 ADB Revised Guidelines for the Preparation of Country Assistance Program Evaluations and Country Partnership Strategy Final Review Validations. Manila.

19 Rationale and Context 3 Figure 1: Annual GDP Growth (%) of Southeast Asian Countries, Indonesia Malaysia Philippines Thailand Singapore Viet Nam Source: World Development Indicators Database. Accessed September In terms of sector shares (Figure 2), more than half of the Philippines GDP during the validation period has been derived from the services sector, followed by industry and agriculture. The share of the services sector has been increasing since 2011at the expense of both industry and agriculture and is now almost 60%. Figure 2: Share of Philippine GDP by sector (%), Services (% of GDP) Industry (% of GDP) Agriculture (% of GDP) Source: World Bank. World Development Indicators databank.

20 4 Philippines: CPS Final Review Validation, Macroeconomic fundamentals also improved substantially over the period : unemployment fell from 7.3% in to 4.7% as of October 2016, 12 exceeding the medium term target of 6.5% to 6.7% by 2016; inflation fell to 1.8% average for 2016, below the Philippines Central Bank s target band (2.0% 4.0%) as of end 2016, led by lower fuel and food prices; and the national government fiscal deficit in 2015 was 0.9% of GDP, well below the target of 2%. 13 These positive developments gave the government more fiscal space to shape development policies. Heading into the CPS period, ADB regarded low public spending for social services, including on education, health and social protection, as an impediment to inclusive growth and a favorable investment climate. 14 Official figures for national accounts indicate that GDP grew by 6.9% in but ADB has forecasted more modest growth of 6.4% for 2017 and 6.6% for The International Monetary Fund (IMF) has higher growth forecast at 6.8% for 2017 and 6.9% 2018 respectively due to higher public spending While international financing institutions have produced optimistic growth forecasts, other observers, such as the World Economic Forum and the IMF, have been more guarded. The investment climate suffers from low competitiveness and the high cost of doing business. 18 The World Economic Forum s Global Competitiveness Report ranked the Philippines 57 out of 138 assessed economies, in terms of overall competitiveness, setting it back 10 places from previous year s ranking. 19 The Global Competitiveness Report noted that the four most problematic areas that the Philippines needed to address were inefficient government, inadequate infrastructure, corruption, and the tax regime. Upgrading public infrastructure is recognized as the Philippines major structural challenge. The IMF notes that At 21.8% of GDP in 2014, the investment rate in the Philippines is well below regional peers. Raising investment, particularly in infrastructure, would allow the country to reap the dividends of its young and growing population. 20 The Philippines ranks very low in terms of infrastructure competitiveness when compared to its regional peers, with its weakest scores being in the quality of air transport and ports (Table 1). 11 Philippine Statistical Authority Annual Labor and Employment Status. Reference Number: Release Date: Tuesday, February 8, R7v29Ovt.dpuf 12 Philippine Statistical Authority Labor Force Survey. Accessed March Bureau of Treasury Full-Year 2015 National Government Budget Deficit Widens to P121.7 Billion. Press release. 14 ADB Country Partnership Strategy: Philippines, Manila. para ADB Asian Development Outlook 2017: Transcending the Middle-Income Challenge. Manila. 17 IMF World Economic Outlook. October Subdued Demand Symptoms and Remedies 18 Global Affairs Canada: aspx?lang=eng 19 World Economic Forum Global Competitiveness Report Geneva. 20 T. Komatsuzaki Improving Public Infrastructure in the Philippines. IMF Working Paper WP/16/39 Asia Pacific Department. February.

21 Rationale and Context 5 Table 1: Global Infrastructure Competitiveness Ranking of Selected Southeast Asian Countries, Indicator Philippines Singapore Malaysia Thailand Indonesia Viet Nam Quality of Roads Quality of Railroads Quality of Ports Quality of Air Transport Available Airline Seat Kilometers Quality of Electricity Supply Fixed Telephone Connectivity Mobile Telephone Connectivity Overall Source: World Economic Forum The Global Competitiveness Report Geneva. 11. Poverty and inequality. In 2016, the total population was estimated at 103 million and growing at 1.9% per annum. 21 Overall poverty incidence declined from 25.2% in 2012 to 21.6% in 2015, 22 the fastest poverty incidence decline in the last decade. From 2012 to 2015, per capita incomes in the poorest 30% of the population grew by 24.3%, exceeding the average for all income groups (15.8%) and the richest 20% of the population (12%). Notwithstanding this, the World Bank noted that poverty affects roughly 25% of the population and many Filipinos live just above the poverty line, moving in and out of poverty due to their high vulnerability to climatic, disaster, financial and price shocks. 23 At the subnational level, poverty remains high in the eastern Visayas and central and western Mindanao regions, reflecting wide income and regional inequalities. As an example, the per capita gross regional GDP in the Autonomous Region in Muslim Mindanao (ARMM) is about 20% of the national average and Mindanao as a whole, has a very high incidence of poverty In 2014, the Philippines ranked 115 in the human development index of the United Nations Development Programme (UNDP), placing it in a group of countries with medium level of human development. 25 Some progress has been seen in particular subsectors, for instance in the rising rates of primary and to a lesser extent secondary school net enrollment. 26 Net primary school enrollment increased from 91% in 2009 to 96% in 2013, while secondary school enrollment increased from 61% to 67% during the same period. Among the poor, income distribution has improved slightly as shown by the decline in income gap, poverty gap and poverty severity indexes from 2012 to In its 2014 report on the country s progress in achieving the Millennium Development Goals (MDGs), the government reported that it had reached its target on access to safe water and was on track to achieve the MDGs on education, empowering women, reducing infant and under-five mortality, reversing incidences of malaria, and increasing the proportion of households with access to sanitary toilet facilities. However, progress on poverty and welfare in general is threatened by economic and social inequality, as well as by regional disparities, especially in the conflict-affected provinces of the island of Mindanao. The UNDP report further notes that ensuring that social services reach the poor remains a major challenge: women in the labor force are confined largely to low- 21 ADB Basic 2017 Statistics. Manila. 22 Philippine Statistical Authority Poverty Incidence among Filipinos Registered at 21.6% in 2015 PSA. Reference Number: PHDSD , Release date: Thursday, 27 October World Bank Country Partnership Strategy for the Republic of the Philippines for the Period FY Washington. 24 Philippine Statistics Authority, The information on the incidence of poverty is from Joel Mangahas Making a Difference in Mindanao. Manila: ADB. p UNDP Human Development Report 2015: Work for Human Development. New York. 26 ADB Senior High School Support Program. Summary Sector Assessment: Education. Manila. 27

22 6 Philippines: CPS Final Review Validation, wage, low-productivity jobs and have limited access to land ownership, credit, and training. Natural disasters such as hurricanes and floods have resulted in severe losses of life and property and have constrained efforts to reduce poverty. 13. Recent developments in Mindanao areas affected by conflict. In May 2017, an armed conflict between the Philippine military and local militant groups erupted in Marawi, Lanao del Sur which is under the governance of the ARMM. The government declared martial law over the entire island of Mindanao on the grounds of rebellion. 28 The economic impact of the armed conflict has yet to be assessed but, thus far, the armed conflict has resulted in multiple fatalities for both sides and the devastation of the city s infrastructure. Most Marawi City residents have evacuated the area to neighboring municipalities and cities. In the short term, government efforts are directed to the relief and rehabilitation of Marawi City and its residents but more strategic initiatives for reconstruction and recovery are also necessary in the medium to long term. C. Government Development Plans in the Context of the CPS PDP To achieve integrated and coordinated programs and policies for national development, a PDP for the period 2011 to 2016 was formulated in Preparation of the PDP included exhaustive consultations with government agencies, regional development councils, local government units, the business sector, nongovernment organizations, academe, and groups of well-known experts in economic and social development. With good governance and opposition to corruption as an overarching theme, the PDP, adopts a framework of inclusive growth, which, if sustained, would generate labor demand and reduce poverty. The PDP, centers on five key strategies: (i) boost competitiveness in the productive sectors to generate employment; (ii) improve access to financing to address the evolving needs of a diverse public; (iii) invest significantly in infrastructure; (iv) promote transparent and responsive governance; and (v) develop human resources through improved social services and protection. The PDP serves as a guide for programming, budgeting, program implementation, and monitoring. It makes use of a public investment program component that identifies budgetary requirements and sources of finance for these programs and projects. Its performance management is tracked through a results matrix for specific programs and projects that specifies responsible implementing agencies. 15. PDP : Midterm Update. Halfway into its period of implementation in 2014, a midterm review 29 of the PDP was undertaken by the government to enable it to make adjustments to policies, strategies, measures and programs if needed to reflect progress and lessons learned to that point. The review highlighted the country s robust economic performance, but also acknowledged remaining challenges, including the slow pace of vital infrastructure development and the high cost of doing business. The persistence of poverty and poor provinces was highlighted, revealing the need to refocus strategic interventions. The review detailed these interventions and set results-based and time-sensitive targets. These included a reduction in unemployment to 6.5% 6.7% and a reduction in the incidence of income poverty to 18% 20% by 2016; a reduction in underemployment to about 17%; and a reduction of multidimensional poverty to 16% 18% by Under social protection, the midterm PDP review also targeted increasing 28 PCOO Duterte Declares Martial Law in Mindanao, Cuts Short Russia Trip. News Release NEDA Philippine Development Plan : Midterm Update. Manila.

23 Rationale and Context 7 the social insurance coverage of poor families under the PhilHealth Sponsorship Program from 88.7% in 2010 to 100% by Total estimated investment targets under the adjusted PDP amount to P4.19 trillion, consisting of about 1,500 priority programs and projects from 2013 to More than half of the investment targets are programmed for infrastructure development (P1.84 trillion, 53%), followed by social development (P billion, 21%), agriculture and fisheries (P billion, 15%) and sustainable and climate resilient environment and natural resources (P billion, 5%) PDP A new PDP 31 for the period was finalized in March 2017 to reflect the progress made in the previous period and to set the priorities of the new administration for the medium term. The new PDP contains the new administration s 10-point socioeconomic agenda, which focuses among other things on infrastructure building, fiscal reforms, rural development, health education systems, job creation, and enhanced competitiveness. Key education legacy reforms from the previous administration that have a good chance of being continued in some form include the expansion of education, including increasing the duration of basic education from 10 to 12 years and promoting technical and vocational education and training (TVET). In terms of poverty reduction programs, the national form of conditional cash transfer (CCT), 32 the Pantawid Pamilyang Pilipino Program (4Ps), started in 2007 is perceived by program stakeholders to have been effective in directing cash to poor households to spur school attendance and access to preventive health care and nutrition services and is likely to be continued with enhanced beneficiary targeting. The community-driven development (CDD) approach introduced through KALAHI-CIDSS, and later expanded nationwide under the name KC-NCDDP, which provides block grants to communities (barangays) for small-scale infrastructure projects, is also likely to be continued. As the previous administration came to an end, considerable urgency was given to improving the effectiveness and efficiency of the above social protection programs, with the notion of convergence taking center stage, essentially linking the 4Ps, KC-NCDDP and other programs such as the sustainable livelihood approach to gain greater impact and sustainability. 17. The latest PDP includes an enhanced focus on infrastructure development in Mindanao. Among the main priorities are to (i) develop the metropolitan area of Cagayan de Oro so the city can become the main gateway and transshipment hub in northern Mindanao, while remaining the main educational center in the area; (ii) expedite road projects and improve logistics, particularly in western Mindanao; (iii) expand the rail network among main cities and growth areas; (iv) expand water transport between main ports; (v) fast-track implementation of the Visayas Mindanao power connection; and (vi) complete the 230 kv Mindanao transmission backbone from Lanao del Sur in the north to Davao del Sur in the south. The PDP also prioritizes ensuring national security against internal and external threats in recognition of the fact that communities that experience armed conflict are frequently among the poorest in the country. Under the long-term vision of the Philippines in the PDP, pursuing the peace agenda for areas threatened by armed conflict is part of one of the four areas for strategic action. 30 NEDA Philippine Development Plan, : Revalidated Public Investment Program. Manila. 31 NEDA Philippine Development Plan, Manila. 32 Department of Health Point Socioeconomic Agenda of the Duterte Administration. Manila.

24 8 Philippines: CPS Final Review Validation, D. Country Partnership Strategy and ADB Portfolio 1. ADB Country Partnership Strategy 18. Combining the priorities of the government with those of ADB s Strategy 2020, 33 the CPS, for the Philippines 34 was designed to support the Philippines to achieve high, inclusive, and sustainable growth focusing on three of the five core operational areas of Strategy 2020: infrastructure, environment, and education. The CPS promoted the following four program objectives: (i) an improved investment climate and private sector development ADB would support scaling up of transport and energy infrastructure investments and policy reforms that improve the quality of competition and regulation, enhance fiscal policy and expenditure management, and strengthen legal and judiciary reforms; (ii) more efficient, effective, and equitable social services delivery ADB would increase support for the efficient, effective, and equitable delivery of social services; (iii) reduced environmental degradation and vulnerability to climate change and disasters ADB would provide support in the areas of environment, climate change, and disaster risk management by prioritizing strengthening ecosystem functions and the preservation of natural resources; and (iv) strengthened governance and reduced corruption ADB would continue and deepen its efforts to strengthen governance and reduce corruption at the country, sector, and project levels. 19. ADB originally envisaged that its support would encompass five priority sectors: transport, energy, education, agriculture and natural resources, and water supply and other municipal infrastructure and services. Support for public sector management was deemed to be crosscutting. All of these were to make a contribution to the overall CPS key objective to help the Philippines achieve high, inclusive, and sustainable growth. 20. Responding to the 2014 update of the national government development plan, ADB realigned its country operations business plan (COBP) for by updating the sector objectives for energy, agriculture, natural resources and rural development and public sector management. The resulting ADB program focused on four areas (or what might be described as new CPS objectives): (i) sustainable and climate-resilient infrastructure; (ii) good governance and inclusive finance; (iii) inclusive employment and education; and (iv) regional cooperation and integration (RCI). Unfortunately, there was little explanation or justification in the CPS, COBP, or CPSFR for the specific grouping of operations that fall under each of these objectives. The CPSFR fleshes out these objectives through exclusive lists of sectors of focus, leaving important assumptions implicit. This throws up some unexamined challenges. Nonetheless, the validation recognizes this structure, and works with it in the discussion of efficiency and effectiveness (and to some degree relevance) ADB Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank, Manila. 34 ADB Country Partnership Strategy: Philippines, Manila. 35 The validation team recognizes that the CPS reforms of 2015 stress relevance and development impact as the criteria for assessing the CPS objectives in CPS final review validations (see ADB Reforming the Country Partnership Strategy. December. Manila). However, it accommodates the CPSFR s emphasis on efficiency and effectiveness, recognizing that it will take some time for the 2015 reforms to be fully reflected in documents.

25 Rationale and Context 9 2. Planned ADB Country Program 21. Based on the CPSFR, the total programmed resource envelope for the period was $2.4 billion. About half of the envelope was programmed for public sector management (PSM), while 27% was for infrastructure (transport, energy and water and other urban infrastructure services). The breakdown of the programmed allocation by sector is provided in Figure 3. Figure 3: ADB Indicative Resource Allocation for Sovereign Operations in CPS, TRA 11% ENE 8% PSM 50% EDUC 12% ANR 11% WSOMIS 8% ANR = agriculture and natural resources, ENE = energy, PSM = public sector management, TRA = transport, WSOMIS = water sector and other municipal infrastructure and services. Source: ADB Country Partnership Strategy: Philippines, Manila, Results Framework. 3. ADB Approved Portfolio 22. From January 2011 to December 2016, ADB approved 16 sovereign loan projects totaling $4.317 billion and 11 grant projects totaling $47 million. TA operations consisted of 37 TA projects totaling $73 million while nonsovereign operations consisted of four projects totaling $342 million. The total approved portfolio amounted to $4.78 billion, almost double the planned investment for the period (Table 2). Sovereign loans make up about 90% of the total portfolio and nonsovereign operations 7%. (Figure 4). Of the total 16 approved sovereign loans, nine are still active and seven have closed, three of which have completion reports. 36 For TA projects, of the 47 approved, 31 are still active and 16 have closed, 10 of which have TA completion reports. None of the four nonsovereign projects or 11 grants have extended annual review reports or grant completion reports. (Appendix 1 and 2). 36 ADB Completion Report: Emergency Assistance for Relief and Recovery from Typhoon Yolanda. Manila. ADB Completion Report: Increasing Competitiveness for Inclusive Growth Program (Subprogram 1). Manila; and ADB Completion Report: Increasing Competitiveness for Inclusive Growth Program (Subprogram 2). Manila.

26 10 Philippines: CPS Final Review Validation, Table 2: ADB Approved Portfolio in the Philippines, , Sector and Modality ($ million) Modality Sovereign Loans Nonsovereign loans Technical Assistance Grants All Modalities Sector No. Amount No. of Amount No. of Amount No. of Amount Amount % of Loans Approved Loans Approved TAs Approved Grants Approved Approved ANR % Education 3 1, , % Energy % Finance % Health and Social % Services Industry and Trade % Multisector % Public Sector Management 6 1, , % Transport % WUS % Total 16 4, , ANR = agriculture, natural resources and rural development, No. = number, TA = technical assistance, WUS = water and other urban infrastructure and services. Source: ADB Loan, TA, Grant and Equity Approvals Database Figure 4: ADB Approved Projects in the Philippines, , by Modality Sovereign Loans 90% Nonsovereign loans 7% Technical Assistance 2% Grants 1% Source: ADB Loan, TA, Grant and Equity Approvals Database 23. On an annual basis, ADB support averaged $796 million per year, reaching almost $1 billion in 2014 (Figure 5a). The main approvals in 2014 were: the Senior High School Support Program, the second subprogram for Increasing Competitiveness for Inclusive Growth Program, and the first subprogram for the Local Government Finance and Fiscal Decentralization Reform Program. Approvals for nonsovereign operations were higher in 2015 with the approval of the 150-MW Burgos Wind Farm Project and the Tiwi and MAKBAN Geothermal Power Green Bonds. By sector, PSM makes up about 42% of the total portfolio, followed by education (23%) and finance (11%). The infrastructure sectors accounted for a combined 14% of the total portfolio (Figure 5b).

27 Rationale and Context 11 Figure 5a: ADB Annual Approved Projects in the Philippines, , by Modality ($ million) Sovereign Loans Nonsovereign loans Technical Assistance Grants Source: ADB Loan, TA, Grant and Equity Approvals Database. Figure 5b: ADB Approved Projects in the Philippines, , by Sector Public Sector Management 42% Multisector 0.45% Industry and Trade 8% Finance 11% Transport 3% Energy 7% Water and other urban infrastructure and services 4% Agriculture, Natural Resources and Rural Development 2% Education 23% Source: ADB Loan, TA, Grant and Equity Approvals Database. 24. ADB active portfolio. In addition to these approvals, ADB also managed an active portfolio (approved before 2011) amounting to $2.074 billion. This included 11 active sovereign loans ($1.673 billion), seven nonsovereign loans ($373 million), six grants ($15 million) and 18 TA projects ($14 million). The combined approved and active portfolio during the period amounted to $6.853 billion (Table 3). In terms of sector allocation, the majority of the combined approved and active portfolio ($2.81 billion) was allocated to public sector management, followed by education ($1.484 billion), and finance ($806 million). The infrastructure sector (energy, transport and water and other urban infrastructure and services) received $1.01 billion or about 14.7% of the total support during the period (Figure 6).

28 12 Philippines: CPS Final Review Validation, Table 3: ADB Combined Approved and Active Portfolio in the Philippines, , by Sector and Modality ($ million) Modality Sovereign Loans Nonsovereign loans Technical Assistance Grants All Modalities Sector No of Amount No. Amount No. of Amount No. of Amount Amount % Loans Approved of Loans Approved TAs Approved Grants Approved Approved Agriculture, Natural Resources and Rural Development Education 4 1, , Energy Finance Health and Social Services Industry and Trade Multisector Public Sector Management 9 2, , Transport Water and Other Urban Infrastructure and Services Total 27 5, , Source: ADB Loan, TA, Grant and Equity Approvals Database Figure 6: Combined ADB Approved and Active Portfolio, , by Sector Public Sector Management 41% Transport 2% Water and Other Urban Infrastructure and Services 3% Agriculture, Natural Resources and Rural Development 4% Multisector 0.31% Industry and Trade 5% Health and Social Services 1% Finance 12% Energy 10% Education 22% Source: ADB Loan, TA, Grant and Equity Approvals Database.

29 CHAPTER 2 Validation of the Country Partnership Strategy Final Review A. Relevance 25. The validation assesses the ADB program relevant, downgrading the CPSFR rating of highly relevant. This criterion assesses the ADB program s strategic relevance to country development needs, sector development constraints, and government policies and plans. The validation finds the support provided under the program was generally consistent with and responsive to government policies and plans, including the 2014 updating of the PDP, , which was considered in the preparation of ADB s COBP, The ADB program exhibited continuity, as is required in areas of reform that are challenging and demand long-term commitment. The Local Government Finance and Fiscal Decentralization Reform Program, which is now in its second phase, is a good example. Yet the program also showed adaptability to changing government priorities, with ADB revising its strategy to acknowledge the government s formal changes to the PDP as made in To ensure alignment, the CPS shared selected results targets from the government s PDP targets. ADB s flexibility was also evident in its response to the devastating impacts of Typhoon Yolanda in late 2013, which had an economic transformational effect in the typhoon-affected areas. The continued reliance on programmatic approaches (including PBL) highlights the relevance of the CPS intention to mainstream policy lending as part of more holistic programmatic assistance in selected sectors. The validation also notes that the three completed loans were rated highly relevant by both the PCRs and the PVRs. Nevertheless, the validation reassessed the program relevant, a downgrading from the CPSFR s highly relevant rating for the following reasons: (i) a midcourse strategy revision was made so the ADB program remained aligned with the national update in priorities, but approvals consistent with the new strategy were slow to arrive; (ii) some projects in the energy sector were approved although they did not reflect the key priorities of the government; (iii) there was a loose connection between lending and technical assistance, reflecting in part the late preparation of a knowledge plan; and (iv) delays in implementing some emergency response projects reduced their relevance by the time they delivered benefits. 26. The CPSFR capably captures the country context 37 and links the ADB program to it. It lays out the increasingly favorable macroeconomic fundamentals near the start of the CPS period, noting however the stubborn persistence of poverty and regional inequalities. It highlights the approach taken to the CPS preparation; the substantive 37 See details of the country context in Chapter 1.B.

30 14 Philippines: CPS Final Review Validation, dialogue on national development strategies, prior to and during CPS formulation and attention to political signals. Against this backdrop, the CPSFR notes that ADB sought to align its program with government development objectives as specified in the PDP, A country knowledge plan 38 was belatedly produced in conjunction with the COBP, which provides a useful summary of knowledge products produced up to 2015, as well as setting out the anticipated knowledge needs articulated in the main CPS assistance areas. The program also showed adaptability, as it responded to signals of political support and renewed government priorities. In the implementation of the program, ADB revised its strategy to acknowledge the government s formal changes to the PDP in 2014, 39 when inclusive growth defined as poverty reduction in multiple dimensions and massive creation of quality employment was declared the desired outcome. To ensure alignment between the ADB and government programs, the CPS shared selected results targets from the government s PDP targets. 27. The ADB program was equally mindful of ADB s own Strategy The CPSFR explains that the CPS focused on core operational areas (transport, energy, education, agriculture and natural resources, and water resources and other urban services), making PSM a driver of change. Moreover, RCI was integrated as a theme in strategic planning. Subsequent to the government s PDP midterm update in 2014, ADB and the government agreed in 2015 that ADB should formally reorient the COBP so ADB could focus more strategically on four inter-related program areas: (i) sustainable and climate-resilient infrastructure; (ii) good governance and inclusive finance; (iii) inclusive employment and education; and (iv) regional integration. 28. To demonstrate that the ADB program was implemented with an appropriate degree of flexibility, the CPSFR notes ADB s response to several economic, social and political events, chief among these the devastating impacts of Typhoon Yolanda in late 2013 and the opportunities presented by the 2014 signing of the Comprehensive Agreement on the Bangsamoro, 40 to target the poorest regions of the Philippines. ADB s Yolanda support was notable in that it was the first time an ADB loan adopted the performance-based lending modality based on ADB s Disaster and Emergency Assistance Policy. 41 Moreover, there was an important transformational aspect to ADB s emergency assistance to the typhoon-affected areas, which sought to rebuild better than before and trigger an economic transformative effect in these areas. The PVR for the Typhoon Yolanda cited this economic transformative effect as one of the key factors for assessing the project highly relevant The CPSFR alludes to the CPS s intention to increase the share of project lending in total financing, 43 suggesting that this had been realized, but its data (and Figure 2 of the CPSFR) do not fully reflect the operations active or approved in the CPS period. The validation has recalculated the data (Figure 7) and they show that program lending continued to be substantial, and even dominant in the latter part of the CPS period. The continued reliance on program lending highlights the relevance of the CPS intention (drawing on CAPE recommendations) to mainstream policy lending so ADB can provide 38 ADB Report on the Philippines Country Knowledge Strategy and Plans Manila. 39 During a mid-term review of PDP implementation in 2014 ( adjustments were made to policies, strategies, measures and programs based on updated information, and lessons learned during the first half of the Plan s implementation. 40 Available online at: 41 ADB Disaster and Emergency Assistance Policy. Manila. 42 ADB Validation Report: Philippines: Emergency Assistance for Relief and Recovery from Typhoon Yolanda. Manila. 43 The CPSFR s assertion in its para. 8 is unsubstantiated, since no reference to increasing project lending s share in total finance is to be found in the CPS,

31 Validation of the Country Partnership Strategy Final Review 15 more holistic programmatic assistance in selected sectors. This intention appears to have been partly realized. Among sovereign loans, a high proportion (63% by number, 69% by amount) used programmatic approaches such as policy-based lending (PBL), resultsbased lending, special assistance loans and sector loans. However, PBL has not always been well supported or well linked to TA. The ADB TA program appears to have arisen in an ad hoc way in response to government requests. In part, this can be attributed to the lateness in preparing a knowledge plan that could have established a tighter connection between lending and technical assistance. 30. The consistency of implementation of the overall planned program also contributed to the relevance of the program (Table 3 and Appendix 3). This comprehensive view reveals substantial consistency in the education and public sector management sectors, the latter being the dominant sector in both planning and implementation. However, a planned health and social protection project was not approved and an unplanned lending operation in the industry and trade sector was approved, which the validation understands was more a reflection of shifts in government demand than factors internal to ADB. Figure 7: Trends in Project and Program Lending (Approval of Sovereign Loans) ($ million) 1, , Project Program 3-year Average Project 3-year Average Program Source: ADB Loan, TA, Grant and Equity Approvals Database 31. Assessment of actual versus planned sovereign lending. There were important differences between the lending envisaged at the time of the approval of the CPS, in 2011 and the loans that were actually delivered, although there were often good reasons for these differences as they were mainly in response to shifts in government demand. In the program planning conducted in 2011, the multisector, PSM, social protection projects that formed part of the emergency response (approved in 2013 and 2014) were not planned; 44 the loans (together with grants, see Appendix 1) were however an appropriate response to needs arising from Typhoon Yolanda. Nevertheless, there was a loosening of focus over the implementation period. The CPS results framework s list of five sectors plus PSM as a crosscutting sector expanded during implementation to eight sectors plus PSM. While this suggests inconsistent implementation, it is important to note that many of the shifts in course followed the government s PDP, midterm update, in which case the inconsistency should be viewed as an appropriate response to government s new priorities. Appendix 3 44 A regular Kalahi-NCDDP was already in the design stage prior to the disaster and this program was quickly refitted to address the emergency needs.

32 16 Philippines: CPS Final Review Validation, compares the planned and approved subset of lending operations for the period , which should reflect ADB strategy shifts (through the COBP prepared in December 2014) to accommodate the government plan revision (undertaken in early 2014). 32. There is little in the planned program for 2015 that suggests a quick pivot toward the new government priorities established in the government plan update. To begin with, the Capital Markets and Nonbank Reforms Program, Subprogram 1 (approved 16 November 2015) was not focused on inclusive financing as the priorities require; it was about deepening the bond market. The intent of this loan clearly indicates that inclusive financing will not be made the focus in this sector in ADB support until A TA for developing a framework for inclusive financing was approved in August 2016, 46 but it only became effective in January 2017 and progress towards achievement of outcome is not yet available. 33. Some planned operations are aligned with the revised strategy. The Improving National Roads for Inclusive Growth in Mindanao Project for example, could be seen as supporting regional integration, since it opens up the interior to port facilities that can link to neighbouring countries, although the project history indicates that it has been a quite long drawn out effort. 47 Moreover, if the loan reflects the current TA 48 provided in the sector it will explicitly address climate change adaptation. Operations that were more closely aligned with the new priorities were nearing approval by late 2016, e.g., the Youth School to Work Program and the Local Government Finance and Fiscal Decentralization Reform Program, Subprogram 2. The path toward the Youth School to Work program is being prepared by a 2015 TA, but there is a concern that the TA promises more than its actual design can deliver. 49 It should be noted that these two evidently relevant programs in skills development and LGU financing were firm in the COBP, pipeline, yet were approved after a water sector project that was a stand-by project in the COBP. 34. Additionally, some recent TA has been applied to the new priority areas, to develop capacity and set the stage for subsequent lending; a TA focused on the Mindanao Development Authority (MINDA), approved in July 2015, is heavily oriented toward encouraging investment with a regional integration perspective, specifically addressing the Philippines commitments under the implementation blueprint of the Brunei-Indonesia-Malaysia-Philippines East ASEAN Growth Area (BIMP-EAGA) ADB Report and Recommendation of the President to the Board of Directors: Proposed Programmatic Approach and Policy-Based Loan for Subprogram 1 Republic of the Philippines: Encouraging Investment through Capital Market Reforms Program. Manila. Figure 2. Loan ADB Philippines: Financial Inclusion Framework Strengthening. Technical Assistance Report. Manila, 15 April. TA 9166-PHI. 47 A PPTA (ADB Improving National Roads for Inclusive Growth in Mindanao Project. Manila. PPTA PHI) was approved in December 2013 and closed in March The ensuing loan with the same name (project number ) is tagged as dropped in the e-ops database. A related loan for $62 million (ADB Road Improvement and Institutional Development Project. Manila. Loan 2836) with $30 million cofinancing from OPEC was approved in December 2011 and is closing in June There is another related loan under the same project group (project number ) with the title Road Improvement and Institutional Development Project that is tagged firm in the e-ops and is programmed for 2017 approval, but project details are not available. 48 See the TA for $1.2 million that was approved 16 December 2013: ADB Improving National Roads for Inclusive Growth in Mindanao Project. Manila. TA 8574-PHI. 49 ADB Capacity Development Technical Assistance: Support for the Nationwide Rollout of JobStart Philippines. October, Manila. TA ADB Strengthening Institutions for Investments in Mindanao. Manila. TA 8924-PHI. The TA was for $225,000 and it was approved on 6 July 2015.

33 Validation of the Country Partnership Strategy Final Review In conclusion, the list and speed of approvals under COBP, indicates that ADB is a rather slow boat to turn. It is has proved difficult to drop operations that have been in the design stage for years and to replace these with new designs. The speed and readiness shown in ADB s response to the Yolanda disaster has been hard to transfer to other priority areas of government. The attempt by ADB to be responsive, within the usual institutional constraints, is nonetheless evident. 36. Relevance of the nonsovereign portfolio. ADB focused its efforts on the needs of the private sector, in line with the priorities of the government. In infrastructure, operational priority was given to critical national and local infrastructure projects in: (i) energy; (ii) water and sanitation; (iii) transport (including toll roads, ports, and mass transit systems); (iv) education; (v) infrastructure finance; and (vi) financing for microbusinesses and small and medium-sized enterprises. These priorities accord somewhat with the approved private sector operations shown in Table A1.3 in Appendix 1, which includes the four operations approved in the CPS period plus two approved before CPS period but largely implemented during the CPS period. However, there were too few operations to cover all the government-identified priority areas. During the CPS period, ADB continued to focus on energy financing, especially for renewable energy projects, signaling a shift away from the more conventional energy financing it had provided up to In addition, ADB s recent participation in financing of the Mactan Cebu International Passenger Airport Project was a milestone transaction, which validated the work that had been carried out by the authorities (with technical support by ADB on the sovereign side) to develop a public private partnership (PPP) framework encouraging private sector participation in the provision of public services. 37. The CPSFR s assertion that ADB s private sector operation complemented those in the public sector is borne out in the case of the reinforcement of PPP initiatives; the PSM support helped to set the framework and fill the pipeline, while the nonsovereign lending helped to realize the PPP. However, nonsovereign operations approved in the CPS period are not tightly linked with either the initial or revised CPS objectives, particularly regarding poverty reduction and inclusive growth, giving the impression that there is a separate or additional set of factors that drive nonsovereign operations. Nevertheless, it s the validation s view that overall the NSO portfolio was relevant. 38. Relevance of the sector program. This validation acknowledges the ADB program s relevance, including its strategic positioning, as it was well aligned with the Philippines needs and governmental policies. The validation emphasizes the following positive points: (i) the ADB program was based on a firm analytical foundation and on engagement with relevant stakeholders; (ii) ADB s assistance was implemented with an appropriate degree of flexibility and, in the case of the emergency assistance provided for Typhoon Yolanda, had an important economic transformative effect on the typhoonaffected areas; and (iii) the overall planned program was implemented consistently. However, this validation assesses the program relevant for the following reasons: (i) the program s consistency with the overall strategy varied across sectors, and (ii) a realignment to reflect the government s PDP midterm review was slow to take effect. 39. Relevance of crosscutting objectives. The CPSFR states that the ADB program was relevant to the Philippines key economic, social, and environmental issues. Strategy 2020 has three strategic agendas: inclusive economic growth, environmentally sustainable growth, and regional integration. The support for inclusive economic growth is visible in most projects covering all sectors. The CPS focused on three of the five core operational

34 18 Philippines: CPS Final Review Validation, areas of Strategy 2020 infrastructure, environment and education and also promoted four program objectives: (i) improved investment climate and private sector development; (ii) more efficient, effective, and equitable social services delivery; (iii) reduced environmental degradation and vulnerability to climate change and disasters; and (iv) strengthened governance and reduced corruption. ADB realigned its COBP in response to the government s midterm review of the PDP and the resulting program focused on RCI among other areas. Regional cooperation has been explicitly addressed through activities linked to the BIMP-EAGA program, which covers the Mindanao region. The ADB program also addressed social development through improved education access and quality, community development programs, and social protection programs, and via its assistance for post-typhoon recovery. The CPS s design framework was aligned with Strategy 2020 and its Midterm Review. Overall, the crosscutting objectives of the CPS are assessed relevant. Combining the relevance ratings for the sector program and crosscutting work, the validation assesses ADB s program relevant. B. Efficiency 40. The validation concurs with the CPSFR s assessment of the ADB program performance efficient. For the ongoing portfolio, the processing time of all loans from approval to effectivity averaged 6.9 months, slightly below the bank average of 7.0 months. Ongoing Philippines project loans took longer to process, 8.2 months versus the ADB average of 6.7 months, while ongoing PBL was processed more efficiently at 3.0 months compared with the ADB average of 8.7 months during the same period ( ). The overall disbursement ratio of the Philippine loans has been better than the ADB average for much of the CPS period, although this appears to be more to do with the shift to PBL and other programmatic lending than to improvements in project implementation. PBL disburses quickly and is often based on already-achieved policy measures, hence such loans tend to disburse soon after program effectiveness. Delays in investment project implementation are still an issue and need to be further improved. The three completed program loans were rated highly efficient by both the PCRs and the PVRs. For nonsovereign operations, both coal-fired energy projects carried over from the previous CPS ranked high in terms of economic performance, with the Masinloc Power Plant in Zambales Province deemed very efficient. 41. Disbursements and implementation risk. Any efficiency assessment of the ADB program in the Philippines must be set against its ability to grow during the CPS period attaining an annual average of $700 million in the portfolio, compared with $614 million during the previous CPS period ( ). 51 This growth in itself could place some stress on the efforts to maintain efficiency. The disbursement ratio of the Philippines portfolio has been above the Southeast Asia Department (SERD) and ADB averages for much of the CPS period (except in 2013 and 2016), but the modalities mix, with a strong tendency toward program loans, appears to account for much of the good performance. The emergency reconstruction loans provided in 2013 and 2014 boosted the uncontracted ratio for loans (up to 82% in 2013), but this had eased somewhat by 2015 (to 55%), approaching the SERD average (47%). Although the CPSFR cited efforts in the early 2000s to adopt quality-at-entry measures, the share of at-risk projects continues to be disappointing, and generally has been higher than the SERD and ADB averages except 51 As of March 2016, the ADB Board had approved two more sovereign loans: ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan for Additional Financing and Technical Assistance Grant to the Republic of the Philippines: Social Protection Support Project. Manila. Loan 3369-PHI; and ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Republic of the Philippines: Angat Water Transmission Improvement Project. Manila. Loan PHI.

35 Validation of the Country Partnership Strategy Final Review 19 for the 2016 operations (Table 4) a surprising result in view of the ADB s proximity to its client. In general, at-risk projects appear to have had problems that originate at the programming and design stage (as per the 2012 Country Project Portfolio Review). Such projects do not appear to fully address weaker capacity of local government units than national government agencies and complexities with local government financing mechanisms (CPSFR, para. 25). Table 4: Disbursement Ratio and Implementation Risk, Disbursement Ratio (%) a Implementation Risk (%) Philippines SERD ADB a Covers project loans and grants only Source: ADB Annual Portfolio Performance Reports ( ) 42. Net resource transfer. In view of the reliance on program lending in the current CPS, it would be expected that the net resource transfer (NRT) for ordinary capital resources (OCR) would be favorable, and this can be seen in 2014, 2015, and 2016 (Table 6). On the whole, the OCR NRT increased from -$ million in 2011 to a total for the whole period of $ million, although the huge $1.146 billion negative transfer in 2013 was the main factor affecting the period. A secondary factor that contributed to the negative NRT for the entire program (-$ million) was the cessation of finance from the ADF, 52 leaving a purely repayment trail for the period , and an NRT of -$ million for the period. This unfavourable balance compares badly with the positive transfer of resources amounting to $982 million in the last country strategy period, (as reported in the CPSFR). Table 5: Net Transfer of Resources ADB-Philippines Amount in $ millions Totals Ordinary Capital Resources a (157.27) (1,145.57) Asian Development Fund b (60.03) (59.80) (104.74) (106.64) (96.71) (98.90) (526.82) Grants c Totals (214.30) (1,248.66) (202.71) a Net transfer of resources for ordinary capital resources is defined as loan disbursements less principal repayments or prepayments and interest or charges received. Includes nonsovereign loans and net equity investments. b Net transfer of resources for Asian Development Fund (ADF) defined as loan disbursements less principal repayments and interest/charges received. c Net transfer of resources for grants defined as disbursements funded by ADF, Pakistan Earthquake Fund, Climate Change Fund, and Asia Pacific Disaster Response Fund. Source: ADB Annual Reports 2016 and The systemic obstacles referred to by the CPSFR are still valid, including start-up delays, ineffective flows of funds to local government units (LGUs) through intermediaries, and insufficient implementing agency capacity (especially at the LGU level). These are felt in the lending portfolio, but nonlending also faces challenges. The 61 TA projects approved in the CPS period averaged $1.6 million, whereas the average TA across ADB for the period was about $1 million. There are indications that in some cases the relatively large size of the TA projects may have made them harder to 52 The Philippines has drawn only from OCR in the current CPS period.

36 20 Philippines: CPS Final Review Validation, implement. In some cases, TA provided proved to be too rigidly designed to adapt to changing government demands and changes in team leadership; for instance, according to the TA completion report, the studies under a TA project related to inclusive growth policy were not undertaken and policy dialogue with government had to make use of earlier TA inputs Sustainable and Climate Resilient Infrastructure 44. The CPSFR adopts the updated CPS grouping of sustainable and climate resilient infrastructure, in its analysis, noting that it has been mostly efficient, but it does not explain what this subset of infrastructure operations encompasses and what binds it together. Presumably this terminology (responding to the 2014 government plan update) has its roots in the original CPS commitment to improve sustainable environmental infrastructure in urban areas (CPSFR, para. 18). Without providing details, the CPSFR notes delays in the transport sector, 54 and more specifically in the energy sector, including support for the efficient vehicles project, flagging the at-risk status of this project. 55 It does not comment on the unduly long gestation period for the two water projects approved in In general, it attributes delays in infrastructure projects to policy uncertainty in infrastructure financing policy and local government financing and incentive issues. It foresees a gradual increase in the use of a results-based approach that can make better use of country systems as well improve the effectiveness and efficiency of government sector programs. 2. Good Governance and Inclusive Finance 45. The CPSFR notes the importance of improved coordination between central government and local government agencies to facilitate efficient delivery of support to the lower income and poorest communities, adding that considerable ADB support has been directed towards this pillar with encouraging results. It notes interventions in this area have been consistently rated highly efficient or efficient. It is not clear to the validation which ratings are being discussed here as there has been only one operation in the PSM sector and one in the finance sector that have been rated and that fall within the scope of the CPSFR validation. 46. Public sector management. In the PSM sector, the $500 million emergency response loan for relief and recovery after Typhoon Yolanda did receive a highly efficient rating in the PCR. 56 The PCR noted that both ADB and the government fast-tracked processing to ensure a timely response to the disaster. ADB began the processing of the loan while the government was still drafting its recovery plan. The project was approved less than 1 month after the typhoon struck and the loan agreement was signed 45 days thereafter. 53 ADB Technical Assistance Completion Report: Strategic Policy Actions for Successful Structural Transformation and Inclusive Growth. July. Manila. TA 7912-PHI. 54 This likely refers to the Road Improvement and Institutional Development. Loan 2836-PHI. ADB monitoring found this to have experienced implementation delays due to slow procurement and changes in scope of various portions of the selected road resurfacing, see ADB Back to Office Report for Loan Review Mission of Loan 2836-PHI: Road Improvement and Institutional Development. Manila.14 June ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan and Administration of Loan and Grant to the Republic of the Philippines for the Market Transformation through Introduction of Energy-Efficient Electric Vehicles Project. Manila. The CPSFR states that the efficient delivery and utilization of planned outputs is at risk, and will require the resolution of difficult institutional and incentive issues (footnote 26). 56 ADB Project Completion Report Philippines: Emergency Assistance for Relief and Recovery from Typhoon Yolanda. Manila, June. Loan 3080-PHI.

37 Validation of the Country Partnership Strategy Final Review Finance. In the finance sector, the Financial Market Regulation and Intermediation Program was delayed by about 10 months due to stringent contracting requirements imposed by ADB. 57 This delay was significant as the objective of the program was to respond quickly to add depth and stability to the finance sector following the global financial crisis of The PCR and PVR both rated the combined cluster program (loans 2278 and 2715) less than efficient Multisector support. The CPSFR notes that multisector support was provided for the National Community-Driven Development Project and related TA projects. Delays were experienced in the start-up of this lending project, but disbursement improved significantly as government agencies gained implementation momentum. The validation notes that the use of government systems for Pantawid Pamilyang Pilipino Program (4Ps or conditional cash transfer [CCT]) and community-driven development (CDD) projects has allowed capacity to be built within the government system, and this ultimately improved the efficiency of program delivery over time. 3. Inclusive Employment and Education 49. Education. The CPSFR notes that the results-based loan for the expansion of senior high school is at an early stage of implementation (it was approved 15 December 2014). 59 However, it raises the hope that the shift to providing investment financing through national systems will promote more efficient delivery of ADB support, although it adds that building local implementation capacity remains a key challenge for effective implementation of results-based lending. The validation notes that by the end of 2016 the disbursement rate remained at 33%. The CPSFR hopes for efficient delivery would have been more convincing if they had been accompanied by an update on loan implementation against the implementation schedule mentioned in the loan RRP. 50. Agriculture and natural resources. The CPSFR attributes start-up delays in the Integrated Natural Resources and Environmental Management (IREM) Project 60 to the late effectivity of the project, lack of agreement with the executing agency on the procurement modality (delaying project management recruitment) and challenges in preparing watershed management plans that cover wide forest areas in four different regions. The Second Agrarian Reform Communities Project 61 (approved under the earlier strategy) also experienced a slow project start-up due to difficulty in complying with national government and local government cost-sharing agreements, which delayed confirmation, procurement, and implementation of subprojects. This was exacerbated by the inability of LGUs and contractors to comply with full documentation requirements and reporting ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan for Subprogram 2 Republic of the Philippines: Financial Market Regulation and Intermediation Program. Manila. Loan ADB Project Validation Report for: Financial Market Regulation and Intermediation Program. Manila. November. Loans 2278 and ADB Report and Recommendation of the President to the Board of Directors: Proposed Results- Based Loan for the Philippines: Senior High School Support Program). Manila. Loan ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan, Grant, Administration of Loan, and Administration of Grant to the Republic of the Philippines for the Integrated Natural Resources and Environmental Management Project. Manila. Loan ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan and Administration of Loan to the Republic of the Philippines for the Agrarian Reform Communities Project II. Manila. Loan Categorized as a problem project under the National Economic and Development Authority Monitoring and Evaluation Staff Alert Mechanism (as of March 2015) for slow implementation performance.

38 22 Philippines: CPS Final Review Validation, The CPSFR also holds that the ADB shift to support for rural enterprise and rural employment is an effort to deliver support to rural communities more efficiently and effectively. It rightly notes that the challenge will be to design implementation arrangements that can overcome the institutional constraints previously encountered in attempts to support agriculture and natural resource sectors in the Philippines, but does not explain why the anticipated shift is likely to lead to greater success. The validation sees no ready argument for why that would be the case. There is instead evidence that when ADB forges suitable partnerships in the agriculture, natural resources and rural development (ANR) sector these can be efficient and effective, as indicated in the Cordillera Highland Agricultural Resource Management Project (CHARM) I and II partnership with IFAD, where in-country IFAD capacity drew ADB and government closer and made supervision more effective, especially in CHARM II. 63 The hurdles faced in the ANR sector appear to stem more from difficulties that ADB project teams face overseeing large numbers of small project activities scattered over wide project areas. For instance, the road to improve access to markets in rural areas in Bicol has incurred 25% slippage due to unreleased funds. The funds could not be released due to lack of liquidation documents and pending approval of a variation order. 64 Timely intervention could have avoided such problems. ADB Management subsequently confirmed that the shift to support rural enterprise and rural employment is now being restructured to include a systematic medium- to long-term institutional capacity development program that bridges the gap between current government capacity and the required regionally coordinated planning. The latter is to help local governments realize growth and enhance rural employment generation through increased market access and the expansion of rural enterprises. 4. Regional Cooperation and Integration 52. Regional cooperation and integration (RCI) efforts are described as efficient by the CPSFR, referring both to sector-based efforts and RCI-specific initiatives, such as the Brunei Darussalam-Indonesia-Malaysia-Philippines East ASEAN Growth Area (BIMP- EAGA) working groups, clusters and related TA. 65 No evidence is provided for the stated efficiency of this arrangement. Other ADB documentation tends to point to a loose connection between the RCI support provided to Mindanao institutions, the BIMP secretariat, national agencies based in Manila, and the ASEAN secretariat. 53. BIMP-EAGA has some promise as a test-bed of ASEAN policies and regulations. It hives off policies in manageable pieces and puts them into practice before a full ASEAN roll-out. However, this effort has yet to translate into bankable infrastructure projects. Institutionally, BIMP-EAGA has struggled, lacking a full secretariat, 66 and is dogged by perceptions that it exists in name but with little real substance on the ground. Its institutional set-up, heavily reliant on ADB support, may not be sustainable. The TA completion report for the regional TA supporting three of ADB s Southeast Asian subregional initiatives (covering BIMP-EAGA and two other programs not related to the 63 IFAD IFAD Coordination with the Asian Development Bank. Internal manuscript. 64 NEDA Region V Bicol Development Updates: Agrarian Reform Community Project 2. March p ADB Technical Assistance for Strengthening Institutions for Investments in Mindanao. Manila; ADB TA Advancing Regional Cooperation and Integration through Brunei Darussalam-Indonesia- Malaysia-Philippines East ASEAN Growth Area and Indonesia-Malaysia-Thailand Growth Triangle. December. Manila. TA 8814-REG; ADB Promoting Links and Improving Coordination Among the Greater Mekong Subregion (GMS), the Brunei Darussalam-Indonesia-Malaysia-Philippines East ASEAN Growth Area (BIMPEAGA), the Indonesia-Malaysia-Thailand Growth Triangle (IMT-GT), and the Association of Southeast Asian Nations (ASEAN). Manila. TA 7718-REG. 66 C. Dent and R. Richter Sub-Regional Cooperation and Developmental Regionalism: The Case of BIMP- EAGA. Contemporary Southeast Asia, Vol. 33, No. 1. April. pp

39 Validation of the Country Partnership Strategy Final Review 23 Philippines, Greater Mekong Subregion and the Indonesia-Malaysia-Thailand Growth Triangle) suggested that ASEAN may need to take a more active role in coordinating these initiatives, 67 echoing observations already made earlier by others, 68 but other sources indicate that ASEAN may not have enough capacity and resources to undertake this role. 69 How to unblock BIMP-EAGA is a very important, unresolved issue. 5. Nonsovereign operations 54. Given that most nonsovereign approvals occurred recently, efficiency is measured only for the two coal-fired energy projects carried over from the previous CPS, which ranked highly in economic performance. The Masinloc Power Plant in Zambales Province, in particular, is deemed very efficient given an economic internal rate of return (EIRR) of 25%. The economic benefits were largely due the relatively modest expenditure required to rehabilitate the existing power plant to generate additional capacity compared with the much higher capital costs of building a new power plant. In particular, foreign investors recognized that Masinloc was the lowest cost option for adding baseload generation capacity and had significant potential for an extension of its economic life. C. Effectiveness 55. The validation assesses the ADB program performance less than effective. There were shortfalls in achieving project and program outputs and outcomes as set out in the design and monitoring frameworks, as described in the ensuing paragraphs. Capacity development components in certain sectors (e.g., agriculture and natural resources) have seen shortfalls in outputs and outcomes as against the envisaged targets. There has been lack of progress toward achieving some of the government s sector-level outcomes set in the CPS. Of the 14 sector-level results framework outcome indicators identified in the CPS, only six (43%) have been achieved or are on track to be achieved. For example, in the education sector, the sector target of improved access and quality of basic education does not seem to be on track, while in the PSM sector (the most prominent sector in terms of ADB operations) the picture is mixed, with one indicator likely to be achieved (investment ratio), another dropped (participation target), and other indicators lacking recent data. On the positive side, most stakeholders, particularly beneficiaries of CDD initiatives related to disaster relief and recovery who were interviewed during the independent evaluation mission, assessed ADB s overall performance effective or better. For nonsovereign operations, ADB s role was deemed effective in adding both conventional and nonconventional generation capacity. 1. Progress Toward Sector-Level Outcomes 56. Of the 14 sector-level results framework outcome indicators identified in the CPS, two have been achieved, four are on track to be achieved, four are not on track to be achieved, three are deemed inappropriate, and one was dropped. Overall, only 43% of the envisaged outcomes have been achieved or are on track to be achieved. However, the assessment of sector outcomes is not straightforward for two reasons. First, some outcomes and indicators were modified following the mid-term review and updating of 67 ADB Technical Assistance Completion Report Promoting Links and Improving Coordination Among the Greater Mekong Subregion (GMS), the Brunei Darussalam-Indonesia-Malaysia-Philippines East ASEAN Growth Area (BIMP-EAGA), the Indonesia-Malaysia-Thailand Growth Triangle (IMT-GT), and the Association of Southeast Asian Nations (ASEAN). Manila. TA 7718-REG. 68 Footnote Asian Development Bank Institute ASEAN 2030: Toward a Borderless Economic Community. Tokyo.

40 24 Philippines: CPS Final Review Validation, the PDP. The CPSFR presents the original and modified results indicators in an appendix, and this is reproduced in Appendix 4 with the IED comments in the far-right column. In the education sector, for example, while the sector target of improved access and quality of basic education remained the same, the target indicators for secondary level net enrollment, completion and national assessment test achievement rates for 2016 have all been increased. Although the national data for these indicators from 2014 onwards are not available, progress towards achieving these targets does not seem to be on track. 57. Second, assessment of progress against sector outcomes and indicators is frustrated by a lack of information on achievements. Some outcomes appear inappropriate for lack of significant programming in the sector (water, agriculture). In the case of the energy sector, the possible sector outcome of alleviation of electricity blackouts and shortages was not included as a sector outcome, despite this being a key issue (particularly in Mindanao) and ADB having actively financed power projects. Nonetheless, from available data, it appears that in the energy sector progress is on track, while in education progress is unlikely to be sufficient to meet the targets. In PSM, the picture is mixed, with the investment ratio likely to be achieved, but the participation target being dropped altogether (the other indicators lack recent data). 2. Sustainable and Climate Resilient Infrastructure 58. Transport. ADB sought to support the government in developing climate resilient infrastructure, to be realized largely in the Re-Structuring Road Improvement and Institutional Development Project; despite implementation delays, ADB will probably meet the target of 340 km of road upgrading. However, the nine institutional capacity development output targets in the project will probably not be met at all since they were dropped to shift resources to other physical improvements besides road upgrading. 70 This shortfall is not addressed in the CPSFR. Some capacity development in the sector was achieved through TA provided for Davao Sustainable Urban Transport Project, 71 although this appears to have been limited to the development of a capacity development program with a listing of training needs Energy and water. For the energy sector, partial achievement of expected energy savings was attained in the energy efficiency project. 73 The CPSFR highlights the piloting of efficient tricycles (e-trikes) in Manila 74 and renewable energy in Visayas-Mindanao. It acknowledges these have not had a national scale impact as they have yet to be scaledup. However, there seems little scope for scaling up the e-trike introduction (only 3,000 are likely to be produced) as the government has cancelled the project as a cost-cutting measure. 75 In the water sector the CPSFR claims some success in strengthening the 70 Department of Public Works and Highways Proposed Loan Extension and Re-Structuring Road Improvement and Institutional Development Project (RIIDP) ADB Loan No PHI: Co-Financed by OPEC Fund for International Development, OFID Loan No. 1446P. Manila. 27 May. 71 ADB Technical Assistance to the Philippines for the Davao Sustainable Urban Transport Project. Manila. TA 8195-PHI. 72 ADB Technical Assistance Completion Report for Davao Sustainable Urban Transport Project. Manila. TA 8195-PHI. 73 ADB Project Completion Report Loan and Grant Numbers: 2507 and 0142 Philippines: Philippine Energy Efficiency Project. June, Manila. 74 ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan and Administration of Loan and Grant to the Republic of the Philippines for the Market Transformation through Introduction of Energy-Efficient Electric Vehicles Project. Manila. Loan DOE ENER.GIST DOE Targets Rollout of 3k E-Trikes This Year. energist/ index.php/about-ener-gist/76-categorised/alternative-energy-technology/e-vehicles/12324-doe-targetsrollout-of-3k-e-trikes-this-year

41 Validation of the Country Partnership Strategy Final Review 25 institutional capacity but acknowledges that the links between programming and sector level results are tenuous. 60. Taken together, it is hard to see how the operations falling under this objective have made a significant contribution to sustainability or climate change mitigation or adaptation. The reduced and modest institutional development achievements seem inadequate. In particular, the lack of scale-up in the e-trike initiative points to insufficient analysis of the market, and the project is a poor model for climate change mitigation. 3. Good Governance and Inclusive Finance 61. The CPSFR asserts that ADB has directly contributed to major policy and institutional reforms; improved public sector management; and laid the foundations for increased business investment. Unfortunately, it does not offer any link to programming to support these claims. The flagship program in this sector, the Financial Market Regulation and Intermediation Program Subprogram 2 does in fact show evidence of success. 76 Its PCR explains how its long gestation period through the turbulent global financial crisis helped focus the program on the vulnerabilities that had been revealed by the crisis. Additional stability was added to the system through such measures as establishing a Financial Stability Forum, enabling Bangko Sentral ng Pilipinas to carry out open market operations, and a supporting a doubling of deposit insurance coverage. The program was rated successful and most of its design and monitoring framework targets were achieved. Progress toward the other targets was also seen. 77 Even so, as the breadth and depth of reforms originally envisaged at appraisal had not been realized, the PVR rated the program less than effective. 78 It must be added that any success shown by ADB operations in this sector over the CPS period has not been centred on inclusiveness as the CPS objective would suggest. 62. Public sector management. While the two completed loans for the Increasing Competition for Inclusive Growth Program were rated highly effective by their respective PCRs, the PVR downgraded the rating to effective. 79 The PVR noted that, although three out of the four outcome indicators (75%) for the envisaged outcome on improving competitiveness either met or exceeded the targets, one indicator (global logistics performance index) was not achieved. Also, only 72% of the program output indicators were achieved. Public sector management support has contributed to the government s policy reform agenda as well as to systems and capacity in public fiscal revenue and expenditure management, decentralization and PPP initiatives. The CPSFR does not provide a convincing case for its claims, but evidence of some success can be found. The institutional strengthening for PPP support is particularly evident, with a Public Private Partnership Centre established, 80 improvements made to the legal 76 ADB. 2010: Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Republic of the Philippines for Subprogram 2 Financial Market Regulation and Intermediation Program. Manila. Loan ADB Project Completion Report: Financial Market Regulation and Intermediation Program. September. Manila. Loans 2278 and ADB Project Validation Report: Philippines: Financial Market Regulation and Intermediation Program. November. Manila. Loans 2278 and ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Republic of the Philippines for the Proposed Programmatic Approach and Policy-Based Loan for Subprogram 1 Increasing Competitiveness for Inclusive Growth Program. Manila. Loan 2872; and ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Republic of the Philippines for the Proposed Programmatic Approach and Policy-Based Loan for Subprogram 2 Increasing Competitiveness for Inclusive Growth Program. Manila. Loan For details, see The development of the PPP Center website is supported by an ADB TA for PPP.

42 26 Philippines: CPS Final Review Validation, framework, and a pipeline of PPPs established. These have already led to the implementation of key initiatives that can serve as models in the Philippines and beyond. 81 ADB has also supported a review of the Local Government Code, with two bills now in Congress focusing on LGU revenue generation. The validation cannot find support for progress in ADB s support for court administration and policy reforms in the judiciary. This long-standing support has stagnated compared with its early days a decade or more ago. 63. Multisector support. The completed loan for Emergency Assistance for Relief and Recovery from Typhoon Yolanda 82 was rated highly effective by PCR and the ensuing PVR. Both the PCR and PVR noted that the expected outcome and outputs were all fully achieved. Under the multisector umbrella, the KC-NCDDP (para. 16) provided support for recovery and rehabilitation activities in over 14,000 barangays (villages) in more than 500 municipalities across 39 provinces affected by Typhoon Yolanda and the Bohol earthquake in 2013, benefiting about 3.3 million households. A broad range of community infrastructure was funded, with subprojects decided by the barangay assembly, employing local workers, 10% 30% of whom were women. The response to natural disasters also included fast disbursing loans and grants 83 (listed in Appendix 1), and additional funds to supplement CDD approaches already seen in the KC-NCDDP. These have been implemented by government and NGOs, and their work has generally been appreciated by beneficiaries. 84 Less positively, the high expectations for the multidonor trust fund (MDTF) were not realized in view of the slow establishment of the fund. 64. Social protection. In social protection, ADB not only funded cash transfers, it also helped to strengthen the national household targeting system. As a result, 53% of 4P beneficiaries in 2013 were from the poorest quintile and a further 29% were from the next poorest quintile. Both of these groups survive on less than $1.90 per day, the international poverty line Inclusive Employment and Education 65. Education. The CPSFR notes the boost this objective received in the 2014 PDP review, linking it to the subsequent ADB change in focus in its rural development support to rural enterprise and rural employment programs. Education reform also received more attention, in view of its potential to improve employment prospects. ADB assisted the government in formulating and building support for revamped education policy and delivery mechanisms, especially in the expanded kindergarten to 12th grade program. Moreover, ADB fashioned an innovative, results-based lending program for senior high school. The related youth skill development support has been provided through TA (the JobStart pilot) and the associated loan is under development. This loan is expected to be a policy loan, making it unlikely that it will quickly boost LGU skill development units (called public employment service offices). It is too early to assess results in this new thrust in the education and skill development sector, but the innovations (e.g., a voucher system and curriculum change, and bolstered LGU public employment service offices) could eventually improve the quality of teaching outcomes and increase the 81 P. Taruc, ADB pledges more funding for Philippines. CNN Philippines, Thursday, 30 July. business/2015/07/29/adb-pledges-more-funding-philippines.html 82 Footnote ADB Proposed Grant Assistance Republic of the Philippines: Emergency Assistance and Early Recovery for Poor Municipalities Affected by Typhoon Yolanda (Financed by the Japan Fund for Poverty Reduction). December. Manila. Grant Results of the survey of beneficiaries conducted by the Independent Evaluation Mission of the operation. 85

43 Validation of the Country Partnership Strategy Final Review 27 employability of entrants to the labor force. To achieve these aims, the scale of the skill development support will probably need to be expanded Rural development. The shift in ADB s rural development programming reflects the poor performance of ADB programs in the ANR sector. The ADB information system shows no disbursement for the grant for the Agribusiness Development Assistance for Smallholders in Mindanao, suggesting that the ground was not adequately established for this grant to proceed following approval. It was to be implemented in relation with the Agrarian Reform Communities Project II, which has itself faced difficulties in disbursing and achieving its outputs, particularly in its community infrastructure component. It follows on the heels of another problematic project in the sector; Southern Philippines Irrigation Sector Project, which was rated less than effective (by both its PCR and PVR) in achieving production increases through user participation in irrigation development projects. 87 The institutional side of these projects presents the most difficult challenges in this sector, requiring significant supervision and support from ADB to achieve success. 5. Regional Cooperation and Integration 67. As the CPSFR points out, ADB support to Mindanao includes a strong focus on expanding RCI. ADB is assisting in improving transport connectivity and developing economic corridors within BIMP-EAGA. In close coordination with the Mindanao Development Authority, ADB is supporting the preparation of the western and the south central Mindanao growth corridors. These are worthwhile efforts, well received by enthusiastic Mindanao Development Authority staff. However, progress has been very slow. Strategic electricity grid connection projects have not been launched, and the air linkage expansion that has occurred has been through other efforts (e.g., by regional airports themselves, as shown by Mactan International Airport in Cebu). Some air links that were initiated in the 1990s (e.g., Manado Davao, Kota Kinabalu Davao) have disappeared. In the crucial agricultural sector, which can be the basis for regional exports, other countries are making strides in developing their halal agro-businesses, but the Philippines has only recently gained Brunei Darussalam s commitment to assist in certifying halal products. 6. Factors impinging on effectiveness 68. While the CPSFR does not provide a list of projects that it considers to fall outside the core priorities of the government, it would seem that some of the projects facing difficulties in achieving their outputs (in the energy and ANR sectors) may be what the CPSFR had in mind. These projects call into question ADB s design and approval procedures. 69. The weak capacity of local government units has hindered implementation of the portfolio. Projects implemented by local government units make up about 70% of the active portfolio. Problems with complex local government financing mechanisms were flagged in the CPS, 88 but do not seem to have been adequately addressed thereafter. 86 The concept paper for the loan aims for coverage of only 64 public employment service offices to implement JobStart for the period , see ADB Proposed Programmatic Approach and Policy-Based Loan for Subprogram 1 Republic of the Philippines: Facilitating Youth School-to-Work Transition Program. February, Manila. Loan ADB Project Validation Report: Southern Philippines Irrigation Sector Project. December. Manila. Loan ADB Development Effectiveness Brief: Philippines: A New Horizon for One of Asia s Most Promising Nations. June. Manila.

44 28 Philippines: CPS Final Review Validation, A great deal of the success of lending programs hinges on suitable complementary TA to prepare the ground for reforms and to see them through after broad policy and regulatory changes. In investment projects, TA is crucial in raising the capacity of implementers to play their roles in managing investment funds. ADB TA has been weak in both respects. 71. In some cases, the role of TA support has not been sufficiently tracked to enable an assessment of its contribution to reforms. For instance, the ultimate success of the TA Capacity Development of Financial Regulators hinged on a single outcome: the total local currency bonds were to increase to 38% of GDP by December 2013 (baseline 35.4% in 2010). 89 The CPSFR notes that this outcome was achieved in 2013, but fails to note the subsequent decline to 34% of GDP by far below the Philippines regional peers, which have local currency debt markets exceeding 70% of GDP. The extent to which capacity development was actually achieved in financial regulation is left unanswered; teasing this out from the larger dynamics appears to be beyond the design and monitoring capabilities of ADB. 72. In other cases, it is evident that the design of some TA has been inadequate, in terms of understanding its context or in gaining the buy-in of critical stakeholders. For instance, the Increasing Competitiveness for Inclusive Growth Program 91 included a new five-star rating system for hotels and resorts, but the TA provided 92 was a rushed effort that failed to consult stakeholders properly and led to much resistance Nonsovereign operations 73. In the energy area, ADB s role was effective in adding both conventional and nonconventional generation capacity. In the existing portfolio of conventional coal-fired power projects, the rehabilitation of the Masinloc plant was completed successfully. Before rehabilitation, there was only one generating unit capable of operating at half a load, i.e., 150 megawatt (MW), while the other generating unit was inoperable. After the 3-year rehabilitation plan ( ) had been executed, the plant s capacity had increased from 25% at the time of the private sector takeover in 2008 to 70% by 2011, and the availability factor jumped from 65% to 92% over the same period. The plant is now able to run at its full load capability of 630 MW. Similarly, the other coal-fired power plant, the Visayas Base-Load Power Project financed by the KEPCO SPC Power Corporation in Cebu Province, although initially encountering environmental and social resistance, introduced much-needed base-load power that stabilized power supply in the Visayas. Since 2011, the Visayas Base-Load Power Project has provided the Visayas grid with 200 MW of base-load power, which translates to more than 1,300 GWh of electricity per year. This accounts for roughly 12% of total electricity supply in the grid. 74. Projects in the nonconventional, renewable energy subsector are more recent, but some have already reached their output milestones. For instance, the 150-MW 89 ADB Technical Assistance to the Philippines for Capacity Development of Financial Regulators (Financed by the Japan Fund for Poverty Reduction). Manila. TA ADB Size of LCY Bond Market in % of GDP. Asian Bonds Online. Accessed December 28, 2016 at 91 ADB Report and Recommendation of the President to the Board of Directors, Proposed Policy-Based Loan for Subprogram 2 Republic of the Philippines: Increasing Competitiveness for Inclusive Growth Program. November. Manila. Loan ADB Improving Competitiveness in the Tourism Sector. Manila. TA 8334-PHI: 93 See for instance D. Torrevillas The fault in star-rating system- From the Stands. The Philippine Star, 14 January.

45 Validation of the Country Partnership Strategy Final Review 29 Burgos Wind Farm Project in Ilocos Norte Province was already built and started commercial operations at the end of 2015, helping to demonstrate the feasibility and sustainability of large-scale private sector wind farms and to meet the government s target of 200 MW of wind power capacity. Other infrastructure finance projects have also been effective. The Philippine Investment Alliance for Infrastructure fund (approved in 2012) was effective in reaching its target of at least $525 million in committed capital from ADB, Langoer Investments Holding B.V. (APG), the Government Service Insurance System (GSIS), and Macquarie Group, since it closed on 31 July 2012 with a total committed capital of $625 million. However, while the fund is on track to demonstrate the viability of the private equity fund structure for infrastructure finance in the Philippines, it s not clear whether it will reach the outcome of having 100% of the fund s underlying assets complying with ADB s safeguard policy requirements, since ADB had participated in only three out of the six investments made by the fund as of July The Tiwi and Makiling-Banahaw (Mak-Ban) Geothermal Power Green Bonds Project was also effective in reaching its output of successfully introducing the Tiwi MakBan green project bonds for geothermal energy, demonstrating the viability of green project bonds for renewable energy in the Philippines. D. Sustainability 75. The validation concurs with the CPSFR assessment of program performance as likely sustainable. The program was complementary to existing government efforts, it supported the implementation of structural policy reforms and helped to advance competition policy, regulatory efficiency, PPPs in infrastructure, and competitive labor markets. The institutional arrangements and additional financing to carry out the Yolanda Rehabilitation and Recovery Plan were adequate and sustainable. The PCRs and PVRs rated two of the three completed loans highly likely sustainable, since many of the reforms under the program were institutionalized and funded by the government. Although the government has demonstrated good commitment to sustaining the reforms related to ADB s programs, this has been variable across the different areas supported by ADB. Some notable successes were noted, an example being ADB s support for the PPP initiative. Financing of operation and maintenance has improved through ADB PSM support that has helped the government rethink its approaches to fiscal revenue management, including cost recovery by central and local governments. A key initiative has been the Local Government Finance and Fiscal Decentralization Reform Program. However, there are also some initiatives where success is not yet completely assured; such as the CCD program in the social protection subsector (4Ps and KC-NCDDP) where some uncertainty in the government s commitment has been apparent with the change in the administration in There are some other initiatives which appear less sustainable, such as the agriculture and natural resources sector which struggled to realize full commitment of counterpart funding and institutional resources. For nonsovereign operations, all the four projects approved under the CPS, are likely to be sustainable given their on-time performance. 1. Government Commitment to Reform Policies and Capacity Development 76. The CPSFR notes that a core objective of the realignment of ADB s strategic focus in response to the government s PDP midterm update in 2014 was to help ensure that ADB remained focused on areas likely to be strongly supported by any new government. ADB has gained government support for the program pipeline through to 2018, in the form of the COBP, Going forward, continuing efforts should be made to stay engaged in the process of the PDP, preparation, thus reducing the likelihood of disruptive shifts away from previous areas of ADB support.

46 30 Philippines: CPS Final Review Validation, The validation concurs with this view. In the area of infrastructure, the CPSFR provides some PSM examples where it is evident that ADB is supporting reforms that have high political commitment and a high chance of retaining political support. For instance, ADB is supporting the government s PPP initiative to ensure alignment with government priorities and to address sustainability. This includes updating the legislative framework for PPPs (the build-operate-transfer law amendment), making the government commitment to PPPs more visible, high level, and durable. Moreover, at an institutional level, the PPP Centre has embarked on an effort to expand the network of regional institutions nationwide that can lend support to PPPs outside Manila where developing bankable transactions is more challenging. 78. ADB support that has not been as well aligned with government priorities will be less sustainable. The CPSFR suggests that some projects (e.g., in ANR) have struggled to receive full funding commitments from counterparts. Some doubt about the sustainability of ADB PSM projects is also discernable. In the case of the law and judiciary subsector, the attention given by the current administration to the war on drugs obscures the progress still needed across all pillars, draining the momentum from reform efforts dating back two CPS periods. In the decentralization and local governance subsector, ADB s impact has been blunted by shifts in the national government s programming (e.g., the reformulation of bottom-up budgeting ) and uncertainty in its overall policy directions. In this complex sector, the CPSFR rightly notes that continuity in programming from the previous CPS to the current has served to lay a foundation for more ambitious reforms, in particular the Local Government Finance and Budget Reform (LGFBR) Program. 94 While the completion report rated this program most likely sustainable, the lack of an agreed or operating platform to track progress on actions outlined in the LGFBR post-program framework (falling into the current CPS) undermines the claim that the program will be sustainable. 79. The CPSFR notes that ADB support and engagement has helped build broadbased support for difficult reforms, making these likely to be sustained even under the new administration. The validation believes that, while the style of engagement is praiseworthy, the conclusion is too hopeful. Some uncertainty is apparent in the government s commitment to current programming, e.g., in social protection and PSM. Beneficiaries of 4Ps and KC-NCDDP programs and their government advocates have voiced the concern that the idea of convergence among the various social protection programs being implemented remains shallow, inhibiting the proper institutionalization, integration, and scaling-up of approaches that have proven themselves in the field. Moreover, completing the journey for these initiatives requires that a new administration recognize the progress that has been made and suppress any tendency to replace existing programs with new ones to simply create the new administration s brand. 80. The CPSFR could also have taken a more critical view of the effectiveness of the Philippines Development Forum. The sustainability of reforms could indeed have benefited by the government taking a stronger leadership role, but what is critical is that the forum brings all the key stakeholders to the table for useful dialogue and policy ideas. That has not generally been the case in the CPS period, even if some technical working groups tried to stay active. 94 ADB Report and Recommendation of the President to the Board of Directors: Proposed Program Loan and Technical Assistance Grant to the Republic of the Philippines for the Local Government Financing and Budget Reform Program Cluster (Subprogram 1). Manila; and ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan for Subprogram 2 to the Republic of the Philippines for the Local Government Financing and Budget Reform Program. Manila. Loan2387 and Loan 2584.

47 Validation of the Country Partnership Strategy Final Review Operation and Maintenance Practice and Capacity 81. The CPSFR points to the increasing focus on support for national programs as the impetus for a sectorwide adoption of good operation and maintenance (O&M) practices, utilizing a credible medium-term expenditure plan, spurred by the mediumterm expenditure framework ADB has promoted in the education sector. ADB would like to see this approach taken up in other sectors, such as road infrastructure investment and maintenance. Financing of O&M has also been advanced through ADB PSM support that has helped the government rethink its approaches to fiscal revenue management, including cost recovery by central and local governments. The Local Government Finance and Fiscal Decentralization Reform Program is a key initiative. The CPSFR acknowledges, however, that this aspect needs more work for its goals to be realized. 3. Nonsovereign operations 82. All the four projects approved under the CPS, are likely to be sustainable given their high disbursement ratio and on-time performance. Only the Mactan-Cebu International Airport project is slightly behind schedule as the order of activities has shifted (improvement activities in Terminal 1 have begun before starting the work on Terminal 2 construction), which reflects the 41% disbursement ratio (only $31 million out the $75 million approved). The two carry-over projects from the earlier CPS, the Masinloc and the Visayas Base-Load power projects, both have financially sound positions and remain profitable. Therefore this validation also assesses the NSO portfolio likely sustainable. E. Development Impacts 83. The validation assesses the development impact of the CPS program to be less than satisfactory. In terms of achievement of the government s overall targets, only three targets out six are likely to be achieved or exceeded (para. 84). The three targets that are likely to be achieved or exceeded are: (i) improvements in the human development index, (ii) reduction in the fiscal deficit, and (iii) consolidation of the public-sector deficit. Achievements are lagging in terms of GDP growth, rate of growth of employment, and poverty incidence. Given the importance of the unachieved targets, particularly GDP growth and poverty incidence, the validation assesses overall progress toward achievement of these targets to be less than satisfactory. Achievements on the crosscutting issues have been satisfactory, with progress made in private sector development, good governance and inclusive finance, and inclusive employment and education, but considerably less progress than expected has been made on RCI issues. Out of the three completed sovereign loans, one (Emergency Assistance for Relief and Recovery from Typhoon Yolanda) was assessed by the PCR to have had a satisfactory impact while the other two loans (both for the Competition for Inclusive Growth Program) were assessed by the PCR to have had a highly satisfactory impact. The validation report for the latter two loans reassessed the rating to satisfactory, noting that only one of the two envisaged impact indicators was on track to be achieved. Combining the development impact results of less than satisfactory for the achievement of overall targets (para. 84) and satisfactory ratings for achievement of crosscutting work (para ) achievements, the validation assesses the development impacts of ADB s program less than satisfactory.

48 32 Philippines: CPS Final Review Validation, Progress Toward Government s Overall Targets 84. Overall progress on the six country development goals specified in the CPS results framework is well presented in the CPSFR. The three targeted goals that are likely to be achieved or exceeded are: improvements in the human development index, reduction in the fiscal deficit, and consolidation of the public sector deficit, while the three remaining goals that appear unlikely to be achieved are: (i) GDP growth, (i) rate of growth in employment, and (ii) poverty incidence. Looking at each of the lagging goals in turn, GDP growth averaged 6.1% during , just 1% below the targeted goal, but still a strong growth rate. However, given the small size of the ADB program when compared with the Philippines economy, ADB s contribution towards this GDP growth is at best marginal. The goal for rate of employment growth had two parts: (i) 0.74 million jobs a year should be created during the CPS period and (ii) women should account for at least 50% of the nonagriculture employment increase. The first goal has been achieved, with an average annual employment increase of 0.77 million; however, women accounted for only 45.5% of the increase and this goal is unlikely to be achieved. The poverty incidence goal was the goal that was furthest from being achieved, with poverty incidence 21.6% in 2015, far below the target of 16.6%. Given the relative importance of the unachieved indicators, particularly GDP growth and poverty incidence, the validation assessed the overall progress toward the government s overall targets to be less than satisfactory. 2. Progress on Crosscutting Thematic Issues 85. Taking into consideration the CPS s priorities as well as those stemming from its realignment in 2014 following the government s PDP midterm review in the same year, the main crosscutting thematic issues of the program are (i) private sector development, (ii) good governance and inclusive finance, (iii) inclusive employment and education, and (iv) RCI. 86. Private sector development. In energy, ADB has committed itself to supporting the shift from conventional generation to renewable. While coal-based generating projects (Masinloc and Visayas Base Load Power) are still in ADB s portfolio, all new nonsovereign projects in the sector have targeted renewable sources, some through innovative financing instruments in support of large wind farm investments and the issuance of the first climate bond in Asia. In addition, ADB s recent participation in the financing of the Mactan Cebu International Passenger Airport Project represented a milestone transaction, which validated the work that has been carried out by the authorities (with technical support by ADB on the public sector side) to develop a PPP framework encouraging private sector participation in the provision of public services. ADB will try to replicate this successful PPP experience as some of the TA support to the Public-Private Partnership Center is being used to leverage private sector investment in the transport sector, particularly for railways. While the NSO portfolio performance has generally been successful, there were weaknesses in terms of screening, appraisal, and structuring performance. Although the selection of infrastructure projects has improved in recent years, the sourcing of finance sector projects, especially in terms of SME support through nonsovereign operations, have slowed down considerably in the past decade, with no new facility being processed during the CPS, mainly due to lack of market appetite caused by excess liquidity. In general, the validation supports the CPSFR s view that ADB has effectively promoted private sector development in the Philippines. 87. Good governance and inclusive finance. Activities related to governance and inclusive finance have made progress, with ADB s public sector management support contributing to the government s policy reform agenda and governance improvements

49 Validation of the Country Partnership Strategy Final Review 33 and CCD approaches under the KC-NCDDP and the conditional cash transfers supporting inclusive finance. In terms of good governance, public sector management support has contributed to the government s policy reform agenda in the areas of public fiscal revenue and expenditure management, decentralization, and a review of the Local Government Code. In terms of inclusive finance, ADB s assisted 39 provinces affected by Typhoon Yolanda and the Bohol earthquake by funding a broad range of community infrastructure, benefiting about 3.3 million households. There was a very high positive satisfaction rate (88%) from the 108 respondents who responded to IED s beneficiary survey interviews conducted in 10 villages in Bohol, Leyte and Western Samar provinces that received assistance in the aftermath of the Bohol Earthquake and Typhoon Yolanda in 2013 (detailed survey results in Supplementary Appendix A, particularly Table SAB.8). 88. Inclusive employment and education. In terms of education, there has been good progress on education reform, especially in the expanded kindergarten to 12th grade program and the new results-based lending program for senior high school. In terms of inclusive employment, the JobStart pilot to increase the employability of new labor force entrants is underway, but it is too early to assess results. 89. Regional cooperation. Although ADB has actively promoted regional cooperation through the BIMP-EAGA program, the assistance to date has been via technical assistance and studies and no investments in hard or soft infrastructure have yet taken place. In terms of transport connectivity, ADB is supporting the preparation of the western and south-central Mindanao growth corridors, two of the priority economic corridors in the BIMP-EAGA program. ADB should consider providing additional assistance in other infrastructure subsectors that could potentially yield high regional and subregional impacts, such as port development, airport development, and electricity grid interconnection. 90. Development impacts of crosscutting work assessment. The validation finds the development impacts of the crosscutting work to be satisfactory. 3. Evidence of and Plausible Links for CPS Likely Contribution to Development Impact 91. The validation concurs with the CPSFR that ADB can make a credible connection between its sustained programmatic support and certain reforms that have yielded significant results, e.g., improved revenue and expenditure management and PPP advancement. In particular, the magnitude of the lending and TA support provide justification for this stance. The additional assertion in the CPSFR that ADB made some contribution to social protection and education and national progress in improving key subindexes of the Human Development Index rating is perhaps optimistic because the relative contribution of ADB resources to the social sectors is very modest, although the progress made was significant (mean years of schooling increased from 8.4 in 2011 to 8.9 in 2014; life expectancy increased from 67.8 to 68.2 years in the same period) The acknowledgement in the CPSFR that the ADB-financed upgrading of roads (340 km) has made a modest contribution to government objectives of increased and more efficient movement of goods and people is more in keeping with the scale of the support. The conclusion that planned outputs to improve water supply and sanitation, 95 F. Aldaba The Philippines Human Development Index Ranking. Philippine Human Development Network Regional Launch of the 2015 Human Development Report. 18 January. The Peninsula Manila, Makati City, Philippines.

50 34 Philippines: CPS Final Review Validation, and to reduce resource degradation have not yet generated expected results is candid, but it misses the point programming has been limited in these areas. 93. Of the three completed sovereign loans, one (Emergency Assistance for Relief and Recovery from Typhoon Yolanda) was assessed by the PCR to have had significant impact while the other two loans (both for the Competition for Inclusive Growth Program) were assessed by the PCR to have had substantial impact. The PVR for the latter two loans downgraded the rating to significant impact, noting that the impact indicators were partly achieved. The achieved impact indicator concerned the country s improved ranking in the competitive index from 85 in 2010 to 47 in 2015, which was substantially exceeded. However, the targeted 5% per annum increase in the number of youth in fulltime employment was not met. The increase was only 1.29% per annum during Factors Affecting the Development Impacts of ADB Support 94. As the CPSFR points out, the anticipated shift to more programmatic support is underway for PSM and education, and these efforts appear promising. But it is early days in terms of fashioning a more coherent programmatic approach, let alone discerning results. In decentralization and local governance and in the justice sector there are persistent obstacles to deep and broad reforms. The CPSFR s conclusion that the challenge is to further build capacity is fully supported, but a great deal of dialogue (springing from sound evidence) will be needed as well. Expanding such an approach to other sectors is further down the road and remains to be taken up in the new CPS. 95. Development impact is to some degree also affected by the integrity of ADB operations. ADB can demonstrate to the government that assessing risks in key areas (procurement, financial procedures, anti-corruption measures) and mitigating these risks systematically can greatly improve project delivery. Guidance for conducting such an assessment comes in the form of the ADB Second Governance and Anticorruption Action Plan (GACAP II). There is some evidence that this is yielding fruit in the recent performance of the Philippines Corruption Perception Index (Figure 8) and also, more narrowly, in the number of project-related cases of integrity violation in ADB s portfolio in recent years (Table 7). Figure 8: Philippines Corruption Perception Index, Source: Transparency International