Document of. The World Bank FOR OFFICIAL USE ONLY PROJECT PAPER ON A PROPOSED ADDITIONAL LOAN IN THE AMOUNT OF US$59.

Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY PROJECT PAPER ON A PROPOSED ADDITIONAL LOAN IN THE AMOUNT OF US$59.124 MILLION TO THE REPUBLIC OF THE PHILIPPINES FOR Report No: 56355-PH KAPITBISIG LABAN SA KAHIRAPAN COMPREHENSIVE AND INTEGRATED DELIVERY OF SOCIAL SERVICES PROJECT Philippines Sustainable Development Unit Sustainable Development Department East Asia and Pacific Region August 29, 2010 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. 1

CURRENCY EQUIVALENTS (Exchange Rate Effective April 20, 2010) Currency Unit = Peso Php 44.56000 = US$1 FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS 4Ps AF ACT ADSDPP BLGU BSPMC CAS CBO CCT CDD CEAC CIDSS COA CPM CSO DA DBM DENR DILG DSWD e-ngas FAM FM FMR FPIC GAD GOP IA IAS IBRD IDA IFR IP IRA ISR KALAHI KC Pantawid Pamilyang Pilipino Project (conditional cash transfer program) Additional Financing Area Coordination Team Ancestral Domain Sustainable Development and Protection Plan Barangay Local Government Unit Barangay Sub-project Management Committee Country Assistance Strategy Community-Based Organizations Conditional Cash Transfer Community Driven Development Community Empowerment Activity Cycle Comprehensive and Integrated Delivery of Social Services Commission on Audit Community-based Procurement Sub-manual Civil Society Organization Designated Account Department of Budget and Management Department of Environment and Natural Resources Department of the Interior and Local Government Department of Social Welfare and Development Electronic-New Government Accounting System Finance and Administration Manual Financial Management Financial Management Report Free and Prior Informed Consent Gender and Development Government of the Philippines Implementing Agency Internal Audit Services International Bank for Reconstruction and Development International Development Association Interim Financial Report Indigenous People Internal Revenue Allotment Implementation Status Report Kapitbisig Laban sa Kahirapan KALAHI-CIDSS 2

KCAF KPI LGU MCC MCT MDC MDP M & E MIAC MIBF MIS MLGU MOA MT MTPDP NAPC NCA NCIP NSC NSCB NTWG NEDA NGO NPMO ODA OM O&M PDO PLGU PMO PO PSA RPMO SOE SP SWDRP TWC KALAHI-CIDSS Additional Financing Key Performance Indicator Local Government Unit Millennium Challenge Corporation Municipal Coordination Team Municipal Development Council Municipal Development Plan Monitoring and Evaluation Municipal Inter-Agency Committee Municipal Inter-barangay Forum Management Information System Municipal Local Government Unit Memorandum of Agreement Makamasang Tugon Medium-Term Philippine Development Plan National Anti-Poverty Commission Notice of Cash Allocation National Commission on Indigenous Peoples National Steering Committee National Statistical Coordination Board National Technical Working Group National Economic and Development Authority Non-governmental Organizations National Project Management Office Official development assistance Operations Manual Operations and Maintenance Project Development Objective Provincial local government unit Project Management Office People's Organization Participatory Situational Analysis Regional Project Management Office Statements of Expenditure Sub-project Social Welfare and Development Reform Project Technical Working Committee Vice President: James W. Adams Country Director: Bert Hofman Sector Director John A. Roome Sustainable Development Leader: Mark C. Woodward Task Team Leader: Andrew N. Parker 3

PHILIPPINES Kapitbisig Laban Sa Kahirapan Comprehensive and Integrated Delivery of Social Services (KALAHI-CIDSS) Project CONTENTS A. Introduction... 8 B. Background and Rationale... 8 C. Proposed Changes... 10 D. Consistency with CAS... 15 E. Appraisal of Restructured and Scaled Up Project Activities... 15 F. Expected Outcomes... 20 G. Benefits and Risks... 20 H. Financial Terms and Conditions for the Additional Financing... 22 ANNEXES Annex 1: Implementation Status and Results Ratings... 16 Annex 2: Results Framework and Monitoring... 17 Annex 3: Monitoring and Evaluation Framework... 27 Annex 4: Financial Management and Disbursement Arrangements... 35 Annex 5: Map IBRD 33466.50 4

PHILIPPINES KALAHI-CIDSS (ADDITIONAL FINANCING) PROJECT PROJECT PAPER EAST ASIA AND PACIFIC EASPS Basic Information (Original Project) Project ID: P077012 Project Name: Kapitbisig Laban sa Kahirapan- Comprehensive and Integrated Delivery of Social Services (KALAHI-CIDSS) Project Team Leader: Andrew Parker Expected Closing Date: May 31, 2011 Environmental category: B Partial Assessment Lending Instrument: Specific Investment Loan Joint IFC: Joint Level: Basic Information (Additional Financing) Date: September 28, 2010 Team Leader: Andrew Parker Country Director: Bert Hofman Sector Manager/Director: Mark C. Woodward Sectors: Water supply (40%); General transportation sector (40%);Other social services (20%) Themes: Participation and civic engagement (33%); Rural services and infrastructure (33%); Conflict prevention and post-conflict reconstruction (17%); Indigenous peoples (17%) Project ID: P114048 Environmental category: Partial Assessment Lending Instrument: Specific Investment Loan Additional Financing Type: Scale Up, Restructuring Joint IFC: Joint Level: Project Financing Data [X] Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing (US$m.): 59.124 Proposed terms: IBRD Flexible Loan with variable-spread, commitment-linked and level repayment schedule, 25 years of total maturity including a grace period of 10 years. Source Local Foreign Total Financing Plan (US$m) Borrower 45.700 0.00 45.700 International Bank for Reconstruction and 59.124 0.00 59.124 Development Total: 104.824 0.00 104.824 Borrower: 5

Responsible Agency: Department of Social Welfare and Development Constitution Hills, Batasan Complex Philippines Tel: (63-2) 931-8101 Fax: (63-2) 931-8191 dinky@dswd.gov.ph Estimated disbursements (Bank FY/US$m) FY 2011 2012 2013 Annual 29.500 23.300 6.324 Cumulative 29.500 52.800 59.124 Project implementation period: Start: January 1, 2011 End: May 31, 2014 Expected effectiveness date: December 16, 2010 Expected closing date: May 31, 2014 Does the project require any exceptions from Bank policies? Ref. Section Appraisal of Project Activities Have these been approved by Bank management? Does the project include any critical risks rated substantial or high? Ref. Section Project Risks and Mitigating Measures 6 [ ]Yes [X] No [ ]Yes [ ] No [ ]Yes [X] No Project development objective Ref. Section Bank Response Empower local communities in targeted poor municipalities and selected urban areas to achieve improved access to sustainable basic public services and to participate in more inclusive Local Government Unit (LGU) planning and budgeting. Project description [one-sentence summary of each component] Ref. Section Bank Response Building on the Project's strong performance, the Additional Financing (AF) will expand the project's reach to 220 of the poorest municipalities within the 42 poorer provinces already covered. The AF will also introduce the following key enhancements to further improve project impact: (i) a reformulation of the Project Development Objective (PDO) to better capture the focus on community empowerment, (ii) strengthening the roles of the municipal local government units to integrate the key principles and mechanisms of KALAHI-CIDSS in local development planning; (iii) systematizing the engagement with the provincial local government units; (iv) the design and testing of the a CDD approach in urban areas, and (v) further simplification of the project's key performance indicators linked to a strengthened monitoring and evaluation system. The Additional Financing will support the original three (3) components with one additional component to cover the pilot-testing of the urban KALAHI-CIDSS as follows: a. Component 1 1 Grants to Barangays in Rural Areas, will include not only direct subproject investment grants but also technical assistance funds for communities and to cover the costs of capacity building activities for community volunteers; b. Component 2 - Capacity Building and Implementation Support will cover: (i) the costs incurred by Area Coordination Teams that support community facilitation activities,; (ii) capacity building for barangay and municipal LGUs; and, (iii) a clearly defined set of social accountability activities, covering the grievance redress system, third-party monitoring, and active information disclosure. c. Component 3 Grants to Barangays in Urban Areas will support the project's piloting of 1 Project components 1-4 are equivalent to project parts A-D used in the project Loan Agreement.

a KALAHI-CIDSS model in urban poor communities. d. Component 4 - Project Management and Monitoring and Evaluation focuses on the project costs that are specifically related to DSWD's management and monitoring of the project. Which safeguard policies are triggered, if any? Ref. Section Appraisal of Project Activities The original Project triggered three (3) safeguard policies: Environmental Assessment (OP/BP4.01), Indigenous Peoples (OP/BP4.10) and Involuntary Resettlement (OP/BP4.12). The same safeguards policies are expected to apply to the proposed Additional Financing as the same type and nature of subprojects will be supported and there would be no changes in the original project design. The project would retain its Category B environmental classification. No significant potentially adverse environmental impacts on communities or their surrounding areas are anticipated. The original project was in compliance with the safeguards covenants in the Loan Agreement. Bank supervision has consistently rated safeguards performance as satisfactory with no major issues. All sub-projects undergo screening to determine environmental risks or issues and proper mitigation measures were formulated by the community and reflected in the Environmental Management Plan as part of the sub-project design. No involuntary resettlement took place, nor is it anticipated under the AF, as nearly all sub-projects financed were small-scale infrastructure that required minimal land acquisition. Although the project has been compliant with all safeguards policies, the National Project Management Office prepared an enhanced Environmental Impact Assessment Guidelines, Indigenous Peoples Planning Framework and Land Acquisition and Resettlement Policy Framework to reflect the enhancements/innovations based on seven years of implementation. The enhanced safeguards instruments were disclosed locally through DSWD website (April 15, 2010) and through the Bank Infoshop (April 16, 2010) Significant, non-standard conditions, if any, for: Board presentation: None For effectiveness: (a) the Borrower has revised the Operations Manual (excluding its sub-manuals) in a manner acceptable to the Bank, in order to take into account the overall revisions in Project implementation and management arrangements from the Original Project to this Project; and (b) the Borrower has furnished to the Bank an Annex to the Project Implementation Manual, satisfactory to the Bank listing the additional provinces, and municipalities therein, eligible to participate in the Project Dated Covenant: The Borrower shall, not later than 6 months after the Effective Date, furnish to the Bank the fully revised Operations Manual, including all sub-manuals, and the fully revised Project Implementation Manual, all acceptable to the Bank. 7

A. Introduction 1. This Project Paper seeks the approval of the Executive Directors to provide additional financing (AF) in the amount of $59.124 million to the Government of the Philippines for the Kapitbisig Laban Sa Kahirapan Comprehensive and Integrated Delivery of Social Services (KALAHI-CIDSS) Project (IBRD Loan No. 7147PH). 2. The proposed AF would support the restructuring and scaling up of the parent project through the following: (i) expansion of the project s coverage to 220 of the poorest municipalities across 42 of the poorest provinces; (ii) adoption of two enhanced implementation modalities designed to support greater devolution to municipal local government units (MLGUs) and to pilot the KALAHI-CIDSS in selected urban poor communities; and, (iii) enhancements to the monitoring and evaluation framework. Background and Rationale 3. Parent project. The original KALAHI-CIDSS Project was approved by the Board on August 23, 2002, with a loan amount of US$100.0 million and was declared effective on December 16, 2002. The initial closing date of June 30, 2009, was extended to May 31, 2011. The original development objective of the KALAHI-CIDSS project is to strengthen local communities participation in barangay 2 governance, and develop their capacity to design, implement and manage development activities that reduce poverty. 4. Project implementation performance. Project implementation progress and progress toward achieving the project development objective have been generally rated satisfactory (Annex 1). The ISR rating in 2008 was moderately satisfactory due to slow disbursement and financial management issues. The ISR rating for 2009 was improved to satisfactory after disbursements picked-up and FM issues were resolved (as explained in paragraph 31). The project is on track to meet or exceed most of its key performance indicators (Annex 2). Total disbursements as of March 31, 2010, reached $90.36 million. The project is in full compliance with all loan covenants. Key results of the project to date include: a. Attained full-scale implementation in 2006 with a coverage of 4,229 barangays (villages) in 184 municipalities of the poorest 42 provinces, with almost all barangays committing to sustain the participatory processes introduced by the Project. b. Financed 5,326 community sub-projects which benefited approximately 1.1 million households. About 50 percent of the sub-projects were basic social services facilities (e.g., water system, school buildings, health station and day care centers), with 28 percent for basic access infrastructure, such as access roads and small bridges. The rest of the sub-projects were community 2 A barangay is the smallest administrative division in the Philippines and is also the Filipino term for a village. It is the level of political representation closest to the people and is governed by barangay officials headed by an elected Barangay Captain and barangay councilors. 8

enterprise facilities (12 percent) and environmental and disaster control infrastructure (10 percent). As of March 31, 2010, 99 percent of the subprojects have been completed. A total of approximately $121 million has been invested in community sub-projects, leveraging more than $38 million in local counterpart contribution equivalent to 31 percent of the total sub-project cost. In addition, about 17 percent of the barangays have accessed funding from other sources to support their priority sub-projects. c. Achieved a high level of sustainability indicated by a sustainability evaluation that showed 96 percent of a sample of 611 completed sub-projects was rated excellent or satisfactory. In addition, the project carried out functionality audits of 3,882 completed sub-projects, of which 87 percent were rated functional. d. Initial positive results of the use of CDD approaches were documented by an independent impact evaluation of KALAHI-CIDSS (Lebonne and Chase, 2009). The participatory processes applied have led to positive changes in villages social and institutional dynamics. In particular, frequency of interaction between villagers and local officials has increased, suggesting an increase in the level of trust in local authorities. The results from the endline studies for the impact evaluation will be available during 2010. 5. Rationale for Additional Financing. The Government of the Philippines (GOP) is requesting AF to maintain the momentum of implementation by scaling up the geographic coverage and restructuring to enable more flexible implementation modalities. The AF would also permit implementation to continue during the political transition resulting from the general election in May 2010. 6. Geographic expansion. The AF would contribute to the scaling up of KALAHI- CIDSS into a nationwide CDD program, as envisioned in the current Country Assistance Strategy. The parent project covered 184 out of a total of 803 municipalities in 42 of the poorest provinces. Given the continuing high rates of poverty, the AF aims to expand the current coverage to reach a total of about 220 rural municipalities most of which have a poverty incidence of 50 percent or greater in the existing 42 provinces. A proposed grant from the Millennium Challenge Corporation 3 (MCC) would increase the overall coverage of the KALAHI-CIDSS program to 367 municipalities across 48 provinces. 7. Enhanced implementation modalities. While the core operational approaches and systems, as defined in the project s operations manuals and procedures, have proved successful and remain valid, the AF would utilize two enhanced modalities. First, an LGU-led CDD approach (called Makamasang Tugon (MT) in Filipino meaning massbased approach ) for previously supported municipalities that meet performance and 3 Millennium Challenge Corporation was created by the United States Congress in 2004 as an independent aid agency that provides assistance for poverty reduction. 9

governance criteria 4, and which was piloted under the parent project, would be formally adopted in the AF to support a more devolved, cost-effective implementation model. The MT approach is designed to give greater responsibility and authority to municipalities over program implementation at the local level, while retaining the Department of Social Welfare and Development s (DSWD s) monitoring and oversight functions. Second, the AF would support piloting of the KALAHI-CIDSS in selected urban poor communities which, although part of the original design of the KALAHI-CIDSS, was not implemented due to operational constraints. Proposed Changes 8. Restated Project Development Objective (PDO). To better reflect the project s core objective of community empowerment, it is proposed to restate the PDO from: Strengthening local communities participation in barangay governance, and developing their capacity to design, implement and manage development activities that reduce poverty (KALAHI-CIDSS Project Appraisal Document, p. 2) to Empower local communities in targeted poor municipalities and selected urban areas to achieve improved access to sustainable basic public services and to participate in more inclusive Local Government Unit (LGU) planning and budgeting. The restated PDO statement is intended to clarify and more sharply focus on the empowerment aspects of the project, while also introducing an element to better reflect the project s current efforts to support LGUs in responding to community needs. Nearly all of the key performance indicators have been retained while others have been refined for clarity. New indicators are included to track progress towards the institutionalization of participatory approaches at barangay and municipal levels, which would be implemented through the LGU-led CDD approach. 9. Project components 5. The AF would support the original three project components and would add a specific component to support pilot-testing of the urban KALAHI-CIDSS modality. To ensure alignment of proposed project activities with the revised PDO and Results Framework, the Project components would be adjusted as follows: Component 1: Grants to Barangays in Rural Areas (US$50.000 million- IBRD). The component would have two sub-components: (i) planning grants to support communities in the identification of barangay needs and assessment of local resources and capacity, which would cover costs associated with community mobilization, preparation of proposals by community volunteers as well as project operations, maintenance and community-based monitoring, and (ii) investment grants to fund sub-projects selected by communities. Component 2: Capacity Building and Implementation Support (US$1.700 million-ibrd). The component will cover: (i) Social mobilization activities following the Community Empowerment Activity Cycle (CEAC) put in place 4 In partnership with the Department of the Interior and Local Government, the MT was pilot-tested starting in 2008 in 33 municipalities that were selected using a set of filters designed to assess the performance of a municipal LGU in localizing the principles and key features of KALAHI-CIDSS. 5 Project components 1-4 are equivalent to project parts A-D used in the project Loan Agreement. 10

during the first phase of project implementation; (ii) capacity building for staff of barangay and municipal LGUs (B/MLGUs); and, (iii) a clearly defined set of social accountability activities, covering the grievance redress system, third-party monitoring, and active information disclosure. Component 3: Grants to Barangays in Urban Areas (US$0.900 million- IBRD). This component will cover both planning grants and sub-project investments in selected urban poor areas. Preparatory activities under this component would include: (i) community-based poverty mapping, (ii) the adaptation of the methodology used for social mobilization and planning to the urban context and subsequent development of specific operations manuals; (iii) testing of a grant-making mechanism for urban poor communities; and, (iv) a rigorous evaluation using mixed quantitative and qualitative methods. The nature and scope of sub-projects would be expected to respond to the specific concerns of urban poor communities including: housing, resettlement, livelihoods, and urban sanitation and environmental issues. Component 4: Project Management, and Monitoring and Evaluation (US$6.377 million-ibrd). This component will finance incremental project management and operational costs. This will include contracting specialized staff who will assist DSWD to carry out its capacity building, supervision, and monitoring and evaluation functions. It will also cover the costs associated with: (i) strengthening the project s management information system, (ii) conducting regular monitoring of project outcomes, (iii) carrying out external impact evaluations and specialized studies, and (iv) capacity building interventions for project staff and communities. 10. Results Framework. An updated Results Framework and Results Monitoring Matrix has been prepared including intermediate results and key indicators, which would help ensure that the planned design improvements can be captured by the project s monitoring and evaluation system. A comparison of the original indicators from the PAD (revised after the Mid-Term Review through a Loan Amendment) and the proposed revised Results Framework has been prepared (Annex 2). 11. Area selection and coverage. Municipalities would be selected from within the 42 poorest provinces where the parent project has been operating. 6 The small-area poverty estimates 7 of the National Statistical Coordination Board, which provide a municipal-level poverty map for the entire country, would be used for selecting municipalities to be covered. Within each of the 42 provinces all municipalities with a poverty incidence of 33 percent or more would be eligible for support up to a maximum of 50 percent of the total number of municipalities. An estimated 220 municipalities will 6 The final list of provinces and eligible municipalities to be covered by the AF would be incorporated in the Project Implementation Manual, and any subsequent changes to the list would require clearance by the Bank. 7 National Statistical Coordination Board. 2009. 2003 City and Municipal Level Poverty Estimates. Manila, or as updated from time to time. 11

be covered under the AF, comprising around 5,060 barangays 8. In addition, the proposed MCC grant 9 would support about 147 municipalities. Previously covered municipalities would continue to be eligible for support to maintain continuity of engagement. An estimated 112 of the 184 municipalities previously supported by the parent project would be covered under the AF, with most of the remainder covered through MCC s support. The AF would support about 108 new municipalities, with MCC support adding a further 85 municipalities (Table 1). Table 1: Expansion of Geographic Coverage of the KALAHI-CIDSS No. of Municipalities Covered New Old Total KALAHI-CIDSS (2003-2009) 184-184 KALAHI-CIDSS Additional Financing (2010-2013) 108 112 220 KALAHI-CIDSS (Millennium 85 62 147 Challenge Corporation, 2011-15) New municipalities refer to those that have not been previously covered by the KALAHI-CIDSS. Old Municipalities refer to the 184 municipal LGUs that were covered under the parent project, excluding 10 original municipalities that did not participate in the project. 12. Implementation modalities. A differentiated approach to municipalities supported under the AF would be adopted: i. For new municipalities: Implementation will follow the established Community Empowerment Activity Cycle (CEAC) detailed in the existing operations manuals. Under the AF, based on lessons learned during implementation of the parent project, the CEAC manual would be enhanced to: (i) strengthen engagement with municipal LGUs to systematize the handover process to a municipal coordination team after 3 annual cycles; (ii) enhance the development of community-based organizations and links to barangay LGUs; (iii) sharpen facilitation techniques and processes for greater inclusion of marginalized and vulnerable groups (e.g., indigenous peoples, conflict-affected communities, women), drawing from experiences from the recently completed Japan Social Development Fund-Social Inclusion Project (TF54218). 8 The exact number of barangays covered will depend on the final selection of municipalities. 9 The MCC plans to provide $120 million in grants for the KALAHI-CIDSS over a five year period (CY2011-15). Funds would cover additional municipalities following the same set of procedures as would be utilized by the AF. DSWD, MCC, and the Bank have coordinated closely to ensure a common operational approach would be followed in both programs, including: (i) a single methodology for the selection of municipalities to be covered; (ii) a single senior management team at DSWD (including National Director, Deputy Director and Department Heads); and, (iii) adoption of the same set of operational manuals and guidelines. 12

ii. iii. For old municipalities: Implementation would follow the Makamasang Tugon (MT) approach. MT involves the same CEAC processes but under the direct facilitation of a municipal coordination team designated and financed by the municipal LGU with support from DSWD. The MT guidelines would be subject to further enhancement based on a full assessment of the lessons learned from the pilot-testing. For urban areas: The AF would support piloting in about 8 urban poor communities in four cities in each of the island clusters of Luzon, Mindanao, and Visayas as well as Metro Manila selected according to a transparent and objective process. The pilot-testing of a CDD approach for urban areas would be based on the same guiding principles and follow a community empowerment cycle similar to the approach adopted in rural areas in the parent project; however, given the very different context from rural areas, the implementation design and arrangements of the urban KALAHI- CIDSS are likely to be substantially different. The findings from the pilots would inform the design of an urban CDD model that could be expanded further under a future urban CDD program. 13. Enhancing provincial-level engagement. Given the decision to cover up to 50 percent of municipalities in any given target province, the AF would seek to enhance engagement with provincial LGUs and other stakeholders at the provincial level through more systematic and formalized arrangements to strengthen local poverty reduction strategies. The AF would support the key role of provinces in relation to: (i) provision of technical assistance and coordination for CDD implementation; (ii) oversight of municipal governance and its impacts on CDD processes; (iii) establishment of mechanisms for improved inter-municipal coordination; and, (iv) enhanced provinciallevel poverty targeting. These arrangements would be described in details in a revised Project Implementation Manual. 14. Coordination with the conditional cash transfer program. Through the Social Welfare and Development Reform Project, implemented by DSWD, the Bank is also supporting a conditional cash transfer program the Pantawid Pamilyang Pilipino Project (4Ps). During implementation of the AF, DSWD would develop and implement a coordinated strategy towards achieving greater synergy of outcomes and convergence between the two programs, based on a set of operational guidelines, on which DSWD has already initiated consultation with the Bank and other stakeholders. 15. Monitoring and evaluation (M&E). The parent project successfully established an M&E system that includes comprehensive data collection and validation at all levels of project implementation (community, municipality, region, and national); participatory monitoring by communities and LGUs; and the conduct of a range of evaluation studies on different aspects relating to project impact and design. As the coverage of the KALAHI-CIDSS expands, there is a need to take stock of current arrangements and introduce refinements and adjustments to the system. Based on an overarching M&E framework (Annex 3), the AF would strengthen the M&E system in the following key areas: (i) simplification of and efficiency improvements in the data collection process; (ii) 13

information technology systems upgrading, both hardware and software; (iii) additional training for KALAHI-CIDSS project staff; and, (iv) enhancement of DSWD s own capacity to manage and oversee evaluation studies. Within the first six months of implementation of the AF, DSWD would produce a revised M&E manual to reflect these enhancements that would be approved by the Bank. 16. Governance and anti-corruption (GAC). To complement the core M&E system, the KALAHI-CIDSS has also established three key GAC mechanisms designed to promote transparency and accountability of operations: (i) a grievance redress system; (ii) independent third-party monitoring; and (iii) an active approach to information disclosure at the community and agency levels. Under component 2 of the AF, the GAC focus of the project would be further enhanced. The grievance redress system, highlighted a number of cases where there was a breakdown in the participatory process leading to the suspension of some municipalities from the KALAHI-CIDSS program. The effectiveness of the system would be reviewed and a more complete picture of information requests, grievances and resolution patterns obtained. Adjustments would subsequently be made to improve future reporting through both formal and informal channels. Second, building on the independent monitoring conducted under the parent project 10, DSWD would assess the potential for enhancing the role of civil society organizations, including the media in monitoring and providing independent feedback on project operations. This approach would be facilitated by the strengthened provinciallevel engagement that is proposed as civil society capacity tends to be substantially greater at the province than at the municipal level. Third, DSWD would continue to refine and expand its approach to active information disclosure at the national and local levels. This would be achieved by making further design improvements to the current project website, and enhancing the availability of information both about project operations as well as the local planning and budgeting process. At the community level, the AF would continue to support efforts to embed transparency mechanisms in governance, e.g., through a new NGO partnership on local procurement. Fourth, drawing from local and global experience, the KALAHI-CIDSS would introduce a system of social audits that would be carried out after the completion of sub-projects as a means of further institutionalizing a participatory, results-oriented approach to project operations. 17. Estimated project cost and financing plan. As a flagship anti-poverty program and a core program of DSWD, GOP would contribute a significant proportion of total project costs, which includes a significant local counterpart contribution in cash and inkind from LGUs and communities. About 85 percent of the loan proceeds would be allocated for barangay grants that support community sub-projects, while 10 percent would be allocated for project management and the remainder would be for the urban pilot (2 percent) and capacity building (3 percent) (Table 2). Based on exchange rate movements and price inflation since the parent project was developed, it is proposed to increase the size of the indicative municipal allocation from approximately $5,865 11 to 10 Center for Policy and Executive Development, U.P. National College of Public Administration and Governance (November 2004-May 2005); KALAHI-CIDSS: KKB Integrated Monthly Monitoring 11 Equivalent to Php300,000 at 2002 exchange rates. 14

$9,767 12 multiplied by the number of barangays in each municipality. The current percentage of eligible expenditures financed would be maintained under the AF. Component Table 2: KALAHI-CIDSS Additional Financing by Component IBRD (US$M) GOP * (US$M) Total (US$M) IBRD Financing (%) Grants to Barangays in Rural Areas 50.000 23.900 73.900 68 Capacity Building and Implementation Support 1.700 15.500 17.200 10 Grants to Barangays in Urban Areas 0.900 1.200 2.100 43 Project Management 6.377 5.100 11.477 55 Front-end Fee 0.147 Total 59.124 45.700 104.824 56 * includes estimated local counterpart contributions, in cash and in kind, from LGUs and communities of $31.4 million Consistency with CAS 18. The proposed activities in the AF are fully consistent with the current Philippines Country Assistance Strategy FY10-12 (Report No. 47916). The AF would contribute to the CAS s overall objective of inclusive growth by improving the delivery of basic public services in poor areas (Strategic Objective 3 of the CAS) and also by enhancing local governance (Strategic Objective 5). Appraisal of Restructured and Scaled Up Project Activities 19. Implementation arrangements. The project s oversight and management arrangements will follow broadly the same arrangements as outlined in the KALAHI- CIDSS operations manuals and project implementation manual previously approved. DSWD will continue to serve as the Implementing Agency for the project with an Undersecretary as Director and Assistant Secretary as Deputy Director, both of whom provide overall policy directions and ensure project coordination with the Departmentwide policies and directions. The technical management and supervision fall under the National Project Management Office (NPMO) headed by a senior DSWD official and supported by a full complement of technical and administrative staff with the competence required by the Project. As in the current operations, a Regional Project Management Office (RPMO), headed by the DSWD Assistant Regional Director, will continue to supervise day-to-day operations. An Area Coordination Team (ACT) would be directly hired in accordance with qualification standards required by the Project and deployed to each new municipality. The ACT would be supported and complemented by an MLGU- 12 Equivalent to Php465,000 at 2010 exchange rates. 15

designated Municipal Coordination Team (MCT), which would eventually take over the facilitation and management function as part of a local sustainability planning process. 20. Oversight functions will be provided by the National Steering Committee (NSC) and National Technical Working Group (NTWG). The NSC and NTWG would be revitalized to confirm representatives under the new government expected after the May 2010 elections and to enhance the selection process and guidelines for broader representation of civil society and the private sector. The roles and responsibilities of the NSC and NTWG will likewise be reviewed and confirmed by its members to: (i) enhance coordination with other programs and ensure synergy with national policies on poverty reduction; (ii) strengthen monitoring responsibilities for effective risk and problem management; and, (iii) enhance resource mobilization and advocacy for CDD approaches. At the sub-national level, DSWD will initiate the organization of project oversight committees, linking with existing bodies, such as the Regional Development Councils through the Regional Social Development Committee, and/or the Regional KALAHI Convergence Groups. 21. The recent adoption of the Social Welfare and Development Reform Agenda (SWDRA), which positions KALAHI-CIDSS as the core community-based service delivery model, provides additional opportunities to mainstream the Project within DSWD s operations. The mainstreaming agenda would be actively pursued through current efforts aimed at enhancing the delivery of social protection programs by reducing fragmentation and overlap and improving coordination, and by strengthening internal coordination mechanisms within DSWD as part of the on-going rationalization and restructuring process. 22. Environmental and social safeguards. The project would retain its Category B environmental classification. No significant potentially adverse environmental impacts on communities or their surrounding areas are anticipated. The parent project has been in compliance with the safeguards covenants in the Loan Agreement. Bank supervision has consistently rated safeguards performance as satisfactory with no major issues. All subprojects undergo screening for environmental risks/issues and proper mitigation measures were formulated and reflected in the Environmental Management Plans by the communities. The negative list of prohibited investments with adverse environmental impacts was also implemented. The Environmental Impact Assessment Guidelines were updated to reflect new Regulatory issuances by the Department of Environment and Natural Resources and the updated options in the positive and negative list, taking into consideration the experience in the original loan project. 23. No involuntary resettlement took place as nearly all sub-projects financed were small-scale infrastructure that required minimal land acquisition most of which was publicly-owned land. Nevertheless, the NPMO has taken steps to ensure that deeds of donation are executed and filed for annotation by the municipal Register of Deeds which will be continued under the AF operations as reflected in the enhanced Land Acquisition and Resettlement Policy Framework. 16

24. DSWD has undertaken a thematic review of the project s Indigenous Peoples (IP) Strategy which provided information on IP presence in project areas and documented the lessons learned on the various mechanisms through which the inclusion of IPs was promoted during project implementation. These lessons were incorporated in the enhanced Indigenous Peoples Planning Framework which will be applied during the AF operations. 25. Although the project has been compliant with all safeguards policies, the National Project Management Office prepared an enhanced Environmental Impact Assessment Guidelines, Indigenous Peoples Planning Framework and Land Acquisition and Resettlement Policy Framework to reflect the enhancements/innovations based on seven years of implementation. The enhanced safeguards instruments were disclosed locally through DSWD website (April 15, 2010) and through the Bank Infoshop (April 16, 2010). The Project has been classified as a gender-responsive project based on the NEDA Harmonized GAD Guidelines. 26. Economic and financial analysis. Based on community needs identification and sub-project prioritization, it is expected that the KALAHI-CIDSS would continue to support a range of basic service delivery investments covering community infrastructure (roads, bridges, access trails), social sectors (water supply, schools, clinics, day care centers), and other community-based investments (community enterprise facilities, environmental protection, and others). An economic analysis conducted 13 indicated that the overall economic internal rate of return for the project is approximately 20 percent, and rates of return for individual sub-project types vary from 16 percent for day care centers to 65 percent of water supply projects. The cost-benefit analysis carried out also indicated the unit cost of infrastructure is lower than that of other government agencies, with cost savings ranging from 8 to 30 percent. 27. With regard to operation and maintenance (O&M) of sub-projects, DSWD has undertaken a series of functionality and sustainability assessments to determine the effectiveness of O&M arrangements. While the assessments found that nearly all subprojects had been completed as planned and were in use, they also identified weaknesses in the institutional and managerial arrangements relating to the community-based groups established to manage on-going O&M. Under the AF the performance of O&M groups would be enhanced by strengthening the links to municipal staff through the Municipal Coordination Teams (MCTs) and providing additional technical information and guidance. At the national level, DSWD would seek closer engagement with line agencies to enhance the consistency of KALAHI-CIDSS investments with relevant sector plans while, at the same time, advocating for the adoption of more participatory approaches in sectoral programs at the local level. 28. Procurement. Based on successful implementation of the procurement arrangements during the original KALAHI-CIDSS, arrangements under the AF would 13 Araral, E. and Holmemo, C. 2007. Measuring the Costs and Benefits of Community Driven Development: The KALAHI-CIDSS Project, Philippines. World Bank Social Development Department, Working Paper Series No. 102. 17

remain unchanged, and would follow the Bank s Guidelines: Procurement under IBRD Loans and IDA Credits published in May 2004, as revised in October 2006 and May 2010 (the Procurement Guidelines), and the Guidelines: Selection and Employment of Consultants by World Bank Borrowers published in May 2004 as revised in October 2006 and May 2010 (the Consultant Guidelines) and the provisions stipulated in the Loan Agreement. 29. At the community level, procurement for the KALAHI-CIDSS is undertaken by trained community teams based on the Community Procurement Sub-Manual. The following enhancements to the Community Procurement Sub-Manual are currently being finalized: making the overall procurement processing more efficient, particularly in the mandatory review beyond the Municipal Coordination Team level; ensuring wider participation of bidders (suppliers and contractors); the use of simplified procurement/bidding documents; clearer definition of the technical assistance requirements for sub-projects; and adoption of more standardized designs for sub-projects that would be reflected in updated technical guidelines for the project. Community bids and awards committees supported by the procurement team take the lead in implementing procurement supported by ACTs/MCTs who provide technical assistance in the community procurement implementation. The ACTs/MCTs also perform the role of internal auditors during the inter-municipal fiduciary review process. These arrangements, which have been consistently assessed as satisfactory, would be retained under the AF. National level procurement under the AF would be minimal and of small value within the current capacity of DSWD procurement staff. 30. Financial management. A detailed financial management assessment has been prepared (Annex 4). The overall financial management system of DSWD meets the Bank s financial management requirements. Despite this, the assessed financial management risk of the AF before the mitigating measures is considered substantial, with the main significant inherent risks of the Project being: (i) the wide geographic reach of project activities, including hard-to-reach areas with safety and security risks in some areas, which makes effective supervision difficult; and (ii) communities who are the direct beneficiaries of the project initially have minimal financial management experience. To reduce the financial management risk to moderate, existing mitigating measures that have shown effective impact will continue to be implemented. Financial management arrangements for the AF would follow those of the original KALAHI- CIDSS, which have been generally found to be adequate in mitigating the financial management risk, including: i. Maintenance of separate books of accounts. ii. A Designated Account maintained for the project where all loan proceeds released from the Bank are credited, with project bank accounts opened at the DSWD regional offices for the operating funds of the region. iii. Monitoring and evaluation of the procurement and financial management performance at the community level conducted regularly by RPMO and NPMO and cross-barangay reviews by Barangay Sub-Project Management Committees, with copies of reports available during project implementation review missions. 18

iv. Public disclosure of project accounts through Barangay Assembly meetings and the posting of information relation to sub-projects on notice-boards and in designated community project offices. v. Grievance redress reports made available to the NPMO finance unit for assessment of any financial management issues and adequacy of actions. vi. Capacity building on financial management conducted for community officers, community facilitators and RPMO. vii. Reports of the project posted in the Project s website. viii. Quarterly financial monitoring reports submitted to the Bank no later than 45 days after the end of each calendar quarter. ix. Annual project audited financial statements submitted to the Bank no later than 6 months after the end of each calendar year. The audit of the financial statements of the Project shall be carried out by the Commission on Audit (COA). The audit shall also include a value-for-money audit, which would cover physical inspection of sub-projects and evaluation of the sustainability of sub-projects and the adequacy of the maintenance and monitoring operations representing at least 10 percent of sub-projects. The report would be submitted together with the annual project audited financial statements. 31. Under the AF, the following mitigating measures shall be enhanced: i. The Grievance Redress mechanism to ensure greater efficiency and effectiveness. ii. The National Steering Committee and National Technical Working Group shall be revitalized to include wider stakeholder representation especially from the civil society and private sector. iii. The NPMO together with the RPMO shall ensure that audit findings/observations and recommendations by the COA in its audit of the project financial statements shall be fully resolved/addressed within one year from the end of the reporting period. iv. The audit observations and recommendations issued by COA and IAS shall be fully resolved/addressed by DSWD within one year from the date of the issuance of the reports. 32. The financial reports under the Project have always been received by the Bank on or before the due dates. COA issued qualified opinions on the 2007 and 2008 audited project financial statements mainly due to delays in the submission of complete documents on sub-projects for audit, delayed completion of sub-projects, and other observations in terms of the sustainability and adequacy of maintenance of completed sub-projects. NPMO has reported that except for the issue on complete documentation of donated properties used for sub-projects, which at this point is no longer considered as a significant risk, all the observations and recommendations of COA and IAS have been fully addressed. 33. At the agency level, mitigating measures relating to DSWD have already been agreed and include: (i) strengthening the Internal Audit Service in accordance with terms of reference acceptable to the Bank; and (ii) resolving the issues reported by COA in its 19

audit of the agency accounts based on a time-bound plan. These measures will be supported through the Social Welfare and Development Reform Project, and the AF will also benefit from these agency-wide reforms. 34. Project financing. The AF will bring the total loan amount for the KALAHI- CIDSS project to $159.124 million (Table 3). Table 3: KALAHI-CIDSS Original and Additional Financing by Category (US$M) Eligible Expenditure Categories Current Allocation Disbursed to Date (March 31, 2010) Proposed Additional Financing TOTAL Revised Allocation (1).Grants Under Parts A and C 90.6 77.9 50.900 141.500 (2) Goods, Consultants Services and Incremental 8.4 11.4 8.077 16.477 Operating Costs (3)Front-end fee 1.0 1.0 0.147 1.147 TOTAL 100 90.3 59.124 159.124 Expected Outcomes 35. The AF would provide continued support to GOP s flagship anti-poverty program by building on the achievements of the past seven years of implementation experience. In addition to expanding the coverage of the KALAHI-CIDSS to a new set of poor municipalities, the AF would respond to two specific requests of GOP: (i) that the KALAHI-CIDSS should support a stronger role and set of responsibilities for LGUs this is being achieved through expansion of the LGU-led CDD approach which would not only support greater devolution of project activities but would also contribute to the institutionalization of CDD mechanisms into the local planning and budgeting process of government; and, (ii) that the KALAHI-CIDSS should be better coordinated with other anti-poverty programs of DSWD this would be achieved through closer operational coordination with the 4P s conditional cash transfer program as part of DSWD s reform agenda and GOP s overall social protection framework. 36. In addition, as the results of the endline surveys for the quantitative and qualitative impact evaluations will become available during 2010, there will be ample opportunity to review and respond to the findings of the evaluations as part of the preparation process for scaling up the KALAHI-CIDSS program into a nationwide CDD program. Benefits and Risks 37. The KALAHI-CIDSS is a unique program in the Philippines in terms of its scope of coverage and focus on community empowerment through bottom-up planning and 20