Report and Recommendation of the President to the Board of Directors

Report and Recommendation of the President to the Board of Directors Sri Lanka Project Number: 43407 August 2010 Proposed Loan, Technical Assistance Grant, and Administration of Technical Assistance Grant Republic of the Philippines: Social Protection Support Project

CURRENCY EQUIVALENTS (as of 11 August 2010) Currency Unit peso (P) P1.00 = $0.022200 $1.00 = P45.05 ABBREVIATIONS 4Ps Pantawid Pamilyang Pilipino Program (Building Bridges for the Filipino Family Program) ADB Asian Development Bank AusAID Australian Agency for International Development CCT conditional cash transfer DOH Department of Health DPSP DSWD Development Policy Support Program Department of Social Welfare and Development LGU local government unit LIBOR London interbank offered rate MDG Millennium Development Goal NGO nongovernment organization OCR ordinary capital resources NHTS-PR national household targeting system for poverty reduction TA technical assistance TASF Technical Assistance Special Fund NOTES In this report, "$" refers to US dollars. Vice President C. Lawrence Greenwood, Jr., Operations 2 Director General K. Senga, Southeast Asia Department (SERD) Director S. Lateef, Social Sectors Division, SERD Country Director N. Jain, Philippines Country Office, SERD Team leader Team members Peer reviewer C. Holmemo, Poverty Reduction Specialist, SERD C. Burkley, Social Development Specialist, Regional and Sustainable Development Department (RSDD) U. Hoque, Social Development Specialist (Gender and Development), SERD E. Masaki, Social Sector Economist, SERD R. O'Sullivan, Principal Counsel, Office of the General Counsel C. Spohr, Senior Education Economist, SERD A. Bacasmas, Assistant Project Analyst, SERD S. Handayani, Senior Social Development Specialist, RSDD In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS Page PROJECT AT A GLANCE I. THE PROPOSAL 1 II. THE PROJECT 1 A. Rationale 1 B. Impact and Outcome 3 C. Outputs 4 D. Investment and Financing Plans 6 E. Implementation Arrangements 7 III. TECHNICAL ASSISTANCE 7 IV. DUE DILIGENCE 8 A. Economic and Financial 8 B. Governance 8 C. Poverty, Social, and Gender 9 D. Safeguards 9 E. Risks and Mitigating Measures 9 V. ASSURANCES AND CONDITION 10 VI. RECOMMENDATION 10 APPENDIXES 1. Design and Monitoring Framework 11 2. List of Linked Documents 14

PROJECT AT A GLANCE 1. Project Name: Social Protection Support Project (formerly Conditional Cash Transfers Support Project) 2. Project Number: 43407-01-3 3. Country: Philippines 4. Department/Division: Southeast Asia Department Social Sectors Division 5. Sector Classification: Sectors Primary Subsectors Multisector 6. Thematic Classification: Themes Primary Subthemes Social development Capacity development Gender equity Health programs Preprimary and basic education Social protection Human development Institutional development Gender equity in human capabilities 6a. Climate Change Impact: Adaptation Mitigation 6b. Gender Mainstreaming: Gender equity theme 1 Effective gender mainstreaming Some gender benefits No gender elements 7. Targeting Classification: General Intervention Geographic dimensions of inclusive growth Targeted Intervention Millennium Development Goals 1 M1a, M1b, M2 Income poverty at household level 8. Location Impact: Rural Urban National Regional High High Low 9. Project Risk Categorization: Complex 10. Safeguard Categorization: Environment Involuntary resettlement Indigenous peoples C C B 11. ADB Financing: Sovereign/Nonsovereign Modality Source Amount ($ million) Sovereign Project loan Ordinary capital resources 400.0 Total 400.0 12. Cofinancing: No Cofinancing available. 13. Counterpart Financing: Source Amount ($ million) Government 484.2 14. Aid Effectiveness: Parallel project implementation unit Program-based approach Yes Yes

I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on a proposed loan to the Republic of the Philippines for the Social Protection Support Project. The report also describes proposed technical assistance (TA) grants for Capacity Development for Social Protection, and Strengthened Gender Impacts of Social Protection, and if the Board approves the proposed loan, I, acting under the authority delegated to me by the Board, will approve the TA grants. 2. The project will support the Government of the Philippines in implementing and expanding its social protection agenda, especially the conditional cash transfer (CCT) program Pantawid Pamilyang Pilipino Program 1 (4Ps) and the national household targeting system for poverty reduction (NHTS-PR). The associated capacity development TAs will support capacity development and institutional strengthening of the government for efficient implementation of the social protection agenda. 2 The project is included in the Philippines country operations business plan, 2010 2012. 3 II. THE PROJECT A. Rationale 3. Despite high economic growth over the past 6 years, poverty incidence in the Philippines increased from 30% in 2003 to 33% in 2006. Key causes of poverty include high inequality and chronic underinvestment in physical and human capital, especially health and education. As a result, the Philippines is lagging on progress in meeting the Millennium Development Goal (MDG) targets for universal primary education, maternal mortality, and access to reproductive health services. Net enrollment in elementary school declined from 99.1% in 1990 to 83.2% in 2007. Only 70% of students who enter grade 1 stay until grade 6, and one in five children 6 11 years old are not in school. Universal immunization against measles has not yet been achieved and malnutrition remains a major concern, with only 64% of children meeting normal weight-for-age standards. Maternal mortality rates remain high at 162 per 100,000 live births in 2006. 4. Government estimates indicate that about 45% of Filipinos are vulnerable to falling into poverty if confronted by external shocks such as family health problems and deaths, loss of employment, natural disasters, and price increases. 4 In 2007 2008, escalating food prices contributed to a 9.45% reduction in the average standard of living and an increase of more than 50% in the severity of poverty. 5 In the absence of appropriate safety nets, households have developed coping mechanisms to external shocks that tend to erode human capital and perpetuate poverty, such as increasing working hours, changing eating patterns, withdrawing children from school, or foregoing critical health care. 5. Demand-side constraints, such as financial barriers and lack of awareness of the importance of human capital investment, are key constraints to utilization of health and education services by the poor. Although many public health services are free, health facilities 1 Building Bridges for the Filipino Family Program. 2 The Asian Development Bank (ADB) provided project preparatory technical assistance to the Philippines for Support for Conditional Cash Transfers (approved 21 December 2009). 3 ADB. 2009. Country Operations Business Plan: Philippines, 2010 2012. Manila. 4 National Anti-Poverty Commission and National Statistical Coordination Board. 2005. Assessment of Vulnerability to Poverty in the Philippines. Manila. 5 H. Son. 2008. Has Inflation Hurt the Poor? Regional Analysis in the Philippines. Economic Research Department Working Paper. No.112. Manila: ADB.

2 are often located in areas not easily accessible to poor families, leading to high transport costs. The average cost for travel to health facilities is P109 per visit, while outpatient treatment is P1,872 per person. 6 Nearly half of the health care costs are paid out-of-pocket, and 79% of poor households have no insurance coverage. The poor are often unable to afford basic health care since out-of-pocket payments are required at the point of services. For education, demand-side factors are the main determinants of enrollment. Among girls 7 12 years old, the main reasons for being out of school are high associated costs and lack of interest. From 2002 to 2007, the number of out-of-school youth rose markedly for children 13 16 years old, reaching more than 20% in many regions. 7 The leading causes were high cost of education (particularly for girls), lack of personal interest (particularly for boys), and working or looking for work. 6. Government efforts to address poverty and improve human development outcomes have been compromised by low spending on social sectors, particularly social assistance programs. In 2009, national government spending on social services was only 5.9% of gross domestic product. Spending on social protection was even lower at only 1.2%, although it has increased from an average of 0.8% in 2005 2007. The social protection sector has been characterized by a lack of policy and institutional coordination, with several departments undertaking uncoordinated, and sometimes ineffective, programs. Benefits have been further compromised by weak targeting systems to identify beneficiaries and high leakages to the non-poor. 7. To respond to these challenges, the government recently increased its focus on reforming and strengthening its social protection system. The reform agenda led by the Department of Social Welfare and Development (DSWD) includes (i) accelerating social protection policy reform; (ii) improving targeting of programs; (iii) expanding the CCT program and strengthening delivery mechanisms, including governance systems and monitoring and evaluation; and (iv) securing adequate and predictable financing for social protection by consolidating programs and gradually expanding overall budget allocation. The reform agenda is well under way and significant government ownership is demonstrated through a doubling of the social protection budget since 2007. The budget of DSWD, which has the primary role in delivering social protection services, has more than tripled since 2007; these increases are sustained through the medium-term expenditure plan, 2010 2014. 8. The cornerstone of the social protection reform effort is the CCT program (4Ps). The 4Ps provides cash grants to poor households based on their fulfillment of health- and educationrelated conditionalities. The program pilot was launched in 2007 with 6,000 beneficiary households in four municipalities and two cities. Results from the pilot showed that from 2007 to 2009, school enrollment and attendance rates increased significantly, elementary school completion rates increased from 67.5% to 73%, the number of children who received deworming pills increased by 21.4%, the number of fully immunized children increased by 26.2% and the number of women who completed prenatal visits increased by 45.4%. 8 The 4Ps gradually expanded to 341,000 households in 2008 (set 1), 666,000 households in 2009 (set 2), and aims to reach 1 million households in 2010 (set 3). 9 9. The 4Ps directly addresses poverty through the provision of cash grants, while simultaneously reducing long-term poverty through increased investments in human capital, a 6 National Statistics Office. 2008. National Demographic and Health Survey 2008. Manila. 7 D. Maligalig et al. 2010. Education Outcomes in the Philippines. ADB Economics Working Paper Series. No. 199. Manila: ADB. 8 DSWD. 2009. Preliminary Study on the Effects of the Pantawid Pamilyang Pilipino Program. Manila. 9 Numbers are cumulative. Set 1: 341,000 households, set 2: 325,000 households, set 3: currently at 257,995 households. Sets are defined by poverty ranking (poorest municipalities phased in first). The program is nationwide, and covers the poorest households in 733 municipalities in 80 provinces.

3 key factor in addressing intergenerational poverty. Cash transfers help meet the direct and indirect costs of health care and schooling, as well as reduce the incentive to remove children from school to work. The program also promotes utilization of education and health services and other positive behavior changes through family development sessions focusing on responsible parenthood, health and nutrition, and education. 10. Several development partners have helped develop and are supporting the evolving social protection reform agenda. The World Bank is providing a $405 million loan. The Australian Agency for International Development (AusAID) provided grant support for the development of the good governance and anticorruption aspects of the 4Ps, monitoring and evaluation, and improved auditing. 10 The Japan International Cooperation Agency provided support for the CCT program through the Development Policy Support Program (DPSP) 3 11 and fiscal stimulus support in 2010. In addition, Japan and the Republic of Korea provided TA for the 4Ps through the World Bank; the United Nations Development Programme supports the policy agenda; and the United Nations Children's Fund is in current discussions with DSWD to support the 4Ps. 11. The Asian Development Bank (ADB) is a key partner in the social protection reform agenda. The three DPSPs in 2007, 2008, and 2009 supported policy dialogue on social protection reform, including improved targeting and poverty orientation of public spending. DPSP 2 and DPSP 3 provided support for piloting and scaling up the 4Ps. In addition, fiscal stimulus support under the Countercyclical Support Facility 12 (2009) included increasing the coverage of the program. 13 ADB and the government have had continuous dialogue through the Philippines Development Forum subgroup on social protection and ADB-organized large regional conferences on social protection in 2009 and 2010. 12. The proposed project will assist the government in implementing its development strategy and social protection reform by supporting the NHTS-PR and the 4Ps. This is consistent with ADB's support for the Medium-Term Philippines Development Plan and the mutual objectives of higher pro-poor sustainable growth and MDG attainment. The support has significant potential for leveraging key improvements in the Philippines' social protection portfolio, including improved targeting, reduced leakage, and rationalization and consolidation of existing programs. The ADB assistance will provide additional support to strengthen the gender and indigenous peoples aspects of the 4Ps. B. Impact and Outcome 13. The impact of the project will be reduced income poverty and non income poverty. The outcome will be increased consumption and utilization of education and health services among poor households and women beneficiaries of the 4Ps. 10 These include support for the NHTS-PR, grievance redress, compliance verification; monitoring and spot checks; improved audits; and institutional strengthening. AusAID is currently developing a TA facility for DSWD and development partners to provide technical and analytical support for the CCT program. 11 ADB. 2009. Report and Recommendation of the President (RRP) to the Board of Directors: Proposed Loan to the Republic of the Philippines for the Development Policy Support Program: Subprogram 3. Manila. 12 These programs do not overlap with the project. DPSP 3 provided support for the government's 2008 expenditures; a proportion of Countercyclical Support Facility funds supported half the 2009 budget for the 4Ps. 13 ADB. 2007. RRP to the Board of Directors: Proposed Loan to the Republic of the Philippines for the Development Policy Support Program: Subprogram 1. Manila; ADB. 2008. RRP to the Board of Directors: Proposed Loan to the Republic of the Philippines for the Development Policy Support Program: Subprogram 2. Manila; ADB. 2009. RRP to the Board of Directors: Proposed Loan to the Republic of the Philippines for Countercyclical Support. Manila.

4 C. Outputs 14. The project will support implementation and expansion of the 4Ps in set 2 and 3 areas (footnote 9), and cover about 582,000 households 14 in 436 municipalities and 37 cities in 53 provinces. 15. Output 1: Efficient implementation of a national targeting system to select poor households. This output will support implementation of the NHTS-PR as a standardized targeting mechanism for identifying poor households. The NHTS-PR targets poor households in two steps: (i) selection of poor provinces and municipalities based on poverty incidence according to the family income and expenditure survey and small area estimates; (ii) use of a proxy means test methodology to predict household income on the basis of education, socioeconomic characteristics, housing conditions, access to basic services, assets, tenure status, and regional variables. The information to calculate the proxy means test is collected through household assessments, encoded online regionally and transmitted to DSWD nationally. The lists of poor households are validated in community assemblies and through spot checks and cross-checking with the family income and expenditure survey data. 16. DSWD is implementing the NHTS-PR nationwide and is planning to assess about 8.3 million households. Experience from the 4Ps pilot shows that the targeting system has performed well, with an inclusion error of less than 10%. 15 When finalized, it will constitute a homogenous and transparent mechanism to identify poor households and a nationwide database that can be used by various national and local social protection and poverty reduction programs. An executive order issued in March 2010 requires all government agencies to use the system for household targeting of poor households in their programs. 17. Output 2: Conditional health and education cash grants provided to poor households. This output will partially finance conditional health and education grants in selected poor provinces, municipalities, and cities. Beneficiary households are selected using the NHTS-PR and validated for eligibility. 16 DSWD pays the transfers to mothers and/or pregnant women of eligible households, who will receive the cash grants for up to 5 years subject to the eligibility criteria and compliance. 17 Transfers are paid quarterly, directly into women beneficiaries' accounts established in the Land Bank of the Philippines. 18 The 4Ps includes two types of transfers: one related to health and one to education. A computerized compliance verification system will verify compliance with conditionalities. 19 18. Poor households with children 0 14 years old and/or pregnant women are eligible for a health grant currently set at P500 ($11) per household per month (for 12 months per year). The conditionalities are: (i) all children 0 5 years old attend the health center to obtain services established by the Department of Health (DOH) according to their age, including immunizations; (ii) pregnant women attend the health center according to DOH protocol, including delivery by 14 The World Bank loan is financing the 4Ps in set 1 areas, covering around 341,000 households. 15 The percentage of non-poor households included in the program. In comparison, programs in Latin America and South Asia have inclusion errors of around 30%. These errors tend to increase as programs scale up due to higher density of poverty in pilot areas. 16 Eligible households are those included in the NHTS-PR database with children 0 14 years old and/or a pregnant mother. 17 In households with no mother, the grant is paid to another responsible adult in the family (father, grandparent). 18 In some cases, over the counter payments are done if there is a long distance to the nearest bank branch or when issuance of cash cards is delayed. 19 This entails associating beneficiaries with schools and clinics, recording attendance, encoding attendance through a computerized system, and linking such data to the payment system. Beneficiaries who repeatedly do not comply with the conditions will be suspended from the program following an established sanctions procedure.

5 skilled personnel and postnatal care; (iii) children 6 14 years old comply with deworming protocol at schools; and (iv) the household grantee (mother) and/or spouse attend family development sessions at least once a month. 19. Poor households with children 6 14 years old are eligible for the education grant. 20 The education transfer is P300 ($7) per child per month (for 10 months per year), for up to a maximum of three children. Beneficiary households will receive the education transfer for each child from 6 to 14 years of age as long as they are enrolled in primary or secondary school and maintain a class attendance rate of at least 85% every month. 20. Eligible households can receive both the health and education grants. 21 The average transfer per household is estimated at 23% of the average annual household income. This proportion is in the range of those used in successful CCT programs in Latin America, where grants provided a sufficient incentive for families to utilize health services and send their children to school, while being low enough to avoid distorting labor market decisions. 22 21. Meeting the supply-side requirements and monitoring compliance are the responsibilities of DOH, the Department of Education, and local government units (LGUs). 23 A supply-side assessment is done to assess health and education systems, identify gaps and needs, if any, and corresponding solutions and recommendations to enable 4Ps beneficiaries to meet the conditionalities of the program. 24 Anecdotal evidence suggests that several LGUs are increasing their investments in health and education services as a result of these supply-side pressures. 22. Output 3: Strengthened capacity for conditional cash transfer program operations. This output will provide capacity development and support for all key national and local management activities in the 4Ps, including household registration, compliance verification, payment management, organization of assemblies of grantees, and strengthening of gender and indigenous peoples aspects. 23. Output 4: Improved systems for monitoring and evaluation of social protection programs. This output will support the implementation of a management information system that will cover all steps in the operation of the 4Ps. It will also support monitoring and evaluation, including (i) spot checks to monitor 4Ps implementation; (ii) monitoring and evaluation studies; 25 and (iii) regular monitoring and reporting, including quarterly and annual reviews, and internal audits. It will also support the operation of a grievance redress system, featuring a publicly accessible grievance database to track and resolve complaints, including targeting errors, payment irregularities, fraud, and corruption. 20 DSWD is also implementing cash grants to households with children 3 5 years old that regularly attend day care or preschool. Based on further study, ADB will consider including support for these grants at project midterm. 21 The maximum transfer a household can receive is P15,000 per year for 5 years. 22 In Mexico (Oportunidades), the transfer is about 21% of total annual household expenditures; in Colombia (Familias en Accion), about 15% of the minimum wage; and in Nicaragua (Red de Proteccion Social) about 17% of the total annual household expenditure. Impact evaluations of these programs show significant positive impacts on family investments in children s human capital. A very low transfer, such as in the Honduras CCT program representing less than 5% of average per capita consumption, showed less impact on families human capital. 23 Responsibilities of each department are described in a joint memorandum circular. Coordination is governed by national, regional, and municipal advisory committees, and by a memorandum of agreement that clarifies lines of authority and responsibility between DSWD and participating LGUs. 24 In the event that a barangay is not prepared to meet the supply-side requirements, the LGU will be given 6 months to address the problem(s) before program implementation may start. 25 This will include qualitative evaluation studies and impact evaluation. ADB and the World Bank are exploring collaboration on a rigorous impact evaluation using regression continuity methodology.

6 D. Investment and Financing Plans 24. The overall government program has a total estimated cost of $1.29 billion 26 from 2009 2014. The World Bank is financing one-third of the program with a loan of $405 million (approved in 2009), the proposed ADB loan will finance one-third, and the government will finance one-third. 25. The project is estimated to cost $884.2 million. The government requested a loan of $400 million from ADB s ordinary capital resources (OCR) to finance the project. 27 The loan will have a 25-year term, including a grace period of 5 years, an annual interest rate determined in accordance with ADB s London interbank offered rate (LIBOR)-based lending facility, and a commitment charge of 0.15% per annum. The government has provided ADB with (i) the reasons for its decision to borrow under ADB s LIBOR-based lending facility based on these terms and conditions, and (ii) an undertaking that these choices were its own independent decision and not made in reliance on any communication or advice from ADB. ADB will finance 45.2% of the project cost and the government will provide counterpart financing of 54.8% including taxes and duties, and financing changes. The government will allocate the counterpart funds of $484.2 million mainly to cover a share of the household grants, capacity building, and administrative costs. 28 The financing plan is in Table 1 and the project investment plan is in Table 2. Table 1: Financing Plan Source Total % Asian Development Bank 400.0 45.2 Government of the Philippines 484.2 54.8 Total 884.2 100.0 Source: Asian Development Bank estimates. Table 2: Project Investment Plan ($ million) Item Amount a A. Base Cost b 1. Efficient implementation of a national targeting system 13.7 2. Health and education cash grants for poor households 798.5 3. Strengthened capacity for conditional cash transfer program operations 38.3 4. Improved systems for monitoring and evaluation 5.2 Subtotal (A) 855.7 B. Contingencies 7.7 C. Financing Charges During Implementation c 20.8 Total (A+B+C) 884.2 a Includes taxes and duties of $1.84 million financed from government resources. b In mid-2009 prices. c Includes interest and commitment charges. Interest during implementation for the Asian Development Bank loan has been computed at the 5-year forward London interbank offered rate plus a spread of 0.3%. Commitment charges for an ADB loan are 0.15% per year to be charged on the undisbursed loan amount. Source: Asian Development Bank estimates. 26 Including financing charges. 27 Recurrent costs financed under the loan are for operating expenses and are only to be used for project costs. 28 This includes the full government contribution to the overall program, and is not limited to the counterpart for the ADB loan.

7 E. Implementation Arrangements 26. DSWD will be the executing agency. The project will support the national project management offices of the NHTS and 4Ps, both of which are established and operating. DSWD and the regional project management offices have overall responsibility for implementing the program. Municipal links are hired to work with beneficiary households, and the LGUs are designating at least one full-time staff for the 4Ps. 27. The implementation arrangements are summarized in Table 3 and described in detail in the project administration manual. To ensure efficient project implementation, joint supervision missions will be undertaken by the government, ADB, and the World Bank. Table 3: Implementation Arrangements Aspects Arrangements Implementation period October 2010 September 2015 Estimated project completion date 30 September 2015 (loan closing date: 31 March 2016) Project management (i) Oversight body DSWD executive committee; secretary of DSWD (chair); all undersecretaries and assistant secretaries, DSWD (members) (ii) Executing agency DSWD (iii) Key implementing agencies DSWD, DSWD regional offices (16) (iv) Project implementation unit NPMO (NHTS): 20 staff; NPMO (4Ps): 109 staff Procurement Shopping 6 contracts $578,000 Consulting services Quality- and cost-based selection 1 contract $500,000 Fixed budget selection 4 contracts $400,000 Single-source selection 5 contracts $500,000 Individual consultant system 2,931 person-months $1,961,095 a Retroactive financing NHTS, 4Ps cash grants for education. Retroactive financing can be used for up to 20% of the loan balance and for expenses up to 12 months before loan Disbursements signing. Advance contracting: NPMO and RPMO consultants. The loan proceeds will be disbursed in accordance with the Asian Development Bank (ADB) Loan Disbursement Handbook (2007, as amended from time to time) and detailed arrangements agreed upon by the government and ADB. 4Ps = Pantawid Pamilyang Pilipino Program (Building Bridges for the Filipino Family Program), DSWD = Department of Social Welfare and Development, NHTS = national housing targeting system, NPMO = national project management office, RPMO = regional project management office. a Consulting services for project personnel in the NPMO and RPMOs will be recruited using individual consultant system due to the distribution of consultants across 17 regional offices (three per region). Source: Asian Development Bank; Department of Social Welfare and Development. III. TECHNICAL ASSISTANCE 28. ADB will provide capacity development TA to improve social protection delivery at the national and local levels. The outcome will be strengthened capacity of DSWD to implement the social protection reform agenda. The TA will have four outputs: (i) strengthened and accelerated implementation of the computerized verification system; (ii) improved capacity for monitoring and evaluation, including civil society monitoring, and implementation of the grievance redress system; (iii) review of the NHTS-PR aimed at facilitating the rollout of the system to other government agencies; and (iv) a study on integration of early childhood care and development into the 4Ps. The TA is estimated to cost $1 million, of which $800,000 will be financed on a grant basis by ADB's Technical Assistance Special Fund (TASF-other sources). The government will provide $200,000 equivalent (in-kind) as counterpart support. 29. ADB will also administer TA to (i) undertake participatory gender audits of the implementation processes and impact of the 4Ps; (ii) design community-driven and municipal

8 gender action plans based on the specific needs of beneficiaries; (iii) provide grants to municipalities to operationalize the gender action plans; and (iv) prepare knowledge products related to management of gender in the CCT program. The TA is estimated to cost $425,000, of which $300,000 will be financed on a grant basis by the Gender and Development Cooperation Fund. 29 The government will provide $125,000 equivalent (in-kind) as counterpart support. 30. Policy advisory TA to support the policy agenda for rationalization and convergence of social protection programs will also be prepared. 30 The TA will (i) formulate and implement an action plan for rationalization and coordination of social protection programs; (ii) build national and local institutional capacity to support the social protection reform agenda; and (iii) support DSWD in establishing a referral system for the poorest population, linked to the national household targeting system. 31 IV. DUE DILIGENCE A. Economic and Financial 31. Inclusive growth in the Philippines has been constrained by gaps in human capital investment, which are largely driven by demand-side factors. Evidence of CCTs globally suggests the 4Ps can effectively (i) address short-term poverty and vulnerability; and (ii) improve education and health outcomes, leading to longer-term gains in productivity and break down of intergenerational poverty traps. Accurate targeting will maximize the direct benefits of the 4Ps grants. The project is also expected to significantly increase the efficiency of government investments in poverty reduction and social protection. Simulations suggest that mainstreaming the NHTS-PR could decrease leakage under three other programs by enough to offset the annual cost of 4Ps grants to at least 780,000 households. Even without such savings, given the government's strong commitment to the 4Ps and NHTS-PR, and the relatively modest size of the programs (with annual costs estimated at 0.7% of the budget and 0.17% of gross domestic product), project benefits are considered to be financially viable and sustainable. B. Governance 32. At the country level, lack of effective sanctions coupled with limited public accountability and political interference requires robust systems for corruption prevention and redress. At the project level, DSWD is considered an anticorruption champion in the government. A 2009 integrity development review of DSWD via technical assistance from AusAID and the World Bank found that DSWD has several control mechanisms in place to minimize corruption risks. Significant progress has been made in addressing gaps in accounting and auditing. The integrity development review also identified gaps that need attention to improve governance and mitigate corruption risks, including (i) adherence to budgeting, accounting, and auditing rules; (ii) improved risk assessment and mitigation; and (iii) corruption risk management through partnership with anticorruption nongovernment organizations (NGOs). 33. Like most CCT programs, the 4Ps presents particular implementation challenges from a governance perspective, including its large scope and high volume of financial transactions; its engagement of multiple government agencies; and many project locations in remote areas. However, these challenges are paired with some key advantages, including being implemented by a champion department with regard to anticorruption; a very small amount of procurement, reducing the prospects of corruption; direct payment to beneficiary bank accounts, reducing 29 Contributors: the governments of Canada, the Netherlands, and Norway. 30 This TA will be processed separately from the loan. 31 The system will involve tracking 4Ps beneficiaries to facilitate referral to complementary services.

9 opportunities of local intervention; and inclusion of strong anticorruption mitigation measures in the project design. These include (i) interagency governance structures from national down to municipal levels; (ii) beneficiary targeting based on objective, poverty-based criteria; (iii) robust monitoring and audit systems, including spot checks, and civil society oversight; and (iv) transparency and accountability through public information campaigns and a grievance redress system. To ensure that these measures are well implemented, DSWD is hiring additional 4Ps staff and intensifying its training activities. ADB s Anticorruption Policy (1998, as amended to date) was explained to and discussed with DSWD. The specific policy requirements and supplementary measures are described in the project administration manual. C. Poverty, Social, and Gender 34. Poverty and social impacts. Improved survival, health, and education of children and women are direct benefits of the project. Better health and education utilization will promote employability and productivity of the next generation of workers. Regular and reliable cash transfers over 5 years will help promote savings and enable households to invest in livelihoodenhancing activities and facilitate their movement out of poverty. The project's support for the NHTS-PR will ensure that a standardized and transparent mechanism and database is in place, and facilitate identification and targeting of poor families. The project will strengthen DSWD's institutional management and administrative capacity to scale up the 4Ps, contributing to DSWD's effectiveness in delivering social welfare programs. 35. Gender impacts. Women are a main target group of the 4Ps. Key gender issues that the project will address include (i) low utilization of health care by women, especially obstetric and maternal care; (ii) high infant morbidity and mortality, and their effects on women's work burdens; (iii) insufficient allocation of resources for the health and education of female children; (iv) intrahousehold gender roles and control over resources; and (v) poor women's limited access to income and economic resources. The gender action plan (i) ensures that bank accounts are opened in women's names; (ii) supports training of women on citizenship and rights, domestic violence, leadership, child care, and nutrition; (iii) targets 70% attendance of fathers in specially designed modules on gender-responsive family practices and the role of fathers as caregivers; (iv) encourages linkages with NGOs and other service providers to support access to complementary services; (v) develops staff capacity on gender issues; and (vi) ensures integration of gender equality indicators in the monitoring and evaluation system. D. Safeguards 36. The project includes about 9,000 indigenous peoples household beneficiaries, who are among the poorest and most marginalized households in the Philippines. The project will significantly improve the health, education, and income status of these households. Key measures include (i) information and training provided to indigenous peoples in a form appropriate to their language and cultures; (ii) working with indigenous leaders and local NGOs to mobilize indigenous households to participate in the program; (iii) seeking transport assistance for indigenous peoples through coordination with LGUs or NGOs; (iv) targets of 10% indigenous women and 12% indigenous peoples total for municipal link positions in indigenous areas; and (v) sensitivity training and coaching to all 4Ps staff. The project is classified as category B for indigenous peoples, and category C for involuntary resettlement and environment, in accordance with the ADB Safeguard Policy Statement (2009). E. Risks and Mitigating Measures 37. Major risks and mitigating measures are summarized in Table 4.

10 Risks Outcome Poor quality of education and health services, and work disincentive due to the cash transfers, may undermine results. Outputs Errors or interference in the selection of beneficiaries Payment windows geographically inaccessible; misappropriation of funds, and cash card fraud. Program operations compromised by lack of implementation capacity and governance challenges Inadequate financial management, audit and accounting policies and procedures. Inability to undertake compliance verification through the compliance verification system Source: Asian Development Bank. Table 4: Summary of Risks and Mitigating Measures Mitigating Measures Memoranda of understanding and interagency coordination mechanisms between Department of Social Welfare and Development and partner agencies to ensure that adequate education and health services are available. Government health and education programs are expected to improve services. The size of the grant is calculated to avoid significant work disincentives. Target areas selected through objective poverty criteria. Proxy means test verified and processed in a central databank that issues a centrally generated list of beneficiaries and payroll. Beneficiaries are publicly validated. Discussions to increase bank outlets and automated teller machines, and referrals for transport assistance. Grants are directly transferred to beneficiary accounts, minimizing leakage. A grievance redress system was developed. Additional staff hired, training activities strengthened, and computer system installation speeded up to improve implementation, monitoring and evaluation, and enforcement of grant conditions. The ratio of staff to beneficiary households is higher in highly populated areas. The program is designed to be transparent and accountable, adapting best international conditional cash transfer practices. Targeting is based on proxy means tests and eligibility criteria are well defined. Separate books of accounts for the project are required. Financial management capacity and staffing is to be strengthened. Biannual internal program audits are required and spot checks will be undertaken. Additional training to be provided for the compliance verification system. Additional staff to be deployed in highly populated areas. The project will finance only the education portion of the grant until the compliance verification system is operational. V. ASSURANCES AND CONDITIONS 38. The government and DSWD have assured ADB that implementation of the project will conform to all applicable ADB policies including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the project administration manual and draft loan agreement. It is a condition for withdrawal of loan proceeds for the conditional grants that agreed compliance verification procedures have been instituted and are being used as the basis for beneficiary payments, as also described in the project administration manual and draft loan agreement. VI. RECOMMENDATION 39. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the loan of $400,000,000 to the Republic of the Philippines for the Social Protection Support Project from ADB s ordinary capital resources, with interest to be determined in accordance with ADB s London interbank offered rate (LIBOR)-based lending facility; for a term of 25 years, including a grace period of 5 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan agreement presented to the Board. 11 August 2010 Haruhiko Kuroda President

Appendix 1 11 DESIGN AND MONITORING FRAMEWORK Design Summary Impact Reduced income poverty and nonincome poverty Performance Targets/ Indicators with Baseline By 2018: Accelerated progress towards the following national MDG targets: MDG 1: Proportion of population below national poverty threshold less than 25% (2006 baseline: 33%) MDG 2: Primary net enrollment more than 90% (2008 2009 baseline: 85.1%) MDG 3: Achieved MDG 4: Achieved MDG 5: Maternal mortality less than 100 per 100,000 live births (2006 baseline: 162) Data Sources/ Reporting Mechanisms Data published by NSCB 4Ps evaluations and MIS data (DSWD) Assumptions and Risks Assumptions Beneficiary households continue investments in human capital after exit from the 4Ps. Political and financial support for the 4Ps and social protection reform is maintained. Risk Other determinants of income, consumption, and human capital investments are not present (e.g., political and economic stability). Outcome Increased consumption and utilization of education and health services among poor households and women beneficiaries of the 4Ps By 2015: At least 10% increase in average per capita consumption of beneficiaries in target communities. At least 90% each of boys and girls 6 14 years old in poor beneficiary households attend school (baseline 2008-2009: 85.1%) At least 70% of pregnant women deliver in a health facility (2008 baseline: 44.5%) NSCB small area estimates of poverty Impact evaluation survey (DSWD) MIS (DSWD) Proxy means test (DSWD) Data published by NSCB National demographic and health survey (NSO) Field health service information system Risks Cash transfer a disincentive to work (dependency) Poor quality of social services At least 80% of births are delivered by skilled health personnel (2008 baseline: 62.2%) At least 85% of children are fully immunized before 1 year old (2008 baseline: 70%) Decrease in the share of children 6 14 years old who are working in project areas (2008 baseline: 4.6%). Outputs 1. National targeting system to select poor households implemented efficiently By 2015: 20% of poor households nationwide registered in the NHTS-PR The NHTS-PR has less than 10% inclusion and/or exclusion error Database of NHTS-PR (DSWD) Impact evaluation of the 4Ps (DSWD) NHTS-PR annual report (DSWD) Risk Transitory movements of households in and out of poverty not captured by targeting system At least three national programs use the NHTS-PR as targeting

12 Appendix 1 Design Summary Performance Targets/ Indicators with Baseline mechanism Data Sources/ Reporting Mechanisms Assumptions and Risks At least 60% of poor households registered in the database receive benefits of social protection programs 2. Conditional health and education cash grants provided to poor households By 2015: At least 580,000 poor households receive cash grants, in which at least 90% of grant recipients are women. At least 80% of mothers in beneficiary households receive 4Ps grants regularly and on time NHTS-PR database (DSWD) MIS (DSWD) Attendance monitoring sheets Spot-check reports Risk Payment windows geographically inaccessible to target households At least 80% of households meet education conditions regularly At least 80% of households meet health conditions regularly At least 80% of women and men attend monthly family development sessions Local area maps are produced showing locations of (i) target households; (ii) health facilities, day-care centers, schools; (iii) payment windows; and (iv) location and quality of roads. 3. Strengthened capacity for CCT program operations By 2011: Central and local project management structures established. At least 200 central and local staff acquire knowledge on gender analysis, indigenous people sensitivity, and prevention of sexual harassment. Detailed work schedule and budget plans (DSWD) Training and workshop records (DSWD) Project management meeting minutes (DSWD) Audit reports MIS (DSWD) Risks Lack of implementation capacity Political interference in compliance verification Gender action plan implemented Participatory gender audits and community-driven gender action plans piloted in 12 municipalities 4. Improved systems for monitoring and evaluation of social protection programs MIS is established and functioning to support payments, verification, updates, and grievance system. 90% of grievances received are resolved within established time protocol Spot-check surveys MIS (DSWD) Impact evaluation of the 4Ps (DSWD) Records of grievance redress system (DSWD) Risks Difficult to find control sites for impact evaluation Political interference in grievance redress system At least two rounds of spot checks (for the 4Ps) of schools, clinics, municipal links, and beneficiary households carried

Appendix 1 13 Design Summary Performance Targets/ Indicators with Baseline out annually Impact evaluation report based on first follow-up survey Data Sources/ Reporting Mechanisms Assumptions and Risks Activities with Milestones Inputs 1. NHTS-PR to select poor households implemented and functioning efficiently ADB: $400 million 1.1 Household assessment in set 3 areas, and registration of poor households into the Item Amount NHTS-PR database (Q3 2010; updates through Q2 2015) ($ million) 1.2 Completion of list of potential beneficiaries of the 4Ps, using the NHTS-PR PMT, Output 1 3.7 for all sets (Q3 2010) Output 2 362.5 1.3 NHTS-PR PMT targeting mechanism applied in two other national programs Output 3 21.6 (by Q2 2015) Output 4 4.5 2. Conditional health and education cash grants provided to poor households Contingencies 7.7 2.1 Set 2 and set 3 beneficiary household validation, Land Bank enrollment, and identification card distribution (by Q3 2010) Government: $484.2 million 2.2 Distribution of cash cards to beneficiaries (initiated in Q3 2010, completed by Q4 Item Amount 2011) ($ million) 2.3 Preparation and DSWD transmission to Land Bank of beneficiary payrolls for every Output 1 10.0 quarter of 2010 2015 Output 2 436.0 2.4 Payments of 4Ps grants to Set 2 and set 3 beneficiaries (quarterly) Output 3 16.7 2.5 Computerized compliance verification system operating for set 3 by Q1 2011 and used as basis for all subsequent grant payments Output 4 0.7 3. Strengthened capacity for CCT program operations Financing charges 20.8 3.1 Mobilization of additional staff as per new staffing plan under approved reorganization, including hiring of contractual staff for the national project Capacity Development TA: management office and regional project management office (by Q4 2010) $1,000,000 3.2 Completion of supply-side assessment and analysis (by Q2 2011) ADB: $800,000 3.3 Training and capacity building (periodic, during Q3 2010 Q4 2015) Government: $200,000 3.4 Information dissemination (periodic; Q3 2010 Q4 2015) 3.5 More efficient institutional mechanisms for providing grants to remote beneficiaries Gender TA: in place by Q4 2012 Gender and Cooperation 3.6 Piloting of participatory gender audits and community-driven gender action plans Development Fund: $300,000 (Q3 2010 Q4 2012) Government: $125,000 4. Improved systems for monitoring and evaluation of social protection programs 4.1 By Q4 2010, launch of core modules for computerized MIS: (i) household information, (ii) registration, (iii) verification, (iv) payments, (v) updates, and (vi) grievance redress system 4.2 Fully integrated computer-based MIS operating by Q2 2011 4.3 Development and testing of spot-checking methodology (Q3 2010) 4.4 Actual spot checking and reporting twice a year (Q3 2010 Q4 2015) 4.5 Monitoring and evaluation studies (Q4 2010 Q3 2015); final reports by Q3 2015 4Ps = Pantawid Pamilyang Pilipino Program (Building Bridges for the Filipino Family Program), ADB = Asian Development Bank, CCT = conditional cash transfer, DSWD = Department of Social Welfare and Development, MDG = Millennium Development Goal, MIS = management information system, NHTS-PR = national household targeting system for poverty reduction, NSCB = National Statistical Coordination Board, NSO = National Statistics Office, PMT = proxy means test, Q = quarter, TA = technical assistance.