Document of The World Bank FOR OFFICIAL USE ONLY INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT SUPPLEMENTAL FINANCING DOCUMENT FOR

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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 Report No PH INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT SUPPLEMENTAL FINANCING DOCUMENT FOR PROPOSED SUPPLEMENTAL FINANCING IN THE AMOUNT OF US$500 MILLION TO THE REPUBLIC OF THE PHILIPPINES FOR THE PHILIPPINES SECOND DEVELOPMENT POLICY LOAN TO FOSTER MORE INCLUSIVE GROWTH FOR POST TYPHOON RECOVERY December 04, 2013 Poverty Reduction and Economic Management Sector Department Philippines East Asia and Pacific Region 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 GOVERNMENT'S FISCAL YEAR January 1 December 31 CURRENCY EQUIVALENTS Currency unit: Philippine Pesos (PHP) as of November 12, 2013 US$ 1 = PHP43.59 Currency Unit US$1.00 ABBREVIATIONS AND ACRONYMS AIR Applied Insurance Research JBIC Japan Bank for International Cooperation BPO Business Processing and Outsourcing KALAHI- CIDSS Kapitbisig Laban Sa Kahirapan- Comprehensive and Integrated Delivery of Social Services BSP Bangko Sentral ng Pilipinas LBP Land Bank of the Philippines CAS Country Assistance Strategy LDP Letter of Development Policy CAT-DDO Catastrophe Draw Down Option LGU Local Government Unit CCT Conditional Cash Transfer NCDDP National Community Driven Development Project COA Commission on Audit NDRRMC National Disaster Risk Reduction and Management Council DBM Department of Budget and Management NEDA National Economic Development Authority DBP Development Bank of the Philippines NHTS-PR National Household Targeting Survey for Poverty Reduction DOF Department of Finance NGO Non-Government Organization DPO Development Policy Operation NIA National Irrigation Authority DPL Development Policy Loan NSCB National Statistical Coordination Board DPWH Department of Public Works and Highways OFDA/ CRED Office of Foreign Disaster Assistance/Centre for Research on Epidemiology of Disasters EM-DAT Emergency Events Database PDNA Post-Disaster Needs Assessment EMMA Emerging Market Mapping and Analysis PEFA Public Expenditure and Financial Accountability FAITH Foreign Aid Transparency Hub PFM Public Financial Management FY Fiscal Year GDP Gross Domestic Product

3 GFMIS Government Financial Management Information System PHP Philippine Peso GNP Gross National Product SME Small and Medium Enterprises IBRD International Bank for Reconstruction and Development SONA State of the Nation Address IDA International Development Association UACS Unified Account Code Structure IFC International Finance Corporation UNDP United Nations Development Program IMF International Monetary Fund UNOCHA United Nations Office for Coordination of Humanitarian Affairs IPF Investment Project Financing WBG World Bank Group Vice President: Country Director: Sector Director: Lead Economist: Axel van Trotsenburg Motoo Konishi Sudhir Shetty Rogier van den Brink

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5 PHILIPPINES SUPPLEMENTAL FINANCING FOR THE PHILIPPINES SECOND DEVELOPMENT POLICY LOAN FOR POST TYPHOON RECOVERY TABLE OF CONTENTS PROGRAM SUMMARY...i I. BACKGROUND... 1 II. TYPHOON HAIYAN/YOLANDA... 1 III. GOVERNMENT S RESPONSE TO THE CRISIS... 4 IV. WORLD BANK GROUP S RESPONSE AND STRATEGY... 4 V. THE SECOND DEVELOPMENT POLICY LOAN REFORM PROGRAM TO FOSTER MORE INCLUSIVE GROWTH... 7 A. ECONOMIC PERFORMANCE SINCE THE APPROVAL OF DPL B. ECONOMIC AND FISCAL COSTS OF THE TYPHOON... 8 C. REFORM PROGRAM SUPPORTED UNDER DPL D. POVERTY AND SOCIAL IMPACT ASSESSMENT VI. RATIONALE FOR PROPOSED SUPPLEMENTAL FINANCING VII. IMPLEMENTATION ARRANGEMENTS A. TERMS OF THE SUPPLEMENTAL FINANCING B. FUNDS FLOW AND AUDITING REQUIREMENTS FOR THE SUPPLEMENTAL FINANCING C. FIDUCIARY ASPECTS D. ENVIRONMENTAL ISSUES VIII. BENEFITS AND RISKS A. BENEFITS B. RISKS MAP 20 TABLES Table 1 : Philippines: Selected Macroeconomic Indicators, ANNEXES Annex 1: Casualties and economic damage of storms in the Philippines and elsewhere Annex 2: IMF Assessment Letter Annex 3: Country at a Glance This document was prepared by Rogier van den Brink, Paul Mariano, Maria C. Sy, Wael Mansour, Danielle Malek, Miguel-Santiago Oliveira, Aleksandra Posarac, Ousmane Dione, Deepak Mishra, Hoon Sahib Soh, Rocio Castro, Marianne Juco, Abighail Baca, Joseph Louie Limkin, Anthony Sabarillo, Jolanta Kryspin-Watson, Kevin Cruz, Karl Chua, Kai Kaiser, Joselito Armovit, Miro Capili, Maribelle Zonaga, Jesse Ang, Chiyo Kanda, Edward Mountfield, Manuela Francisco, Amelia Johnston, Ayleen Ang, Mildred Gonsalvez, Lynnette Perez, Rashiel Velarde, Jorge Avalos, Agnes Albert-Loth, Caryn Bredenkamp, Roberto Rosadia, Tomas Sta. Maria, Cecilia Vales, Aisha de Guzman, Christopher Ancheta, Catherine Vidar, Eleanor Gonzales, Hanif Anilmohamed Rahemtulla and Victor Dato.

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7 PROGRAM SUMMARY THE REPUBLIC OF THE PHILIPPINES SUPPLEMENTAL FINANCING FOR THE PHILIPPINES SECOND DEVELOPMENT POLICY LOAN Borrower: Implementing Agency: Financing Data: Amount: Terms: Disbursements: Project ID: The Republic of the Philippines Department of Finance IBRD Loan US$500 million The Borrower selected a US denominated, Commitment-linked IBRD Flexible Loan with a variable spread, with level repayments on June 1 and December 1 of each year, with a Grace Period of 10 years and a Final Maturity of 25 years, with all conversion options selected. The Front End Fee and the Premia for Interest Rate Caps and Collars will be capitalized. The Lending Rate for the Loan would be US$ 6 month LIBOR + variable spread (resets every 6 months). The Lending Rate would be approximately: 0.344% (US$ 6 month LIBOR) % (variable spread) = 0.814% based on today's rates. The proposed Supplemental Financing will be disbursed in one tranche upon effectiveness P i

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9 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROPOSED SUPPLEMENTAL FINANCING TO THE REPUBLIC OF PHILIPPINES SECOND PHILIPPINES DEVELOPMENT POLICY LOAN (DPL 2) I. BACKGROUND 1. Before Typhoon Haiyan, locally named Yolanda, struck the Philippines, economic prospects looked excellent. Remarkably, the Philippine economy had grown by 7.6 percent in the first half of 2013, outperforming major economies in the region. Growth was the highest among the five largest South-East Asian economies. 1 The country s strong macroeconomic fundamentals, characterized by low and stable inflation, healthy external balances, and strong government finances, shielded the economy from the persistent weaknesses of the global economy. 2. In June and July, financial markets across the developing world, including the Philippines, experienced high volatility as investors responded to the planned tapering of the US monetary stimulus program. However, indicative of its strong macroeconomic policy framework, Philippine financial markets quickly stabilized and rebounded in September. On October 3, the country received an upgrade to investment grade from a third credit rating agency. 3. Then, on October 15, 2013, a 7.2 magnitude earthquake struck the country. The quake was centered within two miles of Carmen town on the island of Bohol, Central Visayas. Its effect was felt across Central Visayas and as far as the coastlines of northern Mindanao. It caused significant damage in the provinces of Bohol and Cebu, and more than 3 million people were affected. The earthquake caused 222 casualties and displaced some 350,000 people. The damage to public infrastructure alone was reported to be at about US$52 million. 2 But worse was yet to come. II. TYPHOON HAIYAN/YOLANDA 4. In the first week of November, a super typhoon developed in the Pacific and headed straight for the Philippines. The President of the Philippines went on national television to warn the public about the clear and imminent danger of this impending typhoon, internationally named Haiyan and locally named Yolanda. The impact of the typhoon was estimated to exceed that of Pablo (Bopha), a Category 5 typhoon which hit southern Philippines in In the preparation, massive evacuation of communities along the typhoon s predicted path was undertaken. These early warnings and preparations will no doubt have saved many lives. 1 The ASEAN-5: Philippines, Indonesia, Malaysia, Thailand and Vietnam. 2 Source: NDRRMC 1

10 5. Typhoon Yolanda hit on November 8 with an estimated 11.2 million people affected across nine regions, per initial reports of the National Disaster Risk Reduction and Management Council (NDRRMC). 3 As of December 3, a total of 4.02 million persons are displaced with 125,225 persons inside 426 evacuation centers, and around 3.9 million persons outside the evacuation centers. The Government has so far reported 5,680 fatalities, with 1,779 persons still missing. Initial reports indicate that economic and social infrastructure has sustained significant damage. A total of 1,180,837 houses are reported damaged of which 587,035 were totally destroyed. While nine regions out of a total of seventeen were affected, four regions bore the brunt of the typhoon: Western, Central and Eastern Visayas, and MIMAROPA (Map). 4 Within these regions, the provinces of Eastern Samar, Western Samar, Leyte, Biliran, northern Cebu, Occidental Mindoro, Negros Occidental, Capiz, Aklan, Romblon, and northern Palawan already among the poorest provinces in the Philippines were the worst affected The Government is leading a major humanitarian effort, in coordination with the United Nations Office for the Coordination of Humanitarian Affairs (UNOCHA) and in partnership with national and international agencies. As of December 3, the Government has distributed approximately US$20 million worth of relief assistance (NDRRMC). Meanwhile, the Government reported on a new website called the Foreign Aid Transparency Hub (FAiTH) 6 that pledges from the international community for post-yolanda support had reached US$504 million. In addition, the Asian Development Bank and the World Bank Group committed to provide US$500 million each in fast-disbursing budget support. 7. Humanitarian assistance is slowly making its way to the affected regions, including hard-to-reach areas. The negative impacts of the crisis are (i) the expected rise in poverty levels in the affected areas in the absence of social safety nets, (ii) the deterioration in human capital indicators if education and health services are not restored in timely manner, (iii) and the rise in unemployment and under-employment as natural-resource based local economies collapse. While the humanitarian assistance will alleviate human distress in the short-term, rapid and substantial funding is needed for the reconstruction and recovery process to start and reduce the negative impacts. 8. The typhoon has struck areas which are among the poorest and most vulnerable. Eastern Visayas, where the entire population was reported to have been affected by the typhoon, has one of the highest poverty incidence rates (45.4 percent) in the Philippines. 7 With very limited savings capacity, the disruption in economic activity and incomes as a result of the typhoon is expected to bring severe hardship to these populations. 3 NDRRMC Update, SitRep No. 51, December 3, 6.00 am. 4 This region consists of five provinces: Occidental Mindoro, Oriental Mindoro, Marinduque, Romblon and Palawan. 5 These provinces are defined as those that were directly hit. The following provinces were peripherally hit: rest of Cebu, Bohol, Siquijor, Negros Oriental, Iloilo, Guimaras, Antique, Mindoro Oriental, Marinduque, the rest of Palawan, and all provinces of Region V The national poverty rate is 27.9 percent (first half of 2012). Eastern Visayas is the third poorest region in the country. 2

11 9. Agriculture and fisheries are the backbone of these regions. The destruction of physical assets and means of production (such as land, livestock, permanent crops, and agriculture and fishing equipment) will have a substantial long term impacts on the domestic economy and household welfare alike. And there are strong multiplier effects to the informal sector, which constitutes a large share of economic activity. 10. The poor health status of the population in the affected areas is likely to worsen, as health service infrastructure has sustained significant damage, while the health risks and health care needs have surged. 8 The affected areas included those with some of the worst health outcomes in the country. Now, initial reports indicate that about half of government hospitals and rural health units have sustained significant damage; the supply chains for medicines and equipment has been disrupted; the cold chain was destroyed; and many health care workers have been displaced. Thousands of people need short- and long-term care from psycho-social stress and physical injuries, while the risk of potentially life-threatening diarrheal and water-borne disease stemming from the absence of clean water and sanitation has sharply increased. Furthermore, food shortages experienced by typhoon victims will compromise the health of vulnerable groups such as young children, pregnant women and the elderly. Overcrowding in temporary shelters increases the risk of communicable disease; poor drainage and stagnant water can increase the dengue risk; and there will be increased environmental exposure due to damaged buildings. 11. The typhoon has disrupted the education of about 1.8 million children. 9 Preliminary reports estimate that around 3,000 schools were either totally or partially damaged. Classes were suspended in four regions. Many children had to move to evacuation centers and 417 schools still serve as evacuation centers. In one region alone, 3,720 schools remain closed. The earliest date of resumption of classes is expected in January In addition, the traumatic experience of students and teachers may have a long lasting impact on their mental health and learning and teaching performance, if not addressed immediately. 8 In the immediate recovery phase, essential health and nutrition services will be needed for up to 9.8 million people, including disease surveillance and outbreak control; the establishment of temporary health facilities and services; and mobile health teams. Nutrition services for an estimated 100,000 children and 60,000 mothers will include the provision of nutrition supplies for therapeutic feeding, micronutrient supplements and equipment and communitybased therapeutic feeding centers for girls and boys with severe acute malnutrition. Estimates are based on the United Nations Humanitarian Country Team s Typhoon Haiyan Action Plan, November 2013, and are subject to revision. 9 A special education relief effort would include (i) creating temporary or alternative learning spaces; (b) using alternative delivery modes for teaching and learning or alternative learning systems; (c) mobilizing volunteer or mobile teachers from other non-affected regions; and (d) providing psychosocial and health services for students and education service providers especially in the worst-affected areas. 3

12 III. GOVERNMENT S RESPONSE TO THE CRISIS 12. After the disaster struck on November 8, the Government responded decisively to the disaster despite the loss of power and communications in many areas hit by the typhoon. Official Government reports of casualties and damages started coming in through the Secretary of Interior and Local Government who was on site within 24 hours. The Government s NDRRMC established a Regional Task Force to coordinate response efforts. 13. On November 10, following a recommendation by the NDRRMC, President Aquino declared a state of national calamity. 10 This has helped hasten rescue and relief efforts to areas devastated by the typhoon and has allowed the President to impose a price ceiling on basic necessities and prime commodities to avoid overpricing and hoarding of vital commodities. He also ordered police and military to take all necessary measures to ensure peace and order in affected areas, given the incidences of looting reported in some areas. On November 11, the Government, through the Department of Finance (DOF) and the National Economic and Development Authority (NEDA), requested all international and bilateral aid agencies to provide information on possible forms and amount of assistance that each could provide to help Government address the impact of the typhoon. At the same time, many NGOs and civil society groups, supported by very active social media, started initiatives to collect donations for the victims of the typhoon. 14. The Government is currently preparing a Recovery and Reconstruction Plan. Disaster response and recovery will constitute a considerable financial burden on the budget of the national government and the affected local governments. Early and initial quantitative estimates point to substantial costs. This includes estimates for the rehabilitation of public infrastructure, combined with a social safety net program, to restore at least pre-disaster levels of public service delivery. The sheer magnitude of Yolanda could give rise to higher damage and casualties than were caused by other recent storms/typhoons in the Philippines and other countries (Annex). And due to the archipelagic geography of the country, the remoteness of the areas affected, and the difficult access to affected villages, it is expected that the unit costs of service delivery and recovery will also be higher than compared to natural disasters in other countries. This increases both the burden on the national budget, as well as the burden on private household savings and the private sector. IV. WORLD BANK GROUP S RESPONSE AND STRATEGY 15. The UNOCHA leads the coordination of the humanitarian actions by the development agencies in partnership with the Government. Regular briefings are being held in Manila, with attendance from the World Bank Group and other development partners. The UNOCHA provides updated situation reports by on the impact of the disaster and the humanitarian response and pledges of international aid agencies and countries. On November 11, it was reported that 22 countries had pledged assistance to provide critical humanitarian relief

13 16. In this context, the Government requested immediate assistance from the World Bank Group to assist its reconstruction efforts in the typhoon struck areas. On November 12, the Government requested the rapid reprogramming of resources from the on-going projects towards reconstruction efforts; fast disbursement of upcoming projects, including through allowing the retroactive financing of eligible expenditures; and the preparation of an emergency response budget support operation of US$500 million. 17. In response, the World Bank Group is preparing a comprehensive package of recovery and reconstruction support. The package consists of: (i) just-in-time technical assistance, knowledge sharing on damage assessment and recovery and reconstruction planning; (ii) restructuring of existing investment IBRD projects; (iii) new IBRD operations, including delivery of an operation in final stages of preparation, the proposed quick-disbursing budget support operation, and a possible new investment or results-based operation to support medium and long-term reconstruction efforts; and (iv) IFC support to the private sector (banks, small and medium-sized businesses, power companies, etc.). 18. Immediate technical assistance. The Bank is assisting the Government s damage assessment by using remote sensing technology for rapid assessments of loss and damages, which could be followed by a comprehensive post-disaster needs assessment to develop a medium and long-term recovery strategy. The Bank will also mobilize the international expertise to share knowledge from other countries that have suffered from similar wide scale disaster impacts (e.g., Indonesia, Japan, Pakistan, Mexico, Turkey, Haiti). 19. Restructuring of existing projects. Undisbursed balances from ongoing projects in the portfolio, in an estimated amount of up to US$100 to 140 million, could be rapidly mobilized to support post-disaster reconstruction. A one-time emergency response restructuring of 3 to 5 projects is planned to quickly support rehabilitation or reconstruction efforts in the typhoonstruck areas, possibly including roads and bridges, public facilities such as schools and health facilities, irrigation schemes, shelters, and community-based infrastructure. The response could include the provision of temporary incomes through cash-for-work and other social safety net programs to typhoon victims. 20. Delivery of a project at final stages of preparation. A proposed US$480 million National Community Driven Development Project (NCDDP), currently at final stages of preparation, already has a provision for emergency response. This project will scale up the successful Kapit- Bisig Laban sa Kahirapan 11 Comprehensive Integrated Delivery of Social Service (KALAHI- CIDSS) program. The project could immediately support typhoon affected communities with community-level or livelihood infrastructure (e.g., water, rural roads, schools and clinics), using retroactive financing. The project offers a community-driven and transparent way of identifying people s needs and using the communities themselves to lead the reconstruction effort with respect to small infrastructure works. 11 Linking hands in the fight against poverty 5

14 21. Proposed quick-disbursing budget support operation. This document describes a proposed US$500 million Supplemental Financing to the second operation in the programmatic development policy lending series (DPL2). The Philippines DPL series, launched in 2011, aims to support the Government s objective of fostering more inclusive growth. The proposed Supplemental Financing to the DPL2 will assist in addressing the unanticipated financing gap caused by the unprecedented magnitude of the typhoon which could jeopardize the Government's reform program. 22. A new investment operation to support medium-term reconstruction needs. Based on the Government s reconstruction plans, still to be defined, the Bank could prepare a new investment or results-based (Program for Results) operation to support post-recovery and reconstruction efforts by national and local governments. A typical package could include financing of: (i) critical infrastructure and lifelines such as water supply, sanitation, roads, electricity transmission, or temporary housing; (ii) reconstruction of and retrofitting to new standards of public buildings (e.g. schools, hospitals, emergency response facilities); (iii) livelihood restoration; and (iv) restoration of urban and rural housing and settlements, including through voucher grant financing to poor and vulnerable households. 23. In parallel, the Bank will continue to provide technical assistance to manage the risk from natural hazards and future catastrophic events. It would achieve this through: (i) prioritization and retrofitting of key public buildings (schools and hospitals) and utilities (water, gas, electricity supply and distribution infrastructure); (ii) improving the preparedness and capacities for disaster risk management and response; 12 (iii) strengthening risk-informed land use and development planning at the disaster-prone LGUs; (iv) enhancing disaster risk financing capacity through support to the institutional strengthening and contingent liability risk transfer tools in order to achieve fiscal resilience in times of calamity. 24. The IFC is also ready to provide advisory and financing support for the private sector. The IFC is in contact with its client banks (universal banks, thrift/rural banks, and microfinance institutions) to develop specific programs to facilitate private sector recovery. Financing facilities including risk share facilities and advisory services could be extended to private sector banks in order to help small and medium size companies in the affected areas recover. IFC is also reaching out by extending financing to power transmission and generation companies to repair damage caused by the typhoon, as well as for rebuilding of hotel and retail facilities in the affected areas. 25. IFC is also planning to conduct an Emerging Market Mapping and Analysis (EMMA). This is a market analysis to determine the best approach for humanitarian groups to carry out emergency responses as well as determine the appropriate delivery of investments or advisory services to restore private sector activities. 12 For instance, the DOF has been working with the Bank on catastrophe risk modeling. The model can evaluate options for risk transfer (e.g., insurance, catastrophe pool) in order to minimize and efficiently manage the fiscal burden of disaster impacts. 6

15 V. THE SECOND DEVELOPMENT POLICY LOAN REFORM PROGRAM TO FOSTER MORE INCLUSIVE GROWTH 26. Achieving inclusive growth which creates jobs and reduces poverty and vulnerability, constitutes the main challenge facing the Philippines. The current lack of inclusive growth negatively affects the ability of a large part of the population to deal with a variety of economic, natural disaster and health shocks, as dramatically illustrated by the suffering caused by the current disaster. 27. Since coming to office in mid-2010, the current administration is seen as strongly committed to inclusive growth. Guided by the principles contained in President Aquino s Social Contract with the Filipino People, 13 the administration has implemented an ambitious reform program. The program is driven by five Cabinet clusters: (i) good governance and anticorruption; (ii) human development and poverty reduction; (iii) economic development; (iv) security, justice, and peace; and (v) climate change adaptation and mitigation. The Philippine Development Plan for and the annual State of the Nation Address (SONA) reports provide clear articulation of this reform program. 28. The World Bank Development Policy Loan (DPL) series supports key building blocks of the inclusive growth agenda. The DPL series is an integral component of the Bank s broader lending program, fully in line with the Country Assistance Strategy s objectives: maintaining a stable macro economy, improving the investment climate, improving public service delivery (in health and education), and the cross-cutting objective of improving governance. 29. The Philippines DPL series to foster more inclusive growth was launched in 2011 and envisioned three operations. The first DPL was approved in May 2011 and the second in March The objectives of the DPL series is embodied in the DPL program s pillars, which are: (i) boosting public infrastructure investment, (ii) facilitating private investment, (iii) investments in human capital, (iv) good governance and transparency, and (v) fiscal sustainability. A. Economic Performance since the Approval of DPL Pre-typhoon, the Philippines was expected to continue posting strong economic performance over the medium term. Private consumption, which comprises over 70 percent of GDP, would continue to drive overall growth on the back of sustained growth of remittances and growth of the business process outsourcing (BPO) industry. Continued improvements in the investment climate would also contribute to higher domestic and foreign direct investment. A doubling of public infrastructure spending from 2.5 percent to 5 percent of GDP by 2016, as announced by the President in his SONA in July 2013, would be an important source of growth in the medium-term, both directly as well as indirectly through its beneficial effect on economic profitability

16 B. Economic and Fiscal Costs of the Typhoon 31. The immediate impact of the Typhoon on poverty, jobs, and output would be severe. Initial estimates are that in the Western, Central, and Eastern Visayas regions (with a total population of about 18.5 million, which includes the largely unaffected urban agglomeration of Metro Cebu), about 9 million people are affected. Pre-typhoon, the poverty rate in these regions was about 32 percent. Because of the typhoon an additional 2.3 million more people (or half a million households) would be pushed into poverty, resulting in an increase in the poverty rate to about 60 percent. 14 They would have lost on average about US$480 per household or about 40 percent of their income in the last quarter of Adding affected people from peripheral regions, a total of 10 million people would have lost an estimated US$960 million. 32. The short-term fiscal costs of the Typhoon come on top of several other unanticipated events in the last four months of The unanticipated spending for the immediate aftermath of Typhoon Yolanda comes on top of two other major unanticipated recent events: the Zamboanga rebellion (September 9 to 30) and the Bohol Earthquake (October 15). For 2013 only, the preliminary estimates of the fiscal costs of increased spending (e.g. emergency support, humanitarian assistance) and lost revenues (e.g. agriculture, tourism) amount to around US$300 million or 0.1 percent of GDP. 33. Preliminary, initial estimates suggest that the total damage and loss of public and private assets in the affected regions could amount to between US$7.3 and US$14 billion, or between 2.7 and 5.1 percent of GDP. 15 This is based on very early range estimates of the areas affected and of the proportion of assets to be replaced or rebuilt. 16 The impact on productivity of the damage depends also on the extent to which critical network infrastructure (e.g. power, roads) is damaged and the time needed for repairs. The Typhoon largely spared one of the country s main population centers (Metro Cebu), and the contribution of the affected regions (both directly hit as well as peripherally hit) to national GDP is only 15.4 percent of GDP. However, the damage of assets in the affected regions as a share of the affected region s GDP is more significant at around 30 percent. Assessing the full extent of the damage will take time and on-the-ground verification. 14 World Bank staff estimate based on national household survey data from the first half of These percentages express the value of a flow (2013 GDP) against a stock (the value of the assets) to get a sense of the magnitude of the disaster. 16 These estimates are based on a perpetual capital stock method using national accounts investment data. The total value of public assets in the affected municipalities is estimated at around US$2.6 and US$8.5 billion. The estimate of the total value of private assets in the affected areas is between US$12 and US$40 billion. 8

17 34. The fiscal costs of the relief and reconstruction program, again based on very preliminary initial estimates could range between US$3 and US$5.4 billion (between 1.1 to 2 percent of GDP). 17 They also include the costs of a comprehensive recovery program of humanitarian relief, the reconstruction and rehabilitation of public infrastructure, 18 social safety net programs, and the public grant element of targeted interventions to replace some of the private assets for the poor and most vulnerable (e.g. housing construction grants, agricultural and fisheries asset replacement). 35. The magnitude and pace of the implementation of the recovery program will determine the Typhoon s ultimate impact on poverty, job losses, and output losses. For instance, the very preliminary initial assessment of the output loss due to the typhoon (before recovery and rehabilitation) could lower the GDP growth rate by as much as 0.9 percentage points in 2014 relative to the pre-typhoon estimate However, if the program is implemented quickly, with 50 percent of the spending (US$1.5 to US$2.6 billion) undertaken in 2014, real GDP growth in 2014 would decline by around 0.2 percentage points only. 20 Providing quick disbursing financing is therefore an urgent matter. The combination of a decline in tax revenues and an increase in spending 21 would increase the fiscal deficit from 2.2 percent of GDP to around 2.9 percent of GDP in 2014 before declining to 2.5 percent of GDP in 2015 (Table). 37. The unanticipated financing gap in 2014 estimated at around US$2.1 billion, or 0.7 percent of GDP, will be partially financed by the contributions of development partners. In addition to pledges already received, the Government is organizing a meeting (planned for mid- December) for development partners to solicit additional support. In this context, the Asian Development Bank and the World Bank will provide US$500 million each in budget support loans (including the Supplemental proposed in this document) at favorable terms compared to commercial lending. 22 Together with complementary technical assistance and international knowledge, the additional financing of the unanticipated fiscal gap by the development partners will ensure the continuation of the Government s reform program and its associated development spending projected GDP 18 These estimates are based on the initial assumptions about the share of assets damaged, the reconstruction to damage cost ratio, and the additional markup to build back better infrastructure. 19 Latest figures point to a strong economic performance in H with real GDP growing by 7.6 percent y.o.y and its continuation of into Q GDP growth loss is estimated directly by examining the official national accounts data from the National Statistical Coordination Board (NSCB) on both national and regional levels. Using historical trends, quarterly figures and other published data sources, various assumptions are taken on the quarterly losses incurred by the various sectors. Overall output losses are then extrapolated to obtain full year estimates. Baseline growth used is the World Bank official projections for 2013 and 2014 published in the East Asia and Pacific Economic Update, October 2013 edition. 21 Under this scenario, spending in the first half of 2014 could reach US$0.6 to 1.1 billion. 22 The increased financing needed for this unanticipated shortfall would not arrest the continuing decline in the national government debt to GDP ratio (Table). 9

18 Table 1 : Philippines: Selected Macroeconomic Indicators, Pre-Typhoon Scenario Post-Typhoon Scenario [1] Actual Projection Projection Growth and inflation Gross domestic product (percent change) Inflation (period average) Savings and investment Gross national savings Gross domestic investment Public sector National government balance (Gov't definition) Total revenue (Gov't definition) Tax revenue Total spending (Gov't definition) [2] Capital Expenditure National government debt [3] Balance of payments [4] Merchandise exports Merchandise imports Remittances Current account balance Foreign direct investment (USD billion) Portfolio investment (USD billion) International reserves Gross official reserves (USD billion) [5] Gross official reserves (months of imports) Nominal GDP (USD billion) Sources: Government of the Philippines for historical data, World Bank for projections Notes: 1. Projections are based on the latest data. These are very preliminary, and are subject to change as data are updated. 2. The pace of spending of the reconstruction package for public and private infrastructure is assumed as follows: i) 50 percent of the total spending in 2014, ii) 30 percent in 2015, iii) 20 percent in 2016 (not shown in the table). This applies to both low and high case scenarios of reconstruction spending. 3. Includes the PHP55.6 billion on-lending to Power Sector Assets and Liabilities Management (PSALM) Corporation, net of which results in a ratio of 50.9 percent. 4. Using BPM5. 5. Includes gold. C. Reform Program Supported under DPL Attaining the initial reform program targets has been challenging, but the program remains on track. For instance, rapidly raising tax revenues through a combination of tax policy and administration measures has meant taking on powerful vested interests. In this regard, the passage of the highly contested alcohol and tobacco tax (the Sin Tax ) at the end of 2012 was an important political and tax policy win for the Government. Generally the Government has demonstrated a concerted drive for results and the reform program remains solidly on track. A recently conducted mid-term review by Cabinet has brought strong cross-sector coordination and sharpened focus to the reform agenda, including the areas supported by the DPL series. The reform program has deepened notably in the area of public infrastructure disaster and climate change resilience, rural road infrastructure, and has strengthened poverty targeting and Open Government platforms. 10

19 39. Boosting Public Infrastructure Investment. Overall gross investment remains stable as a share of fast-growing GDP, and public construction has seen rapid increases. The Government has streamlined implementation procedures and improved the operations of its flagship programs. Public infrastructure provision is a top priority, including enhancing the resilience of priority public infrastructure to disasters and climate change resilience. Progress achieved on reforms with respect to tourism infrastructure and farm-to-market roads programs is supported under the DPL series. The series also supports the progress made on implementing the Metro Manila Master Flood plan and an enhanced mechanism to track climate change resilience expenditure execution. 40. Facilitating Private Investment. Improving the business environment for firms of all sizes is a key pillar of the DPL series. During 2013, the Philippines made significant improvements in the Doing Business 2014 report, ranking among the top 10 economies making the biggest improvement in business regulations for local entrepreneurs. 41. Investments in Human Capital. Progress made under DPL2 has continued. The National Household Targeting Survey for Poverty Reduction (NHTS-PR) was consolidated as the Government s platform for better targeting programs to improve the human capital of the poor and contribute to their resilience to unanticipated shocks. Public spending for education has expanded significantly, and the Government expanded basic education from 10 to 12 years through the K to 12 program. Under the conditional cash transfer (CCT) program, coverage has been extended to children over 15 years old to improve completion of secondary education among the poor enrolled in the CCT program. The Philippines has also significantly increased spending on health and is expanding national government sponsored financial protection of the poor and near poor. The Government is making a concerted effort in improving timely and credible measures of health care utilization, notably among the extreme poor and poorest two quintiles ( bottom 40 percent ). 42. Good Governance and Transparency. The Philippines was among the initial group of countries that signed up for the Open Government Partnership when launched in Since 2011, the Department of Budget and Management (DBM) has been publishing quarterly allocations and obligations by line agencies. Since the approval of the DPL2, improvement in the policy environment for good governance has continued. DBM is working with the Office of the President on the establishment of government-wide Open Government protocols and platforms. In 2014, budget preparation done by DBM and auditing done by Commission on Audit (COA) will use the same unified account code structure (UACS). Budget disbursement and execution data will become available in a more timely fashion when the automation of budget reporting under the Government Financial Management Information System (GFMIS) is expected to go live in The Government has completed an Open Government platform and its supporting regulations, greatly enhancing the degree of information line agencies are putting in the public domain. 43. Fiscal Sustainability. Similarly, continued progress was recorded on tax effort toward reaching the objective of 16 percent of GDP. As noted above, the passage of the highly contested alcohol and tobacco tax (the Sin Tax) end-2012 was an important political and tax policy win for the Government. Improvements have occurred in tax administration, while customs revenue collections have continued to underperform. A significant and critical reform program in the 11

20 customs agency is currently underway. Further public finance reforms are underway, including rationalizing fiscal incentives, and enhancing accountability and transparency of the budget. 44. The debt to GDP ratio remains on a downward trajectory, and is improving in tenure and foreign exchange exposure composition. The Government has also taken steps to proactively monitor fiscal risk and improve medium-term debt management. Through its annual publication of a Fiscal Risk Statement, 23 the formalization of its Debt & Risk Management Cluster, and other reforms supported by the Disaster Risk Management DPL with a Catastrophe Deferred Drawdown Option (CAT-DDO), 24 government has taken a more proactive, integrated and proportionate stance to managing risk. The CAT-DDO supported the policy framework established under the National Disaster Risk Reduction and Management Act (2010). The CAT- DDO leveraged a technical assistance program to support the Act and provide the Government with access to global knowledge and expertise. For instance, the inter-agency work done on a detailed national valuation and risk profile of public infrastructure assets made significant progress the asset loss estimates in this document were based on this database. High natural disaster risks (as now dramatically highlighted by Typhoon Yolanda) and other contingent liabilities (associated mainly with certain PPPs under preparation and losses of state companies) underline the risks of external and internal shocks derailing the Philippines trajectory of fiscal consolidation. D. Poverty and Social Impact Assessment 45. Previous assessment remains valid. The Second DPL assessed the poverty, social, gender and environmental impact of the DPL-supported reforms. The assessment concluded that the impact would be broadly positive, as described in the Program Document, distributed to the Board on February 15, The previous assessment remains valid today. VI. RATIONALE FOR PROPOSED SUPPLEMENTAL FINANCING 46. The rationale for the proposed supplemental financing to DPL2 satisfies the operational requirements for a supplemental development policy operation. While typhoon damage is a recurring phenomenon for which the Government is usually logistically and fiscally prepared, the unprecedented magnitude of the typhoon has led to an urgent and unanticipated financing gap that could jeopardize the Government's reform and development spending program. The time available is too short to prepare a free-standing operation. Given the urgency, the proposed supplemental financing allows the Bank to provide support in a timely manner so that the Government can deal rapidly and decisively with the aftermath of the typhoon, while The objective of the CAT-DDO (approved in September 2011) was to enhance government capacity to manage the impacts of natural disasters. Following Tropical Storm Sendong (Washi), the loan (US$500 million) provided direct budget support on December 29, The loan has a revolving feature option if prepaid. The loan will close on October 31,

21 also ensuring that the DPL-supported reforms continue to be implemented. The reform program, supported by the DPL series, remains on-track. The Government and key implementing agencies remain committed to implementing the reform program, which aims to boost inclusive growth and introduce irreversible improvements in governance. VII. IMPLEMENTATION ARRANGEMENTS A. Terms of the Supplemental Financing 47. The conditions of effectiveness are unchanged from DPL2. As with any DPO, the Bank requires the provision of a legal opinion, the achievement of satisfactory progress in carrying out of the reform program, and maintenance of a macroeconomic framework satisfactory to the Bank, in order to declare effectiveness. 48. The closing date for the Supplemental Financing is December 31, B. Funds Flow and Auditing Requirements for the Supplemental Financing 49. The proceeds from the loan will be deposited into a deposit account in US dollars at the Central Bank or Bangko Sentral ng Pilipinas (BSP). The equivalent local currency amount will immediately be transferred to an account of the government available to finance budgeted expenditures. After disbursement of the loan, the Government will ensure that the equivalent Peso amount of this loan amount is promptly accounted for (in Philippine Pesos) in the Borrower s budget system in the General Fund, and thereby be available to finance budget expenditures. The Borrower will provide to the Bank a written confirmation that this accounting has been completed. 50. Disbursement of the loan will not be linked to any specific purchases and no procurement requirements have to be satisfied. The proceeds of the operation would not be used to finance expenditures excluded under the Loan Agreement. If, after being deposited in a government account, the proceeds of the loan are used for ineligible purposes as defined in the Loan Agreement, the Bank will require the Borrower to refund the amount directly to the Bank. C. Fiduciary Aspects 51. The public financial management and public procurement systems are adequate for this operation. The Bank prepared a public expenditure and financial accountability (PEFA) assessment to document the current state of public financial management in the country and the actions being undertaken by the past and current Administrations to further increase public financial management and transparency. The 2010 PEFA assessment indicates that the Philippines public financial management (PFM) system is reasonably capable of maintaining overall fiscal balance, but there is still scope for strengthening some dimensions, particularly in the areas of budget credibility and accounting/reporting, which limits efficient execution of priority programs. A comprehensive PFM reform program is under implementation. 52. Since approval of the DPL2, improvement in the policy environment for fiscal transparency has continued. Since 2011, DBM has been publishing quarterly allocations and 13

22 obligations by line agencies. The Philippines achieved an overall ranking of 48 out of 100 in the Open Budget Initiative This was up from a ranking of 55 in The country was among the initial group that signed up for the Open Government Partnership when launched in The control environment of the BSP is adequate for this operation. The Philippines does not have an active IMF program to develop safeguard assessments. The BSP is also not subject to international audit. However, BSP's financial statements are being audited by the COA. The World Bank and IMF have been relying on the audited financial statements released by COA. The auditor's opinions in 2010, 2011 and 2012 for BSP audited financial statements are unqualified. D. Environmental Issues 54. The reforms supported are not expected to have a significant environmental effect. While provision of the Supplemental Financing will assist the Government in its efforts to deal with the aftermath of the typhoon, the financing builds on an existing programmatic development policy lending series and is designed to support the ongoing reform program and policies under DPL 2. This reform program and policies, as supported by the Supplemental Financing, are not expected to have a significant environmental effect in the Philippines. VIII. BENEFITS AND RISKS A. Benefits 55. Quick disbursing financing will assist the Government of the Philippines in meeting the immediate and urgent needs for relief and reconstruction for the areas affected by the typhoon. 56. The rapid financing at favorable terms compared to commercial loans will ensure that the planned development spending associated with the Government s reform program remains on track. This reform program is supported by the DPL series, with the third DPL currently under preparation. B. Risks 57. The risk assessment made for the Second DPL remains. The main risks are internal (political and institutional constraints to implementation of the reform agenda, including constraints on revenue mobilization); external (deteriorating global economy); and catastrophic (particularly a vulnerability to typhoons). The risks are being mitigated by selective and close alignment to core reform priorities by the Government; complementary policy dialogue, technical assistance and investment lending to support the reforms, the strengthening of the social safety net through conditional cash transfers, and improving disaster risk management. 14