FOR OFFICIAL USE ONLY

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US$405.0 MILLION TO THE REPUBLIC OF THE PHILIPPINES FOR A SOCIAL WELFARE AND DEVELOPMENT REFORM PROJECT Human Development Sector Unit East Asia and Pacific Region October 14,2009 Report No: PH This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS (Exchange Rate Effective June 1,2009) Currency Unit = Peso US$1 = PhP47 PhP 1 = US$0.02 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS 4Ps ADB APIS ARMM AusAID BAC BESRA BIS CAS CCT CDD COA CPAR CPI CQ cso CY cvs DA DBM DepEd DILG. DOF DOH Pantawid Pamilyang Pilipino Program Asian Development Bank Annual Poverty Indicators Survey Autonomous Region in Muslim Mindanao Australian Agency for International Development Bids and Awards Committee Basic Education Sector reform Agenda Baseline indicator system Country Assistance Strategy Conditional Cash Transfer Community Driven Development Commission on Audit Country Procurement Assessmenl Report Consumer Price Index Consultant s qualifications Civil Society Organization Calendar year Compliance Verification System Designated Account Department of Budget and Management Department of Education Department of the Interior and Local Government Department of Finance Department of Health DPO DSWD ECDP engas EPTS FIES FMR FSP FY GAA GASSG GFRP GDP GNI GOP HAF HSRA IAS IBRD ICT ID IDA IDAP IFR Development Policy Operation Department of Social Welfare and Development Early Childhood Development Project Electronic National Government Accounting System Electronic Procurement Tracking System Family Income and Expenditure Survey Financial Monitoring Report Food for School Program Fiscal Year General Appropriations Act General Administration and Support Services Group Global Food Crisis Response Program Gross Domestic Product Gross National Income Government of the Philippines Household Assessment Form Health Sector Reform Agenda Internal Audit Services International Bank for Reconstruction and Development Information, Communications and Technology Identification International Development Association Integrity Development Action Plan Interim Financial Reports

3 FOR OFFICIAL USE ONLY IP IPPF IPRA JICA KALAHI CIDSS LFS LBP LCS LGC LGU MAC MDG MIS MTEP MTPDP NAC NAPC NCA NCB NCR NDHS NEDA NFA NGAS NGO NHTS-PR NPMO-4Ps Indigenous People Indigenous Peoples Participation Framework Indigenous Peoples Rights Act Japan International Cooperation Agency Kapitbisig Laban Sa Kahirapan Comprehensive and Integrated Delivery of Social Services Labor Force Survey Land Bank of the Philippines Least-cost selection Local Government Code Local Government Unit Municipal Advisory Committee Millennium Development Goals Management Information System Medium Term Expenditure Plan Medium Term Philippines Development Plan National Advisory Committee National Anti-Poverty Commission Notice of Cash Allotment National Competitive Bidding National Capital Region National Demographic and Health Survey National Economic and Development Authority National Food Authority New Government Accounting System Non-Governmental Organization National Household Targeting System for Poverty Reduction National Project Management Office of 4Ps NPMO-NHTS NSCB NSSHR NSO OM PAGCC PBD PDO PFM PIP PhilGEP S PhilHealth PMT PPG PS QCBS RAC I2FP SAE SBD SEMP SIL SOE sss SWDRP SWIDB UNICEF WHO National Project Management Office of NHTS National Statistical Coordination Board National Sector Support for Health Reform National Statistics Office Operations Manual Philippine Anti-Graft and Corruption Commission Philippine bidding document Project Development Objective Public Financial Management Project Implementation Plan Philippine Government Electronic Procurement System Philippine Health Insurance Proxy Means Test Policy and Programs Group Procurement service Quality and cost based selection Regional Advisory Committee Request for payment Small Area Estimates Standard bidding document Social Expenditure Management Project Specific Investment Loan Statement of Expenditures Single source selection Social Welfare and Development Reform Project Social Welfare Institute and Development Bureau United Nations Children s Fund World Health Organization. Vice President: Country Director: Sector Manager: Task Team Leader: James W. Adams Bert Hofman Xiaoqing Yu Jehan Arulpragasam This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.

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5 PHILIPPINES Social Welfare and Development Reform CONTENTS Page A. STRATEGIC CONTEXT AND RATIONALE Country and sector issues.,, Rationale for Bank involvement Higher level objectives to which the project contributes... 5 B. PROJECT DESCRIPTION Lending instrument. Financing Arrangements and Other Approaches Project development objective and key indicators Project components Lessons learned and reflected in the project design Alternatives considered and reasons for rejection C. IMPLEMENTATION Partnership arrangements Institutional and implementation arrangements Monitoring and evaluation of outcomeshesults Sustainability Potential risks and possible controversial aspects Loadcredit conditions and covenants D. APPRAISAL SUMMARY Economic and financial analyses Technical Fiduciary Social Environment Safeguard policies Policy Exceptions and Readiness Annex 1: Country and Sector or Program Background Annex 2: Major Related Projects Financed by the Bank and/or other Agencies. 36

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7 Annex 3: Results Framework and Monitoring Annex 4: Detailed Project Description Annex 5: Project Costs Annex 6: Implementation Arrangements Annex 7: Financial Management and Disbursement Arrangements Annex 8: Procurement Arrangements A. General B. Assessment of the agency s capacity to implement procurement C. Procurement Plan D. Frequency of Procurement Supervision Annex 9: Economic and Financial Analysis Annex 10: Safeguard Policy Issues Annex 11: Project Preparation and Supervision Annex 12: Documents in the Project File Annex 13: Statement of Loans and Credits Annex 14: Country at a Glance Annex 15: Governance and Anti-Corruption Action Plan (GACAP) Annex 16: Map Number IBRD 33466R

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9 REPUBLIC OF THE PHILIPPINES SOCIAL WELFARE AND DEVELOPMENT REFORM PROJECT APPRAISAL DOCUMENT EAST ASIA AND PACIFIC EASHD Date: October 14,2009 Country Director: Bert Hofman Sector ManagedDirector: Xiaoqing Yu Project ID: PO82144 Lending Instrument: SDecific Investment Loan Y Team Leader: Jehan Arulpragasam Sectors: Other social services (1 00%) Themes: Social safety nets (P) Environmental screening category: Not Required [XI Loan [ ]Credit [ ]Grant [ ]Guarantee [ ]Other: For Loans/Credits/Others: Total Bank financing (US$m.): Proposed terms: IBRD Flexible Loan with a Variable Spread option, and a total maturity of 25 Borrower: Republic of the Philippines 6/F Department of Finance Building, Roxas Boulevard Manila, Philippines Tel: (63-2) / Fax: (63-2) mteves@dof.gov.ph Responsible Agency: Department of Social Welfare and Development DSWD Bldg., Batasan Complex Constitution Hills, Quezon City Philippines Tel: Fax: arbala@dswd.gov.ph

10 Does the project depart from the CAS in content or other significant respects? Ref: PAD I. C. Does the project require any exceptions from Bank policies? Re$ PADIEG. - Have these been approved by Bank management? Is approval for any policy exception sought from the Board? Does the project include any critical risks rated substantial or high? Ref: PAD III. E. Does the project meet the Regional criteria for readiness for implementation? Ref: PAD I K G. Project development objective Ref: PAD ILC., Technical Annex 3 [ ]Yes [XINO [XIYes [ ]No [XIYes [ ]No The project development objective (PDO) is to strengthen the effectiveness of DSWD as a social protection agency to efficiently implement the CCT program (4Ps) and expand an efficient and functional National Household Targeting System of social protection programs. Project description Re$ PAD II.D., Technical Annex 4 Component 1 : Support to the National Household Targeting System for Poverty Reduction - Support the DSWD in developing and implementing its National Household Targeting System for Poverty Reduction (NHTS-PR) which will be used to better target to the poor key social assistance and social protection programs of DSWD and other government agencies. Component 2: Support to Pantawid Pamilyang Pilipino Program (4Ps) - Support the 4Ps through provision of health and education grants to poor and eligible households living in the selected municipalities. Component 3: Building Institutional Capacity to Lead in Social Protection -Support the strengthening of basic institutional capacity of DSWD to undertake policy analysis and strategic planning and the installation of a technically sound monitoring and evaluation system. Which safeguard policies are triggered, if any? Re$ PAD IKF., Technical Annex 10 O.P Indigenous People s Policy. The team agreed that this policy is triggered because the project is likely to deliver direct and indirect benefits to IPS. Direct benefits are likely to be delivered through the conditional cash transfer (CCT) program, which targets poor areas where IPS may be present. IPS are also likely to benefit indirectly from the policy reforms under the project. Significant, non-standard conditions, if any, for: Ref: PAD III.F. Board presentation: None Covenants applicable to project implementation: (i) For the first two years of project implementation, DSWD will carry out spot checks semiannually, no later than January 3 1 and July 3 1 in each year, commencing July 3 1,20 10, and until July 3 1, Thereafter, the spot checks will be carried out in annual basis, no later than July 3 1 in each year, and commencing July 3 1,20 13.

11 (ii) Payments for the CCT Grants for Health will be made upon the establishment and operationalization of a compliance verification system linked to payments as set out in the Operation Manual. (iii) Payment for the CCT Grants for Education Services will be made based on the existing manual monitoring system at the school level until June 30,20 10 or such a later date as the Bank may agree. Thereafter, payments for the Education Grant will be linked to the compliance verification system. (iv) DSWD to appoint the consultant to conduct the spot checking verification of the cash grant processes by April 30,2010 Financial Management: (i) DSWD to engage, no later than 6 months of loan effectiveness, the services of reputable audit consultants, having qualifications and terms of reference acceptable to the Bank, to assist in strengthening the internal control system of DSWD, including its internal audit unit. (ii) DSWD to fill the Operations Audit Division Head position in IAS no later than five months of loan effectiveness. (iii) DSWD to establish a dedicated financial management group for the project, including hiring a Financial Management officer and other key Financial Management staff for the project no later than five months of loan effectiveness. (iv) DSWD to submit to the Bank no later than 60 days after the end of each calendar semester an internal audit report for the project. Mid-Term Review: DSWD to conduct a mid-term review of SWDRP within 24 months after the effective date.

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13 A. STRATEGIC CONTEXT AND RATIONALE 1. Country and sector issues' 1. After posting strong economic growth for several years, the Philippines is experiencing an economic slowdown as the country was not spared by the impacts of global economic crisis. In , GDP grew at an average rate of 5.4 percent and reached 7.3 percent in 2007, the highest growth in three decades. In 2008, however, GDP growth decelerated to 3.7 percent in 2008 and barely grew in the first quarter of 2009 (0.4 percent) as the global economic crisis has affected the domestic industrial activity, particularly the export-oriented manufacturing industries. With a population of 88.6 million in 2007, per capita income stood at $1,620e2 2. The Philippines has made progress in poverty reduction over the last two decades, although still not as rapid relative to its Asian neighbors. The proportion of Filipinos living below the national poverty line declined from 45 percent in 1991 to 30 percent in Poverty measured using the international benchmark shows a similar trend. However, between 2003 and 2006, when GDP growth averaged 5.4 percent, poverty incidence increased from 30.0 percent to 32.9 percent during the same period, indicating a low response of poverty reduction to growth. High rates of inequality explain some of the disconnect between the recent experience in growth and poverty reduction. The country's Gini coefficient remains high relative to its Asian neighbors and large variation in economic opportunities persists at the sub-national level. Per capita incomes in the poorest regions are only percent of the national average and have the highest incidence of poverty. 3. Moreover, the Philippines has been lagging in its progress toward achieving some key nonincome MDG targets. Net enrolment ratio in primary education did not show any progress from 84.6 percent in 1990 to 84.8 percent in 2007 and only 75.3 percent of pupils that enter grade 1 make it to grade 6, which are far from the target of 100 percent. Dropout from elementary school is higher for children among poor households. Although important progress has been made in reducing infant mortality, the proportion of 1 -year-old children immunized against measles barely rose from 77.9 percent in 1990 to percent in Malnutrition remains a major issue, with only 64 percent of Filipino children meeting the World Health Organization's (WHO) normal weight-for-age standards. Meanwhile maternal mortality rates remain high at 162 per hundred thousand live births in Recent data show that the food and fuel price shock in 2008 and the recent global economic crisis, and now the recent typhoon related disaster, have taken their toll on household welfare and the economy as a whole, which has serious implications in reducing employment and incomes of Filipino households. The unemployment rate increased from 7.4 percent in January 2008 to 7.5 percent in April 2009 while the growth of remittances from overseas Filipino workers began to slow down, from 13.7 percent growth in 2008 to 2.8 percent from January to May Moreover a growing number of Filipinos consider themselves poor, unable to sustain their daily food requirements, and in worse conditions this year compared to 2008 because of the joint effects of the 1 See Annex 1 for a more detailed discussion of country and sector issues. 2 Per capita GNI was computed using the Atlas method. 3 Updates as of May 2009, NSCB MDG Watch: Statistics at a glance of the Philippines' Progress based on the MDG indicators, 1

14 food and global economic crises that successively hit the co~ntry.~ Such negative developments pose serious threats to the already slow progress in reducing poverty in the Philippines and at the same time highlight the need for policy action to mitigate deepening impacts, especially to poorer households. 5. While poverty remains at one-third of the population, an even higher proportion of Filipinos are vulnerable to shocks that throw them into poverty. Shocks that commonly throw Filipino households into poverty are those related to health (e.g., loss of a family member, especially the head of the household), employment, natural disasters, civil unrest, and food price^.^ Recent Government estimates show that some 45 percent of Filipinos are vulnerable to falling into poverty because of these shockse6 The compounding effects of the food, fuel, and the global economic crises, have exposed the vulnerability of Filipinos to shocks, especially among poor households. In fact, estimates show that the combined effects of the food and fuel inflation in July 2008 may have increased the poverty headcount by 3.9 percentage points, bringing an additional 3.3 million households into poverty. Meanwhile, the socio-economic impacts of the global economic crisis seeped through the decline in remittances, lower demand for labor, and reduction in real wages. As the global demand continued to fall in 2009, labor-intensive industries, such as manufacturing and retail and wholesale trade suffered the biggest contraction, many of which consist of a majority of low-skilled workers who are disproportionately susceptible to job cuts. In the absence of appropriate safety net programs, households have developed coping mechanisms following a shock, but these tend to erode human capital and perpetuate poverty. Families respond to income shocks by increasing working hours, changing eating patterns, receiving transfers from relatives and friends, or withdrawing children from school7 6. Despite the Government s recognition of the high degree of vulnerability among Filipino households, there remain several policy and institutional weaknesses in addressing issues of social protection in the Philippines. The Government places high priority on the poor and vulnerable groups in its Medium-Term Philippine Development Plan (MTPDP) for However, to date, Government efforts to address lagging poverty and human development outcomes especially among the poorest and most vulnerable households have been compromised by several factors: (i) spending on social sectors, particularly social assistance programs has generally been low. National government s ending on social protection services was estimated to constitute only 0.4 percent of GDP in 2007.! The budget of the Department of Social Welfare and Development (DSWD), which has the primary role in delivering social welfare services, accounted for only 0.32 percent of the national budget (about 0.05 percent of GDP) in 2007: (ii) there has been a lack of policy and institutional coordination in the broad area of social protection, with several Departments undertaking uncoordinated programs that address various aspects of social protection especially after the devolution of basic social services to the LGUs in 1992 as part of the Local Government Code; and (iii) even though numerous social assistance programs are in place, benefits from such 4 World Bank, Global Crises and Household Vulnerability in the Philippines: Social Impacts and Policy Responses, forthcoming. World Bank (2001) Philippines: Poverty Assessment. Volume 1: Main Report. National Anti-Poverty Commission and National Statistical Coordination Board (September 2005) Assessment of Vulnerability to Poverty in the Philippines. World Bank (2001). Manasan, R. (2006) Review of Government Programs and Spending Priorities for Social Welfare Protection and Social Development: Phase I. and Manasan (2009) Assessment of Social Protection Programs in the Philippines (mimeo). 2

15 programs have been muted due to lack of a legitimate and functional system to target poorest households. Assessments of these schemes show high leakage rates to the non-poor and undercoverage of the poor. 7. The Government has recently increased its focus on reforming and reinforcing its social protection system. In response to the challenges mentioned above, the Government, with World Bank support, has taken some positive steps in addressing the major lapses in its social protection policies. Recent economic events have also made the Government redouble its efforts in the area of social protection. 0 A sector reform effort is underway at the DSWD, with technical support from the World Bank, which can put into place the main building blocks for developing a sound social protection program in the Philippines. In developing its reform program, the DSWD has articulated four discrete components to its reform. They include: (i) Leading in Social Protection (the development and implementation of a social protection framework and the development of a targeting system for the poor); (ii) Faster and Better Service Delivery (improving its suite of programs, including putting into place a new program of conditional cash transfer for households, while reviewing and refining existing delivery models and improving governance systems); (iii) Smarter Financing (securing more predictable funding for core DSWD functions, more strategic budget allocation, including for resource augmentation of local government units and other partners); and (iv) Improving Systems for Service Delivery - which would entail improving monitoring and evaluation systems and management information systems, as well as enhancing organizational capacity. These reforms are intended to improve DSWD s effectiveness in delivering social welfare programs and to put into place the building blocks for the development of a more coherent social protection system. a The Government recently established an institutional framework for the enhanced delivery of social protection programs, with a view to reducing fragmentation and overlap, while enhancing coordination. A key step was taken in July 2008 with the creation of an inter-agency National Social and Protection Welfare Cluster to consolidate programs of various government agencies into a single, national social welfare strategy. Over the longer term, such an inter-agency program would be expected to lead to reallocation of resources across programs to scale-up more effective social protection programs relative to less effective programs. 0 In February 2008, the Government launched a pilot Conditional Cash Transfer (CCT) program (Pantawid Pamilyang Pilipino Program, or 4Ps) that focuses on supplementing the income of the poorest households in selected municipalities while also supporting their human capital development. Program planning for the 4Ps began in 2007, with World Bank technical support, prior to the onset of the food and fuel price shocks in 2008, with a planned target of 20,000 household beneficiaries. The program was launched in February 2008 with 6,000 household beneficiaries in four pilot municipalities and two cities in the Philippines. In response to the crisis which happened in the succeeding months, the government decided to accelerate and augment the program and has rolled it out to about 376,000 beneficia ry households by March 2009, with intensive and continued technical assistance from the World Bank. In mid-2009, the Government has subsequently announced its intention to expand the program to up to one million households by Ibid. 3

16 the end of The DSWD envisions its CCT program becoming the backbone of its social protection framework. e The Government, furthermore, decided to use the Proxy Means Test (PMT) methodology as the targeting tool to roll out a National Household Targeting System for Poverty Reduction (NHTS- PR). The Government would like to have this system result in the generation of a database of poor households covering the whole country. The development of a national targeting database is expected to have significant impacts by directing scarce resources to the poorest households. This could both increase the benefits to poorest households by reducing leakage of existing social protection programs, hence, having a greater impact in reducing poverty incidence and severity, as well as allowing for cost efficiencies. It can be used for the targeting of other national programs intended for poor households, such as the subsidized health insurance for the poor through Philippine Health Insurance Corporation (PhilHealth) and the rice subsidy program through the National Food Authority (NFA). 8. The Government is thus taking concerted steps on an ambitious agenda of reform to address the multiplicity of issues in the social protection sector. It has requested the Bank for its assistance to support this agenda through an investment project. The proposed project is aimed at supporting the Government strategically advance its agenda of reform in social protection. 2. Rationale for Bank involvement 9. In order to support the Government s social reform program, the proposed project will assist the Government to put in place the building blocks for developing a sound social protection program and strengthening DSWD s capacity to implement the reform program. The Bank s support for this agenda is central to its Country Assistance Strategy (CAS). The proposed project forms a corner-stone to the strategic focus of reducing vulnerabilities, one of the building blocks of the new CAS (FY2010-FY2012) aimed at enhancing inclusive growth. The Bank s intervention in this area is strategic. The proposed project could potentially leverage major change in how effectively the Government addresses social protection and targets poverty reduction programs in the future. An effective household targeting system and CCT program could serve as primary pillars of a coherent social protection program for the Philippines in the future which, if successful, could eventually replace multiple and duplicative welfare programs as it has in other countries. Promoting the systematic monitoring and evaluation of this Department s main programs will assist the Government toward its stated move to empirically based budgeting. Furthermore, the proposed project is aimed to promote the emergence of a strong institutional leader in the social protection sector. The Bank has extensive global expertise in the general area of social protection as well as in CCTs which will be a particular focus of this project. The Philippines can benefit from the Bank s global experience and knowledge. The Government has specifically asked the Bank for its assistance in this area, and it should be noted that the Bank has played an instrumental role in providing technical assistance to the design and scale-up of this Government program over the last two years, in close tandem with project preparation. The World Bank and DSWD have had a close partnership over the years, with DSWD having implemented the Social Expenditure Management Projects (SEMP1 and SEMP2) as well as its Early Childhood Development (ECD) project (all rated satisfactory), while also currently implementing KALAHI-CIDSS, a major community driven development (CDD) project funded by the Bank. The World Bank is the DSWD s major external partner, and the Department has articulated the value it places in the Bank s technical and fiduciary 4

17 expertise in undertaking its reform. In a politically charged environment, DSWD sees value in having the Bank s credibility and backing in developing a social protection program. 3. Higher level objectives to which the project contributes 10. The Government s MTPDP has laid out the agenda for poverty reduction, good governance and efficient delivery of services. The MTPDP recognizes the growing number of vulnerable groups in the country which continuously experience social and economic shocks. Similarly, the Philippines is lagging compared to other East Asian countries in meeting key social MDG targets. In order to achieve the MDG targets, the Government will have to rise to the challenges of improving the delivery of basic services The proposed project would provide the Bank with the entry-point of supporting reforms at the DSWD and putting into place the building blocks for a social reform program as well as strengthening the key agency that will implement the reforms. In addition, through its support of the 4Ps, the proposed project would give the Philippines traction toward meeting all six of the key social MDG targets. 12. The proposed project will be a centerpiece for the new Country Assistance Strategy for the World Bank (FY2010-FY2012), focused on reducing vulnerabilities for inclusive growth. It has close synergies with other Bank operations. It follows through with the implementation of a broad social protection agenda laid out in the Bank s recent Global Food Crisis Response (GFRP) Development Policy Operation. There are, moreover, close synergies with the sector-wide reform agendas in education and in health being supported by our National Program Support for Basic Education (NPSBE) and National Sector Support for Health Reform (NSSHR) projects. These projects and their implementing agencies have committed to and are already responding to supplyside demands in CCT pilot sites. In addition, the Bank s community driven development project, KALAHI-CIDSS, is also currently operational in about half of the CCT sites covered by the project and it is being scaled-up to include more of the CCT municipalities. There are synergies to be exploited between the CCT program and community level supply side interventions, as well as exploitation of social capital already in place in KALAHI sites. B. PROJECT DESCRIPTION 1. Lending instrument, Financing Arrangements and Other Approaches 13. The lending instrument chosen for the Bank support is a Specific Investment Loan (SIL). The SIL is considered the most appropriate instrument to support this new reform agenda of the DSWD, including support to establishing and consolidating systems around the new CCT program, expanding the targeting system, supporting monitoring and evaluation, and strengthening institutional capacity to deliver in these areas. Experiences from other countries indicated that a SIL instrument is more appropriate for projects wherein a major portion of the loan proceeds will be delivered in cash and can be disbursed easily, provided control mechanisms are in place including targeting mechanisms and spot checks to monitor targeting implementation and to monitor the 4Ps. The SIL provides clarity and stability in adhering to the agreed criteria. Given these various considerations, in particular the heightened requirements in terms of adherence to the agreed 5

18 criteria, transparency and downward accountability measures, a SIL instrument has been deemed appropriate for the proposed operation. 14. The Borrower chose the IBRD flexible loan with a variable spread and a total maturity 25 years including a grace period of 10 years. The choice of the above terms is advantageous to the Government due to a much lower spread as compared to the fixed spread. 2. Project development objective and key indicators 15. The project development objective (PDO) is to strengthen the effectiveness of DSWD as a social protection agency to efficiently implement the CCT program (4Ps) and to expand an efficient and functional National Household Targeting System of social protection programs. Achievement of the PDO will be measured in terms of the following monitoring indicators: (1) share of all poor households registered in the National Household Targeting System for Poverty Reduction (NHTS- PR);" (2) share of children 6-14 years old in poor beneficiary households attending school at least 85 percent of the time; and (3) share of children 0-5 years old undergoing growth monitoring and check-ups in accordance with Department of Health (DOH) protocol. 3. Project components 16. The project will finance the following three components: (1) Support to the National Household Targeting System for Poverty Reduction (NHTS-PR); (2) Support to Pantawid Pamilyang Pilipino Program (4Ps); and (3) Building Institutional Capacity to Lead in Social Protection. A full description of the proposed project is provided in Annex 4. Component 1: Support to the National Household Targeting System for Poverty Reduction (NHTS-PR) (US64.5 million - IBRD) 17. The objective of this component is to support the DSWD in implementing the NHTS-PR which will be used to better target the poor in key social assistance and social protection programs of DSWD and other government agencies. The NHTS-PR consists of a set of uniform, objective, and transparent criteria to select the poor, thus reducing the overall cost of targeting and improving coordination, efficiency, and effectiveness of social programs. This is fundamental to improving governance and anti-corruption by improving transparency and reducing leakages as indicated in the project's Governance and Anti-Corruption Action Plan (Annex 15). DSWD is currently creating a standardized national database of poor households nationwide. 18. This project component will have two subcomponents: (1) Implementation of the Targeting Mechanism, which will support the implementation of the standardized targeting mechanism nationwide; and (2) Implementation Support for NHTS-PR, which will include (i) support to National Project Management Office (NPMO-NHTS) for NHTS-PR; (ii) development and implementation of a Management Information System (MIS) for targeting; and (iii) spot checks for targeting. lo Based on baseline of poor households in the latest official household data of 2006 (4.7 million poor households total). 6

19 Subcomponents and activities 1.1. Implementation of Targeting Mechanism (USS54.8 million - IBRD) 19. The objective of this sub-component is to support the current implementation of a standardized targeting mechanism nationwide. The rules, procedures, and methodology are defined by DSWD at the central level, following the successful experience of the targeting mechanism used for the roll-out of the CCT program to date. The operation is decentralized at the regional level through the regional offices of DSWD. At the municipal level, there is coordination with LGUs for the logistics of the collection of information and for coordination with barangays (villages). The targeting mechanism is composed of two main steps: first, a geographical selection of poor provinces and municipalities based on poverty incidence; and second, a household assessment in areas selected through the estimation of per capita income using a Proxy Means Test (PMT) methodology. The household assessment follows a rigorous process of quality control of the data collected. This subcomponent will finance the household assessment of about 8.3 million households nationwide. It includes costs of collection, supervision, processing, and estimation of PMT. 20. The main outcome of this subcomponent will be to have a homogeneous and transparent mechanism to identify poor households so as to develop a database that can be used by various social protection programs at the national and local level. The NHTS-PR is currently being implemented nationwide. The implementation has been divided in 3 phases, prioritizing poorest provinces and municipalities. 21. This subcomponent will finance household assessments for about 8.3 million households, maintenance of the database, hardware for processing information, the issuing of identification (ID) cards for poor households, and a survey and benefit incidence analysis to measure targeting outcomes Implementation Support for NHTS-PR (US$9.7 million -IBRD) I. 2. I. National Project Management OfJice for NHTS-PR 22. There is a National Project Management Office (NPMO-NHTS) within the structure of DSWD dedicated exclusively to implement the targeting system. Composed of technical staff of various disciplines, the NPMO-NHTS performs policy-making functions and ensures the execution of tasks and activities of the NHTS-PR. The NPMO-NHTS is headed by a National Project Director and assisted by a Deputy. The regular operation of the NHTS-PR is supervised by the National Project Manager. The NPMO-NHTS has a team of targeting, training, social marketing, finance specialists, statisticians, data analysts, MIS systems engineers. The NPMO-NHTS under a decentralized operation through the regional field offices of DSWD carries out all the steps in the implementation of the targeting system. The specific functions and responsibilities are described in the Operations Manual for NHTS-PR. 11 It is estimated that 8.3 million household assessments will result in about 4.7 million households being classified as poor in the database. 7

20 23. This activity will finance staff of the NPMO-NHTS, training, social marketing, specialized technical assistance, and vehicles to support the implementation of the NHTS-PR Development and Implementation of a Management Information System (MIS) for NHTS-PR 24. This activity will support the development of an MIS for the NHTS-PRY which is critical for its accurate and effective use. The system will support all steps of the targeting mechanism, including data collection, quality control procedures, and validation routines, processing, estimation of the PMT, and selection of poor households. The main outcome of the MIS will be to create and maintain a standardized database of poor households. This activity includes: (i) development of software to support the data collection process and to manage the database; (ii) licenses for the application developed; (iii) procurement of hardware, software, servers, and data communications for NPMO-NHTS and local offices (municipalities) in selected areas; and (iii) training of staff to use the system Spot Checks for Targeting 25. This activity will support the assessment of the implementation of the targeting mechanism through quantitative and qualitative spot checks, to provide information about the execution of the different processes in the implementation of the targeting mechanism. The information will be the basis for analysis and random audit of the operation of the targeting mechanism at different levels and among the different institutions involved. The assessments and further analysis will be carried out by an independent institution to add more credibility to the analysis. This assessment will cover the collection process, the processing, the estimation of PMT, and the sharing and maintenance of the database. The assessment will cover the NPMO-NHTS, regional field offices, and municipalities. Component 2: Support to Pantawid Pamilyang Pilipino Program (4Ps) (Total: US$444.4 million; IBRD: US$ million, GOP: US$ million) 26. The objective of this component is to support the implementation of the CCT program - 4Ps in selected poorest provinces and municipalities. The 4Ps is a CCT program aimed at addressing poverty and supporting improved health and education outcomes of poor children and pregnant women. The 4Ps provides cash grants to poor households subject to their meeting certain conditions in health and education. 27. This component will have two subcomponents: (i) Grants, and (ii) Implementation Support for 4Ps, to support the National Project Management Office (NPMO-~PS), develop a Management Information System for 4Ps, and strengthen Monitoring and Evaluation of 4Ps. SubcomDonents and activities Ps Grants (Total: US$432.1 million; IBRD: US$325.1 million, GOP: US$107.0 million) 28. This subcomponent will finance 75 percent of the health and education grants of the 4Ps in selected poorest provinces and municipalities covering the period CY2009-CY2013. The households covered were selected as beneficiaries of the program, following a standardized 8

21 ~~ targeting mechanism with rigorous quality control process. The transfers are being paid by DSWD to poor and eligible households living in selected municipalities. l2 Selected households will receive the cash transfers for up to 5 years subject to the eligibility criteria and the compliance with the conditionalities. Following the successful practice of other CCT programs, the 4Ps includes two kinds of transfers: one related to health and one related to education. 29. Health Grant. Poor households with children 0-14 years old and/or pregnant women will be eligible for a health transfer currently set at PhP 500 (US$11) per household per month (for a period of 12 monthdyear) regardless of the number of children 0-14 years old. The health transfer requires that households fulfill the following conditionalities: (i) all children 0-5 years old should attend the health center or rural health unit to get the services established by DOH according to their age; (ii) pregnant women must attend the health centers or rural health unit according to DOH protocol; (iii) all children 6-14 years old in primary school should comply with the de-worming protocol at schools; and (iv) for households with children 0 to 14 years old the household grantee (mother) and /or spouse shall attend family development sessions at least once a month. 30. Education Grant. Poor households eligible for the education grant are those living in selected areas with children 6-14 years old. The education transfer is PhP 300 (US$6) per child per month (for a period of 10 months/year), up to a maximum of 3 children. Beneficiary households will receive the education transfer for each child between 6-14 years old as long as they are enrolled in primary and secondary school and maintain a class attendance rate of 85 percent every month. The DSWD is also commencing implementation of cash grants to 3-5 year olds who regularly attend day care (in cases where the household has less than the cap of 3 children in elementary sch~ol).'~ 3 1. As the 4Ps CCT program is being newly rolled out, this project, along with World Bank and other Technical Assistance, is supporting the phased implementation of a fully computerized payment verification system14. Phased implementation which is underway, is scheduled to lead to full implementation of verification linked to the payment database by mid l5 32. As a transitional measure until June 30, 2010, when full implementation of verification linked to the payment database is expected to be in place, the project will support the beneficiary grants that have been targeted to the poor beneficiaries for education. From the commencement of the program these grants have been provided to targeted poor beneficiaries; payments have been on the basis of declared student enrollment at the outset of the program; and school attendance has been regularly monitored by schools. l2 Currently these include 160 municipalities/cities listed in the Project Implementation Plan selected by the Borrower, where such list may be revised from time to time with the prior approval of the Bank. 13 The Bank project will defer support of this grant until further assessment of the viability of this conditionality, while supporting such an assessment. l4 This entails, upon identifying beneficiaries, associating them to schools and clinics, manually recording attendance at schools and clinics, developing and rolling out a computerized MIS system (Component 2.2.2), encoding attendance through the MIS system, and then linking such data to the centralized payment system. See Annex 4 for further description of this system. 15 Phased implementation is scheduled to have manual recording of attendance in place by , computerized recording of such attendance rolled out commencing Q and full implementation of verification linked to the payment database by end of

22 2.2. Implementation Support for 4Ps (US$12.3 million, IBRD) Support to National Project Management Office (NPM0-4Ps) 33. There is a National Project Management Office (NPMO-4Ps) within the structure of DSWD to oversee the whole implementation of the program. As shown in other CCT programs around the world, a key to program success is a strong and efficient NPMO-4Ps which is capable of developing and implementing all key activities of the program cycle, including registration of families, verification of conditionalities, managing payments, organizing assemblies of grantees, implementing a grievance system, undertaking monitoring and evaluation and developing and using an MIS system that supports all these operation activities. DSWD has made major advances in setting up a NPMO-~PS, assess about households, organize verification, socialization and registration of households in the program, and process payments through Land Bank to most of these households. Continued effort is required to properly set up systems for registration, verification, grievance acceptance and resolution and monitoring, and evaluation activities. 34. The program is also supporting the establishment of a Grievance Redress System (GRS), featuring a publicly accessible grievance database, to resolve and track complaints including targeting errors, payment irregularities, fraud and corruption. The GRS will facilitate both resolution of complaints and, through the database, analysis of systemic vulnerabilities in project design and implementation. (See Annex 15 on the GAC Action Plan). 35. This activity will finance consultants at the NPMO-4Ps needed for a speedy and efficient operation, as well as training, social marketing, the grievance redress system, specialized technical assistance, and vehicles for regional offices Developm ent of a Management Information System (MIS) for 4Ps 36. This activity will support the development of an MIS that will cover all the steps in the operation of the 4Ps. The system will manage different flows of information at different levels. The system will operate at the NPMO-4Ps level, regional level, and at the municipal level to support the implementation at the lowest possible level. The MIS will have the following modules: (i) household information; (ii) registration; (iii) verification of conditionalities; (iv) payments; (v) updates; and (vi) grievance redress system. This activity will finance the hardware and software, network and communication connections as well as training needed to run and support the operation of the program Monitoring and Evaluation of 4Ps 37. This activity will support monitoring and evaluation of 4Ps with a view to building DSWD s capacity in these areas as a step towards more evidence-based planning and policy - one of the objectives of DSWD s reform agenda. More specifically, this activity will assist in the design and implementation of (i) a spot check methadology to monitor 4Ps operation that will produce the information required for informed and timely policy decisions and adjustments; (ii) a methodologically rigorous impact evaluation of the 4Ps project on the basis of which the 10

23 Government and the public would have evidence of program impact, key for program sustainability; (iii) support to an Independent Monitoring and Advisory Committee; and (iv) the regular monitoring of the whole project Spot Checks for 4Ps 38. For the first two years of project implementation, semi-annual monitoring will be carried out through a comprehensive spot check system to ensure that the program is functioning and to trouble-shoot any process problems that may arise. On the third year of project implementation, the frequency of the spot checks will be done on an annual basis. Spot checks will assess all major steps in the 4Ps process, including: (i) payment; (ii) dissemination, training and orientation; (iii) verification of compliance; (iv) availability of supply-side services; and (v) the grievance redress system. The spot checks will assess whether beneficiaries receiving the grants meet the eligibility criteria set out in the Operations Manual, whether beneficiaries are complying with the requirements of the CCT program, and whether grants were received by eligible beneficiaries. Spot checks will validate the range of players involved in 4Ps delivery: beneficiaries, schools, health centers, parent leaders, municipal links, and municipal, regional and central offices. The actual implementation of the spot checks and the preparation of reports verifying these data against program administrative records will be carried out by an independent, external party chosen on the basis of its credibility and technical capacity. By combining different techniques of data collection (surveys, focus groups and structured interviews) and analyzing the 4Ps administrative data, this external party is expected to inform the program administration on how well specific operational aspects of the program are functioning and where adjustments are needed. Beyond its technical merits, spot checks are key to enhancing the governance, transparency, and accountability under this program. (See Annex 15) Evaluation of Project Impact 39. The objective of this subcomponent is to address the issue of whether the 4Ps has a significant statistical impact on the main project outcomes along the dimensions of health and education of children, and poverty reduction. The evaluation will also assess the impact of increased demand on the supply of education and health services at the local level and social impacts including women s empowerment and any socio-economic spin offs from the formation of beneficiary groups. Such an evaluation is seen to be critical for the longer-term sustainability of the program. The impact evaluation will have a randomized design and include control and treatment groups, ensuring a methodologically rigorous identification strategy. (See Annex 4 for the proposed design). The project will finance some of the activities to carry out an impact evaluation of the 4Ps, in particular those related to the follow-up survey and any complementary qualitative work or structured interviews to be carried out as parallel activities Monitoring 40. The objective of this activity is to support monitoring of the whole project, including preparation of regular (quarterly and annual) progress reports, mid-term and annual reviews, independent performance tracking by civil society groups and monitoring by internal audit services. Regular monitoring will be complemented by independent oversight on the part of an Independent Monitoring and Advisory Committee comprising of eminent members of civil society. 11

24 Component 3: Building Institutional Capacity to Lead in Social Protection (US$2.1 million - IBRD) 41. This component would support the strengthening of basic institutional capacity of DSWD to strengthen its leadership role in social protection. It focuses on strengthening the capacity of DSWD to undertake policy analysis and strategic planning related to social protection. In addition to supporting overall policy analysis and planning, it will contribute to the development of an operational social protection strategy, as well as to strengthening the synergies among existing social protection and welfare programs of the Department, It will also contribute to mainstreaming technically sound monitoring and evaluation protocols for systematic use in evidence-based decision making within the Department. Furthermore, this component supports the implementation of a social marketing plan for broader engagement among internal and external stakeholders and strengthens knowledge management and learning with a view to strengthening partnerships across stakeholders that deliver on the social protection agenda. Finally, it also builds capacity for financial management and internal audit to strengthen internal controls. Subcomponents and activities 3.1. Policy and Strategy (US$ 0.6 million - IBRD) 42. This subcomponent would assist DSWD to enhance the capacity in policy and strategy formulation which is among its core functions as a leader in social protection. To achieve this objective, the project would support several key areas: 1. Policy Analysis and Research. This subcomponent would strengthen the Department s capacity for undertaking and using policy analysis and research for policy formulation. It will support hands-on trainings, consultations, manual development and other capacity building activities to strengthen the competence of DSWD to undertake relevant policy analysis based on risk assessment, benefit incidence analysis and research. A medium-term policy and research agenda will be developed in consonance with the priority thrusts of the reform agenda, including emerging concerns related to operationalizing and sustaining the NHTS-PR and ~Ps. 2. Strategic Planning. This sub-component will also support the formulation, dissemination and adoption of key strategic plans that would define the operational mechanisms for integrated delivery of social protection programs and services. Specifically, the formulation of the following strategic plans will be supported: a. National Social Protection Operational Framework The project would support DSWD translate its indicative social welfare and development framework, which contains the principles and major thrusts for the delivery of social protection programs, into an operational social protection strategy. The operational framework is envisioned to further institutionalize and mainstream the targeting and CCT programs. b. Frameworkfor Integrated Service Delivery. The project would assist the Department to develop an integrated framework that would define the linkages of its four service delivery models (Le. household-based, community-based, center-based, and disaster 12

25 management) to ensure synergies and to achieve greater impact in the long run. The integrated service delivery framework would also lay the foundation to ensure further convergence with social protection services of other agencies Implementation Support (US$ 1.0 million - IBRD) 43. This subcomponent would support institutional strengthening of the Department in three functional areas which are essential for effective implementation to achieve the project development objectives. This entails the strengthening of (i) social marketing to ensure full transparency and enhance understanding of social protection strategies and programs among relevant stakeholders; (ii) knowledge management and learning development to build on the experiences from implementation of 4Ps and the NHTS-PR as well as program assessments and impact evaluations; and (iii) financial management to strengthen capacity in step with the scaling up of the Department s implementation of the programs supported by this project Monitoring and Evaluation (US$ 0. Smillion, IBRD) 44. This sub-component would assist the DSWD to enhance capacity in monitoring and evaluation which will be also among its core functions as leader in social protection. Monitoring and evaluation would be intrinsic to program and policy development as it would track performance of key programs and policies, the results of which would be used for further program enhancements. 45. The initial activities would involve the review of existing monitoring systems in various units of the Department as a basis for the development of the logical framework design, guidelines and protocols for a broader monitoring system. The regular staff would be assisted and provided on-the-job training by consultants to be hired under the project. Subsequently, actual operations of the monitoring system would be implemented by the regular staff with mentoring/coaching by the consultant(s). With project support, national and regional staff would also undergo on-the-job training on the use of the guidelines by undertaking actual program assessments of at least two major social protection programs. 46. The project would likewise support the development of the guidelines and operations manual on evaluation which would be led by the Planning and Policy Bureau. The guidelines would draw inputs from a review of on-going and completed evaluations. The results of the evaluations would eventually feed into program innovations, policy formulation, standard-setting and other decision-making. 4. Lessons learned and reflected in the project design 47. Lessons learned from previous World Bank operations and from the pre-pilot of the 4Ps and incorporated in the project design include the following: (i) a two-step poverty targeting process (geographic and household-level) using a PMT methodology and processes to ensure data quality, can reduce errors of inclusion and exclusion; (ii) CCT programs improve educational attainment and health and education indicators according to various impact evaluation results of countries such as Mexico, Brazil, Colombia, Nicaragua, among others; (iii) CCT programs require much administrative capacity of the institution in charge. It is important to take into account the implementation capacity of the key agencies in designing the project; (iv) keep the project design 13

26 simple while concentrating on development objectives, outcomes and implementation with the least complex institutional design and arrangements; (v) definition of the rules and procedures as well as the responsibilities of the agents involved in the operational manual are crucial for the success and sustainability of the program; (vi) extensive training of the staff at central and local level in all the operational steps of the program is a necessary condition for the success of the program. (vii) design of an MIS that allows information to flow smoothly is key to the implementation of a CCT program; (viii) a rapid assessment, including processes and implementation of the program is needed to measure medium term indicators; and ( ix) rigorous impact evaluation is needed to measure the progress of the program in the long term and lock in long-term budgetary support from the partner government. Moreover, the project has benefited fiom the extremely valuable experience of having pre-piloted the program in 2008 in several municipalities in the Philippines with World Bank technical assistance. 5. Alternatives considered and reasons for rejection 48. The team considered and rejected several alternatives for the design of this operation in deciding on the current design. 49. With regard to the overall design, the team considered variations in terms of the breadth and focus of the components in supporting a broader agenda of national social welfare development reform underway at DSWD. The team chose to focus on strengthening the effectiveness of the CCT program, the roll-out of the national targeting system, along with necessary institutional strengthening as core elements to support. It opted not to support some other elements of the DSWD reform agenda (including improving regulatory capacity, etc.) in favor of maintaining strategic focus. In addition, the team also considered but rejected the idea of supporting the maintenance of the targeting database only in CCT areas in favor of engaging more broadly and supporting the roll-out of the national targeting system beyond CCT areas, given the strategic importance of this effort. 50. The team also considered a variety of lending instruments for this project. Whereas an APL approach is attractive, it was deemed that the medium- to long-term policy agenda in this sector is subject to political volatility to lock into such a long-term planning horizon. A DPL instrument was considered inappropriate to support the Government implement this new and complex program. In fact, a DPL (the GFRP DPO) has recently been used to reinforce and further the agenda supported by this investment operation. It assisted in furthering necessary policy decisions as well as galvanizing a decision for allocating adequate budgetary resources to support the national targeting effort and the CCT program. However, that operation only high-lighted the need for a follow-up investment loan to ensure that broad policy commitments in this area can actually be achieved through careful implementation and technical expertise. An investment loan can be tailored to provide the needed support. Hence, it was decided that a SIL is the most appropriate instrument to support this operation. C. IMPLEMENTATION 1. Partnership arrangements 14

27 51. The SWDRP is envisioned as putting into place the building blocks for operationalizing a broader sectoral reform agenda that will eventually serve as a framework for coordinating the social protection program in the Philippines, including the participation of various development partners. The evolving social welfare reform agenda has been undertaken under the auspices of the joint donor-government Social Protection Sub-working Group of the Philippine Development Forum. The Australian Agency for International Development (AusAID) initially provided grant support in the development of the good governance and anti-corruption aspects of the 4Ps CCT program and is currently engaged in a more substantial technical assistance support to the entire program, executed in part by AusAid and in part by the World Bank. AusAid is also to provide grant-financed technical assistance in the important area of internal audit capacity building at DSWD. Korea and Japan are also supporting the broad TA agenda through Bank executed grant financing (particularly focusing on monitoring and evaluation efforts). Japan International Cooperation Agency (JICA) and Asian Development Bank (ADB) are supporting this reform agenda through development policy loans that, complementing the World Bank GFRP DPO, reinforce key policy actions related to this agenda. The United Nations Children s Fund (UNICEF) and the UNFPA have also had discussions with DSWD to support 4Ps in some capacity as well, while other development partners have requested updates on the progress of this operation with prospects of aligning their emerging cooperation with some aspects of the social welfare reform agenda. Partners in the education and health sectors are similarly discussing how assistance to sector program efforts in those can build on synergies with the CCT program. 2. Institutional and implementation arrangements 52. The DSWD will be the executing agency for SWDRP and shall have overall responsibility for accounting for project funds and coordinating activities under the project. In DSWD, the Executive Committee chaired by the Secretary (with all the Undersecretaries and Assistant Secretaries as members) shall have oversight responsibility for SWDRP. The Undersecretary for Policy and Programs Group (PPG) will be the Project Director and overall coordinator of SWDRP. A designated Undersecretary will be responsible for each of the components of the Project. Currently, the Undersecretary for Policy and Programs Group is responsible for Component 1 on Implementation of the NHTS-PR and Component 3 on Building Institutional Capacity to Lead in Social Protection while the Undersecretary for General Administration and Support Services Group has been designated as the Program Director for Component 2 on Support to 4Ps. 53. While overall oversight and management of SWDRP will be mainstreamed and placed with the office of the Undersecretary for Policy and Program Group, two discrete implementation units will be supported by the project: (i) the NHTS National Project Management Office (NPMO- NHTS) that will be charged with implementing the National Household Targeting System; and (ii) the 4Ps National Project Management Office (NPMO-4Ps) that will be charged with implementing the 4Ps component. 54. A dedicated NPMO-NHTS has been set up to oversee the day-to-day management of the National Household Targeting System, headed by a Director. The NPMO-NHTS will consist of technical staff of DSWD and consultants with support from regional coordinators and provincial supervisors. The NPMO-NHTS consists of people depending on the speed of project implementation during 2009 and beyond. The specific functions and responsibilities is detailed in the Operations Manual for NHTS-PR. The DSWD has also organized a National Targeting 15

28 Advisory Group composed of representatives from the academe, statistical offices, NGOs and private sector to provide advice. 55. A NPMO-4Ps was also established to perform the day-to-day operations of the 4Ps. The NPMO-4Ps is headed by a Director and is composed of about 60 staff. At the regional level, the DSWD Field Directors assume the overall responsibility for implement ing 4Ps with technical support from the Technical Assistance Division and a dedicated 4Ps focal person. At the municipal level, the Department has hired one Municipal Link for each of the 4Ps municipalities, while the local government units are also designating or hiring at least one full-time staff who serves as counterpart of the DSWD municipal link. At the community level, the school principal and midwife have been designated as the education and health focal persons respectively whose primary responsibilities are to oversee and ensure appropriate verification of compliance to conditionalities. 56. The 4Ps National Advisory Committee (NAC) has been in place since May 2008 to ensure coordination among key government agencies. The NAC is chaired by the 4Ps Program Director and composed of representatives from the DSWD, National Anti-Poverty Commission (NAPC), National Economic and Development Authority (NEDA), Department of the Interior and Local Government (DILG), Department of Health (DOH), Department of Education (DepEd) and National Nutrition Council. The Advisory Committee is replicated in all regions through the Regional Advisory Committee (RAC) which includes the counterpart of all the member-agencies of the NAC and provincial representatives. Similarly, the Municipal Advisory Committee (MAC) is organized in all 4Ps municipalities, with the mayor as chair and with the participation of relevant municipal-level representatives of NAC member-agencies. The Advisory Councils at each level also serve as the Grievance Committee to handle public complaints. 57. The DSWD has also organized an Independent Monitoring and Advisory Committee composed of eminent persons from the academe, non-government organizations, religious sector and private sector who provide strategic advice and have agreed to serve as external monitors of the 4Ps Program to ensure transparency and social accountability. 58. The implementation of Component 3 on Building Institutional Capacity to Lead in Social Protection shall be under the direct coordination of the Undersecretary for PPG with the following DSWD BureausLJnits providing technical management: (i) Planning Service for the policy and strategy sub-component, (ii) Social Welfare Institute and Development Bureau, Social Marketing Services and Internal Audit Services for the institutional strengthening sub-component, and (iii) Planning and Monitoring Unit of Planning and Policy Bureau for Monitoring and Evaluation subcomponent. 3. Monitoring and evaluation of outcomeshesults 59. The monitoring of outputs and evaluation of outcomes are vital parts of the project, not only to measure its end results, but also to inform, and if necessary, adjust its implementation. DSWD will carry out all monitoring and evaluation for the project. A comprehensive monitoring and evaluation system will be established and will include both internal and external monitoring, as well as impact evaluation. 16

29 60. The information to be used by DSWD project administrators in monitoring project outputs will come from three main sources. First, program administrative records and the MIS systems will produce the information required for informed and timely policy decisions and adjustments. Second, spot checks to monitor targeting implementation and the 4Ps program will be undertaken as a source of information to monitor implementation processes and outputs and as a form of social audit. Spot checks have been proven to provide valuable operational guidance in similar projects implemented by other countries. DSWD will be responsible for ensuring that these two types of data to monitor project outputs are gathered and used for policy decisions. The actual implementation of the spot checks and the preparation of reports verifying these data against program administrative records will be carried out by an independent, external party chosen based on its credibility and technical capacity. Third, some aspects of monitoring (e.g. targeting effectiveness) will also be based on data that will be collected by the regular national household surveys, particularly the Family Income and Expenditure Survey (FIES), next to be undertaken in Translating the findings from the analysis of the data into concrete policy actions and rectifications in the operations of the 4Ps is the responsibility of the project administration and will contribute to the broader objective of building capacity on evidence-based decision making that is an important part of DSWD s reform agenda. 61. The 4Ps will also put into place a methodologically rigorous impact evaluation. The results of the impact evaluation will provide evidence whether the program has a positive impact or not. The evaluation will be based on an experimental design, with randomly selected treatment and control groups. The objective of this exercise will be to identify whether the 4Ps had any significant impact on the main project outcomes, along the following dimensions: (i) health; (ii) education; and (iii) well being. 4. Sustainability 62. There are several factors underlying the sustainability of the project and its results. First, there is strong ownership of the program by the implementing agency (which considers it a core element of its overall reform agenda), oversight agencies, and the administration. Long-term sustainability of this nascent program will be contingent on the credibility and quality of the program and its perceived and actual results, pointing to how critical the first years of the program, slated for support by the Bank, are to longer-term sustainability. Second, the program is sustainable from a fiscal standpoint. It has been included in the Department s medium term expenditure plan and vetted by the Department of Budget Management. One of the project s objectives, better targeting of social protection programs, would enhance the fiscal sustainability of more effective programs. Third, the program s outcomes in terms of impact on poverty, health, and education outcomes are expected to be sustained from the perspective of beneficiary families, particularly based on experiences from other CCT programs. The human capital gains to beneficiary children and their families are irreversible. Finally, the program has developed a detailed Strategic Communications plan to build public backing for the program and to inform Congress and the Senate on program developments with a view to maintain long-term budgetary support. 17

30 Vo agency has been responsible for iocial protection oversight at the national evel. Fragmentation of delivery of social irotection program across national nstitutions.,ack of a consistent and accurate poverty argeting system for social protection irograms. rechnical Design Vational Household Targeting System or Poverty Reduction (NHTS-PR) rolled )ut too quickly andor uses sub-optimal argeting methods Ither agencies implementing social irotection programs do not use the VHTS-PR database roxy Means Test (PMT) system generates high inclusion and exclusion :rrors nadequate supply and access to services Weak linkage between the national 4Ps Irogram and local level implementation System for verification of compliance not mulemented jovernment commitment and budgetary,ustainability.,ack of cooperation among key national igencies Inter-agency National Social Welfare Program newly created with DSWD as Secretariat. The project will strengthen the capacity of DSWD and support the development of a coherent policy framework for social protection. Project directly addresses this issue by developing a targeting system to be utilized by multiple government agencies in delivering national social protection programs. Roll out is being implemented in phases. Continued dialogue with the GOP to apply a gradual approach to build capacity and credibility of the system Cabinet has articulated the policy direction that NHTS-PR will be used by other agencies. Credibility, quality and timeliness of the availability of the shared database will be critical Public validation and certification of beneficiaries; spot check to review targeting; Grievance Redress System to capture and resolve complaints. Multi-agency committees including DepEd and DOH established at all levels to manage supply-side issues. MOA between DSWD and participating LGUs; 4Ps Municipal Link assigned by DSWD to LGUs. World Bank providing TA to develop monitoring system and MIS Government s medium-term commitment to program captured in current budget allocation and DSWD s Medium Term Expenditure Plan (being agreed) with Department of Budget and Management (DBM). Joint Memorandum Circular between participating agencies; coordination under National & Regional Advisory Committees. DSWD is Secretariat of new National Social Welfare Program. Risk Rating M M M M M M M M M M Ielays in cash releases 0 DBM is now implementing the comprehensive Release of M Cash (Notice of Cash Allocation) that covers 6 months fund requirement of an agency based on the budget. DSWD has extensive experience in implementing Bankassisted project and thus fully conversant on the processes and follow up of the release of cash from the DBM and Treasury. 18

31 CCT cash releases do not reach the complete set of intended beneficiaries Weak internal audit capacity Non-compliance with internal controls based on the report ofthe Commission on Audit (COA) in its audit of the regular accounts of DSWD in prior years Procurement nappropriate or inadequate specifications md TOR for procurement lelay in procurement holds up other Ictivities, including payment Social and Environmental Safeguards Third party spot check systems to assess the verification system and actual cash transfer Internal audit services (JAS) of DSWD shall cover the project in its scope of work and in the first two years work together with the independent audit firm that will provide capacity building to IAS. All cash transfers to the beneficiaries are coursed through a commercial bank, which are then credited to the beneficiaries' cash account or handed over the counter with the presentation of the DSWD issued identification card. Any other identified conduit in channeling the funds shall be agreed with the Bank. Significant capacity-building for the Internal Audit Services to be provided by independent reputable audit consultants to be engaged by DSWD. Separate set of books of accounts maintained for the project Quarterly submission of Interim Financial Reports which would include financial reports. Semi-annual internal audit review of the project shall cover the review of internal controls compliance. Review and approval of SBD and bidding documents by appraisal Preparation of Procurement Plan on or before project appraisal Early commencement of procurement and monitoring using the Electronic Procurement Tracking System M M M L L iccess the project 1 developed to mitigate exclusion Reputational and Other I'he Bank is associated with a program :hat is used for political purposes that Nil1 compromise the accuracy of the :argeting mechanism 3ovemment regular budget and/or liscretionary funds used to supplement :he size of the 4Ps, leading to scale up ieyond project areas -- at a rate that iutstrips institutional and fmancial nanagement capacity; and/or in a nanner that does not adhere to project )rotocols.?he overall risk is Substantial. L=Low; M=Moderate; S=Substantial Strict protocols for geographic and household targeting using the PMT. Engagement of NGOs and third party monitors. Registrations-frozen three months before national elections. 4Ps staff and capacity building will need to be calibrated to program size and coverage S S 6. Loadcredit conditions and covenants Dated Covenants (i) DSWD, no later than 6 months after loan effectiveness, to engage the services of reputable audit consultants, having qualifications and terms of reference acceptable to the Bank, to assist in strengthening the internal controls in DSWD, including its internal audit unit. 19

32 (ii) DSWD to appoint the consultant to conduct the spot checking verification of the cash grant process by April 30,2010. (iii) DSWD to fill the Operations Audit Division Head position in IAS no later than five months of loan effectiveness. (iv) DSWD to establish a dedicated financial management group for the project, including hiring the Financial Management officer and other key Financial Management staff for the project no later than five months of loan effectiveness. (v) DSWD will conduct a mid-term review of SWDRP within 24 months after the effective date. (vi) For the first two years of project implementation, DSWD will carry out spot checks semiannually, no later than January 31 and July 31 in each year, commencing July 3 1, 2010, and until July 3 1,2012. Thereafter, the spot checks will be carried out in annual basis, no later than July 31 in each year, and commencing July 31, (vii)dswd to submit to the Bank no later than 60 days after the end of each calendar semester an internal audit report for the project. Covenants applicable to project implementation: (i) Payments for the CCT Grants for Health will be made upon the establishment and operationalization of a compliance verification system linked to payments as set out in the Operation Manual. (ii) Payment for the CCT Grants for Education Services will be made based on the existing manual monitoring system at the school level until June 30, 2010 or such a later date as the Bank may agree. Thereafter, payments for the Education Grant will be linked to the compliance verification system. D. APPRAISAL SUMMARY 1. Economic and financial analyses 63. The Project will have positive impacts on the Government s effectiveness in addressing social protection and targeting of poverty reduction programs at present and in the future. By supporting the implementation of the NHTS-PR and the 4Ps, the Project is expected to increase the poverty-reducing impacts of Government poverty reduction programs, allow the Government to better formulate emergency programs to cushion the short-term impacts of sudden income shocks to the poorest, address long-term poverty issues of lagging health and education outcomes, and improve the cost-effectiveness of implementing Government programs. 64. Greater impact of existingprograms in reducingpoverty: The current lack of a uniform and objective targeting system in the Philippines has resulted in the proliferation of transfer programs that suffer from high under-coverage and high leakage rates. Improving the targeting of these programs using the new NHTS-PR would allow more subsidy to be directed to poor households. Improving the targeting of the Government s largest subsidy program (NFA rice subsidy), for instance, is estimated to increase the poor s benefit from the program by nearly four times and increase the poverty-reducing impact of the current NFA program by reducing poverty incidence by as much as 6.4 percentage points (Annex 9 Table 9.1). 20

33 ~~ 65. Mitigation of the immediate impacts of sudden income shocks to poor households: The 4Ps CCT is expected to augment incomes of beneficiary households by about 23 percent, providing them cushion against sudden income shocks such as the food and fuel crises in 2008 and the unfolding global economic crisis in The 4Ps cash transfers are estimated to reduce the poverty incidence and income gap in beneficiary areas by 6.1 and 7.6 percentage points, respectively (Annex 9 Table 9.2). The establishment of the NHTS-PR will also allow for better emergency targeting of poor households through cash transfers in the face of future income shocks. 66. Improvements in education outcomes: The high cost of education has been one of the main deterrents of school attendance among children in the Philippines. With the CCT, it is estimated that children s enrolment rate in 4Ps beneficiary areas could increase by 5 percentage points and their school attainment by an additional year.16 An ex-ante evaluation of the program using a nationally representative survey also estimated that, if targeted to all poor households with children aged 6-15, the 4Ps could reduce the proportion of poor children not enrolled in school by as much as 6.7 percentage points and increase the proportion of poor children who study full-time (versus those working part-time) by 4 percentage points (Annex 9). 67. Improvements in health outcomes: Due to data limitations, it is not possible to perform an ex-ante evaluation of the 4Ps impact on health. Nonetheless, CCT programs with comparable average generosity levels, such as Progresa in Mexico and Familias en Accidn in Colombia, have been shown to reduce the incidence of severe illness and stunting among children and significantly improve both children s and mothers nutritional status. Given the high degree of income-related inequality in maternal and child health indicators, the 4Ps program is expected to result in similar positive improvements. 68. Cost-effectiveness of Government programs: In 2008, it is estimated that about PhP60.9 billion ($1.3 billion) in total have been channeled to subsidizing rice through the untargeted NFA17 rice subsidy program. Leakage of the Government s resources to non-poor households would have been reduced by PhP13.1 billion ($0.3 billion) if the program had been better targeted only to the poor. Shifting to a more accurate targeting system will improve the Government s ability to ensure that subsidies and transfers actually reach the poorest families in a more cost-effective manner (Annex 9). 69. The successful implementation of both the NHTS-PR and the 4Ps are seen by Government as the potential back-bone of a modern social protection system for the Philippines. While the CCT program is nascent, close monitoring and impact evaluation of the 4Ps is planned. Authorities are aware that, if successful, the CCT program could potentially replace other subsidy and transfer programs as a flagship social protection and poverty reduction program for the country. By enhancing the capacity within DSWD to efficiently implement the NHTS-PR and 4Ps and systematically monitor and evaluate the Department s main programs, the project is aimed at promoting the emergence of a strong institutional leader in the social protection sector. l6 Simulations based on estimated elasticities to (predicted) income of 0.21 and 1.4 for enrolment and education attainment of children s 6-14 years old, respectively. Analysis uses data from actual beneficiary areas using the PMT data. (Annex 9) 17 The figure includes estimated contracted debts by the NFA. 21

34 70. The Government s commitment to social protection speaks to the Project s financial and fiscal sustainability. Aside from increasing budget allocation for social protection programs in 2008 and 2009 by at least twice the level in 2007, the Government also formulated the Medium Term Expenditure Plan (MTEP) with a view to securing more predictable funding for the implementation of DSWD s core functions and multi-year programs such as the 4Ps. The Project finances a share of line items both in DSWD s approved budget for 2009 and its MTEP for (Annex 9 Table 9.4). The amounts proposed for loan financing are based on a conservative scenario of zero real growth in the budget of DSWD and will not require increased financing over the life of the project. This conservative budgetary assumption and the fact that the project is couched within the DSWD MTEP should ensure its sustainability at least over the five years for which eligible households are part of the program. 2. Technical 71. The project is technically sound. In particular, the introduction of the two-step targeting process, carrying out a geographical selection of poor areas followed by the household assessment through a proxy means test as the targeting instrument, is based on good practice examples from a number of countries. This methodology has proven to have better targeting outcomes than other targeting mechanisms applied to countries with similar conditions to those of the Philippines. The design was appropriately customized to local conditions. The MIS and ICT applications have a good balance between functionality and cost. The CCT design likewise relies on best practice from other countries where such programs have been implemented for a number of years. The practical experience in Latin American countries supports the CCT program approach, in that it has demonstrated how sustainable poverty reduction requires a multi-sectoral approach involving different actors in service delivery. In this context, CCT programs have been found to be an effective demand-side intervention -to build children s human capital. 3. Fiduciary Financial Management 72. The Bank s assessment points to the need for mitigation measures to be undertaken to address outstanding financial management issues. The Bank s assessment indicates that the financial management systems of DSWD will meet the financial management requirement stipulated in the Bank s OP/BP subject to implementation of agreed actions and mitigating measures. Deficiencies in compliance with internal controls involve lack of up-to-date bank reconciliations statements, inventory accounts not reconciled with physical inventory reports due to property unit s failure to maintain accurate and complete record of purchases and issuances, long outstanding unliquidated funds transferred to non-government organizations, local government units, and national government agencies, among others. The accounts of a number of regional offices are still manually maintained. There is also the absence of an Internal Audit Services Unit (IAS) fully functioning in accordance with international standards and IAS still does not have a fulltime head and a full staff complement. This weakness in the control environment substantially increases the risk of the funds not being used for the intended purpose, unless these risks are effectively mitigated. There is a great deal of awareness at the DSWD as this agency has been judged by the Government s Philippine Anti-Graft and Corruption Commission as the number one 22

35 anti-corruption champion in government for 2008 based on the Anti-Corruption Scorecard with the special focus on the progress of DSWD s action on its Integrity Action Plan (IDAP). 73. The assessed Financial Management risks of the project before the mitigating measures is considered substantial but the residual risk would be moderate when the agreed measures are implemented and have shown the expected impact. The mitigating measures include: (i) implementation of action plans to address the Commission on Audit findings on noncompliance with internal controls and accounting policies and to complete the roll out of the electronic bookkeeping segment of the engas to the remaining regions in DSWD; (ii) filling the key vacant position in Internal Audit Services unit with qualified staff; (iii) semi-annual internal auditing of the agency/project and concurrent strengthening of the IAS capacity by independent reputable audit consultants; (iv) implementation of a grievance monitoring reporting system and conduct of spot checks for 4Ps by an independent third party; and (v) preparation of the annual audited project financial statements and unaudited quarterly interim financial reports. Procurement 74. Procurement for the proposed project would be carried out in accordance with the World Bank s Guidelines: Procurement under IBRD Loans and IDA Credits dated May 2004 revised October 2006, and Guidelines: Selection and Employment of Consultants by World Bank Borrowers dated May 2004 revised October 2006, and the provisions stipulated in the Legal Agreement. 75. A procurement capacity assessment of the implementing agency, carried out prior to appraisal, rated the overall risk of the procurement process as low. The main risks concern the inappropriate or inadequate specifications and TOR, packaging and planning for the procurement of the limited but relatively high value MIS goods and survey works. The agency has a Procurement Service (PS) office under the General Administration and Support Services Group, which is responsible for the procurement undertakings for the central office administered funds. This group had been responsible for the procurement undertakings of the agency involving local and foreignassisted projects including the Bank-financed ECDP, SEMP 1 and 2, KALAHI and a number of grant projects in the past. The procurement chain, including the PS and BAC, is very familiar with the Bank s procurement guidelines and procedures and is staffed with competent personnel to implement the proposed procurement arrangement in Annex 8. The DSWD has benefited from the various procurement and implementation experiences, and reforms and capacity buildings initiated and mainstreamed under previous Bank-financed activities. The government has even awarded DSWD-PS the best procurement unit title. The corrective measures which have been agreed to are: (i) finalization of the most technically sound survey works packaging with the help of the Bank s and DSWD s technical specialists; (ii) the engagement of MIS goods specifications specialists to provide the most appropriate technology for the design of the project; (iii) preparation of the bid documents for MIS goods and RFP for consultants; and (iv) preparation of the procurement plan for the project on or before the project appraisal. Aside from these specific measures, the regular * IDAP is composed of specific anti-corruption measures and is now being implemented by 135 government agencies. An Anti-Corruption Scorecard is also used as a measurement tool to assess the impact or effectiveness of the anticorruption reforms. The scorecard considers the results of the assessment by the accountable persons and those of the rank and file employees of the agency, its stakeholders, the clientlcustomers and the results of local corruption related surveys. 23

36 features of the procurement operations in accordance with the law of the country will be adopted, among which are: the use of the Philippine Government Electronic Procurement System (PhilGEPs) and the agency s website in e-advertizing all bid opportunities, annual updating and publication of procurement plan in the agency s website, use of CSO observers in procurement undertakings conducted by BAC, review by the COA of the all procurement and contracting done under the project, use of timelines (service standards) for efficient procurement operations. Also, DSWD will rely on their Electronic Procurement Tracking System (EPTS), which they have developed and operationalized, to monitor transactions from bid opportunity posting to payment. Further, the project will benefit from the soon-to-be launched procurement info bits in popularized version which will be distributed to various procurement operating units. Project Implementation Plan (PIP) 76. A draft Project Implementation Plan (PIP) has been prepared, and it includes a description of implementation and monitoring arrangements, that spells out the sequence of all project activities, a Financial Management Plan, and an overall Procurement Plan. 4. Social 77. The project supports the key reform agenda of the social welfare and development sector. The demand for reform in this area, as well as a mounting social consensus for the need for action is apparent in the public debate. Since the project evolved from the development of the reform agenda for social welfare and development, it builds on the various multi-stakeholder consultations that the DSWD conducted at the national and local levels with participation from representatives of key national implementing agencies; the academe; private sector, non-governmental networks; leagues of local government units and basic sector organizations. Likewise, the launch of the CCT program has involved the participation of multi-stakeholders from various implementing and oversight agencies, complemented by dialogues with experts groups on education, health, poverty reduction, social protection and targeting. The assessment of the CCT pilot-testing involved the conduct of field consultations with representatives of the local government units and the grantees in six areas. The demand for action in these areas of social protection has only increased in past months with the recent food crisis and, more recently, the global economic crisis. 78. The project is expected to have significant social benefits: (i) The establishment of a targeting system can lead to improved benefits of the CCT and other social protection programs to households that are actually poor (by reducing exclusion errors) and augment the resources available to do so (by reducing inclusion errors); and (ii) by supporting the Philippine CCT program, the project will also enhance the incomes and the educational and health outcomes of poor beneficiary Filipino households in selected areas. The participation of the grantees shall be ensured during the project implementation through the monthly assemblies and the mobilization, with capacity building, of mother leaders. The LGUs shall continue to be mobilized through the municipal inter-agency advisory committee which will have a parallel organization at the provincial level. The civil society organizations will be mobilized for spot checking and through the social accountability or grievance redress mechanisms. 79. The monitoring and evaluation system is designed to track and measure the social impact of the project consistent with the results framework. 24

37 5. Environment 80. The project will not support any physical investments or civil work activities, hence any environmental impacts are not expected. The project is categorized as an Environment C project. 6. Safeguard policies 81. The project is likely to deliver direct and indirect benefits to the Indigenous Peoples (IPS) through the conditional cash transfer (CCT) program or 4Ps, which targets poor areas where IPS may be present. In addition, IPS are also likely to benefit indirectly from the policy reforms outlined in the three project components. On these bases, the Bank s Indigenous Peoples policy (OP4.10) is deemed triggered by the project. However, since the specific locations of the project were not yet identified at the beginning of project preparation, the DSWD issued an Indigenous Peoples Policy Framework (IPPF) as Memorandum Circular No. 01 Series of 2009, which defines the major policy guidelines to identify and classify the IP groups that will be affected by the Project; analyze potential effects and risks on IPS; ensure full participation of IP representatives in all aspects of the Project; and develop strategic adjustments to ensure that the Project responds to specific needs of IPS (See Annex 10). 82. The DSWD would also coordinate with the National Commission on Indigenous Peoples in implementing the IPPF in compliance with the provisions of the Indigenous Peoples Rights Act (IPRA). The IPPF was prepared by an inter-bureau committee composed of representatives from the Social Technology Bureau (Coordinator); Program Management Bureau; NPMO-4Ps; Social Welfare Institute and Development Bureau and the Planning and Policy Bureau of the DSWD. Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.0 1) [I XI Natural Habitats (OPBP 4.04) [I [ XI Pest Management (OP 4.09) [I E XI Physical Cultural Resources (OP/BP 4.1 1) [I [ XI Involuntary Resettlement (OP/BP 4.12) [I [X 1 Indigenous Peoples (OP/BP 4.10) XI [I Forests (OP/BP 4.36) [I [ XI Safety of Dams (OP/BP 4.37) [I [X 1 Projects in Disputed Areas (OP/BP 7.60) [I [X 1 Projects on International Waterways (OPBP 7.50) [I [ XI 7. Policy Exceptions and Readiness 83. The Project complies with all applicable Bank policies. The Project Implementation Plan, Operations Manuals, and procurement plan have been prepared and reviewed during appraisal. 25

38

39 ~~ Country Context Annex 1: Country and Sector or Program Background PHILIPPINES: SOCIAL WELFARE AND DEVELOPMENT REFORM 1. After posting strong economic growth for several years, the Philippines is experiencing an economic slowdown as the country was not spared by the impacts of global economic crisis. In , GDP grew at an average rate of 5.4 percent and reached 7.3 percent in 2007, the highest growth in three decades. In 2008, however, GDP growth posted 3.7 percent in 2008 and barely grew in the first quarter of 2009 (0.4 percent) as the global economic crisis has affected the domestic industrial activity, particularly the export-oriented manufacturing industries. Over the last six years, the services sector continued to contribute the most to GDP growth, with an average growth rate of 6.5 percent, higher than the growth of industry and agriculture sectors, which grew at 4.7 percent and 3.8 percent, respectively, during that period. Meanwhile, the remittances from overseas Filipino workers continued to boost private consumption, recording the highest contribution to GDP growth at 4.2 percent on average over the same period. With a population of 88.6 million in 2007, per capita income stood at $1,620. l9 2. The significant fiscal consolidation and the fiscal reform undertaken by the Philippine government has produced positive results and contributed to the strong economic performance between 2003 and During this period, the national government deficit was reduced from 4.6 percent to 0.2 percent of GDP; the national government debt-to-gdp ratio fell from 78 percent to about 56 percent; and the non-financial public sector debt dwindled from over 100 percent to 61 percent of GDP. Moreover, the consolidated public sector position was balanced in mid-2006 and began to record a surplus in However, gains were not sustained in 2008 due to several factors including the slowing economy, scheduled personal and income tax cuts, and weak internal revenue administration. Spending pressures have been on the rise since 2008 as government increased spending to mitigate the combined impacts of the food and fuel price shock and the global economic crisis. 3. Before the onset of the crisis, inflation remained muted and performance of the external sector had also been strong. Headline inflation rate in averaged 5.2 percent but it rose to 9.3 percent in 2008 due to the increases in food and fuel prices during the year. Prices began to stabilize in 2009, and in July, inflation rate reached only 0.2 percent. Meanwhile, BOP recorded a surplus equivalent to 6 percent of GDP in 2007, the highest in more than 10 years, supported by high remittance inflows and stronger portfolio and other investment inflows. The global economic crisis, however, resulted in the reduction of exports of goods and services, the slowdown in the growth of remittances inflows, and fall in foreign direct investments. The BOP barely recorded a surplus in 2008 while international reserves grew at only 11 percent, after the latter climbed by almost 50 percent the previous year. 4. Domestic investment has remained low and has showed a declining trend in the share in GDP even before the economic crisis. Investments in fixed capital grew at an average rate of only 2.6 percent in and contributed a mere 0.3 percent to GDP growth during this period. Fixed capital investments accounted for only 17.5 percent of GDP-nearly one-fifth of the share of 19 Per capita GNI was computed using the Atlas method. 27

40 private consumption in The current level of private investments is lower than the 20.1 percent share recorded 5 years ago and even lower than the 22.2 percent share recorded 10 years ago. The declining trend in domestic investments raised concern on how the recent pace of economic growth can be sustained. 5. Weak governance has hindered the expansion of domestic investments. The low level of investments can be attributed to the high incidence of corruption, weak rule of law, and political instability, which seriously affect the appropriability for private investors. Over the past ten years, the Philippines has regressed in key areas of governance. Gov ernance indicators collected by Kauffman, Kraay, and Mastruzzi in 2008 showed that the Philippines scored negatively in 5 out of the 6 dimensions of governance: political stability (-1.41), control of corruption (-0.75), rule of law (-0.49), regulatory quality (-0.05), and voice and accountability (-0.20) The progress that the Philippines achieved in reducing poverty over the last two decades has been very modest, especially compared to the record of its neighbors in the region, particularly Indonesia, Thailand, Vietnam, and China (Figure Al). The proportion of Filipinos living below the national poverty line declined from 45 percent in 1991 to 30 percent in Poverty measured using the international benchmark show a similar trend. The proportion of the population living below $1.25-a-day declined from 34.9 percent in 1985 to 22.6 percent in 2006, or a reduction of about 2 percent per year over the two decades. Figure Al. Poverty Reduction in the Philippines versus East Asian Neighbors tural China'. lndo "a $ Thai.. I mid-i _ I..---_... _ mid-1990 eariy (latest) Note: Figures pertain to proportion of population with income per capita below the new international benchmark of US$ 1.25 a day in 2005 PPP, except Philippine Off 1 poverty incidence which is based on national poverty lines. Sources of data: World Bank and NCSB. 7. More recently, even as GDP growth averaged 5.4 percent between 2003 and 2006, poverty increased from 30.0 percent to 32.9 percent during the same period, indicating a low response of poverty reduction to growth. Estimates show that the Philippine's growth elasticity of poverty is greater than unity, although this has declined in recent years.21 Between 1985 and 2000 when *' World Bank's Worldwide Governance Indicators, See also Ravallion, M. (200 1). Growth, Inequality, and Poverty: Looking Beyond Averages. World Development, 29: ; and Cline, W.R. (2004). "Technical Correction" in Trade Policy and Global Poverty, Institute of International Economics, Washington DC. 28

41 growth averaged 3 percent per year, poverty declined by about 2.2 percent annually. Since 2000, when the country posted about 5 percent growth per year, the pace of poverty reduction dropped to 0.1 percent per year. 8. High rates of inequality explain some of the disconnect between the recent experience in growth and poverty reduction. The country's Gini coefficient remains high relative to its Asian neighbors and large variation in economic opportunities persists at the sub-national level. Geographically, the National Capital Region and two adjacent regions (Southern Tagalog and Central Luzon), which account for more than half of GDP, have per capita incomes above the national average and have seen the fastest decline in poverty headcount. On the other hand, per capita incomes in the poorest regions, mostly in the conflict-affected Mindanao, are only percent of the national average and have the highest incidence of poverty. In fact, between 2003 and 2006, only 4 of the 17 administrative regions in the Philippines showed decline in poverty headcount, albeit mildly. 9. Moreover, the Philippines has been lagging in its progress toward achieving some key nonincome MDG targets. Net enrolment ratio in primary education did not show any progress from 84.6 percent in 1990 to 84.8 percent in 2007 and only 75.3 percent of pupils that enter grade 1 make it to grade 6, which are far from the target of 100 percent. Dropout from elementary school is higher for children among poor households. Although important progress has been made in reducing infant mortality, the proportion of 1 -year-old children immunized against measles barely rose from 77.9 percent in 1990 to 81.7 percent in Malnutrition remains a major issue, with only 64 percent of Filipino children meeting WHO'S normal weight-for-age standards. Meanwhile, maternal mortality rates remain high at 162 per hundred thousand live births in Recent data show that the food and fuel price shock in 2008 and the recent global economic crisis have taken their toll on household welfare and the economy as a whole, which has serious implications in reducing employment and incomes of Filipino households. Unemployment rate increased from 7.4 percent in January 2008 to 7.5 percent in April 2009 while the growth of remittances from overseas Filipino workers began to slow down, from 13.7 percent growth in 2008 to 2.8 percent from January to May Moreover a growing number of Filipinos consider themselves poor, unable to sustain their daily food requirements, and in worse conditions this year compared to 2008 because of the joint effects of the food and global economic crises that successively hit the country.23 Such negative developments pose serious threats to the already slow progress in reducing poverty in the Philippines and at the same time highlight the need for policy action to mitigate deepening impacts, especially to poorer households. Sector Context 11. Poverty in the Philippines remains at one-third of the population and an even higher proportion of Filipinos are vulnerable to shocks that throw them into poverty. Shocks that commonly throw Filipino households into poverty are those related to health (e.g., loss of a family member, especially the head of the household), employment, natural disasters, civil unrest, and food 22 Updates as of May 2009, NSCB MDG Watch: Statistics at a glance of the Philippines' Progress based on the MDG indicators, 23 World Bank, "Global Crises and Household Vulnerability in the Philippines: Social Impacts and Policy Responses," forthcoming. 29

42 prices.24 Recent Government estimates show that some 45 percent of Filipinos are vulnerable of falling into poverty because of these shocks.25 An analysis of panel data over the period 1997 to 1999, which covered the Asian Financial Crisis and the El Nifio phenomenon, showed that a quarter on non-poor households immediately succumbed to the effects of the crises, and an even greater proportion of poor households (50 percent) were unable to protect themselves from these shocks26. Good health and education provide security against future risks and keep people out of chronic poverty. An average household s spending on human capital (Le., education and health) represents only 7.3 percent of its total spending, while poor households spend less on health and education (3.1 percent) making them more at-risk to future shocks and less equipped to exit poverty. 12. The compounding effects of the food, fuel, and the global economic crises, have exposed the vulnerability of Filipinos to shocks, especially among poor households. About 40 percent of an average Filipino household s spending goes to food while poor households spend 60 percent, making them more vulnerable to falling into poverty with sudden increases in food prices. Simulations using income and spending patterns of households in the 2006 FIES show that the combined effects of the food and fuel inflation in July 2008 may have increased the poverty headcount by 3.9 percentage points, bringing an additional 3.3 million households into poverty. Meanwhile, the global economic crisis is likely to create socio-economic impacts through fall in foreign and domestic remittances, lower demand for labor, and reduction in real wages. By end- 2008, about 10 million Filipinos work abroad, equivalent to 28 percent of the labor force and 11 percent of the population. As incomes and employment of overseas workers are at risk, so too are remittances to their families, which account for around 10 percent of GDP in As the global demand continued to fall in 2009, labor-intensive industries, such as manufacturing and retail and wholesale trade suffered the biggest contraction, many of which consist of a majority of low-skilled workers who are disproportionately susceptible to job cuts. 13. In the absence of appropriate safety net programs, households have developed coping mechanisms following a shock, but these tend to erode human capital and perpetuate poverty. Families respond to income shocks by increasing working hours, changing eating patterns, receiving transfers from relatives and friends, or withdrawing children from scho01.~ At times of severe economic pressure when adult unemployment is rising and incomes are falling, child work also provides a way for augmenting household incomes. Indeed, studies have shown that the unemployment and underemployment, such as those triggered by the Asian Financial Crisis, coincided with significant declines in high school enrollment rates2* and increased likelihood of child labor Despite the Government s recognition of the high degree of vulnerability among Filipino households, there remain several policy and institutional weaknesses in addressing issues of social 24 World Bank (200 1) Philippines: Poverty Assessment. Volume 1 : Main Report. 25 National Anti-Poverty Commission and National Statistical Coordination Board (September 2005) Assessment of Vulnerability to Poverty in the Philippines. 26 Reyes, C. (2002) The Poverty Fight: Have We Made an Impact? 27 World Bank (200 1) 28 Esguerra, J., M. Ogawa, and M. Vodopivec (April 2002) Options of Public Income Support for the Unemployed in the Philippines, Employment Policy Primer. 29 Esguerra, E. (2002) An analysis of the causes and consequences of child labor in the Philippines. Paper submitted to the International Labour Organization as part of an ILO/International Programme on the Elimination of Child Labour (IPEC) study. 30

43 ~ ~~ protection in the Philippines. The Government places high priority on the poor and vulnerable groups in its Medium-Term Philippine Development Plan (MTPDP) for However, to date, Government efforts to address lagging poverty and human development outcomes especially among the poorest and most vulnerable households have been compromised by several factors: 0 First, spending on social sectors, particularly social assistance programs has generally been low. Total spending on all social services at the national level, at 4.9% of GDP (including education, health, social welfare, housing, other services and transfers to local governments), is significantly less than the regional average and among those countries with similar per capita income. More specifically, developing countries spend about 4 to 6 percent of GDP on education and 3 percent on health, while the Philippines only spend about 2.5 percent and 0.3 percent in education and health, respectively. This has been compounded by fiscal compression, which contributed to a fall in real er capita spending on social services by as much as 28 36) percent between 1997 and Meanwhile, national government spending on social protection services was estimated to constitute only 0.4 percent of GDP in The budget of the Department of Social Welfare and Development (DSWD), which has the primary role in delivering social welfare services, accounted for only 0.32 percent of the national budget (about 0.05 percent of GDP) in Second, social protection programs in the Philippines are fragmented and uncoordinated. The current MTPDP ( ) recognizes the growing number of vulnerable groups in the country who continuously experience social, economic and environmental pressures as natural disasters and economic shocks. Yet, while the National Anti-Poverty Commission (NAPC) is designated to coordinate anti-poverty efforts, there is a lack of policy and institutional coordination in the broad area of social protection, with several Departments undertaking uncoordinated programs that address various aspects of social protection. For example, important programs include food subsidies through the National Food Authority (NFA), a school feeding program through the Department of Education, and a subsidization of poor households through Philippine Health Insurance, as well as an assortment of other subsidy programs that range from fertilizers to drugs to shops and public transport. Meanwhile, the DSWD is mandated to address the prevalent risks and vulnerabilities facing poorer and vulnerable groups. But it had not played a leadership role in social protection previously, hindered primarily by the lack of capacity and budget. Third, service delivery has been difficult because of ongoing challenges in adapting systems to decentralized service delivery. Service delivery, including in social welfare services, continues to be complicated in the Philippines because systems have not completely been adapted to the decentralization that took place in With the passage of the Local Government Code (LGC) in 1991, the delivery of most services was devolved to the local government units. This meant that DOH S and DSWD s functions, for instance, were henceforth to be focused on leadership primarily through policy formulation, standard setting, program development, technical assistance, and resource augmentation. Yet, these Departments clearly recognize that 30 Manasan, R. (2007) Financing the Millennium Development Goals: The Philippines, PIDS Discussion Paper Series NO Manasan, R. (2006) Review of Government Programs and Spending Priorities for Social Welfare Protection and Social Development: Phase I. and Manasan (2009) Assessment of Social Protection Programs in the Philippines (mimeo). 31

44 ~ ~ they have not fully adjusted following the devolution of the functions and there is a need to consolidate their experiences to date and implement their respective reform agendas. 0 Fourth, even though numerous programs are in place, benefits from such programs are muted due to lack of a legitimate and functional system to target poorest households. A variety of programs have been designed to reach poor households in the past, but they have relied on faulty targeting systems which have often been manipulated for political intent. Currently, different targeting schemes are being used for different programs. Assessments of these schemes show high leakage rates to the non-poor and under-coverage of the poor.32 For instance, it was estimated that the leakage rate to the non-poor of the Food-for-School Program implemented by DepEd was 62 percent in 2006/200733, mainly as a result of the program s bias towards including areas in the National Capital Region (NCR), which has the lowest poverty incidence among all the regions in the Philippines. Likewise, evidence also shows that the NFA s rice subsidy program, which comprised about 70 percent of the Government s transfer programs in 2007, is also not well-targeted to the poor. Based on the 2006 FIES, about 40 percent of NFA rice is not consumed by poor households. Only 3 1 percent of the total consumption of NFA rice goes to the poorest quintile, while the richest 2 quintiles accounted for 16 percent. Part of the problem has also been the lack of necessary information to implement these programs as designed. Most programs intend to target assistance to poor families but there is no household targeting system in place. Government Reforms and Policy Actions 15. Recently, the Government has shown increased attention to reform and reinforce its social protection system. In response to the challenges mentioned above, the Government has taken some positive steps in addressing the major lapses in its social protection policies. Recent economic events have also made the Government redouble its efforts in the area of social protection. Given the recent global economic shocks that hit the country in succession, specifically the food and fuel crises in mid-2008, the Government took decisive actions to immediately mitigate the impact of these shocks to consumers while also taking steps to put into place an improved social protection system to cushion the poor from such shocks in the future. A sector reform effort is underway at the Department of Social Welfare and Development (DSWD), with technical support from the World Bank, which can put into place the main building blocks for developing a sound social protection program in the Philippines. An entrypoint for reforms to address some of the above sectoral issues is the decision by DSWD to embark on a reform agenda that would make it more effective in addressing its mandate. Recognizing the challenges of addressing its new role in the context of decentralization, DSWD commenced the formulation of a reform agenda in 2006 and approached the World Bank for assistance in designing and supporting the eventual reform program. In developing its reform program, the DSWD has articulated four discrete components to its reform. They include: (i) Leading in Social Protection - which would entail the development and implementation of a social protection framework and the development of a targeting system for the poor; (ii) Faster 32 Ibid 33 Manasan, R. and J. Cuenca. (2007) Who Benefits from the Food-for-School Program: Lessons in Targeting, PIDS Discussion Paper Series No

45 and Better Service Delivery - which would focus on improving its suite of programs, including putting into place a new program of conditional cash transfer for households, while reviewing and refining existing delivery models (e.g. a community-based CDD program, a center-based welfare program, a disaster relief program), and improving governance systems (such as strengthening regulatory functions); (iii) Smarter Financing - which would entail securing more predictable funding for core DSWD functions, more strategic budget allocation, including for resource augmentation of LGUs and other partners; and (iv) Improving Systems for Service Delivery - which would entail improving cross-cutting and systemic change, such as improving monitoring and evaluation systems and management information systems as well as enhancing organizational capacity. These reforms are intended to improve DSWD s effectiveness in delivering social welfare programs and to put into place the building blocks for the development of a more coherent social protection system. The Government recently established an institutional framework for the enhanced delivery of social protection programs, with a view to reducing fragmentation and overlap, while enhancing coordination. Given the multiplicity of programs that the Government recently undertook to mitigate the impact of price shocks, it realized an important step towards improving service delivery would be to improve policy coordination in social protection. A key step was taken with the creation of an inter-agency National Social Welfare and Protection Cluster to consolidate programs of various government agencies into a single, national social welfare strategy. A0 No. 232-A was passed by the President which specifically assigned the operational responsibilities of the National Social Welfare Program to the Department of Social Welfare and Development. The next steps would entail developing an operational social protection strategy and work-plan and organizing agencies within the cluster. The expected results entail a more rational allocation of responsibilities and resources, such that resources are allocated to programs t hat best address the actual risks and vulnerabilities of the Filipino population. Over the longer term, such an inter-agency program would be expected to lead to reallocation of resources across programs to scale-up more effective social protection programs relative to less effective programs. The Government increased funds appropriated to the social sector and major social protection programs in the 2008 national budget, as well as spending on household subsidies and transfers over and beyond the allocation in the 2008 budget to mitigate the impact of the increase in food and other prices. In 2008, appropriated budget for social services in general increased by 5.1 percent in real terms. DOH, in particular, received a 23 percent real increase in budget allocation in 2008, while DepEd s and DSWD s budgets were increased by 11.2 and 7 percent, respectively. Regular programs of the Government such as the Food-for-School Program (FSP) and PhilHealth Indigent Program likewise received increased budget allocation in In addition, with the spike in food prices during 2008, the Government substantially increased its spending on social protection programs with reallocations of spending during the year. The additional spending went to several programs. Most significant was the increased implicit subsidy through its NFA rice subsidy program. Other subsidy and transfer programs ranged from power subsidies to less well-off electricity consumers to cash transfers to the elderly. During the course of 2008 and 2009, the Government also increased the allocation to CCT program. 33

46 0 In February 2008, the Government launched a pilot conditional cash transfer program (Pantawid Pamilyang Pilipino Program, or 4Ps) that focuses on supplementing the income of the poorest households in selected municipalities while also supporting their human capital development. Program planning for the 4Ps began in 2007, with World Bank technical support, prior to the onset of the food and fuel price shocks in 2008, with a planned target of 20,000 household beneficiaries. The program was launched in February 2008 with 6,000 household beneficiaries in four pilot municipalities and two cities in the Philippines. In response to the crisis which happened in the succeeding months, the government decided to accelerate and augmented the program and has rolled it out to about 376,000 beneficiary households by the middle of 2009, with intensive and continued technical assistance from the World Bank. Households who qualify for the program will get an annual transfer of PhP9,OOO (US$191) to a maximum of PhP15,OOO (US$319) for 5 years on the condition that their children attend school and visit health clinics for regular check-ups. On average, households will receive an annual cash transfer of PhP10,630 (US$226), equivalent to about 23 percent of the total income of poor households. For beneficiary households, the cash subsidy would provide important mitigation for the increase in food prices. Program beneficiaries of the 4Ps are selected using a proxy means test (PMT), a tool that identifies poor households based on objective criteria, utilizing multidimensional variables to explain poverty, rather than relying on a subjective determination of poverty which is prone to distortion. The DSWD envisions its CCT program becoming the backbone of its social protection framework. 0 The Government, furthermore, decided to use the Proxy Means Test (PMT) methodology as the targeting tool to roll out the National Household Targeting System for Poverty Reduction (NHTS-PR). The Government would like to have this system result in the generation of a database of poor households covering the whole country. The development of a national targeting database is expected to have significant impacts by directing scarce resources to the poorest households. This could both increase the benefits to poorest households by reducing leakage of existing social protection programs, hence, having a greater impact in reducing poverty incidence and severity, as well as allowing for cost efficiencies. It will also allow for a system ready to target poor households through cash transfers in the case of future shocks. Moreover, it can be used for the targeting of other national programs intended for poor households, such as the subsidized health insurance for the poor through Philippine Health Insurance (PhilHealth) and the rice subsidy program through the National Food Authority (NFA). In fact, the PhilHealth and NFA have already expressed interest to adopting the PMTbased national household targeting system for their programs. Some see the possibility of improved targeting stemming the large fiscal drain implicit in NFA losses (driven by purchasing rice at international market prices and selling at subsidized prices.) Discussions are underway as to how this targeting database will be made available to all social protection programs. It was deemed critical, nevertheless, to allocate budget for this task in The Government has decided to prioritize the roll-out of the targeting system to the 20 poorest provinces and municipalities with a poverty incidence greater than 60 percent. Reforms in the education and health sectors are also ongoing at the Department of Education (DepEd) and Department of Health (DOH). The Basic Education Sector Reform Agenda (BESRA) was formulated in 2005 as the Government s policy response to gaps in the education sector. The BESRA consists of a package of policy reforms that is aimed at systematically improving the institutional, structural, financial, cultural, physical and informational conditions 34

47 affecting basic education provision, access and delivery to attain universal primary education and the elimination of gender disparity at the primary and secondary levels. Guided by the reform thrusts of the BESRA, the DepEd is currently implementing an aggressive campaign to improve the quality of education in the country. The DOH, meanwhile, initiated the Health Sector Reform Agenda (HSRA) in 1999 to respond to the slow and disappointing progress in program implementation as a result of decentralization. 16. The Government is thus taking concerted steps on an ambitious agenda of reform to address the multiplicity of issues in the social protection sector. As noted above, discrete but key elements of the reform agenda include the launch of a new CCT program and the roll-out of a National Household Targeting System, among others. The Government has requested the Bank for its assistance to support this agenda through an investment project. The proposed project is aimed at supporting the Government strategically advance its agenda of reform in social protection. 35

48 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies PHILIPPINES: SOCIAL WELFARE AND DEVELOPMENT REFORM Project (Bank-Financed) Completed Projects Early Childhood Development Project (LN 43 0 lo), Closed December 2005 Social Expenditure Management Project (LN45350), Closed December 2003 Second Social Expenditure Management Project (LN 711 SO), Closed June 2007 Ongoing Projects Kapitbisig Laban sa Kahirapan- Comprehensive and Integrated Delivery of Social Services (KALAHI CIDSS) ARMM Social Fund Project Second Women s Health and Safe Motherhood National Program Support for Basic Education Project National Sector Support for Health Reform Proiect Ratings Outcome Sustainability ID Impact S L su S S Outcome Implementation Progress (IP) S S Mu S MS HL Latest Supervision (ISR) Ratings Sustainability Development Objective (DO) S S MS S S su 36

49 Annex 3: Results Framework and Monitoring PHILIPPINES: SOCIAL WELFARE AND DEVELOPMENT REFORM Results Framework PDO To strengthen the effectiveness of DSWD as a social protection agency to efficiently implement the CCT program (4Ps) and to expand an efficient and functional National Household Targeting System of social protection programs. Intermediate Outcomes Component 1 A targeting system to select poor households implemented and functioning efficiently. Project Outcome Indicators 0 Share of all poor households registered in the National Household Targeting System for Poverty Reduction (NHTS-PR).34 0 Share of children 6-14 years old in poor beneficiary households attending school at least 85% of the time. Share of children 0-5 years old undergoing growth monitoring and check-ups in accordance with DOH Drotocol. Intermediate Outcome Indicators 0 At least 2 major national programs using the NHTS-PR for selecting their beneficiaries. 0 MIS designed and in operation including integrated data entry application, PMT processing and data management, and sharing capabilities properly functioning. Share of poor households registered in the database receiving benefits of social programs. Use of Project Outcome Information 0 Yrl-Yr2 - Assess progress in building national database of poor households. 0 YR1-YR5 - Measure the achievement of the POIs and assess effectiveness of targeting system for CCT program. Use of Intermediate Outcome Monitoring 0 Assess whether the NHTS-PR is being used by national agencies to target poor households. Assess whether the IT infrastructure software and hardware is being developed to support the NHTS-PR. Assess whether DSWD is making progress in the use of NHTS-PR. 34 Based on baseline of poor households in the latest official household data of 2006 (4.7 million poor households total). 37

50 Intermediate Outcomes Component 2 CCT program implemented and functioning efficiently. Component 3 Key institutional systems on policy formulation, monitoring and impact evaluation and social marketing developed and operationalized Intermediate Outcome Indicators MIS developed and functioning to support payments, verification, updates and grievance system. Share of beneficiary households receiving 4Ps grants regularly and on time. Share of households meeting education conditionalities regularly in accordance with the OM. Share of households meeting health conditionalities regularly in accordance with the OM. Spot checks (for 4Ps) of schools, clinics, municipal links, and beneficiary households carried out evaluation report based on first follow-up survey. 0 Social protection operational framework developed and adopted. 0 Framework for integrated service delivery developed and adopted. 0 Evaluation of two social protection programs completed and disseminated. Use of Intermediate Outcome Monitoring 0 Assess the MIS performance 0 Assess pace of project implementation. 0 Assess that verification system in education and health is in place and functional. 0 Y2-Y5: Assess progress in program implementation Results of the impact evaluation will allow for corrective measures to be undertaken and/or increases buv in among stakeholdes. 0 Policies will provide the analytical basis for sustained implementation of the targeting system and CCT program beyond Capacity building will ensure efficient implementation of SWDRP and eventual mainstreaming of the Project into the whole Social Welfare reform program. 38

51 ARRANGEMENTS FOR RESULTS MONITORING Overall Outcome Indicators 1. Overall Outcome Indicators will primarily be monitored using administrative data from the new management information system for the National Targeting System and for the 4Ps. Other social entities using the database of poor households will report the selected beneficiaries to DSWD to keep track of use of the database. Component 1 2. The results indicators for Component 1 (see table above) would be monitored as part of ongoing supervision, relying primarily on the program s management information system data from the program. DSWD will make semi-annual or annual reports to monitor the indicators. Component 2 3. The results indicators for Component 2 (see table above) would be monitored as part of ongoing supervision, relying primarily on the program s management information system data from the program. DSWD will make semi-annual or annual reports to monitor the indicators. The results indicators for Monitoring and Evaluation of this component, would primarily be monitored using a set of household surveys. There are two follow up surveys to be taken after 12 months, and after 36 months of the baseline. The surveys will collect comprehensive data on welfare measures, consumption and income education enrollment and school attendance, growth monitoring of children and health care and anthropometric measures (for malnutrition), among other variables. DSWD will produce semi-annual or annual reports to monitor the indicators. Component 3 4. The results indicators for Component 3 will be monitored based on the annual reports prepared by DSWD. 39

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56 Annex 4: Detailed Project Description PHILIPPINES: SOCIAL WELFARE AND DEVELOPMENT REFORM Component 1: Support to the National Household Targeting System for Poverty Reduction (NHTS-PR) (US$64.5 million - IBRD) Objective 1. The objective of this component is to support the DSWD in implementing the National Household Targeting System for Poverty Reduction (NHTS- PR) which will be used by key social assistance and social protection programs of DSWD and other government agencies to better target the poor. The national targeting system consists of a set of uniform, objective and transparent criteria to select the poor for the different programs thus reducing the overall cost of targeting and improving coordination, efficiency and effectiveness of social programs. The National Targeting System is currently being implemented by DSWD in phases, starting from the poorest municipalities nationwide. The main outcome is the development of a standardized database of potential poor beneficiaries to be shared electronically or through other means with social programs including the conditional cash transfer program, Pantawid Pamilyang Pilipino Program (4Ps) and other programs. 2. The implementation of the National Household Targeting System is a key component of the National Social Welfare and Development Reform agenda of the GOP, as reflected in the commitment for the Development Policy Operation (DPO) project approved by the Board of the World Bank in December DSWD has already made considerable in-roads in developing an objective and transparent targeting system as shown by rapid implementation of such a system in selecting beneficiaries for the conditional cash transfer program (4Ps) to date. This has been undertaken with considerable World Bank techical assistance. DSWD is implementing the NHTS nationwide and by 2009 is planning to assess about 8.3 million households. The final outcome will be a database including all the poor households nationwide3 for the major social programs. This is a major step forward, as in the past a variety of targeting instruments have been used by central government agencies and Local Government Units (LGUs) - including self targeting, geographical targeting, community based monitoring systems and unverified means tests. Reasons for the proliferation of targeting systems have been a lack of coordination among central government agencies and a lack of clarity of responsibilities in this regard with decentralization. International experience has shown that a single national system with uniform and simple criteria can be created in countries as diverse as the Philippines, such as Brazil, Mexico, and Colombia. 3. The expected outcomes of this component include (i) the creation of a uniform and transparent database of poor households that have been screened through an objective, homogeneous and clear mechanism; and (ii) the improved capacity of DSWD to share that database with other institutions and social programs and to maintain that database and fully update it every four years. 39 About 4.7 million poor households representing 27 percent of the total households in the Philippines in

57 4. This project component will have two subcomponents: (1) Implementation of the Targeting Mechanism, which will support the implementation of the standardized targeting mechanism for households covered nationally; and (2) Implementation Support for NHTS-PRY which will include: (i) support the National Project Management Office (NPMO-NHTS), (ii) development and implementation of a Management Information System (MIS), and (iii) spot checks for targeting. Subcomponents and activities 1.1 Implementation of Targeting Mechanism (USS54.8 million - IBRD) 5. The objective of this sub-component is to support the current implementation of the NHTS- PR as a standardized targeting mechanism in selected areas. The rules, procedures and methodology are defined by DSWD at the central level, following the successful experience of the targeting mechanism used for the roll-out of the conditional cash transfer program (Pantawid Pamilyang Pilipino Program - 4Ps) to date. The operation is decentralized at the regional level through the regional offices of DSWD. At the municipal level there is coordination with LGUs for the logistics of collecting information and coordinating with barangays. The methodology followed and procedures are described in the Operations Manual. 6. The NHTS-PR includes targeting in two steps as follows: 0 The first step involves a selection of poor provinces based on poverty incidence according to Family Income and Expenditure Survey (FIES 2006), and selection of municipalities based on poverty incidence according to Small Area Estimates (SAE 2003). Both statistics are produced by National Statistical Coordination Board (NSCB). 0 The second step involves a household assessment through the application of a Proxy Means Test (PMT) methodology used to predict income of households on the basis of household composition, education, socio-economic characteristics, housing conditions, access to basic services, assets, tenure status, and regional variables. The information for estimating the PMT is gathered in a 2-page questionnaire, the Household Assessment Form (HAF), with relevant variables that predict income of households.,the PMT model was estimated using the dataset of the Family Income and Expenditure Survey (FIES, 2003) combined with the Labor Force Survey (2003). By August 2009, there were about 800,000 poor households registered in the database selected in the poorest provinces and municipalities. 7. The information to calculate the PMT is then to be collected following a number of data collecting strategies such as survey sweeping (Le., all residents in a given area are surveyed), ondemand application, or a combination of the two methods. The methodology to be used depends on the poverty incidence and the urbdrural classification of the areas to be surveyed. The information is collected following strict procedures to guarantee quality and is closely supervised daily. Once the information is gathered, it is encoded online in the data entry application developed by DSWD at the lowest possible level where internet connections are available, either at the regions or at the municipalities. The application includes validation routines to reject inconsistent or wrong information to be verified back in the field. For validated information, a PMT model is calculated to classify the households according to the level of poverty based on latest official available provincial poverty thresholds produced by the NSCB. When the list of poor households has been generated, 45

58 the results will be validated and then the database can be shared with other agencies. The other institutions can use the database to re-certify or to register new beneficiaries for their programs. 8. This targeting method has been used in other middle income countries such as Mexico, Colombia, Chile, and Costa Rica where reported income is hard to verify as a large number of people (over 50 percent of workers) work in the informal sector and there are few databases available to cross check incomes or assets. 9. The project will support the implementation of the NHTS-PR financing the assessment of 8.3 million households nati~nwide.~' The implementation is currently being carried out in three phases. The first phase covers remaining municipalities in the 20 poorest provinces not covered before, to complete enumeration in those provinces. It will also cover munici alities with poverty incidence higher than 60 percent and poverty areas in highly urbanized cities! The second phase will cover municipalities between 50 and 59 percent of poverty incidence in all provinces apart from the 20 poorest provinces and component cities.42 The third phase will cover municipalities below 50 percent of poverty incidence. The strategy for data collection in the specified areas is described in the Operations Manual. The operation of the NHTS-PR is described in Chart 1 below. 10. This subcomponent will finance household assessments of 8.3 million households, maintenance of the database, hardware for processing information, the issuing of identification (ID) cards for poor households, and a household survey to conduct a benefit incidence analysis to measure targeting outcomes. Chart 1. Operation of the National Household Targeting System for Poverty Reduction 40 It is estimated that about 8.3 million household assessments will result in about 4.7 million households being classified as poor in the database. 41 Highly Urbanized Cities - Cities with a minimum population of 200,000 inhabitants, as certified by the National Statistics Office, and with the latest annual income of at least 50 Million Pesos based on 1991 constant prices, as certified by the city treasurer. 42 Component Cities - Cities, which do not meet the above requirements, shall be considered component cities of the province in which they are geographically located. If a component city is located within the boundaries of two or more provinces, such a city shall be considered a component of the province where it used to be a municipality. 46

59 1. Geographical Selection of poor provinces/ municipalities based -U 4, Processing of PMT in NPMO to select poor households 2. Collection of information using HAF to all households living in selected poor areas I supervision Random daily 1 5. Produce a list of poor households to be validated and then it can be shared with other social agencies 3. Processing of HAF online indata entry validation routines at I I because of mistakes / wrong information need to be sent back to the field for 1.2 Implementation Support for NHTS-PR (US$9.7 million, IBRD) Program Management Office for NHTS-PR I 6, Registration of poor householdslmembers of poor households as beneficiaries of social programs 11. There is a National Project Management Office (NPMO-NHTS) within the structure of DSWD dedicated exclusively to implement the targeting system. Composed of technical staff of various disciplines, the NPMO-NHTS performs policy-making functions and ensures the execution of tasks and activities of the NHTS-PR. The NPMO-NHTS is headed by a National Project Director and assisted by a Deputy. The regular operations of the NHTSPR is supervised by the National Project Manager. The NPMO-NHTS has a team of targeting, training, social marketing, finance specialists, statisticians, data analysts, and MIS systems engineers. The NPMO-NHTS, under a decentralized operation through the regional field offices of DSWD, carries out all the steps in the implementation of the targeting system. The number of staff and consultants to implement the system are about 40 people during 2009 and beyond. The specific functions and responsibilities are described in the Operations Manual for NHTS-PR. 12. This activity will finance staff of the NPMO-NHTS, training, social marketing, specialized technical assistance, and vehicles to support the implementation of the NHTS-PR Development and Implementation of a Management Information System (MIS) for NHTS-PR 13. This activity will support the development and implementation of an MIS for the NHTS-PR, which is critical for its accurate and effective use. The system will support all steps of the targeting mechanism including data collection, quality control procedures, validation routines, processing, estimation of the PMT and selection of poor households. The main outcome of the MIS will be to create and maintain a standardized database of poor households. This activity include: (i) development of software to support the data collection process and to manage the database; (ii) licenses for the application developed; (iii) procurement of hardware, software, servers, and data communications for NPMO-NHTS and local offices (municipalities); and (iv) training of staff to use the system. 47

60 Spot Checks for Targeting 14. This activity will support the assessment of the implementation of the targeting mechanism through quantitative and qualitative spot checks, to provide information about the execution of the different processes in the implementation of the targeting mechanism. The information will be the basis for analysis and random audit of the operation of the targeting mechanism at different levels and among the different institutions involved. The assessments and further analysis will be carried out by an independent institution to add more credibility to the analysis. This assessment will cover the collection process, the processing, the estimation of PMT, and the sharing and maintenance of the database. The assessment will cover the NPMO-NHTS, regional field offices, and municipalities. Component 2: Support to Pantawid Pamilyang Pilipino Program (4Ps) (Total: US$ million; IBRD: US$337.4 million, GOP: US$ million) Objective 15. This objective of this component is to support the implementation of the CCT program : 4Ps, in selected poorest provinces and municipalities. The 4Ps is a CCT program aimed at addressing poverty and supporting improved health and education outcomes of poor children and pregnant women. The 4Ps provides cash grants to poor households subject to their children aged 0-14 meeting certain health and education conditions. 16. The conditional cash transfer component constitutes the core element of the social reform agenda undertaken by DSWD as it seeks to assist poor households with cash transfers to improve their consumption levels while encouraging greater use of basic and essential public services. Implementing the CCT requires close coordination and active participation from the Departments of Education and Health to ensure the timely delivery of quality services, essential for program impact and for households to comply with their conditionalities. The Departments of Education and Health have participated in the design and preparation of the CCT program through the National Advisory Committee (NAC). Their active role during implementation and supervision will be equally crucial for the success of the 4Ps. 17. The expected outcomes of 4Ps include: for children 0-5 years old, an increase in full immunization rate, and an increase in the number of children who undergo growth monitoring and check ups; for children 6-14 years old, an increase in net enrollment rate among beneficiary households. 18. The World Bank has supported the DSWD reform agenda and the design and development of the 4Ps program since The 4Ps was pilot tested in 2007 in 3 provinces covering 6 municipalities, 4 rural and 2 urban, benefiting about 6,000 households. The results of the pilot test indicated that (i) the targeting system used to select beneficiaries performed well as it produced moderate to low levels of exclusion and inclusion errors; and (ii) that DSWD was capable of undertaking all activities of the operation cycle, according to the operation manual. Households received cash cards from the Land Bank of the Philippines, and they were paid using these cards. 48

61 19. Due to the encouraging effects of the pre-pilot experience and the need to establish a program that could address immediate needs of the poor during the recent food price increases while improving health and education outcomes of children, the GOP decided to accelerate the rollout of the 4Ps in early By March 2009, DSWD was able to assess with standardized targeting mechanism about 750,000 households in the 20 poorest provinces as well as the poorest provinces in other regions; of which about 43 1,000 households were selected as poor (58 percent) and about 376,000 households were eligible for and registered in the program (87 percent of poor), that is, poor households according to the PMT and with children 0-14 years of age. 43 In 2009, the GOP is increasing the coverage of the program to cover a total of one million households by the end of the year. 20. Despite the rapid pace of the expansion, DSWD has been able to ensure that clear and transparent criteria were used to select the provinces, the municipalities to be included within the provinces, and the households to be selected within those municipalities. The ranking of provinces by poverty incidence using FIES 2006 was used to select the poorest provinces. The poorest municipalities within target provinces were selected using poverty incidence of Small Area Estimates (SAE, 2000), the latest available data at the time that the selection of areas was made.44 The household assessment was made using the PMT model to estimate a score that indicates the household s economic welfare.45 The variables to estimate the PMT are gathered in the Household Assessment Form (HAF) which is a 2-page questionnaire with 35 variables including variables about schools and health centers required for the CCT operation. The information is processed online in the standardized data entry application developed by DSWD. Then the PMT is applied on the data to select poor households. The cut-off points used to define poor are the latest available provincial poverty thresholds published by the NSCB. The final step in targeting of beneficiaries is social audit through a community-based validation process of the identity and eligibility of beneficiaries. 21. In addition to making significant advances in targeting, DSWD has been able to make regular payments to all beneficiaries. The Bank provided technical assistance to DSWD throughout this process. Also, the NPMO-4Ps is currently working on the design of the MIS for verification of conditions, the grievance redress system, and updates. These activities along with the required MIS development will pose major challenges for the program for the roll-out of the verification and grievance redress systems. A monitoring and evaluation system is also being developed and will be phased in as soon as the MIS is ready to produce project data, budget, and costs. The impact evaluation is under design and will also be supported under this component of the project. 43 The implementation was done in 4 batches over a 10 month period. The first and second batches covered the poorest provinces and the third and fourth batches covered poorest provinces in non-poor regions in order to have regional representation. 44 In September 2008, the 2003 Intercensal Small Area Poverty Estimates (SAEs, 2003) was released, but at that moment the municipalities were already chosen. SAEs were produced by NSCB in cooperation with the World Bank. 45 The PMT model was estimated with a dataset combining the household survey (FIES) and the Labor Force Survey (LFS). The econometric model uses a multiple linear regression to estimate the household income per capita based on proxy variables such as household composition, education of household members, socioeconomic and housing conditions, access to basic services, ownership of assets, tenure status, and regional variables. 49

62 Subcomponents and activities Ps Grants (Total: US$432.1 million; IBRD: US$325.1 million, GOP: US$107.0 million) 22. This subcomponent will finance 75 percent of the health and education grants of the 4Ps in selected poorest provinces and municipalities covering the period CY2009-CY2013. The households covered were selected as beneficiaries of the program, following a standardized targeting mechanism with a rigorous quality control process. The transfers are being paid b z DSWD to poor and eligible households living in the selected poor provinces and municipalities. Selected households will receive the cash transfers for up to 5 years subject to the eligibility criteria and the compliance with the conditionalities. Following the successful practice of other CCT programs, the 4Ps includes two kinds of transfers: one related to health and one related to education. Health Grant. Poor households with children 0-14 years old and/or pregnant women will be eligible for a health transfer currently set at PhP 500 (US$11) per household per month (for a period of 12 monthdyear) regardless of the number of children 0-14 years old. The health transfer requires that households fulfill the following conditionalities: (i) all children 0-5 years old should attend a health center or rural health unit to get the services according to their age, as established by the Department of Health (DOH); (ii) pregnant women must attend a health center or rural health unit according to DOH protocol; (iii) all children 6-14 years old should comply with the de-worming protocol in school; and (iv) for households with children 0 to 14 years old the household grantee (mother) and/or spouse shall attend family development sessions at least once a month. 23. As in other countries with CCT programs, the health transfer size is flat regardless the number of eligible children. This scheme has proven to be effective in promoting good health and nutrition practices within households, improving nutrition status of infants, and increasing utilization of health services. 24. Education Grant. Poor households eligible for the education grant are those living in selected areas with children 6 to 14 years old. The education transfer is PhP 300 (US$6) per month (for a period of 10 monthdyear), up to a maximum of 3 children. Beneficiary households will receive the education transfer for each child between 6-14 years old so long as they are enrolled in primary and secondary school and maintain a class attendance rate of 85 percent every month.47 The DSWD is also commencing implementation of cash grants to 3-5 year olds who regularly attend day care (in cases where the household has less than the cap of 3 children in elementary 25. Households with both children younger than 5 years of age and children 6-14 years old will receive the two transfers in one payment if conditionalities are met, according to the number and age of their children. Both transfers will be conditional on compliance with specific conditionalities, which should be met independently. Households will receive each transfer for up to 46 Currently these include 160 municipalities/cities listed in the Project Implementation Plan selected by the Borrower, where such list may be revised from time to time with the prior approval of the Bank. 47 This translates into no more than 3 days of unjustified school absence per month. 48 The Bank project will defer support of this grant until further assessment of the viability of this conditionality, while supporting such an assessment. 50

63 five years if they comply with the conditionalities as established in the Operations Manual. Table 4.1 describes the different types of households and transfers received according to the 4Ps database. 26. As the 4Ps CCT program is being newly rolled out, this project, along with World Bank and other Technical Assistance, is supporting the phased implementation of a fully computerized payment verification system4. Phased implementation which is underway, is scheduled to lead to full implementation of verification linked to the payment database by mid As a transitional measure until June 30, 2010, when full implementation of verification linked to the payment database is expected to be in place, the project will support the beneficiary grants that have been targeted to the poor beneficiaries for education. From the commencement of the program these grants have been provided to targeted poor beneficiaries; payments have been on the basis of declared student enrollment at the outset of the program; and school attendance has been regularly monitored by schools. 28. The average transfer per household under 4Ps is estimated at about 23 percent of the estimated average annual income of households (Table 4.1). This proportion is in the range of those used in other successful CCT programs in the Latin American region - amounts that have been proven to have a sufficient incentive for families to send their children to school and to regularly attend child growth monitoring sessions, yet sufficiently low to avoid distorting labor market decisions. In Mexico (Oportunidades), the transfer is about 21 percent of total annual household expenditures; in Colombia (Familias en Accibn), it represents about 15 percent of minimum wage; and in Nicaragua (Red de Proteccion Social) it represents about 17 percent of total annual household expenditure^.^^ Impact evaluations of these CCT programs have shown important positive impacts on family investments in children s human capital. On the other hand, a very low transfer, such as that under the Honduras CCT program (PRAF) representing less than 5 percent of average per capita consumption, showed relatively less impact on families human capital investments according to the impact e~aluation.~~ 49 This entails, upon identifying beneficiaries, associating them to schools and clinics, manually recording attendance at schools and clinics, developing and rolling out a computerized MIS system (Component 2.2.2), encoding attendance through the MIS system, and then linking such data to the centralized payment system. 50 Phased implementation is scheduled to have manual recording of attendance in place by , computerized recording of such attendance rolled out commencing Q and full implementation of verification linked to the ayment database by end of IFPRI (2005). Impact Evaluation of a Conditional Cash Transfer Program. The Nicaraguan Red de Proteccion Social. Maluccio, J. and Flores, R. Research report 141. Washington, D.C. * The low size of the transfer had no significant impact particularly in household consumption. IFPRI (2003) Sexto Informe -Proyecto PRAFIBID Fase II: Impacto Intermedio, Washington, D.C., July. 51

64 Table 4.1: Types of eligible households and grants received by 4Ps beneficiaries Types of Households Share Share (YO) Average annual Health Education Total Total grant as (YO) of total of eligible income annual annual annual % of average households househol& household grant grant grant annual income PhP PhP PhP PbP household HH with only 0-5 years old ,148 6,000 6, HH with 0-5 years old plus 1 child ,260 6,000 3,000 9, HH wth 0-5 years plus 2 chldren ,981 6,000 6,000 12, HH with 0-5 years old plus 3 or more Ch ,812 6,000 9,000 15, HH with only 1 child 6-14 years old ,3 15 6,000 3,000 9, HH with only 2 children 6-14 years old ,879 6,000 6,000 12, HH wh only 3 or more children 6-14 years old ,490 6,000 9,000 15, HH with no children 0-14 years old 14 Total ,384 10,630 * 23 Source Dakatase of4ps potential beneficiaries as of Nowmter Ndex Avaage estimated incane of 4R beneficiary househdds, from the F%lT model. Ih~s corerponds closely to the avaage household expenditure of the ame haseholdcategoriesfiomthetwopouest decilsinthefjes id. Figures refa to averages weghted ly share ofeligible households. Computations made at hmseholdlevel Compliance Verijication System 29. The compliance verification system for health and education will be done based on quarterly reports of schools and health centers. The reports will be consolidated at the municipal level first and then the processing will take place at the regional level or municipal level if there is access to the online system. The reporting of information will be done every quarter, specifying compliance for each of the three months. For the education grant, the information to be reported is the nonattendance at school of children 6-14 years old. For the health grant, the information to be reported is: (i) the non-attendance at health centers of children 0-5 years old, according to the DOH protocol for their age; (ii) the non-attendance of pregnant women for check ups according to DOH protocol; and (iii) the non-compliance with de-worming protocols at primary schools of children 6-14 years old. The attendance to parenting sessions will be monitored quarterly as well. In the Chart 2 below there is a description of the flows of verification of compliance. A detailed description of verification flows is in the Operations Manual of the 4Ps. Chart 2. Compliance Verification System / -- I - J Distribution of C V Forms _ L, Processing of -> Payment8 ba%ied 00 camp M o nth ly Monitoring of Non-Corn pliance 52

65 30. The Compliance Verification System (CVS) is a six-step cyclical process going through all levels - from the national (NPMO-4Ps), regional (Field Office), and down to the city/municipal level. The CVS involves (i) generation of Compliance Verification forms (by NPMO-~Ps-MIS), (ii) distribution to the schools/daycare centers and health centerdunits (by Field Offices), (iii) monitoring of non-compliance of beneficiaries, (iv) collection of non-compliance reports, (v) processing of payments, and (vi) updating of the database prior to the generation of the updated CV forms for the next reporting quarter. 31. The 4Ps is governed by an Administrative Order (16/2008) that outlines the program rationale, legal basis and description, and an Operations Manual that provides more detailed operational protocols. It is supplemented by a Joint Memorandum Circular (01/2009) defining the institutional arrangements for the implementation of the program signed by all participating agencies (Department of Social Welfare and Development, Department of Health, Department of Education, Department of Budget and Management, Department of Finance, Department of the Interior and Local Government, National Anti-Poverty Commission, and National Economic and Development Authority). In addition, a Memorandum Circular (09/2007) establishes an interagency National Advisory Committee and defines its roles and responsibilities. Furthermore, Memoranda of Agreement are signed with all participating Local Government Units that define their roles and responsibilities under the program. 32. The program exit and sanction rules at the individual and at the local government level are detailed in the Operations Manual, as is the grievance redress system that will lead to such action. The Operations Manual articulates that LGUs found to be non-compliant with the rules and regulations of the program, or to be misusing or misrepresenting the program, will first be subject to up to two warnings and, if necessary, the provision of technical assistance from DSWD to help rectify the issue. If non-compliance persists beyond this, the case will be referred to the National Advisory Committee and can result in suspension or termination of the program in the LGU as articulated in the Memorandum of Agreement with the LGU. 2.2 Implementation Support for 4Ps (US$12.3 million - IBRD) Support to National Project Management OfJice (IvPMO-4Ps) 33. There is a National Project Management Office (NPMO-4Ps) within the structure of DSWD to oversee the whole implementation of the program. As shown in other CCT programs around the world, a key to program success is a strong and efficient NPMO-4Ps which is capable of developing and implementing all key activities of the program cycle, including registration of families, verification of conditionalities, managing payments, organizing assemblies of grantees, implementing a grievance system, undertaking monitoring and evaluation and developing and using an MIS system that supports all these operational activities. DSWD made major advances in setting up a NPMO-4Ps that by March 2009 had been able to assess about 750,000 households, organize verification, socialization and registration of about 3 76,000 households in the program, and process payments through Land Bank to most of these households. Yet, much more needs to be done to properly set up systems for registration, verification, grievance acceptance and resolution and 53

66 monitoring and evaluation activities. The need to improve the current management systems is even greater if further expansions are made to the program. 34. DSWD is proposing a substantial bolstering of the program unit by including cluster coordinators to be in charge of big regions or areas, appointing regional program managers and adding staff and consultants going to the lowest possible level so as to link with the municipal links. A complete set up of the unit and the staffing requirements needed with functions and responsibilities are detailed in the Operations Manual. 35. This activity will also support the establishment of a simple and accessible Grievance Redress System (GRS) to capture, resolve and analyze grievances from beneficiaries and nonbeneficiaries about the project. This is important to the overall governance and anti-corruption plan associated with this project. (See Annex 15). Based on global experience it is anticipated that most grievances will concern: (i) inclusion and exclusion errors; (ii) payment; and (iii) supply-side problems. To address these and other grievances, the project will support the following: a comprehensive Grievance Redress Manual to guide consistent handling of complaints, establishment of a two-person Grievance Redress Unit in the NPMO-4Ps and dedicated grievance redress staff at the regional level, These staff will support Grievance Committees established by DSWD at all levels of project implementation, establishment of multiple channels to submit grievances, including through the Municipal Link, direct to 4Ps offices or via an SMS hotline, , letter, fax and drop boxes at the Barangay Level, creation of a Grievance MIS Database, drawing on Complaints Forms that will be widely distributed in target areas, including to beneficiaries, Parent Leaders, barangay captains, service providers and others, communications programs (brochures, posters, etc) to educate the public on the existence of the GRS. 36. The Grievance Redress Unit in the NPMO-4Ps will work to resolve complaints within a set timeframe stipulated in the Grievance Redress Manual. It will also prepare regular reports for DSWD management on the volume and status of grievances as a means of identifying systemic vulnerabilities in project implementation or design. 37. This support to the NPMO-4Ps will finance consultants at the NPMO-4Ps needed for a speedy and efficient operation, as well as training, social marketing, the grievance redress system, technical assistance and vehicles for regional offices Development of a Management Information System (MIS) for 4Ps 38. This activity will support the development of a management information system that will cover all the steps in the operation of the 4Ps program. The system will manage different flows of information at different levels. The system will operate at the NPMO-4Ps level, regional level and at the municipal level to support the implementation at the lowest possible level. 54

67 39. e e e 0 e e The MIS system should have the following integrated modules: Module of household information. This module will have information from the household assessment form and from information processed about eligible households provided by the targeting MIS, This module should also include an option to produce cross tables or queries with all the information on the HAF questionnaire. Module for registration. This module will update information at assemblies and will produce lists of registered beneficiary households. Module for verzjkation. A monitoring system for verifying compliance of conditionalities, controlling payments to beneficiary households, and generating managerial reports and progress indicators. The DSWD, in coordination with the Departments of Education and Health, will collect the information to verify that beneficiaries comply with agreed conditionalities. Such verification will be completed before DSWD sends to the Land Bank the database with beneficiaries eligible to receive the transfers. This process must be completed every quarter. The system is based on the principle of ongoing reviews, updating beneficiary information and compliance of conditionalities. This module will (i) create/generate school and health center forms for reporting non-attendance; (ii) generate forms to be sent to municipal links with a list of beneficiaries by each barangay; (iii) receive nodattendance reports from schools and health centers to update database of beneficiaries; (iv) produce final lists; and (v) produce reports. Module for payments. This module will control and produce payments to beneficiary households based on reports of compliance. It will also produce detailed payment information to be given to mothers. Module for updates. This module will allow the database to be updated with details of newborn children, change of address, change of school or health center, households moving out of the barangay, deaths, etc. Module for complaints/grievance redress system. This module will include the process of verification of complaints such as generating forms for complaints, updating and processing the information, assigning a tracking number to every complaint, and a person responsible for solving it, and producing reports of complaint resolution. 40. This activity will finance the hardware and software, network connections, as well as training needed to run and support the operation of the program Monitoring and Evaluation of 4Ps 41. This activity will support monitoring and evaluation of 4Ps with a view to building DSWD s capacity in these areas as a step towards more evidence-based planning and policy - one of the objectives of DSWD s reform agenda. More specifically, this activity will assist in the design and implementation of (i) a spot check methodology to monitor 4Ps operation that will produce the information required for informed and timely policy decisions and adjustments; (ii) a methodologically rigorous impact evaluation on the basis of which the Government and the public would have evidence of the program impact, key for program sustainability; (iii) support to an Independent Monitoring and Advisory Committee; and (iv) regular monitoring of the whole project. 55

68 I Spot Checks for 4Ps 42. The objective of this activity is to annually assess the implementation of the program at different levels and with all agents involved. The system of spot checks seeks to ensure that the program is functioning as intended and to trouble-shoot any process problems that arise. The spot checks will assess whether beneficiaries receiving the grants meet the eligibility criteria set out in the Operations Manual, whether beneficiaries are complying with the requirements of the CCT program, and whether grants were received by eligible beneficiaries. Regular monitoring through spot checks will be undertaken to validate the range of players involved in the delivery of the 4Ps program: namely beneficiaries, schools, health centers, parent leaders, municipal links, municipal, regional and central offices. The actual implementation of the spot checks and the preparation of reports verifying these data against program administrative records will be carried out by an independent, external party chosen on the basis of its credibility and technical capacity. By combining different techniques of data collection (surveys, focus groups and structured interviews) and analyzing the 4Ps administrative data, this external party is expected to inform the program administration on how well specific operational aspects of the program are functioning and where adjustments are needed. Beyond its technical merits, spot checks are key to enhancing the governance, transparency, and accountability under this program. (See Annex 15). 43. Given the institutional complexity of the 4Ps and the multiple actors that are involved at different stages, the spot checks for 4Ps will investigate the sequence of procedures involved in the participation of an individual in the program. The spot checks system is based on samples of municipalities and beneficiaries. 44. For the first two years of project implementation, semi-annual monitoring will be carried out through a comprehensive spot check system to ensure that the program is functioning and to trouble-shoot any process problems that may arise. On the third year of project implementation, the frequency of the spot checks will be done on an annual basis. Once the 4Ps program is established, and operating for some period of time with the verification of compliance systems in place, the spot checks will explore different features of the program. Possible areas that could benefit from a spot check assessment include: e e e e e e e Assessment of knowledge: how different parties involved understand the program rules and incentive structure; Assessment of the process of verifying non-compliance with conditionalities, ensuring that school attendance and the use of health services are accurately recorded and reported. Assessment of the process of updating the database through the reports of updates from beneficiaries. Assessment of the payments process including different alternatives used for making payments to beneficiaries. This includes comparing information about beneficiaries age and status against payments calculated and paid. The payments made need to be compared with verification of compliance. Effectiveness of the system of grievances and complaints in solving conflicts. Assessment of service provision: effects of the increased demand for education and health services on the ability of providers to respond to it. Assessment of the implementing agency at central, regional and local levels. 56

69 Evaluation of Project Impact 45. The main objective of the impact evaluation is to address the issue of whether the 4Ps has any significant statistical impact on the main project outcomes along the dimensions of health and education of children, and poverty reduction. In particular, the evaluation would quantify whether the 4Ps program had any impacts on the following outcomes: (i) Health: (a) pregnant women getting adequate medical care during and after their pregnancy and delivery; (b) stunting among children aged 0-5 years; and (c) use of preventive and immunization health services among children aged 0-5 years. (ii) Education: (a) school attendance, enrollment and attainment; and, (b) child labor. (iii) Other: (a) poverty; (b) food expenditures; and (c) expenditures on nutrient-rich foods. 46. The impact evaluation will have an experimental design with randomly selected treatment and control groups in order to ensure a methodologically rigorous identification strategy. 47. The sample for the impact evaluation has been selected in two stages. First, among selected provinces,53 municipalities were randomly chosen so as to be representative of the average poverty level of those covered by the 4Ps program. Second, within each of the municipalities selected in the evaluation sample, barangays have been randomly selected into treatment and control groups. 48. While treatment barangays started participating in the program in early 2009, the roll out of 4Ps program will be frozen in control barangays until the completion of the first follow up survey. The experimental design of the impact evaluation will allow the researchers to quantify evidence regarding its impact and/or guidance for subsequent program s improvements. 49. The budget allows for two follow-up surveys, one done after 12 or 18 months and the second after 36 months. This proposal assumes a follow-up survey with a sample size of 8,000 households, where 4,000 households are in the control group and 4,000 households in the treatment groups. The second follow up survey will be conducted in Jan In addition, qualitative information on the program impact and a new supply side assessment will be collected. Among other things, the qualitative assessment will seek to identify social impacts on women s empowerment, the impact of increased public demand on the supply of public services, social and economic spin-offs from the formation of the beneficiary groups. The facility surveys will serve for verification purposes (of information such as attendance where self-reported household data could be misleading) but also to assess whether there are any pressing issues that emerge due to the increased demand on health and education services Monitoring The objective of this sub-component is to support monitoring of the whole project, including preparation of regular quarterly and annual reviews, independent performance tracking by civil 53 The sample for the impact evaluation has been drawn from the municipalities where the program had not yet been introduced as of October From the 11 provinces available, 3 provinces were excluded because of security factors. From the remaining 8 provinces, 4 provinces were chosen to span all three macro areas in the country (North, Visayas and Mindanao). 57

70 society groups and monitoring by internal audit services. Regular monitoring will be complemented by independent oversight by an Independent Monitoring and Advisory Committee comprising eminent members of civil society. Component 3: Building Institutional Capacity to Lead in Social Protection (US$2.1 million - IBRD) Objective 51. The NHTS-PR and the 4Ps basically serve as platforms for the pursuit of the broader sectoral reform agenda that aims to develop the DSWD as a leader of social protection. Conversely, the sustainability of the targeting system and 4Ps would be contingent on creating an enabling national policy support for their eventual adoption as core components of the reform. 52. This component would support the strengthening of basic institutional capacity of DSWD to strengthen its leadership role in social protection. It focuses on enhancing the Department s core competence on policy analysis and strategic planning; monitoring and evaluation; social marketing; knowledge management/learning development; and it also builds capacity for financial management and internal audit to strengthen internal controls. Subcomponent and activities 3.1. Policy and Strategy (US$ 0.6 million - IBRD) 53. The Philippine Government has recently created an inter-agency Social Welfare and Protection Cluster to ensure an integrated implementation of social welfare policies and programs. The designation of DSWD as the Cluster s coordinator for operations provides a good opportunity to assert the Department s role in formulating more responsive social protection policies and plans. This sub-component would assist DSWD to enhance capacity in policy and strategy formulation. To achieve this objective, the Project would support: 1. Policy Analysis and Research. This subcomponent would strengthen the Department s capacity for undertaking and using policy analysis and research for policy formulation. It will support hands-on trainings, consultations, manual development and other capacity building activities to strengthen the competence of DSWD to undertake relevant policy analysis based on risk assessment, benefit incidence analysis and research. A medium-term policy and research agenda will be developed in consonance with the priority thrusts of the reform agenda, including emerging concerns related to operationalizing and sustaining the NHTS-PR and ~Ps. 2. Strategic Planning. This sub-component will also support the formulation, dissemination and adoption of key strategic plans that would define the operational mechanisms for integrated delivery of social protection programs and services. Specifically, the formulation of the following strategic plans will be supported: 58

71 a. National Social Protection Operational Framework. The DS WD has formulated an indicative social welfare and development framework which contains the principles and major thrusts for the integrated delivery of social protection programs. The indicative framework, which was also adopted by the Social Welfare and Protection Cluster, needs to be further translated into an operational social protection strategy and guidelines. This component would support DSWD in developing this strategy and guidelines in its capacity as Secretariat to the National Social Welfare Program. It is envisioned that such a strategy would provide the strategic mandate for (i) utilization of the NHTS-PR for other social protection programs/services; (ii) adoption of the 4Ps as a core social assistance program; and (iii) strengthening partnership with other national government agencies, local government units and civil society organizations for better targeted and integrated local social protection programs. b. Frameworkfor Integrated Service Delivery. One of the reform areas of the Department focuses on achieving better and faster delivery of its four key service delivery models (i.e., community-based or KALAHI-CIDSS, center-based, household-based or 4Ps, and disaster management). While the Department has made progress in individually developing three key service models (KALAHI-CIDSS Project, the center-based operations, and disaster management), it has only recently initiated the 4Ps or household-based service delivery model. This component would assist the Department to develop an integrative framework that would define the linkages of the four service delivery models to ensure complementation and achieve greater impact in the long run. The integrated service delivery framework would also lay the foundation to ensure further convergence with social protection services of other agencies. 54. As a preparatory step in undertaking the policy and strategy formulation, the DSWD has reorganized the Research Unit under the Planning and Policy Bureau to coordinate the implementation of this sub-component. The Project would support the hiring of consultants who would provide expert guidelines, conduct formal sessions and mentor/coach the staff of the Research Unit to undertake the actual policy and strategy formulation. Some of the policy analysidresearch would entail out-sourcing of services. The Project would also finance a multistakeholders consultation to draw inputs from internal and external stakeholders as well as ensure broad dissemination and adoption of the policies and strategies developed Implementation Support (US$ 1.0 million - IBRD) 55, This sub-component would support institutional strengthening of the Department in three functional areas, which are essential for effective implementation to achieve the project development objectives. This entails the strengthening of (i) social marketing to ensure full transparency and enhance understanding of social protection strategies and programs among relevant stakeholders; (ii) knowledge management and learning development to build on the experiences from implementation of 4Ps and the NHTS-PR as well as program assessments and impact evaluations; and (iii) financial management to strengthen capacity in step with the scaling up of the Department s implementation of the programs supported by this project. 59

72 56.. Social marketing activities would be undertaken to ensure full transparency in implementation of the project and to mobilize public support for policy and program initiatives of the Social Welfare and Development Reform Project (SWDRP). This would support capacity building of national and regional staff in undertaking social marketing activities and preparing appropriate communication materials (e.g. case studies, video documentation, brochures, etc.). Social marketing activities will be undertaken for three main purposes. Firstly, to ensure information needs of beneficiaries are met to prevent problems occurring. This includes information on how beneficiaries are selected, how the payment system operates and how to submit complaints about project implementation and supply-side constraints. It will also include education programs to mitigate fraud in the payment system and prevent local chief executives from imposing local taxes or additional conditionalities on project beneficiaries. Secondly, social marketing activities will ensure transparency and accountability to the public in project implementation. This includes publicizing beneficiary lists and social audit for validation of target households. The final purpose is to mobilize public support for policy and program initiatives of SWDRP. This would include the development of a sourcebook to enhance capacities of national and regional staff in undertaking social marketing activities and preparing appropriate communication materials. 57. To ensure the systematic and timely engagement of other partners for the social welfare and development reform, the Project would suppor t the setting-up of knowledge management and learning development networks and modules. The various learning products (e.g. case studies on 4Ps, results of the impact evaluation, policy advisory notes; operational guidelines) would be developed, packaged and disseminated through learning eventdexchanges, policy dialogues and technical seminars. The Social Welfare Institute and Development Bureau (S WIDB) would take the lead in formulating the knowledge management and learning development guidelines. It is envisioned that the initial site of the knowledge management and learning development network would be at the central office. 58. This sub-component would also support the capacity building on financial management, which is one of the critical elements for ensuring the Project s efficiency and social accountability. There is a need to build the capacities of the Department s financial management staff to international standards and to strengthen it in step with the heavy increase in work-load resulting from the implementation of this large and ambitious program Monitoring and Evaluation (US$0.5 million - IBRD) 59. This sub-component would assist the DSWD enhance capacity in monitoring and evaluation, which will be also among its core functions as the leader in social protection. Monitoring and evaluation would be intrinsic to program and policy development as it would track performance of key programs and policies the results of which would be used for further program enhancements. While monitoring systems have been developed for specific programs/projects (e.g. 4Ps and KALAHI-CIDSS), this sub-component would assist in the development of an integrated or Department-wide monitoring system. The initial activities would involve the review of existing monitoring systems in various units of the Department as basis for the development of the logical framework design, guidelines and protocols for a broader monitoring system. 60

73 60. The initial activities would involve the review of existing monitoring systems in various units of the Department as basis for the development of the logical framework design, guidelines and protocols for a broader monitoring system. The regular staff would be assisted and provided with on-the-job training by consultants to be hired under the Project. The DSWD shall strengthen the Planning and Monitoring Unit of the Planning and Policy Bureau to coordinate the implementation of activities on monitoring. Subsequently, actual operations of the monitoring system would be implemented by the regular staff with mentoring/coaching by the consultant(s). With project support, national and regional staff would also undergo on-the-job training on the use of the guidelines by undertaking actual program assessments of at least two major social protection programs 61. The Project would likewise support the development of the guidelines and operations manual on evaluation which would be led by the Planning and Policy Bureau. The guidelines would draw inputs from a review of on-going and completed impact evaluation. National and regional staff would also undergo on-the-job training on the use of the guidelines by undertaking actual evaluation of, at least, two major social protection programs. The results of the evaluations would eventually feed into program innovations, policy formulation, standard-setting and other decision-making, 61

74 Annex 5: Project Costs PHILIPPINES: SOCIAL WELFARE AND DEVELOPMENT REFORM Project Cost By Component Local Foreign Total US $million US $million US $million Implementation of the National Household Targeting System for Poverty Reduction Pantawid Pamilyang Pilipino Program (4Ps) Building Institutional Capacity to Lead in Social Protection Total Baseline Cost Physical Contingencies Price Contingencies Total Project Costs' Interest during construction Front-end Fee 1.o 1.o Total Financing Required Financing Plan (US$m): BORROWER IBRD Total Source Local Foreign Total

75 Annex 6: Implementation Arrangements PHILIPPINES: SOCIAL WELFARE AND DEVELOPMENT REFORM 1. Implementation period. The Project will be executed over a period of about five years, from January 1,2010 to June 30, Proiect coordination and implementation arrangements. The institutional arrangements for project implementation are aligned with the government structure. At the central level, DSWD, DOF, DBM and COA shall be responsible for ensuring that project resources are budgeted for and that project accounts are audited. 3. Proiect Management. The DSWD will be the executing agency for SWRDP and shall have overall responsibility for accounting for project funds and coordinating activities under the project. In DSWD, the Executive Committee chaired by the Secretary (with all the Undersecretaries and Assistant Secretaries as members) shall have oversight responsibility for SWDRP. The Undersecretary for Policy and Programs Group (PPG) will be the Project Director and overall coordinator of SWDRP. A designated Undersecretary will be responsible for each of the components of the Project. Currently, the Undersecretary for Policy and Programs Group is responsible for Component 1 on Targeting and Component 3 on Building Institutional Capacity while the Undersecretary for General Administration and Support Services Group has been designated as the Program Director for Component 2 on 4Ps. 4. While overall oversight and management of SWDRP will be mainstreamed and placed with the office of the Undersecretary for Policy and Program Group, two discrete implementation units will be supported by the project: (i) the NHTS National Project Management Office (NPMO- NHTS) that will be charged with implementing the National Household Targeting System; and (ii) the 4Ps National Project Management Office (NPMO-4Ps) that will be charged with implementing the 4Ps component. 5. A dedicated National Project Management Office (NPMO-NHTS) has been set up to oversee the day to day management of the national targeting system, headed by a director. The NPMO-NHTS will consist of technical staff of DSWD and consultants with support from regional coordinators and provincial supervisors. The NPMO-NHTS could consist of people depending on the speed of project implementation during 2009 and beyond. The specific functions and responsibilities will be detailed in the Operation Manual for NHTS-PR. The DSWD has also organized a National Targeting Advisory Group composed of representatives from the academe, statistical offices, non-government organizations and private sector to provide advice. 6. A dedicated National Project Management Office (NPMO-4Ps) was also established to carry out the day-to-day operations of the 4Ps. The NPMO-4Ps is headed by a director and is composed of about 40 staff. At the regional level, the DSWD Field Directors assume the overall responsibility for implementing 4Ps with technical support from the Technical Assistance Division and a dedicated 4Ps focal person. At the municipal level, the Department hired one municipal link while the local government units also designated or hired, at least, one full-time staff who serves as counterpart of the DSWD municipal link. At the community level, the school principal and 63

76 midwife have been designated as the education and health focal persons whose primary responsibility is to ensure verification of compliance to conditionalities. 7. The DSWD has also organized the Independent Group composed of eminent persons from the academe, non-government organizations, religious sector and private sector that provides strategic advice and agreed to serve as external monitors of the Program to ensure transparency and social accountability. 8. The implementation of Component 3 Building Institutional Capacity to Lead in Social Protection shall be under the direct coordination of the Undersecretary for PPG with the following DSWD BureausLJnits providing technical management: (i) Planning Service for the policy and strategy sub-component, (ii) Social Welfare Institute and Development Bureau, Social Marketing Services, and Financial Management Services for institutional strengthening subcomponent, and (iii) Planning and Monitoring unit of Planning and Policy Bureau for Monitoring and Evaluation sub-component. 9. Coordination Mechanism. The 4Ps National Advisory Committee (NAC) was set up in May 2008 to ensure coordination with key government agencies. The NAC is chaired by the 4Ps Project Director and composed of representatives from the National Anti-Poverty Commission (NAPC), National Economic and Development Authority (NEDA), Department of the Interior and Local Government (DILG), Department of Health (DOH), Department of Education (DepEd), and National Nutrition Council. The Advisory Committee is replicated in all regions through the Regional Advisory Committee (RAC) which includes the counterpart of all the member-agencies of the NAC and provincial representatives. Similarly, the Municipal Advisory Committee (MAC) was organized in all regions with the mayor as chair and counterpart of NAC member-agencies. 10. Monitoring and Evaluation. M&E procedures and reports are described in Section C.3, Monitoring and Evaluation of Outcomes/Results. 11, Proiect Implementation Plan (PIP). A detailed draft PIP has been prepared by DSWD and will be updated from time to time in agreement with the Bank to guide the execution of each component and the implementation of the Project as a whole. The PIP will set forth all operational and procedural steps regarding reviews and approvals of specific activities, flow of information, detailed description of the functions of Project management and implementing bodies, procurement and financial management arrangements, reporting requirements, and manual amendment procedures. 64

77 Executive Summavy Annex 7: Financial Management and Disbursement Arrangements PHILIPPINES: SOCIAL WELFARE AND DEVELOPMENT REFORM 1. Overall conclusion - A financial management assessment review was carried out at the DSWD, the implementing agency, in accordance with the Financial Management Practices in World-Bank-Financed Investment Operations issued by the Financial Management Sector Board on November 3, The purpose of the review is to ensure that there are in place adequate financial management arrangements for the proposed Social Welfare and Development Reform Project (SWDW or the Project) at DSWD that satisfies the Bank s OP/BP Under OP/BP 10.02, the Bank requires the borrower and all its implementing units to maintain financial management arrangements (budgeting, accounting, internal control, funds flow, financial reporting, and auditing arrangements) that are acceptable to the Bank and that will provide reasonable assurance that the proceeds of the loan are used for the purposes intended. 2. Overall, the financial management system of DSWD will meet the financial management requirement as stipulated in OP/BP subject to implementation of agreed actions and mitigating measures. The current weaknesses are as follows: (i) DSWD has still to complete the roll out of the engas, the computerized bookkeeping segment of the New Government Accounting System (NGAS) to the rest of the regional offices. At present, engas has only been implemented in the central office and in some regional offices. The completion of the roll out of the engas to all offices has been interrupted in 2008 because of certain upgrading to the engas done by COA; (ii) The Commission on Audit (COA) has issued qualified audit reports on DSWD s financial statements due to the following issues involving noncompliance with prescribed internal accounting controls and procedures such as the following among others: (a) Non-recording of donated land, misrecording of the land value; (b) unliquidated funds transferred to Non-government OrganizationsPeoples Organizations (NGOsPos), Local Government Units (LGUs) and National Government Agencies (NGAs); (c) Existence of difference between the book and bank balances of the cash in bank account due to failure of some regional offices to prepare bank reconciliations; (d) Balances of some regional offices inventory accounts not reconciled with the physical inventory reports due to property unit s failure to maintain an accurate and complete record of purchases and issuances; and (e) overstatement of the balance of liability accounts due to failure to adjust long outstanding undocumented payables. Based on the COA s June 30, 2008 audit report on the status of the actions taken by DSWD on prior years issues, DSWD already made significant progress in addressing the issues reported by COA. There are still remaining issues that are still to be completely resolved by the field offices and suggested actions to be approved by COA. 3. The assessed financial management risk of the Project before the mitigating measures is considered substantial. The residual risk would be moderate after the proposed mitigating measures described below are implemented and have shown effective impact. The factors supporting this conclusion and the significant observations and related existing and proposed mitigating measures are summarized below. 4. NGAS and engas - The budgetary controls, accounting procedures and internal controls prescribed by COA under the New Government Accounting System (NGAS) are not considered 65

78 adequate because there are certain internal controls that are found only in various COA memoranda and circulars, and laws and regulations. The Australian Agency for International Development (AusAID) with its grant to the Philippine Government is working with the Department of Budget and Management (DBM) for the improvement on the government s internal controls through the development of a National Guidelines on Internal Controls (NGIC) manual. COA, in its audit of the agency s financial statements, reported certain instances of non-compliance with the internal controls as described above. The bookkeeping segment of NGAS is computerized and is referred to as electronic NGAS (engas). DSWD has still to roll out of the engas to all its regional offices, which is expected to be completed in Due to the absence of a functioning computerized accounting system in all offices, yearly there were always reports by COA of subsidiary records not properly maintained and reconciled with the general ledger, cash balances not reconciled with the balances of depository banks, etc. 5. Internal Controls and Internal Audit - DSWD s internal audit service (IAS) unit is assessed to be weak in view of the limited scope of coverage and the lack of adequate training of the staff to carry out the internal audit function in accordance with international standards. Internal audit function is a key activity to help improve the control environment and facilitate greater reliance on financial management systems. The internal audit function was authorized under the Internal Audit Code and under Administrative Order No 70 of April 2003 requiring all government offices, local government units, and government corporation to organize an IA service in their respective organizations. At present, the effective coverage of internal audit throughout the national government is minimal. Most of the internal audit units of the agencies are understaffed with inadequate skills and resources to perform its mandate. Besides, internal audit methods and focus require major upgrading in line with modern practices. Internal control systems remain weak and relatively ineffective, which leaves the system open to leakagedfraud. Technical Assistance funded by the Bank was provided to the Presidential Anti-Graft Commission (PAGC) through IDF Grant to help expedite this process by developing appropriate audit methodologies. A generic audit manual was produced under this grant which will then be customized and used by government agencies. 6. COA s Reports on DSWD s 2004 to 2007 financial statements - There were issues reported by COA in its audit of DSWD s financial statements such as incomplete maintenance of subsidiary records of inventories in field offices and non-reconciliation of the results of the physical count, long outstanding accounts payable not supported with complete documents not closed, certain bank accounts not reconciled with the balances reported by depository banks, long outstanding cash advances to NGOs/Pos, LGUs, NGAs, etc. These resulted to COA issuing qualified opinions on the annual financial statements of DSWD for 2004 to Based on the COA s June 30, 2008 audit report on the status of the actions taken by DSWD on prior years issues, DSWD made significant progress in addressing the issues but there are still issues that remained to be resolved. DSWD also reported that some of the actions require approval by COA. There is also the challenge of how to stop the same issues that were supposed to have been resolved from occurring again in the following year. 7. Nature of the project -The components 1 and 2 of the project involve targeting of beneficiaries and transfer of funds to selected beneficiaries based on a targeting mechanism established under the Project. The following are the risks identified: (i) Inclusion or exclusion errors exist in the targeting process considering the wide geographical reach and involving very remote 66

79 areas; (ii) The high level of political interference in some weak local authorities with poor governance structures that may exert undue influence on the targeting process; (iii) The reliability and safety of the funding channel considering the limited availability of the banking system in some remote targeted areas; (iv) The staff-complement in DSWD and other agencies not being able to immediately cope with the processes required if there is an unreasonable pressure from higher government officials to speed up the implementation of components 1 and 2; (v) The adequacy of the number of dedicated staff both in operations and finance to ensure compliance by beneficiaries of conditionalities and accuracy of the funds to be transferred; and (vi) Readiness of the management information system to handle all the unique processes of these two components including the grievance monitoring mechanism. 8. Mitigating measures - The mitigating measures that DSWD has undertaken and committed to undertake to reduce the risk described above or minimize if not prevent the issues reported by COA from occurring in the Project transactions are as follows: i.engagement of independent reputable audit consultants no later than 6 months after loan effectiveness, with qualifications and terms of reference acceptable to the Bank, which will provide capacity building to IAS of DSWD, including hands-on training to IAS in the conduct of semi-annual review of the project for at least two years, starting with the second semester after the date of the loan agreement. The first semi-annual audit should include a baseline assessment of internal controls (both operational and financial) of DSWD. The engagement shall include the customization of the Generic Internal Audit Manual and, on the job training to the internal audit staff of DSWD from risk mapping, planning to execution and reporting (semi-annual review of the Project). Starting from the third year of the project, the IAS shall perform the internal audit function of the Project. ii.fil1 the key vacant position in the Internal Audit Services (Operations Audit Head) with qualified staff no later than five months of loan effectiveness. iii.maintenance of separate books of accounts for the project and submission of annual audited project financial statements, which shall include a statement of financial position, a statement of financial performance, a statement of changes in net assetdequity, and a cash flow statement and the notes to the financial statements. iv.maintenance of a Designated Account of the Project in a commercial bank acceptable to the Bank. A project Peso bank account shall also be opened solely to pay for Peso expenditures under the Project. v.unaudited quarterly Interim Financial Reports (IFR) shall be submitted 60 days after the end of each quarter to the Bank and to COA to enable COA to do progressive audit to ensure timely submission of audited project financial statements. vi.creation of a Project Management Office staffed with adequate number of qualified personnel. While the processing and recording of the Project transactions will be mainstreamed using the NGAS and engas, additional qualified finance staff have already been hired whose function shall mainly be to review the accuracy and completeness of the list of beneficiaries and the 67

80 related grant amounts before funds are deposited into the commercial banks for release to the beneficiaries. A dedicated FM group for the Project shall be established, including the hiring of a FM officer and key FM staff no later than five months of loan effectiveness. Additional finance staff shall be hired during project implementation based on a continuous assessment of the volume of work brought by the implementation of the 4Ps. The Assistant Secretary and the Director for Finance shall be responsible for the financial management of the Project. vii.a grievance redress system shall be implemented under the project to ensure that any issues are immediately processed and addressed. viii.an Operations Manual (OM), acceptable to the Bank, shall be adopted under the Project to fully describe the policies and procedures and the various reports to be produced. The OM shall include a section on financial management for the guidance of all concerned units in DSWD and other participating agencies. ix.dswd adopted a time-bound plan to complete the roll out of the engas to all regional offices. This plan shall be submitted to the Bank prior to appraisal completion. Status of the roll out shall form part of the quarterly IFR. x.dswd adopted a time-bound plan to address all the outstanding issues reported by COA in its audit report on the 2007 financial statements of the agency. This time-bound plan that shall be submitted to the Bank before appraisal completion. Status of the implementation of the timebound plan shall form part of the quarterly IFR. xi.dswd shall not later than January 3 1 and July 3 1 in each year, commencing July 3 1, 2010, and until July 31, 2012, and thereafter, not later than July 31 in each year, commencing July 31, 20 13, carry out spot checks under terms of reference acceptable and with a minimum coverage satisfactory to the Bank, to verify (a) that Beneficiaries receiving grants of the Project meet the eligibility criteria set out in the Operations Manual of the Project; and (b) that the Beneficiaries receiving grants under the Project are complying with the requirements of the CCT Program as set out in the Operations Manual. 9. Funds flow arrangements for the Project - The funds flow from the World Bank to the Bureau of Treasury s account at the Bangko Sentral ng Pilipinas (Central Bank of the Philippines). After approval by the Department of Budget and Management (DBM), through the issuance of a Notice of Cash Allotment (NCA), funds flow to the DSWD s Designated Account (DA) maintained in an acceptable depository government commercial bank. A project Peso account shall also be opened at DSWD central office to pay for Peso based expenditures. The traditional basis for disbursement (Statement of Expenditures (SOE) or full documentation) will be used in this project. Regional offices shall submit the SOEs to central office monthly and central office to consolidate all SOEs to support the withdrawal applications. For component 2, liquidation of the advance to the Designated Account shall be immediately based on the amount deposited into a commercial bank for credit to the bank accounts of the household beneficiaries. Transfer of funds to the beneficiaries under 4Ps shall be done under following arrangement: DSWD will transfer funds to the Land Bank of the Philippines (LBP) funds for the beneficiaries. LBP in turn will release the funds to the beneficiaries over the counter upon presentation of the 4Ps identification card, issued by DSWD, or 68

81 deposit the same to each of the account of the 4Ps beneficiaries maintained with LBP for those who have opened a dedicated account with the LBP. Any other conduit in the channeling of funds to the beneficiaries that will be identified during project implementation shall have prior approval by the Bank. Coun trv Financial ManaEemen t Issues : 10. Perceived high corruption in the country - The international institutions monitoring corruption have rated the country s corruption as high. This perception of the existence of high corruption in the country puts any investment in a certain degree of risk. 11. To assist the President in the campaign against graft and corruption, the Presidential Anti- Graft Commission (PAGC) was created. In accordance with PAGC s mandate to formulate national anti-corruption plans and strategies, PAGC organized an anti-corruption workshop which had as its main output the Integrity Development Action Plan (IDAP). IDAP is composed of specific anticorruption measures and is now being implemented by 135 government agencies, including DSWD. An Anti-Corruption Scorecard is also used as a measurement tool to assess the impact or effectiveness of the anti-corruption reforms, with the special focus on the IDAP. The scorecard validates the ratings of the IADP implementing agencies, which were based on the 5-point rating scale of the set of IDAP indicators measuring efficiency. The scorecard considers the results of the assessment by the accountable persons and those of the rank and file employees of the agency, its stakeholders, the clientlcustomers and the results of local corruption related surveys. PAGC monitors the IDAP of the agencies on a quarterly basis together with the Office of the Ombudsman, and the Commission on Audit. In 2009, DSWD was adjudged by PAGC as the number one anticorruption champion based on the anti-corruption scorecard. 12. Weak internal controls/ weak or lack of an internal audit function in government units - One of the outstanding recommendations in the 2003 Public Expenditure, Procurement and Financial Management Review relevant to the Project is the organization of the internal auditing function. The establishment of the internal audit function is authorized under the Internal Audit Code, and in 2003 President Gloria Macapagal-Arroyo directed all government to organize internal audit service under Administrative Order No. 70. Only a few government agencies have complied mainly due to budgetary constraints. DBM has issued a circular on April 14, 2008 authorizing all agencies to establish its own Internal Audit Services ahead of the approval of the overall rationalization plan of the agencies. DSWD is one of the agencies who had already established an Internal Audit Services unit but as described earlier still has to fill some vacant positions and also improve its capacity to international standards. 13. A PEFA PFM Assessment was carried out in respect of fiscal years 2003 to It is intended to serve as an objective measure for benchmarking countries PFM capacities and facilitate tracking of improvements in specific areas of PFM over time. The PEFA report indicates that progress in implementing PFM reforms has been somewhat limited. The PEFA report indicates that progress in implementing PFM reforms has been somewhat limited. Relative to FM some of the most important problematic areas include (i) Inadequate budget formulation, expenditure prioritization and expenditure control systems; (ii) Absence of accountability mechanisms that 69

82 fueled large scale corruption and misuse of public funds within the budget execution process, and (iii) Weak oversight functions. 14. At present, the effective coverage of IA throughout the national government is minimal. Only a few agencies have Internal Audit units and they are understaffed with inadequate skills and resources to perform their mandate. Besides, internal audit methods and focus require major upgrading in line with international standards. Internal control systems remain weak and relatively ineffective, which leaves the system open to leakagedfraud. Technical Assistance funded by the Bank was provided to the Presidential Anti-Graft Commission (PAGC) through IDF Grant to help expedite this process by developing appropriate audit methodologies and a Generic Internal Audit Manual aligned with international standards was produced. 15. The Australian Agency for International Development (AusAID), with its grant to the Philippine Government, worked with the Department of Budget and Management (DBM) for the improvement on the government s internal controls including the issuance of a National Guidelines on Internal Controls manual. This was disseminated to all government agencies for implementation. 16. Absence of an integrated financial management systemkomputerized accounting system not implemented by all offices - The bookkeeping segment of the NGAS is computerized (engas) but still under roll out to all government agencies. COA has suspended the roll out of engas in 2008 because it is currently preparing a revised version, which is expected to be available middle of 2009, as a result of the country s full adoption of the International Public Sector Accounting Standards. As a consequence, DSWD has still to complete the roll out of engas to all its regional offices in 2009 to An integrated financial management system is still not in place in the country. Progress of the implementation of engas in all government units is highly dependent also on the availability of funds in the unit s budget. However, DSWD is one of the few national agencies who made significant progress in the adoption of engas. Hardware equipment required for the roll out of engas to the remaining regional offices was already purchased. Risk Analvsis. 17. A summary of the financial management assessment risk ratings is provided in the table below. The detailed discussion of each subject immediately follows hereunder. Category of Risk (Issues/Factors) Inherent risk I H Risk Rating Risks Mitigating Measures In Place or to be Adopted Residual Risk M Condition of Negotiations, Board or Effectiveness (Y/N?) Countrv level l 1. Perceived high corruption in the country H 1. Strengthening of the internal audit functions in government agencies is currently in progress. Please see detailed discussion under country financial issues above. S N 2. Weak internal controls/weak or lack of 2. Part of the government s actions to safeguard against corruption is the passage of the procurement law and implementing rules and regulations, which are already implemented N 70

83 Category of Risk (Issues/Factors) internal audit function in government units 18. Absence of integrated financial management system 19. High level of political interference in some local authorities may affect targeting process Risk Rating Risks Mitigating Measures In Place or to be Adopted by all units of government Standard bidding documents were issued for mandatory use and the Generic Procurement Manuals to guide the agencies were approved and rolled out. Both of these documents were harmonized with development partners and the same are now being used for World Bank assisted projects. 3. Use of Proxy Mean Test and active involvement of the representatives of the Departments of Health and the Education from the regional to the provincial/school levels and the community awareness campaign of the processes addresses the political interference issue together with the other monitoring measures that the project will implement. Residual Risk Condition of Negotiations, Board or Effectiveness (Y/N?) N 4. Supervision and information campaign to inform municipalities and beneficiaries of rights and obligations; Memorandum of Agreement between DSWD and Municipal governments; monitoring. N S S 1. Weak institutional capacity at DSWD and at the level of local government. 2. Internal audit unit not functioning in accordance with international standards and needs manpower with adequate internal audit experience and background on finance, accounting and engineering. 1. Heavy emphasis of the project is on capacity building under every component. 2. 4Ps staffing both operations and FM will need to be augmented based on the progress of the program size (geographic reach and number of targeted household beneficiaries). Additional FM staffs have been already hired to review each release of funds to the beneficiaries. A dedicated FM group for the Project, including hiring of a FM officer and key FM staff, shall be established no later than five months of loan effectiveness. This number of staff shall be further increased during project implementation based on a continuous assessment of the volume of work especially on the cash grant component. 3. Fill the key vacant position in IAS (Operations Audit Head) with qualified staff no later than five months of loan effectiveness. N N (Dated Covenant) N (Dated Covenant) 4. Engagement of independent reputable audit consultants, with qualifications and terms of reference acceptable to the Bank, no later than 6 months after loan effectiveness who will provide the capacity building to the IA staff of DSWD and also hands-on training to IAS by conducting the internal audit review of the project during the two years engagement. The internal audit review on the project shall be conducted semi-annually with copy of the report sent to the Bank 60 days after end of each N ( Dated Covenant) 71

84 Category of Risk (Issues/Factors) Risk Rating Risks Mitigating Measures In Place or to be Adopted calendar semester, starting with the second semester after the date of the loan agreement.. Residual Risk Condition of Negotiations, Board or Effectiveness (YiN?) 5. The National Guidelines on Internal Controls developed under the AusAID grant will be customized and implemented in all agencies. The General Services Management Unit in all agencies is tasked in the improvement of the internal controls and monitoring compliance thereof. N Proiect 1. 4Ps is a highly visible project and drawing a lot of negative comments from some sectors in society who associate this to the coming 2010 election. 2. The 4Ps will have a wide geographic reach in the country and to places which are hard to reach by any mode of transportation making monitoring and verification difficult. 3. 4Ps involves a lot of new processes and coordination within DSWD and with other participating agencies such as the Departments of Education and Health, local government units, etc. Control risk Budget 1. Should there be a requirement of counterpart fund, delays in the approval of the government s annual budget puts the prompt release of total funds to the 4Ps beneficiaries at risk. Accounting S S M S 1. Strict protocol shall be adhered to for geographic and household targeting using the PMT. 2. Internal Audit Services shall cover the Project in its scope of work and an independent third party to do spot checking of the entire process from targeting to compliance monitoring and release of funds shall be engaged for the Project. 3. The project shall set up a grievance monitoring system to enable it to collate and address issues efficiently and effectively. 4. The DSWD has also organized an Independent Group composed of eminent persons from the academe, non-government organizations, religious sector and private sector who provide strategic advice and have agreed to serve as external monitors of the Program to ensure transparency and social accountability. 5. A Project Implementation Plan and Operations Manual shall be prepared under the Project prior to loan negotiation, which shall also include a financial management section for the guidance of all participating agencieshnits. Draft of these documents shall be submitted to the Bank prior to loan negotiation. 1. Use of prior year s budget as basis of fund release during the period that the government s approval of the current year s budget is delayed is allowed by law. 2. DBM will now implement a comprehensive release of the funds (Notice of Cash Allocation) initially covering 6 months funding of the government agencies. M M L M N N N N N 72

85 Category of Risk (Issues/Factors) 1. Accounting policies & procedures contained in NGAS, government laws and regulations, etc. not fully adhered to by DSWD as reported by COA in its observation and recommendations memorandum. Risk Rating Risks Mitigating Measures In Place or to be Adopted 1. Maintenance of separate books of accounts for the project shall be required to facilitate the preparation of financial reports and for the project not to be burden with the outstanding issues reported by COA on the agency s accounts. 2. DSWD adopted a time-bound plan to address all the outstanding issues reported by COA in its audit report on the 2007 financial statements of the agency. Status of the implementation of the time-bound plan shall form part of the quarterly IFR. Residual Risk Condition of Negotiations, Board or Effectiveness (YiN?) N N 2. The FM staff to carry out the additional work related to component 2 (cash grant) of the project may not be adequate. 3. DSWD has already hired additional qualified FM staff assigned for the 4Ps, which shall be adjusted during project implementation based on the volume of work related to the cash grants. A dedicated FM group for the Project, shall be established no later than five months of loan effectiveness. N ( Dated covenant) Internal controls 1. COA reported several weak implementations of the internal controls and procedures prescribed in NGAS, for inventories, cash transfers, cash advances, and bank reconciliation. S 1. See discussion under accounting on the action to address the issues of noncompliance on internal controls reported by COA, which affected the accuracy of reported account balances. The strengthening of the internal audit function shall be able to improve the monitoring of the compliance on the prescribed internal control policies and procedures in government. M N 2. The National Guidelines on Internal Controls System developed under the AusAID grant will be customized and implemented in all agencies. The General Services Management Unit in all agencies is tasked in the improvement of the internal controls and monitoring compliance thereof. 2. Internal audit unit not fully functioning in accordance with international standards 3. The internal audit unit once strengthened and functioning in accordance with international standards can significantly contribute to the strengthening of internal controls at DSWD. 4. With separate books of accounts maintained for the project, the project financial statements will not be burdened by the issues of noncompliance with internal controls reported by COA in its audit of the agency s prior years financial statements that affected the account balances. Fundsflow 1. Loan proceeds take long period before it is credited into the S 1. The promptness of the deposit into the Designated Account for the loan proceeds has been discussed with DBM and the DOF. M N 73

86 Category of Risk (Issues/Factors) Designated Account from the Central Bank of the Philippines. Delays will create risk of not releasing funds to the 4Ps beneficiaries on time. 2. Inadequate release of counterpart fund, especially for the cash grant, in the event of delays in the approval of the government s annual budget by Congress. Risk Rating Risks Mitigating Measures In Place or to be Adopted 2. DSWD s experience in implementing Bankassisted projects has already made it familiar with the effect of the government processes. As in the other projects, it closely follows up the credit of the loan proceeds to the Designated Account from the responsible government agencies. 3. Release of funds based on prior year s budget is allowed by law. As the beneficiaries involved are the poor and involved a big number of households, there is pressure from society for the government to make good the prompt payment of the cash grant. Residual Risk Condition of Negotiations, Board or Effectiveness (YiN?) Financial reporting o Inaccurate financial reports as discussed above due to the non-compliance with certain accounting policies and internal controls and procedures, and also caused by maintaining the accounts manually in some regional offices. S 1. DSWD adopted a time-bound plan to complete the roll out of the engas to all regional offices in DSWD has already purchased the required hardware for the roll out of engas to the regional offices. Status of the roll out shall form part of the quarterly IFR. 2. The project will require unaudited interim financial reports (IFRs) on a quarterly basis. Format of the IFR was agreed before loan negotiation. M N Y (loan negotiation) Auditing Some COA auditors may not be familiar with the Bank s policies and procedures on FM, procurement and disbursement and therefore may not be able to report to the Bank certain non-compliance thereof. Overall Risk Rating - M S The COA auditors will also be invited to attend the brief orientation on FM, procurement and disbursement that the Bank will hold for the DSWD staffs. L M N Risk Rating: H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk) 20. Strengths and Weaknesses - The significant strength of DSWD is the familiarity of DSWD officials and staff with the Bank s policies, procedures and reporting requirements that would facilitate more effective project implementation. Such familiarity was acquired during the implementation of the Bank-financed projects. In addition, it has already implemented a project (the KALAHI-CIDSS) that operates in far flung places and has a wide geographic reach. DSWD is a relatively small agency and therefore coordination of all units is easier to handle. There is a great 74

87 deal of awareness at the DSWD and this agency has been adjudged by PAGC as the number one anti-corruption champion in government based on the ratings it got in the Anti-Corruption Scorecard, which is used as a measurement tool to assess the impact or effectiveness of the anticorruption reforms, with the special focus on the IDAP 2 1. The significant weaknesses and the corresponding corrective actions are summarized below. Significant Weaknesses 1. Reputational risk to the Bank due to delays in (a) delivery of government counterpart funds caused by delays in the approval of the government s annual budget; and (b) the deposit of the loan proceeds to the Designated Account. 2. Non-compliance with internal control procedures required under the NGAS (Details are discussed in Internal Controls) and the internal audit unit not functioning in accordance with international standards. Corrective Action 1. Use of prior year s budget as basis of fund release during the period that the government s approval of the current year s budget is delayed is allowed by law. As the beneficiaries of the cash grant are the very poor and involve a big number of households, pressure in society will make the government make the prompt payment of the cash grant. 2. DBM will now implement a comprehensive release of the funds (Notice of Cash Allocation) initially covering 6 months funding of the government agencies. 1. Maintenance of separate books of accounts for the project shall be required to facilitate the preparation of financial reports and for the project not to be burden with the outstanding issues reported by COA on the agency s accounts. 2. DSWD adopted a time-bound plan to address all the outstanding issues reported by COA in its audit report on the 2007 financial statements of the agency. Status of the implementation of the timebound plan shall form part of the quarterly IFR. 3. Fill the key vacant position in IAS (Operations Audit Head) with qualified staff no later than five months of loan effectiveness. 3. Books of account are still maintained manually in some regional offices that also contribute to the noncompliance with internal controls such as the proper maintenance of subsidiary records, non-reconciliation of certain accounts, etc. due to the volume of DSWD s transactions. 4. Engagement of an independent reputable audit consultants, with qualifications and terms of reference acceptable to the Bank, no later than 6 months of loan effectiveness who will provide the capacity building to the IA staff of DSWD, including hands-on training to IAS in the conduct of the internal audit review of the projectduring the period of the engagement. 1. DSWD adopted a time-bound plan to complete the roll out of the engas to all regional offices in Status of the roll out shall form part of the quarterly IFR. 2. The project will require unaudited interim financial reports (IFRS) on a quarterly basis. Format of the IFR was agreed before loan negotiation. Financial Management Arrangements for the Project 22. FM organization and staffing - The Assistant Secretary and the Director for Finance shall be mainly responsible for the overall financial management of the Project. A dedicated FM group for the Project, including the hiring of a FM officer and key FM staff, shall be established no later than five months of after loan effectiveness. Additional staff shall hired to handle the review of the list of 4Ps beneficiaries and the amounts of cash grants before funds are transferred to the commercial bank chosen as the funding channel based on the continuous evaluation of the volume of work related to the cash grant. 75

88 23. Budgeting - The project will be using the government s budgeting system. DSWD prepares its budget for locally funded and foreign assisted projects. Preparation instructions (budget calls) are received from the DBM. The project budgets, which are eventually included in the General Appropriation Act (GAA), need approval of the Congress and the President. Budget preparation and discussions start with the lowest level of the organization in DSWD and consolidating by the DSWD central office. There are reviews and approvals within DSWD and with DBM before these are submitted to the legislative and executive branches of government for review and signing into law. The GAA then becomes the basis of the release of funds (through the use of the Notice of Cash Allotment or NCA) to the Agency or Projects. Adequate budget registers are used to control the budget implementation and reporting as required under NGAS. Government agency heads are required to submit accountability and financial reports to the DBM, Commission on Audit, and the Congress in accordance with existing rules and regulations. These reports are designed to monitor the efficiency and effectiveness in the utilization of budgeted government funds by each agency, and generally to verify the attainment of goals established in the budget process and the national development plan. 24. Accounting - The books of accounts of the project shall be maintained using NGAS and eventually recorded using engas. The project FM team at the central office and the FM assistant(s) at the regional offices, working under the direct supervision of the accounting head of the respective offices, shall be responsible for the maintenance of the books of accounts, monitoring of the Designated Account (DA), and prepares the Project Financial Reports required by the Bank. They shall also be responsible in the preparation of withdrawal applications. 25. Internal ControlsDnternal Audit - The project shall follow the National Guidelines on Internal Control System, which include the internal controls policies and procedures found in the NGAS, Government Audit and Accounting Manual (GAAM), COA and DBM memoranda and circulars, other laws and regulations. In addition, the following requirements shall be implemented for the project: a. b. C. d. Maintenance of separate books of accounts and submission of quarterly unaudited interim financial reports (IFR); A Designated Account shall be maintained for the project where all loan proceeds released from the Bank are credited. Regional offices shall be asked to maintain a project bank account for the loan funds transferred from central office to pay for the expenditures incurred in the regions. The expenditures to be incurred at the regional offices are expected to be not significant as most of the goods and consultants services will be procured in the central office and the release of the cash grant to the beneficiaries will be done by the central office through the commercial bank. Monthly bank reconciliation statements shall be required to be submitted by the regions to the central office together with the monthly trial balance. Bank reconciliation statements of the Designated Account and all project bank accounts shall be part of the quarterly IFR. An annual work and financial plan shall be prepared and submitted to the Bank each year, with monthly details and details per office (central and regions) for proper monitoring of project activities. 76

89 e. f. 5 h. Annual physical count of fixed assets and inventories of the project shall be carried out and reconciled with the accounting and property & asset management records. Results of such reconciliation shall be submitted to the Project Management Office and to the Bank as part of the first quarter IFR of each year of the project life. The project shall be covered by an Internal Audit review twice a year, with reports submitted to the Bank 60 days after the end of each calendar semester, starting with the second semester after the date of the loan agreement. Grievance monitoring system shall be established for the project. Spot checks under terms of reference and with a minimum coverage satisfactory to the Bank shall be carried out not later than January 3 1 and July 3 1 in each year, commencing July 3 1, 20 10, and until July 3 1, 20 12, and thereafter, not later than July 3 1 in each year, commencing July 31, External Audit - The external audit arrangements shall be in accordance with the Bank s policies on audits of Projects, and based on terms of reference acceptable to the Bank. COA is the external auditor of DSWD s financial reports. This supreme audit institute is an independent office which was given the mandate under the Philippine Constitution to audit all accounts pertaining to all government revenues and expenditures and uses of government resources. The COA s audit is substantially in accordance with the international auditing standards prescribed by the International Federation of Accountants (IFAC). Based on the audited project financial statements of the Kalahi CIDSS, it was noted that COA s audit of the financial statements also included physical inspection of sub-projects. The physical inspection is carried out by a technical team (other than the team looking at the financial records) that has engineers as members. Review covers not only the physical construction but also the compliance with the procurement procedures. Discussion shall be arranged with COA to agree on the audit approach it will take on the cash grant component of the Project. 27. Financial Reporting - Under this project DSWD shall submit the following reports to the Bank throughout the life of the project: a. Unaudited Interim Financial Reports (IFRs) within 60 days after the end of each calendar quarter, which shall consist of the: (a) financial reports consisting of the following: (i) statement of financial position, (ii) statement of sources and uses of funds which should include the current and cumulative data compared with plan (covering both loan proceeds and government counterpart funds), (iii) bank reconciliation statements, (iv) aging schedule of outstanding funds released to the regional offices, and (v) status of the implementation of the time-bound plans for the engas roll out and the resolution of the COA prior years issues; (b) physical progress report; (c) procurement status report; and (d) status of the implementation of the roll out of the engas and the resolution of the issues reported by COA in the audit of DSWD s financial statements for The physical accomplishment report must be linked to the financial report. In addition, the results of the reconciliation of the physical count of fixed assets and inventories with the accounting and property & asset management records shall be part of the first quarter IFR of each year. Format of this IFR was agreed with the Bank before loan negotiation. 77

90 b. Annual audited project financial statements, which shall consist of a statement of financial position, a statement of financial performance, a statement of changes in net assetdequity, and a cash flow statement and the notes to the financial statements, together with a copy of the management letter reflecting the auditor s findings and recommendations, shall be submitted to the Bank no later than 6 months after the end of each fiscal year. The auditor for this project is COA. The Audit Certificate to be issued shall be the based on the Bank s pro forma audit certificate. 28. Funds FlowLDisbursement Arrangements - This Project will be disbursed over a period five year period. The disbursements of the loan shall be in accordance with the financial plan of the project for the following categories: Allocation of Loan Proceeds Category Amount of the Loan [Expressed in Dollars) % of Expenditures to be Financed 1. Goods, training, workshops, consultants services, and incremental operating costs for the project 2. Conditional cash transfer 3. Front-end fee 4. Unallocated 81,601, % 320,886,000 75% of amounts disbursed under each Grant 1,O 12,500 Amount payable pursuant to the loan agreement iv. Expenditures paid prior to the date of the loan signing but after December 1,2008 in respect of categories 1 and 2 shall be eligible for retroactive financing in the aggregate amount not exceeding $8 1.O million, except for the CCT Grants for Health. Payments for the CCT Grant for Health will be made upon the establishment and operationalization of a compliance verification system linked to payments as set out in the Operations Manual. Payments for the CCT Grants for Education Services will be made based on the existing manual monitoring system at the school level until June 30, 2010 or such a later date as the Bank may agree. Thereafter, payments for the Education Grant will be linked to the compliance verification system. No payments under a CCT Grant will be made to a Beneficiary unless the following criteria have been met: (a) a signed Memorandum of Agreement between DSWD and the Participating LGU and such Agreement has not been suspended or terminated and such LGU has not been declared to be ineligible; (b) the Beneficiary has been selected in accordance with the eligibility criteria as set out in the Operations Manual; (c) Letter of Commitment from the Beneficiary and such Letter has not been suspended or terminated; (d) DSWD and the Beneficiaries have complied with the conditions for the provision of CCT Grants; (e) payments have been made in accordance with a mechanism satisfactory to the Bank; and (0 DSWD has carried out a verification of compliance in accordance with the 78

91 mechanism and procedures set out in the Operations Manual in a manner satisfactory to the Bank. Funds Flow &""... Report of amounts creditedlwit hdrawn I I DSWD Central ' Office - Designated Account... J... f Statement of L... Land Bank of the Philippines (Cash for 4Ps Credit to Individual Bank Accounts of Beneficiaries Over-t he-counter Withdrawal by Beneficiaries 29. The Project funds are composed of the loan proceeds and government counterpart fund. The funds from theloan proceeds will flow from the World Bank to the Bureau of Treasury account at the Central Bank of the Philippines. After the issuance of NCA issued by DBM, the funds will be credited to the Designated Account of the project maintained at DSWD central office. DSWD shall open and maintain a Designated Account (DA) in Dollars, in a commercial bank acceptable to the Bank, with a maximum allocation of $40.0mi llion. The funds advanced to the DA shall be liquidated through the submission of Withdrawal Application and Statement of Expenditures 79

92 (SOEs) and an application for the replenishment of the DA. Disbursements under the Project shall comply with the Bank policies and procedures on disbursements and financial management as reflected in the Bank s Disbursements Handbook and Financial Monitoring Report Guidelines. All reimbursements to the DA shall only be for eligible expenditures based on the agreed eligibility/financing percentage in the Loan Agreement and shall have adequate supporting documents. Attachments of supporting documents to the SOEs for withdrawal applications shall be based on threshold limits of SOEs. Funds shall be transferred to the regional offices, which are drawn from the DA and deposited into the regional offices project bank accounts based on the estimated project quarterly cash requirement of the region. The regional offices shall submit to the central office of DSWD monthly SOEs to liquidate the funds transferred. 30. In addition, other disbursement mechanism such as direct payments and special commitments shall also be available for this Project. Maintenance of project bank accounts at the regional offices is necessary due to the following reasons: (i) there is a logistical problem in making all payments from the DSWD CO where the Designated Account will be maintained because some contracts or expenditures are entered into or incurred at the regional of DSWD, and (ii) the Philippine government is unable to provide working capital to the project to pre-finance the Bank s share of the expenses. 31. Additional internal control measures that shall be implemented by the project to monitor the proper maintenance and usage of the funds at the regions are as follows: (i) Monthly SOEs shall be submitted to DSWD CO; (ii) Monthly bank reconciliation statements and copy of the trial balance shall be submitted to the central office; and (iii) The quarterly IFRs submitted by DSWD CO to the Bank will include a copy of the bank reconciliation statements of the Designated Account and all project bank accounts maintained by the regions. 32. The component 2 of the Project (4Ps cash grant) shall be released from DSWD to the 4Ps beneficiaries by depositing the Funds with the LBP, where the 4Ps beneficiaries are asked to open dedicated bank accounts and?e issued with 4Ps ID cards and LBP cash cards or are released over the counter by LBP upon presentation of the 4Ps ID cards. Reports of cash not deposited to the accounts of the 4Ps beneficiaries due to various reasons such as misspelled names, unclaimed cash cards, etc. shall be reported to DSWD by LBP. Reports are also submitted to DSWD for any unclaimed cash grant after a period of time as shall be defined in the Operations Manual. Any other method of channeling the funds to the APP beneficiaries during project implementation shall be subject to a No Objection from the Bank. Financial Covenants 33. The financial reports that shall be submitted to the Bank are as follows: a. Unaudited Interim Financial Reports (IFRs) within 60 days after the end of each calendar quarter, which shall consist of the: (a) financial reports consisting of the following: (i) statement of financial position; (ii) statement of sources and uses of funds which should include the current and cumulative data compared with plan (covering loan proceeds and government counterpart fund); (iii) bank reconciliation statements, both dollar and all peso project bank accounts; (iv) aging schedule of outstanding funds released to the regional offices; and (v) status of the implementation 80

93 of the time-bound plans for the engas roll out and the resolution of the COA prior years issues. (b) physical progress report and (c) procurement status report. The physical accomplishment report must be linked to the financial report. The first quarter IFR of each year shall also include the report on the results of the reconciliation of the physical count of fixed assets and inventories against the accounting and property & asset management records. Format of this IFR was agreed with the Bank before loan negotiation. b. Annual audited project financial statements, which shall consist of a statement of financial position, a statement of financial performance, a statement of changes in net assetdequity, and a cash flow statement together with a copy of the management letter reflecting the auditor s findings and recommendations, shall be submitted to the Bank no later than 6 months after the end of each fiscal year. The auditor for this project is COA. The Audit Certificate to be issued shall be the based on the Bank s pro forma audit certificate. c. Semi-annual report of the independent reputable audit consultants and/or the internal audit services unit of DSWD on the results of its review of the Project shall be submitted to the Bank within 60 days after the end of each calendar semester commencing with the second semester after the date of the loan agreement. 34. Condition for loan nepotiation a. Final IFR format agreed with the Bank 3 5. Dated covenants a. Engagement of independent reputable audit consultants no later than 6 months after loan effectiveness, with qualifications and terms of reference acceptable to the Bank, which will provide capacity building to IAS, including hands-on training to IAS through the conduct of semi-annual review of the project for at least two years, starting with the second semester of after the date of the loan agreement. The first semi-annual audit should include a baseline assessment of internal controls (both operational and financial) of DSWD. b. Engagement of an independent qualified third party to conduct the regular spot check under terms of reference acceptable to the Bank, by April 30,2010. c. Establishment of a dedicated FM group for the Project, including the hiring of a FM officer and key FM staff, no later than five months after the loan effectiveness. d. Filling the key position in IAS (Operations Audit Head) no later than five months after loan effectiveness. Supervision Plan 36. The frequency of the FM supervision will be in line with the FM Manual and EAP FM regional guidelines and is dependent on the FM risk rating of this project in any given year during 81

94 project implementation. The scope of the supervision is left to the professional judgment of the FM specialist. It may cover any of the following, among others: (1) review of the continuous maintenance of adequate FM system by DSWD; (2) review of selected transactions, where deemed necessary and visits to selected cash grant beneficiaries; (3) review and discussion of the internal audit reports, spot checking reports and grievance monitoring reports, (4) follow up of timeliness of FM reporting and actions taken on issues raised by external auditors; (5) review of financials reports of the project; (4) follow of the status of the agreed actions; and (6) review of compliance with the financial covenants. In addition, the FM implementation review should include desk review of the quarterly IFRs, internal audit reports, and audited financial statements and management letter submitted to the Bank. 82

95 A. General Annex 8: Procurement Arrangements PHILIPPINES: SOCIAL WELFARE AND DEVELOPMENT REFORM 1. Procurement for the proposed project would be carried out in accordance with the World Bank s Guidelines: Procurement under IBRD Loans and IDA Credits dated May 2004 revised October 2006, and Guidelines: Selection and Employment of Consultants by World Bank Borrowers dated May 2004 revised October 2006, and the provisions stipulated in the Legal Agreement. While the new Philippine Procurement Law (RA 9184) is sufficiently in harmony with the Guidelines at the National Competitive Bidding (NCB) level, the Procurement Schedule of the Loan Agreement will include an annex detailing the procedures under the national law that are not acceptable to the Bank. Other than that, NCB procurement will be carried out in accordance with the country s law. The general description of various items under different expenditure categories for the first 18 months are described below and summarized in the attached Procurement Plan. For each contract to be financed by the Loan, the different procurement methods, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank task team in the Procurement Plan. The Procurement Plan will be a rolling plan that will be updated at least annually or as required to reflect the actual project implementation needs and improvements in the institutional capacity of the implementing units. 2. Procurement of Goods. Goods procured under this project would include ID cards and MIS software and hardware for targeting and monitoring, and information and communication technology (ICT) and office goods for the various implementing units. Bulk of the MIS/ICT goods consisting of desktop and notebook computers, printers and accessories, servers and scanners to be distributed to various implementing DSWD units and LGUs will be lumped in one large package for ICB procurement, The procurement for contracts costing US$l,OOO,OOO or more will be done through ICB using the Bank s standard bidding document (SBD). Contracts estimated to cost US$lOO,OOO up to less than US$l,OOO,OOO will be procured following national competitive bidding (NCB) procedures using the Philippine Bidding Document (PBD) as harmonized with the Bank. Procurement for off-the-shelf goods and small value contracts costing below US$lOO,OOO will be awarded based on shopping procedures, by comparing price quotations obtained from several suppliers, usually at least three, as defined in Para. 3.5 of the Guidelines. Direct contracting of highly specialized software which are proprietary and obtainable only from one source may be procured with the Bank s prior agreement. These are small-value software that are necessary to ensure standardization within the system currently used in the DSWD/project. 3. Selection of Consultants. Consultancy services to provide technical assistance in the design and development of survey works, targeting mechanism, survey works and analysis of data gathered, in translating policy ideas on social welfare reforms into action plans and to build capacity of key personnel to implement and manage change in line with the reform agenda will be financed under the program. Quality and cost based selection (QCBS) procedures will be followed in the hiring of consulting firms with contracts estimated to cost the equivalent of US$200,000 or more. Survey works consultants consisting of design, implementation and analysis involving large number of individuals conducting routine data gathering under well-established practices and standards will be selected through Least-Cost Selection (LCS) procedures. Contracts estimated to cost less than 83

96 US$200,000 equivalent may be procured through selection based on consultants qualifications (CQ). Single source selection (SSS), with the Bank s prior agreement, in accordance with the provisions of the Consultant Guidelines may also be used. Government research and training institutions with exceptional expertise for the assignment may also be tapped under the program. Individual Consultants necessary to support the program, meeting the requirements set forth in Section 5 of the Consultant Guidelines, will be selected under contracts awarded on the basis of competition in accordance with the provisions of the Consultant Guidelines. 4. Trainings and Workshops. Training and workshops, including related expenditures for travel and accommodation, fees and materials, related to capacity building and project implementation and others based on annual training procurement plan will be procured in accordance with existing government prescribed procedures and limits which are acceptable to the Bank. 5. Incremental Operating Costs. Activities relating to managing the project, including staff travel and office utilities, and supporting the project operations especially the targeting of beneficiaries and monitoring of cash transfer based on annual IOC procurement plan will be provided in accordance with existing government prescribed limits and procedures acceptable to the Bank. B. Assessment of the agency s capacity to implement procurement 6. Procurement activities will be carried out by the Department of Social Welfare and Development central office. The agency has a Procurement Service (PS) office under the General Administration and Support Services Group, which is responsible for the procurement undertakings for the central office administered funds. This group had been responsible for the procurement undertakings of the agency involving local and foreign-assisted projects including the Bankfinanced ECDP, SEMP 1 and 2, KALAHI and a number of grant projects in the past. 7. The assessment reviewed the organizational structure for implementing the project and the interaction among the project s staff responsible for procurement. The assessment took into consideration the more than 10 years experience of the agency in implementing the various aforementioned projects. The assessment also considered the various studies, including the Country Procurement Assessment Report (CPAR) and the baseline indicator system (BIS) assessment in which an independent consultant determined that the country, in general, was substantially achieving the desirable standards for reliance on its public procurement system. The assessment conducted by the Bank s Procurement Specialist on October 2008 found DSWD s previous procurement performance generally satisfactory to highly satisfactory. The procurement chain including the PS and Bids and Awards Committee (BAC) is very familiar with the Bank s procurement guidelines and procedures and are staffed with competent personnel to implement the proposed procurement arrangement under the project. The DSWD has benefited from the various procurement and implementation experiences, and reforms and capacity buildings initiated and mainstreamed under previous Bank- financed activities. The government has even awarded DSWD- PS the best procurement unit title. 84

97 8. Issuedrisks concerning the procurement aspects for implementation of the project have been identified, and these include: 1) inappropriate or inadequate specifications and TOR; 2) packaging and planning for the procurement of the limited but relatively high value MIS goods and survey works. At the moment, the project has decided to carry out the important task targeting (survey works) in-house. This would require procurement of high-value IT equipment contracts. The corrective measures which have been agreed are: 1) finalization of the most technically sound survey works packaging with the help of the Bank s and DSWD s technical specialists; 2) the engagement of MIS goods specifications specialists to provide the most appropriate technology for the design of the project; 3) preparation of the bid documents for MIS goods and RFP for consultants; and 4) preparation of the procurement plan for the project on or before the project appraisal. Aside from these specific measures, the regular features of the procurement operations in accordance with the law of the country will be adopted, among which are: the use of PhilGEPs and the agency s website in e-advertizing all bid opportunities, updating of procurement plan on an annual basis and publishing this in the agency s website, use of CSO observers in procurement undertakings conducted by BAC, review of the Commission on Audit of the all procurement and contracting done under the project, use of timelines (service standards) for efficient procurement operations. Also, DSWD will rely on their Electronic Procurement Tracking System (EPTS), which they have developed and operationalized, to monitor transactions from bid opportunity posting to payment. Further, the project will benefit from the soon to be launched procurement info bits in popularized version which will be distributed to various procurement operating units. 9. The overall project risk for procurement is low. C. Procurement Plan 10. The DSWD developed a Procurement Plan for the first 18 months of project implementation, which provides the basis for the procurement methods. The Borrower and the Project Team both agreed upon this plan on July 10,2009; it is available at the Procurement Service of DSWD. It will also be available through the Project s database and on the Bank s external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. D. Frequency of Procurement Supervision 1 1. Based on the overall risk assessment, twice a year field supervision missions including post review of procurement action is to be implemented in addition to the prior review to be carried out from the Bank s Manila office. With respect to each contract not subject to prior review, the procedures set forth in paragraph 4 of Appendix 1 to the Procurement and Consultant Guidelines will apply at an initial ratio of not less than one (1) in ten (1 0) contracts. This ratio may be adjusted based on the performance of the agency. 85

98 E. Details of the Procurement Arrangements Involving International Competition 12. This procurement plan, agreed upon by DSWD and the Bank, covers the first 18 months of the activities that will be financed under the project.54 1 Goods Ref. Contract Estimated Procurement P-Q Domestic Review Expected No. (Description) Cost Method Preference by Bank Bid- (US$ M) (yesho) (Prior / Post) Opening Date MIS/ICT 4.00 ICB None Yes prior Aug 2009 hardware and software 9 Comments SBD Goods 2 Consulting Services (a) List of consulting assignment(s) with shortlist of international firms; I Analysis (Survey) I Impact Evaluation 0.69 Qcss Yes May 2010 SRFP (b) The first contract to be awarded following a particular selection method, and subsequent contracts estimated to cost US$200,000 and above per contract and single source selection of consultants will be subject to prior review by the Bank. 54 The Procurement Plan was agreed with the Government as part of the Project Implementation Plan of July 10,2009. This Procurement Plan and the dates therein will be updated during the frst supervision mission. 86

99 (c) Shortlists of consultants for services estimated to cost less than US$200,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guideline. 87

100 Economic Analysis Annex 9: Economic and Financial Analysis PHILIPPINES: SOCIAL WELFARE AND DEVELOPMENT REFORM 1. The project supports the key reform agenda of the social welfare and development sector to address the challenges in social protection. The project development objective is to strengthen the effectiveness of the DSWD as a social protection agency to efficiently implement the new CCT program (~Ps), and expand an efficient and functional National Household Targeting System of social protection programs. 2. The Bank support to these items in the sector reform agenda is expected to improve the poverty-reducing impacts of Government programs and their cost efficiency. First, developing a national household targeting system that is based on an objective and uniform set of criteria will allow for better targeting of existing programs and make way for a more extensive roll-out of new programs such as the CCT. It will also allow for the future emergency targeting of poor households through cash transfers in the face of shocks such as the price and fuel shocks that happened in 2008 and the global economic crisis faced by developed and developing countries alike. Second, implementation of a conditional cash transfer program is expected to ease the impact of sudden income shocks to poor households in the short-term through the cash transfer. Lastly, the conditions set out by the program address longer-term poverty issues that relate to lagging human development outcomes, particularly in education and health. Targeting 3. An efficient targeting system would enhance the Government s ability to design programs to support poor households. The Philippines currently lacks an objective targeting system that is used across the country. This has resulted in the proliferation of transfer programs which tend to have their own household targeting systems. For many of these programs, both the criteria for geographical and household targeting are not transparent or standardized. As a result, program targeting has been used for political purposes. This has tended to weaken the general credibility of Government programs aimed at targeting the poor, and assessments of these programs show high under-coverage of the poor and high leakage to the non-poor. 4. The Government s adoption of a well-designed targeting system will greatly benefit the poor, thereby increasing their poverty-reducing impacts, and improving the cost-efficiency to the Government of implementing these programs. The project supports the roll-out of the national household targeting system that can be applied to various subsidy programs of the Government to more precisely distribute the benefits of existing and future programs to intended beneficiaries and minimize their leakage. 5. For example, improving the targeting of two of the current larger subsidy programs can increase the share of the program benefiting the poor and their cost-effectiveness. 6. Improved targeting of existing programs such as the current NFA rice subsidy program through the new National Household Targeting System for Poverty Reduction (NHTS-PR) will 88

101 improve the poverty reduction impact of such programs. Based on the latest household survey, only 59 percent of NFA rice currently goes to the poor. This means that of the estimated Php32.1 billion implicit subsidy for NFA rice in , poor households only get an annual transfer of P1,843 ($0.1 l/day) equivalent to 15 percent of their spending on rice. Using the NHTS-PR would enable moving away from an untargeted assistance to one that specifically targets poor households only, enhancing the poverty-reducing impact of the program. Assuming the same program budget, improving program targeting using the NHTS-PR would increase the size of transfer to poor households by nearly four times - from 15 percent of their spending on rice in the current setup to 56 percent - and reduce poverty incidence and the income gap by 4.7 and 3.1 percentage points, respectively (Table 9. 1y6. Targeting rural poor households only could reduce poverty incidence by as much as 6.4 percentage points and the income gap by 4.2 percentage points. Baseline Mean Poverty Incidence Income gap Household (POP) (% of Poverty (HH) Income Line) All HHs 172, percent percent Poverty Severity (% of Poverty Line) 4.2 percent Impact of Transfer* Change in HH to Overall Poverty Income** (%) All HHs 1.1 All Poor HHs 10.9 Rural Poor HHs 16.7 Decile 1 HHs 57.1 Percentage point Change in National - Poverty Incidence Income Gap Poverty Severity The share of the current Food-for-School Program (FSP) benefiting the poor could also double from 38 to 76 percent if the program uses geographic and household targeting. The FSP has had a high leakage rate to non-poor households, mainly as a result of its bias towards urban areas and cities with low incidence of poverty, such as the National Capital Region (NCR). Better geographical targeting using available poverty statistics at the municipal level has been estimated to potentially increase the poor s share of the program from 38 percent to 76 percent.57 While it is not possible to simulate the impact of further fine-tuning the FSP s design using a household targeting mechanism due to data limitations, it can only be expected that this will result in an even greater reduction of the inclusion error (of the non-poor), allowing more subsidy to appropriately be made available to poorer households. 8. By directing scarce resources only to intended beneficiaries, putting into place an accurate household targeting system will also improve the cost-efficiency of Government programs. In 2008, about Php60.9 billion ($1.3 billion) in total had been channeled to subsidizing rice through the 55 This estimate is computed based on the difference between the international price of rice and NFA rice at the height of the rice crisis in This estimate assumes complete accuracy of the PMT, whereas there will be some exclusion errors in practice. 57 Manasan, R. and J. Cuenca, (2007) Who Benefits from the Food-for-School Program: Lessons in Targeting, PIDS Discussion Paper Series No

102 NFA.58 While this may appear an inefficient budget allocation given the program s high leakage rate, it was one of the easiest options for the Government to assist the poor, especially at the height of the rice price shock in Still, leakage of the Government s resources to non-poor households would have been reduced by PhP13.1 billion ($0.3 billion) if the program had been better targeted only to the poor. Therefore, while in the short term the Government had been limited by a few available but inefficient options to mitigate the impacts of the food price shock especially to poor households, in the medium term shifting to a more accurate household-based targeting system will improve its ability to ensure that subsidies and transfers actually reach the poorest families in a mare cost-effective manner. Conditional Cash Transfer Program 9. Key economic benefits of the 4Ps Conditional Cash Transfer program are to (i) reduce or mitigate income poverty; and (ii) improve longer-term human capital outcomes, specifically in education and health, of children in poor households. For each beneficiary household, the 4Ps provides a monthly education grant of PhP300 per child for 10 months up to a maximum of 3 children conditional on school attendance and a monthly health and nutrition grant of PhP5OO to those with children 0 to 14 years old or pregnant women conditional on their compliance to agreed health conditions (as described in detail in Annex 4). 10. Economic analysis shows that, in the 4Ps beneficiary areas, the Conditional Cash Transfer can significantly reduce poverty. According to data from the HAF survey (administered to conduct the PMT),59 87 percent of households classified as poor were identified as potential beneficiaries of the 4Ps, suggesting a limited impact of demographic restrictions on the exclusion of poor households from the program. Focusing on poor and eligible households, the 4Ps is expected to increase their total incomes, on average, by 23 percent, and to reduce poverty incidence in targeted areas by 6.1 percentage points (Table 9.2).60 The impact of the 4Ps on the poor s income gap and on the severity of poverty in beneficiary areas is also expected to be substantial. In particular, simulations using the 4Ps data show that the cash transfer could reduce the income gap by 7.6 percentage points and poverty severity by about 5 percentage points. Although preliminary and based on predicted income figures, these estimates are consistent with the results of impact evaluations of comparable CCT programs in other countries. In Mexico poverty was reduced by 17 percent in Progresa communities61, whereas in Colombia the Familias en Accion program reduced the poverty gap by more than 6 percentage points.62 In addition, ex-ante evaluation of the 4Ps done recently by the Asian Development Bank (ADB) using a nationally representative household survey 58 Apart from the Php32.1 billion implicit rice subsidy, this figure includes estimated contracted debts by the NFA, repayment of debt, and all administrative costs. 59 As of March 2009, this dataset provides information on about 750,000 households, of which 418,000 were classified as poor using the PMT. This analysis was based on the November 2008 version of the dataset. 60 Simulations based on the total cash transfer (health plus education component) computed according to the actual demographic composition of potential beneficiary households and per capita income predicted using the PMT. 61 Hoddinott and Skoufias, (2004) The impact of Progresa on Food Consumption Economic Development and Cultural Change 53(1): Institute for Fiscal Studies, Econometrica and SEI, (2006) Evaluacidn del Impact0 del Programa Familias en Acci6n - Subsidios Condicionado de la Rede de Apayo Social. Bogota: Departamento Nacional de Planeacidn. 90

103 shows that the education transfer alone, if targeted to children of all poor households nationwide, could reduce national poverty by as much as 8.3 percentage points.63 Income gap (% of poverty line) Table 9.2: Impact of 4Ps on poverty in beneficiary areas I Poverty incidence (? of population in 4Ps areas) I 63.5 I 57.4 I -6.1 I Severity of poverty (% of poverty line) Economic analysis also shows that, in the 4Ps beneficiary areas, the CCT will increase primary school enrollment and school attainment. On average, 82.8 percent of children 6-14 years old among poor households in 4Ps areas are currently attending school, compared to 89.3 percent of their wealthier counterparts (Table 9.3). The 2004 Annual Poverty Indicators Survey data show that demand-side constraints, notably the lack of personal interest and the high cost of education, are the main determinants of non-attendance in school of children aged 6-14, especially for those in the poorest quintiles. The 4Ps administrative data do not permit simulating the potential impact of the 4Ps on daily attendance or behavioral responses in terms of labor supply. However, using predicted income from the PMT to estimate the income elasticity of school enrollment and attainment of children aged 6-14, it is estimated that the 4Ps could increase children s enrollment rate by 5 percentage points and their school attainment by an additional year.64 The ADB s ex-ante evaluation of the 4Ps shows similar impacts of the program on schooling. If targeted to all poor households nationwide with children aged 6-15, the study shows that the 4Ps could reduce the proportion of poor children not enrolled in school by as much as 6.7 percentage points and increase the proportion of poor children who study full-time (versus those working part-time) by 4 percentage points nationwide. Virtually all of the CCT programs which have been evaluated have had positive effects on school enrollment. In Colombia, Familias en Accidn had an impact of 2.1 percentage points for children aged 8-165; in Nicaragua Red de Protecidn Social increased enrollment for children age 7-13 by 12.8 percentage points66 whereas, in Mexico, Progresa increased enrollment of 6th graders by 8.7 percentage points The program is also expected to positively impact health outcomes of children and pregnant mothers in poor households. Due to data limitations, it is not possible to perform an ex-ante evaluation of the program s impact on health. Nonetheless, CCT programs with comparable average generosity levels, such as Progresa in Mexico and Familias en Accidn in Colombia, have been 63 Son, H. and J. Florentino (2008) Ex-ante Impact Evaluation of Conditional Cash Transfer Program on School Attendance and Poverty: The Case of the Philippines, ADB Economics Working Paper Series No Simulations based on estimated elasticities to (predicted) income of 0.21 and 1.4 for enrolment and education attainment of children s 6-14 years old, respectively. 65 Atta nasio et al., (2006) Child Education and Work Choices in the Presence of a Conditional Cash Transfer Programme in Rural Colombia IFS working Paper, W06/01, 66 Maluccio and Flores, (2005) Impact evaluation of a conditional cash transfer program: the Nicaraguan Red the Proteci6n Social. 67 Schultz, (2004) School Subsidies for the Poor: Evaluating the Mexican Progresa Poverty Program. Journal of Development Economics 74(1):

104 shown to significantly improve health outcomes of eligible children and motherss6* Mexico saw a significant increase in nutrition monitoring and immunization rates, as well as reduction in the incidence of severe illness and stunting of children aged months. In Colombia, enrolment of children below 6 years old in growth monitoring increased by 37 percentage points. As earlier studies in the Philippines reveal a substantial degree of income-related inequality in maternal and child health indicator^,^^ the 4Ps program is expected to result in similar positive improvements. Source. of data: DSWD-4Ps 2008 administrative data. 13. The successful implementation of both the NHTS-PR and the 4Ps are seen by Government as the potential back-bone of a modern social protection system for the Philippines. While this program is nascent, close monitoring and impact evaluation of the 4Ps is planned. Authorities are aware that, if successful, the CCT program could potentially replace other subsidy and transfer programs as a flagship social protection and poverty reduction program for the country. The SWDRP could thus potentially leverage major change in how effectively the Government addresses social protection and targeting of poverty reduction programs in the future. By enhancing the capacity within DSWD to efficiently implement the NHTS-PR and 4Ps and systematically monitor and evaluate the Department s main programs, the project is aimed at promoting the emergence of a strong institutional leader in the social protection sector. Financial Analysis. 14. With an increased focus on poverty reduction in the context of the recent food, fuel, and financial crises, the Government has increased its attention, commitment, and budget to social protection. National government spending on social protection services is estimated to have constituted only 0.2 percent of GDP in the past years. Over the course of 2008 and further in 2009, the Government increased its allocation to various social protection programs. In particular, the DSWD s budget more than doubled in 2009 (from P4.7 billion in 2008 to P10.4 billion), with the largest increase given to the implementation of the 4Ps and the NHTS-PR. To further show its commitment, the Government formulated the Medium Term Expenditure Plan (MTEP) which will assist DSWD in securing more predictable funding for the implementation of DSWD s core functions and multi-year programs such as the 4Ps. 15. The SWDRP finances a share of the total costs of budget line items that correspond to each of the three project components. For 2009, DSWD s budget allocation already includes line items for the 4Ps and NHTS-PR. From 2010 onwards, specific components of the SWDRP are also consistent with budget items in DSWD s MTEP (Table 9.4). 68 World Bank (2009), Conditional Cash Transfers for Attacking Present and Future Poverty 69 Philippines 2003 National Demographic and Health Survey. 92

105 Table 9.4: Link of Project Components to DSWD s Medium-Term Budget, FY Sources: World Bank and DSWD * Total of DSWD s Budget for 2009 and projected budget in the MTEP That the SWDRP fits within the Government s committed Medium-Term Expenditure Plan for the Department of Social Welfare and Development speaks to the project s financial and fiscal sustainability. The amounts proposed for loan financing are based on a conservative scenario of zero real growth in the budget of DSWD and will not require increased financing over the life of the project. This conservative budgetary assumption and the fact that the project is couched within the DSWD MTEP should ensure its sustainability at least over the five years for which eligible households are part of the program. 93

106 Annex 10: Safeguard Policy Issues PHILIPPINES: SOCIAL WELFARE AND DEVELOPMENT REFORM 1. The Social Welfare and Development Reform Project (SWDRP) is likely to deliver direct benefits to the indigenous peoples (IPS) through the Pantawid Pamilyang Pilipino Program (4Ps) or indirectly from their possible inclusion in the national targeting system as well as from policy reforms. Related to this, the Department of Social Welfare and Development issued Memorandum Circular No. 01 Series of 2009 or the Indigenous Peoples Policy Framework or IPPF. 2. The Framework aims to ensure compliance of the SWDRP to the Philippines Indigenous People s Rights Act or IPRA (Republic Act No. 8371) as well as to the World Bank Revised Operational Policy on Indigenous Peoples (OP 4.10). Policy Context 3. Under the IPRA, indigenous people is defined as a group of people or homogenous societies identified by self-ascription and ascription by others who have continuously lived as organized communities on communally bounded and defined territory, and who have, under claims of ownership since time immemorial, occupied, possessed and utilized such territories, sharing common bonds of language, customs, traditions and other distinctive cultural traits, or who have, through resistance to political, social and cultural inroads of colonization, nonindigenous religions and cultures, became historically differentiated from the majority of the Filipinos. 4. The IPRA further provides that IPS have the right to an informed and intelligent participation in the formation and implementation of any projects be it initiated by government or private entities. 5. In parallel, the World Bank Policy on Indigenous People (OP 4.10) provides that all World Bank-assisted projects shall be designed and implemented in such a way that Indigenous People do not suffer adverse effects during the development process; or when avoidance is not feasible, minimize, mitigate or compensate for such effects (paragraph 1). Moreover, Bankfinanced projects are also designed to ensure that the Indigenous Peoples receive social and economic benefits that are culturally appropriate and gender and inter-generationally inclusive (paragraph 1). Situation of Indigenous People in the Philippines 6. The data from the National Commission on Indigenous Peoples (NCIP) indicated that there are estimated million indigenous people in the Philippines as of Specifically, a significant number of IP population are found in Mindanao and the Cordillera Administrative Region (CAR). 7. Although there is a dearth of information on the specific conditions of IPS in the Philippines, several studies showed that they are among the poorest segment of the population 94

107 mainly due to long history of isolation and marginalization. Historically, the IP communities have resisted assimilation and have been forced to move to isolated and mountainous areas where basic services have been inadequate. Moreover, many IP children and youth are unable to complete basic education. The CAR continues to register one of the lowest achievement rates in the country. Similarly, some special studies showed that IPS have low availment of public health services mainly due to misconceptions that these run counter to their cultural beliefs and practices. Indigenous Peoples Participation Strategies 8. In accordance with its mission of providing social protection and promoting rights and welfare of vulnerable and disadvantaged communities, the DSWD is committed to ensure the promotion and protection of the rights of all indigenous people in the Philippines towards poverty alleviation and empowerment. Towards this end, the DSWD developed an Indigenous Peoples Policy Framework (IPPF) which serves as a declaration of policies and standard procedures in developing, funding and implementing programs, projects and services for indigenous people as part of the social welfare and development reform. While the IPPF is initially developed for the implementation of the World-Bank assisted Social Welfare and Development Reform Project (SWDRP), the Department intends to use this to guide other future projects 9. While the specific Indigenous Peoples (IP) communities/groups that will be affected by SWDRP have not been identified during the preparation stage, the DSWD ensured that there is representation of NCIP and other IP groups during the various consultations. The Department will continue to coordinate with the NCIP and other national as well as local IP groups during the course of Proj ect implementation, monitoring and evaluation. 10. Identification of IPS. The Department will ensure that all of their database, starting with the National Household Targeting System for Poverty Reduction (NHTS-PR) has been designed to identify the IP households, which would update the country s database on IPS. Specific to the Pantawid Pamilyang Pilipino Program (~Ps), data on the ethnic grouping is captured in the grantee booklets that allow the program to identify the IPS. The DSWD shall undertake periodic consolidation and analysis of the profile of the IP in the 4Ps and NHTS-PR as basis for ensuring the responsiveness of the program to the specific needs of the IPS. 11. Whenever the target areas of the SWDRP shall be determined to cover IP groups, the DSWD shall prepare a detailed IP development plan in the context of the requisites and format of the Ancestral Domain Sustainable Development and Protection Plan (as provided for in the NCIP procedures). 12. Integrating IP Concerns in Project. There would be a deliberate effort to include the specific responses to IP concerns in the formulation of objectives; processes/activities that will facilitate their participation in the implementation of the various Project components and activities; ways in which IPS could contribute/utilize their own resources (human, material and equipment); and their roles in the structuring of the project organization. Moreover, various analytical studies would be undertaken to ensure that the Project would not have adverse effects 95

108 on IPS. Social acceptability especially of the IPS to the projects should be determined through actual consultation with them, where results of impact analysis and environmental study, among others are presented to serve as their basis in deciding on whether or not the project can and should be undertaken. When adverse effects could not be avoided, there would be plans to minimize said effects as well as appropriate compensation for those who will be affected. These should also be clearly presented to IP communities. 13. Appropriate technical assistance/capability building activities would be given to them to enhance their Project participation. An IP friendly systedmechanism of addressing complaints/grievances and carrying out redress should be established to immediately respond, among others to violation in IP human rights. 14. The 4Ps shall give focused attention on ensuring that all aspects of the program are culturally-sensitive and responsive. Among others, this will involve consideration of IP concerns in relation to the conditionalities, mobilization of grantees, system of cash transfer and establishment of grievance redress system. Moreover, the National Advisory Committee, composed of other government Departments has committed to develop and adopt strategic adjustments to allow full participation of Ips in the Program. 15. Moreover, during the monitoring and evaluation of the Project, special focus should be given to the outcome/effects/impact of the project to the IPS in terms of participation, empowerment and quality of life, among others. Monitoring and evaluation of policies and programs (including 4Ps) shall include special analysis on IPS the results of which shall be use for emerging initiatives. 16. Ensuring IP Participation. The participation of IPS in terms of decision making, management, sharing of resources would be one of the major considerations in the regular monitoring and evaluation. Aside from determining whether the project is still relevant to their needs, effective and beneficial. IP participation in these processes should be ensured. The results of the monitoring and evaluation on IP concerns shall be fed back to the IP groups and NCIP in a form and manner that would ensure informed discussions. 17. At the onset, activities to enhance and utilize the financial, technical and managerial skills of the IPS should be planned and implemented to ensure that they have the capability to continue to sustain the project and its effects, and provide technical/managerial inputs to the project. 18. Representation of NCIP and other IP groups in all major Project structure at all levels will be ensured throughout the project implementation. Among others, NCIPI IP groups will be invited as deemed appropriate to the national and local Advisory Committees of the 4Ps, policy fora and other bodies that will be organized in the course of the Project implementation. Monitoring Compliance to IPPF 19. The Department issued its IPPF as Memorandum Circular No. 01 Series of 2009 to ensure its full adoption and implementation by all bureaus and staff at all levels. An inter-bureau 96

109 committee composed of representatives from the Social Technology Bureau, Program Management Bureau, NPMO-~PS, NPMO-NHTS, Social Welfare Institute and Development Bureau and the Planning and Policy Bureau was created to formulate the IPPF and monitor its implementation. Reports on the implementation of IPPF shall be regularly shared with the NCIP for policy and technical advice. 97

110 Annex 11: Project Preparation and Supervision PHILIPPINES: SOCIAL WELFARE AND DEVELOPMENT REFORM Planned Actual PCN review 01/22/ /23/2008 Initial PID to PIC 10/16/ /17/2008 Initial ISDS to PIC 10/31/ /31/2008 Appraisal 03/23/ /10/2009 Negotiations 08/17/ /24/2009 Board/RVP approval 11/17/2009 Planned date of effectiveness 02/30/2009 Planned date of mid-term review 02/01/2012 Planned closing date 06/30/2014 Key institution responsible for preparation of the project: Department of Social Welfare and Development (D S WD). Bank staff and consultants who worked on the Droiect included: Name Title Unit Jehan Arulpragasam Maria Loreto Padua Agnes Albert-Loth Samuel Haile Selassie Preselyn Abella Dominic Reyes Aumentado Josefo Tuyor Yasuhiko Matsuda Lynette Perez Eduardo Banzon Fe Timonera Robert O Leary Minneh Kane Caridad Araujo Silvia Redaelli Lourdes Anducta Kristine San Juan-Ante Luisa Fernandez Rashiel Velarde Xavier Gine Matthew Stephens Rosechin Olfindo Rosario Manasan Rowena Martinez Task Team Leader Social Development Specialist Senior Financial Management Specialist Senior Procurement Specialist Financial Management Specialist Procurement Specialist Operations Officer Senior Public Sector Specialist Senior Education Specialist Senior Health Specialist Disbursement Officer Senior Finance Officer Lead Counsel Economist Young Professional Program Assistant Program Assistant Extended Term consultant Extended Term Consultant Economist Project Officer Consultant Consultant Consultant EASHS EASPS EAPFM EAPPR EAPFM EAPPR EASPS EASPR EASHE EASHH CTRDM CTRFC LEGES EASHS SASEP EACPF EACPF EASHS EASHS DECRG EACPF EASHD EASHE SASDT 98

111 Bank funds expended to date on project preparation: 1. Bank resources: $43 1, Trust funds: PHRD Grant $500, Total: $93 1, Estimated approval and supervision costs: 1. Remaining costs to approval: $50, Estimated annual supervision cost: $100,000 99

112 Annex 12: Documents in the Project File PHILIPPINES: SOCIAL WELFARE AND DEVELOPMENT REFORM A. Project Implementation Plan B. Bank Staff Assessments Aumentado, Dominic - World Bank of Manila Procurement Capacity Assessment, October 2008 Abella, Preselyn- Financial Capacity Assessment, October 2008 C. Others Manasan, Rosario. Review of Government Programs and Spending Priorities for Social Welfare Social Protection and Social Development: Phase I. October 9,2006. Ahmed, Akhter U., Agnes R. Quisumbing, James Villafuerte, Rena 0. dela Cruz-Dona. Strengthening Social Protection in the Philippines. May 18, Suharto, Edi, Djuni Thamrin. Strengthening Social Protection Systems in ASEAN February Rawlings, Laura B. A New Approach to Social Assistance: Latin America s Experience with Conditional Cash Transfer Programs. August National Sector Support for Social Welfare and Development Reform Project (NSS-SWDRP). Bi- Monthly Progress Report. February-March National Sector Support for Social Welfare and Development Reform Project (NSS-SWDRP). Bi- Monthly Progress Report. April-May National Sector Support for Social Welfare and Development Reform Project (NSS-SWDRP). Major Social Risks and Vulnerability in the Philippines: A Preliminary Survey National Sector Support for Social Welfare and Development Reform Project (NSS-SWDRP). Monthly Progress Report. May 3 1,2007. Templo, Ofelia M., Philip Arnold Tuailo, Jose Ramon Albert. Evaluation of Existing Poverty Databases and Data Generation Activities. August National Sector Support for Social Welfare and Development Reform Project (NSS-S WDRP). Mid- Project Assessment and Indicative Planning Workshop. July 4-6,

113 Annex 13: Statement of Loans and Credits PHILIPPINES: SOCIAL WELFARE AND DEVELOPMENT REFORM Original Amount in US$ Millions Difference between expected and actual disbursements Project ID FY Pumose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev'd P Philippines GFRP DPO PO PH- Natl Rds Improv. & Mgt Ph P Support for Tax administration Reform PO PH-Nat'l Prog Supt for ENV & NRMP PO PH Mindanao Rural Dev. Project - Phase PO PH-NP Support for HNP PO PH-NP Support for Basic Ed PO PH-SUPPORT FOR STRATEGIC LOCAL DEV & INV PO PH-MANILA SEWERAGE PO PH-2ND WOMEN'S HEALTH & SAFE PO MOTHERHOOD PH LAND ADMINISTRATION AND PO MANAGEMENT I1 JUDICIAL REFORM SUPPORT PO PROJECT PH-Rural Power Project PO PH LAGUNA DE BAY PO INSTITUTIONAL STRENGTHE PH: Diversified Farm Income & Mkt PO Devt PHSecond Agrarian Reform Communities Dev PO PH - ARMM Social Fund PO PH KALAHI-CIDSS PROJECT PO PH-MMURTRIP Total: 1, , PHILIPPINESPHILIPPINES STATEMENT OF IFC's Held and Disbursed Portfolio In Millions of US Dollars Com m itted IFC FY Approval Company Loan Equity Quasi 2001 AEI APW Trade 0.65 Alaska Milk Asian Hospital oo Bahay Financial 0.16 Disbursed IFC Partic. Loan Equity Quasi Partic oo

114 Balikatan HF Banco de Oro Cepalco Drysdale Food Eastwood Eastwood Filinvest Filinvest Lan... Globe Telecom H&Q PV 111 H & Q P V - I H&QPV-I1 Holcim Phil LARES MFI MEP MNTC MWC MWC Mariwasa Mindanao Power Mirant Pagbilao PEDF PLGIC Pilipinas Shell PlantersBank Pryce Gases STRADCOM SVI Sua1 Power Walden Mgmt Walden Ventures Total portfolio: Approvals Pending Commitment FY Approval Company Loan Eauitv Quasi Partic 2001 PEDF 2002 Eastwood Total pending commitment: 102

115 ~ Lower-middle-income Annex 14: Country at a Glance PHILIPPINES: SOCIAL WELFARE AND DEVELOPMENT REFORM East Lower- POVERTY and SOCIAL Asla & mlddle- PhlilDDlnes.. Paclflc income 2007 Population, mid-year (millions) ,437 GN I per capita (Atlas method, US$) GNI (Atlas method, US$ billions) ,465 Average annual growth, ' Population (Yd 2.0 Laborforce (%) 3.0 Most recent estlmate (latest year available, ) Poverty (% of population belo wnatlonal PO verty line) Urban population (%of totalpopulation) 64 Life expectancy at birth (pars) 71 infant mortality (per 1000 live births) 24 Child malnutrition (%ofchildren under5) 21 Access to an improved water source (%of population) 93 Literacy (%ofpopulation age Gross primaryenrollment (%of school-age population) 10 Male 10 Female tu I It? a9 leveio pment dlamo nd* capita Life expectancy - I Access to improvedwatersource -Philippines Lower-middle-Income group Gross primary enrollment KEY ECONOMIC RATIOS and LONG-TERM TRENDS I987 I997 GDP (US$ billions) Gross capital formationigdp Exports of goods and services/gdp Gross domestic savingsigdp Gross national savings/gdp Current account baiance/gdp Interest paymentslgdp Total debtlgdp Total deb! service/exports Present value of debt/gdp Present value of debtlexports (average annualgrowth) GDP GDP percapita Exports of goods and services a iconomic ratios' Trade T Indebtedness -Philippines group STRUCTURE of the ECONOMY (%of GDP) Agriculture Industry Manufacturing Services Household final consumption expenditure General gov't final consumption expenditure Imports of goods and services no 43.9 Growth of capital and GDP (%) CF -GDP (average annualgrowth) Agriculture industry Manufacturing SENICES igrowth of exports and imports (%) 20 7 Household final consumption expenditure General gov't final consumption expenditure Gross capital formation imports of goods and services Note 2007 data are preliminaryestimates This tablewas producedfrom the Development Economics LDB database 'Thediamonds showfourkeyindicators in thecountry(in b0id)compared with its income-groupaverage if dataare missing, thediamondwil be incomplete 103

116 BALANCE of PAYMENTS (US$ millions) Exports of goods and services Imports of goods and services Resource balance , , ,477-0.W 20062,561 59, ,702 62,183 4,482 ICurrent account balance to GDP (56) Net income Net current transfers -1, , ,001 Current account balance ,387 5,022 6,473 Financing items (net) Changes in net resewes ,363-1,253-3, Memo: Reserves including gold (US$ millions) 1959 Conversion rate (DEC,/oca//US$j , , EXTERNAL DEBT and RESOURCE FLOWS 1987 (US$ millions) Total debt outstanding and disbursed IBRD 3,747 IDA ,706 4,v ,324 2, , komposition of 2006 debt (US$ mill.) A 2,690 G 5,009 8 ls6 Total debt service IBRD IDA 3, , , Composition of net resource flows Official grants 331 Official creditors 734 Private creditors -623 Foreign direct investment (net inflows) 307 Portfolio equity(net inflows) , ,345 2,388 World Bank program Commitments Disbursements Principal repayments Net flows Interest payments Net transfers F1-199 ~A-IBRO E- Bilatetsl 8-IDA D-Othermltilateral F-Privats G - Wrt-ten IC-IMF Note:This tabiewas producedfrom the Development Economics LDB database. 9/24/08 104

117 ~ Annex 15: Governance and Anti-Corruption Action Plan (GACAP) PHILIPPINES: SOCIAL WELFARE AND DEVELOPMENT REFORM 1. Overview of the Governance and Anti-Corruption Action Plan Development projects in the Philippines operate in a high-risk environment in terms of fraud, error and corruption. Lack of effective sanctions combined with limited public accountability and political interference in budget processes have created an environment that requires robust systems for corruption prevention and redress. Like most Conditional Cash Transfer (CCT) programs, S WDRP presents particular implementation challenges from a governance and anti-corruption perspective. It is large in scope, with over 376,000 beneficiaries and a high volume of financial transactions. It is politically high-profile and engages multiple government actors at the national and sub-national levels. By targeting the poorest of the poor, project locations are often in remote and inaccessible areas, exacerbating implementation challenges and increasing risk. SWDRP has three major advantages, however, compared to most development projects in the Philippines. Firstly, there is only a small amount of procurement, reducing the prospects of corruption in a high-risk area. Secondly, funding is channeled directly from the government to individual beneficiaries, vitiating the prospect of direct siphoning of funds. And finally, SWDRP is able to draw on significant CCT global experience to strengthen the design of anti-corruption measures. The Project will be implemented in accordance with the provisions of the Anti-Corruption Guidelines This Annex summarizes the Governance and Anti-Corruption Action Plan (GACAP) for the project. It draws primarily on a series of outputs produced under an AusAID-funded Externally Financed Output (EFO) arrangement with the Bank, Good Governance and Anti-Corruption in a Conditional Cash Transfer Program.70 Activities funded under the EFO include technical assistance to design the targeting, compliance monitoring, spot check and MIS systems; a Process Risk Mapping exercise to identify project vulnerabilities; a Strategic Communications Plan; Grievance Redress System; and a department-wide Integrity Development Review. It is also informed by international practice and field experience from the Philippines CCT program, which was launched as a pilot by the government in October MajorRisks The major vulnerabilities of SWDRP are a mixture of technical, governance and political risks, as detailed below: 0 0 interference or political bias in the geographic allocation of program locations interference or errors in the process of targeting and registering beneficiaries interference or errors in the process of monitoring compliance with program conditions interference or errors in the payment process This EFO commenced in May 2008 and has been extended until June

118 0 political interference by local chief executives through the levying of unofficial taxes or the imposition of additional conditions on beneficiaries; and 0 lack of institutional clarity between different central government agencies Geographic selection - the integrity of a CCT program can be undermined if target locations are not based on poverty incidence. The absence of objective selection criteria would leave the program open to interference by politicians or officials seeking electoral or financial gain through the allocation of target areas. Targeting and registration of beneficiaries presents the largest set of problems. Unintentional survey or enumeration errors could exclude eligible beneficiaries. Beneficiaries could provide false information to bias eligibility decisions. Politicians or government officials could register supporters or exclude opponents for political purposes. Updating the status of beneficiaries is also another area of potential fraud or corruption. When beneficiaries move to non-project areas, an eligible recipient passes away or other status changes occur, there are few incentives for beneficiaries to report such changes in circumstances. Compliance monitoring is a complex process, demanding significant capacity to collect and manage data. Failure to effectively manage this data can either delay payment or effectively create an unconditional cash transfer program, which would not only undermine project outcomes but be politically untenable in the Philippines context. Compliance monitoring must be made as simple as possible. The beneficiary payment system is de-linked from government systems or other middlemen, mitigating leakage risks. A number of vulnerabilities do exist, however. Long distances and cost of travel to collect payment (for instance, beneficiaries in remote rural communities travelling to a city to access an Automated Teller Machine) can encourage the emergence of intermediaries who charge a fee to collect payments on behalf of beneficiaries. This practice opens up the possibility of siphoning or theft. Besides fraud, error and corruption, the other major risk to CCT programs from a governance perspective is the possibility of supply-side shortages. Conditional Cash Transfer programs generate significant demand-side pressures on schools and health facilities. Additional students and patients require an adequate supply of teachers, education materials, qualified health personnel, equipment and medications. Insufficient upstream assessment of supply-side availability or downstream coordination between implementing agencies, social sector line agencies and local government units can severely restrict achievement of program outcomes. 3. Key Elements of the GACAP SWDRP s Governance and Anti-Corruption Action Plan responds to these identified risks with 5 major sets of activities: (i) Establishment of inter-agency governance structures from national down to municipal level to coordinate supply-side and compliance monitoring; 106