Public Disclosure Authorized Report No. PID4841 Project Name Philippines-Local Government Finance (@+)... & Development Project (LOGOFIND) Region East Asia and Pacific Region Sector UY - Other Urban Development Project PHPE48588 Borrower Republic of the Philippines Public Disclosure Authorized Implementing Agency Environment Category Date PID Prepared February 19, 1999 Projected Appraisal Date Department of Finance, Department of Interior and Local Government, and Participating Local Government Units B June 30, 1998 (Actual) Projected Board Date March 23 1999 Public Disclosure Authorized Public Disclosure Authorized 1. Country and Sector Background Urban finance and development in the Philippines is characterized by four challenges: (i) underdeveloped capital markets for Local Government Units (LGUs) financing; (ii) weak local capacity in delivering local services and in managing and financing infrastructure projects; (iii) limited local resource mobilization; and (iv) poorly organized information to monitor LGU fiscal performance. Underdeveloped capital markets. While long-term financing is presently scarce in the Philippines, the LGU credit market is particularly underdeveloped. LGUs are almost completely dependent upon Government Financial Institutions (GFIs) and the government-backed Municipal Development Fund (MDF) for credit financing. Indeed, the MDF -- which has served as the main conduit for official development assistance (ODA) loans and grants to LGUs -- is presently the only source of long-term credit for LGUs. GFIs typically lend to LGUs on short-to-medium terms for revenue-generating projects. Private commercial banks are generally unwilling to lend to LGUs, due to difficulties in assessing the riskiness and profitability of LGU lending. A few LGUs have considered issuing bonds to raise long-term capital, but the bond market is also underdeveloped and transaction costs are high. Numerous Build-Operate-Transfer (BOT) transactions are being explored by LGUs, but few deals have been closed yet. Weak local capacity. Since the 1991 legislative passage of the Local Government Code, LGUs have taken more responsibility and initiatives for improving local service delivery. Nevertheless, LGUs generally lack the managerial and financial capacity to meet the expanding demand for better services. Given
their limited technical and financial resources; inexperienced staff; weak (or non-existent) creditworthiness; and lack of familiarity with the procedures, rules and regulations governing private sector transactions like bond flotation, commercial bank loans, and BOT projects, most LGUs cannot access private financing to support their development projects. Limited local resource mobilization. On average, LGU local revenues account for only one-third of total revenues; the remaining two-thirds represents intergovernmental transfers (i.e. IRA). LGUs often lack the administrative capacity and political will to collect taxes efficiently, and they must do more to enhance their own revenues through the imposition of fees and user charges for services like water supply and solid waste management. Poorly organized fiscal information. Existing LGU financial data are often released with considerable delays, contain inconsistencies, and are presented in a format that is difficult to understand. The national government?s oversight and supervision of LGU finances remains relatively weak, and at present, there are few incentives to induce improved LGU fiscal performance. Also, currently there is no national policy to deal with financially weak or bankrupt LGUs. At the LGU level, financial reporting, disclosure and dissemination must be improved to allow the general public and potential private investors to understand and assess LGU finances. GOP policy framework. The Government of the Philippines (GOP?s) policy framework for LGU financing outlines the respective roles of various participants in LGU financing, and promotes local self reliance by reducing LGUs' dependence on the national government and concurrently expanding LGU access to private credit. Dependence on the national government will be reduced by: (a) enforcing a?graduation policy? whereby the more creditworthy LGUs access private sources of capital through commercial-bank loans, bonds, and BOT-type arrangements, and (b) limiting national government grant funds to the social and environmental aspects of local investments. GFIs and the MDF would play a complementary and subsidiary role to these private sources, and would refrain from lending to more creditworthy LGUs. The MDF is a key instrument for implementing the policy framework for LGU financing. The project is designed to operationalize the GOP's policy framework by reorienting and strengthening the MDF to: (a) enhance its role in helping resource-poor LGUs to establish a track record of creditworthiness and improve their capacities for planning, financial and project management; (b) support LGU projects with environmental and social objectives that are characterized as "non-bankable" due to their long gestation period and lack of identifiable revenue stream; (c) strengthen its own technical capacity to evaluate and monitor LGU credits and grants and oversee implementation of the GOP's new graduation policy for LGUs; and (d) promote access to ODA funding. 2. Objectives The main project objective is to assist participating Local Government Units in expanding and upgrading their basic infrastructure, services and facilities and in strengthening their capacities in municipal governance, investment planning, revenue generation, and project development and implementation. It would also enhance capabilities at the national level to provide technical support and long-term financing to local governments through the MDF. - 2 -
3. Rationale for Bank's Involvement In designing and preparing this project, the Bank incorporated its global and Philippines-specific knowledge of municipal finance and overall capital market development. Through its support on establishing an LGU financing policy, the Bank has gained credibility with both the national government and the donor community in the Philippines, which look to the Bank for leadership in implementing projects and other actions supporting this new policy. 4. Description A. LGU subprojects: This component would support subprojects for the expansion, rehabilitation and improvement of basic infrastructure, social and environmental services and facilities under LGU responsibility. As the project follows a demand-driven approach, LGUs would be given a choice of eligible subprojects to undertake. Financing under this component would be targeted to LGUs in the 3rd through 6th income classes, in line with the government's policy of encouraging more creditworthy (and higher income class) LGUs to tap market-based financing. Higher-income LGUs in the 1st and 2nd income classes could also access LOGOFIND funding on a case-by-case basis for social and environmental subprojects. B. LGU Training and Capacity Building: This component would support LGU training and capacity building for (i) subproject development and implementation; (ii) municipal planning, finances, and management; (iii) improved training modules and delivery mechanisms; and (iv) piloting of new programs including distance learning; LGU twinning; collaboration with the Leagues of local governments, NGOs and the private sector; conferences and workshops; and a rapid-response ("just-in-time") technical assistance to LGUs. This component would be coordinated and managed by the DOF. It is likely that the Municipal Training Program (MTP) of the DILG's Local Government Academy (LGA) will play a key role in the implementation of this component. The componenet would finance (a) the cost of training including training materials, equipment and allowances, and payment to trainers; and (b) project staff development, and advisory and consulting services. C. LGU Resource Mobilization and Monitoring: This component would support LGU Resource Mobilization and Monitoring including: (a) expanding the Real Property Tax Administration (RPTA) Program to achieve nation-wide coverage; (b) piloting new initiatives to help LGUs improve creditworthiness and revenue generation; and (c) developing and implementing systems to improve monitoring of LGU fiscal performance and local financial reporting and disclosure. This component would be administered by the Bureau of Local Government Finance of the DOF, and would finance consultancy services, contractual staff, equipment and supplies, and training of staff. D. MDF Reorganization and Strengthening: This component would support the MDF Reorganization and Strengthening to implement, on a phased basis, new institutional structures; streamlined procedures and approvals; decentralized (field) operations; and contracting and training of management and staff. Specific activities funded under this component include: (i) salaries of contracted staff; (ii) office equipment and technology; (iii) operating costs of the MDFO Central and field offices; and (iv) MDF staff development and technical assistance. 5. Financing -3-
Total ( US$m) Government 33.7 IBRD 100 IDA 0 Total Project Cost 133.7 6. Implementation The DOF will be the lead executing agency, and will provide overall policy guidance and management of LOGOFIND. The DOF will use the MDF to channel loans and grants to participating LGUs, which will be responsible for subproject preparation and implementation. The Bank and the DOF have agreed on a plan to reorganize the MDF. This plan will include a phased-approach to spinning off or transferring the functions and responsibilities of the MDF to an existing or new financial institution. The plan is expected to take several years to implement fully considering the budgetary constraints affecting government operations and the possible need for executive issuances or enabling legislation. The LOGOFIND project, though loan conditionality and financing, would support the MDF reorganization and strengthening. The Local Government Academy (LGA) of Department of Interior and Local Government (DILG) is likely to play a key role in implementing the LGU training component. It will continue to maintain a small core staff established to implement the Municipal Training Program supported by several World bank projects, and rely mainly on consultants and others to develop and deliver training to participating LGUs. The BLGF of DOF would be responsible for implementing the LGU Resource Mobilization and Performance Monitoring component of the project, working closely with other parties at the national and local levels. 7. Sustainability A key determinant of project sustainability is the inclusion of appropriate incentives, conditionality and support for participating LGUs to improve their financial and management performance, so that they can become fully creditworthy over time and thus, graduate to GFI or private sources of funding. Project sustainability will be further enhanced by: (a) requiring an LGU equity contribution (which heightens their sense of ownership in the subproject); and (b) developing managerial and financial capabilities (through training and technical assistance) that will establish institutional sustainability even after subprojects have been completed. 8. Lessons learned from past operations in the country/sector The proposed project would be the fourth in a series of municipal development operations, dating back more than a decade, in which the Bank has used the MDF to on-lend funds to LGUs in the Philippines. The MDF has proven to be an effective mechanism in providing LGUs with direct access to long-term, affordable credit and in collecting loan payments from LGUs (at present it has no arrears.) The Operational Evaluation Department (OED) audit of the first and second municipal development projects indicates that their success reflects their demand-driven approach to generate sub-projects from LGUs, and their sequencing of institution building before the actual physical investments. Most of the - 4 -
sub-projects -- such as public markets, bus terminals and slaughterhouses -- generate revenues for LGUs. The audit confirmed that once LGUs completed and learned from these revenue-generating projects, they were willing and able to borrow for other types of projects with high social and environmental impacts such as water supply and health-related services. The OED audit also noted that the projects helped to establish a solid institutional base for LGU training and capacity building (through the LGA's Municipal Training Program). In addition, the OED audit recognized the value of the Real Property Tax Administration (RPTA) program to help LGUs capture tax revenues associated with rising property values. The Bank's worldwide experience in providing credit financing to local governments through municipal development funds or intermediaries is mixed. The key lessons learned from the more successful experiences are that: (a) there must be strong government commitment to the financial integrity of the intermediary's operations (i.e., no political interference in its lending and collection decisions), (b) the viability of any lending program depends on the financial health (i.e. creditworthiness) of its borrowers and the stability of the economy as a whole; and (c) the role of the government-backed intermediary should be seen as an interim solution to facilitate more direct relationships between municipal governments and private capital markets. These lessons have been fully incorporated into the design of the proposed project. 9. Program of Targeted Intervention (PTI) No 10. Environment Aspects (including any public consultation) Issues : The environmental impacts will be low to moderate and localized to sub-project locations. The project will finance improvements to municipal services and expansion of basic infrastructure in about 200 LGUs. Environmental safeguards will be adequately adhered to in the design of the sub-projects, so that environmental problems can be avoided. For projects of this nature, category B is assigned. An overall framework has been developed to manage the subsequent sub-project environmental impacts consistent with Bank and GOP policies. Additionally, for the most commonly-financed subprojects (e.g., public markets and slaughterhouses), sound environmental practices are being incorporated in the prototypical design. This design will recommend minimum norms to be maintained for wastewater collection and treatment and garbage collection and disposal related to these subprojects. The project will also assist to enhance and deliver the environmental training modules offered to LGUs. This is expected to improve the skills of local government officials and also provide opportunities for the private sector and community groups to be engaged in environmental assessment and monitoring. During the preparation of LOGOFIND, technical staff working with the MDF received training of the Bank's environmental and social requirements and municipal environmental management. Follow-on training will be supported under the project. 11. Contact Point: The InfoShop The World Bank 1818 H Street, N.W. -5-
Washington, D.C. 20433 Telephone No. (202)458 5454 Fax No. (202) 522 1500 Task Manager Thomas L. Zearley The World Bank 1818 H Street, NW Washington D.C. 20433 Thomas Zearley Principal Operations Officer EASUR; Room MC8-355 Tel: (202) 473-8758 Fax: (202) 522-1787 Note: This is information on an evolving project. Certain activities and/or components may not be included in the final project. Processed by the InfoShop week ending February 26, 1999. Annex Because this is a Category B project, it may be required that the borrower prepare a separate EA report. If a separate EA report is required, once it is prepared and submitted to the Bank, in accordance with OP 4.01, Environmental Assessment, it will be filed as an annex to the Public Information Document (PID). If no separate EA report is required, the PID will not contain an EA annex; the findings and recommendations of the EA will be reflected in the body of the PID. -6-