Document ofThe World Bank

FOR OFFICIAL USE ONLY

Report No: 22213-PH

IMPLEMENTATION COMPLETION REPORT(CPL-34550; SCL-3455A)

ONA

LOAN

IN THE AMOUNT OF US$68 MILLION EQUIVALENT

TO THE

REPUBLIC OF THE PIHLIPPINES

FOR A THIRD MUNICIPAL DEVELOPMENT PROJECT

June 28, 2001

Urban Development Sector UnitEast Asia and Pacific Region

This document has a restricted distribution and may be used by recipients only in the performance of theirofficial duties. Its contents mnay not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective December 31, 2000)

Currency Unit = Peso (PhP)PhPI = USS 0.02

US$ 1 = 49.9

METRIC SYSTEM

FISCAL YEARJanuary I December 31

ABBREVIATIONS AND ACRONYMS

BLGF Bureau of Local Government FinanceBOT Build-Operate-Transfer (also BOO, BTO-- different forms of private sector participation)CAS Country Assistance StrategyCDS City Development StrategyCOA Commission on AuditCPO Central Project OfficeDBM Department of Budget and ManagementDlLG Department of the Interior and Local GovemmentDOF Department of FinanceDPWH Department of Public Works and HighwaysEIRR Economic Internal Rate of RetumFIRR Financial Internal Rate of ReturnGOP Government of the PhilippinesIDF Institutional Development FundIRA Internal Revenue AllotmentLGA Local Government AcademyLGC Local Government CodeLGU Local Government UnitLLA Local Loans AccountLOGOFIND Local Government Unit Finance and Infrastructure Development Project (Ln. 4446)MDF(O) Municipal Development Fund (Office)MDFGB Municipal Development Fund Goveming BoardMDP Municipal Development ProjectMTP Municipal Training ProgramPHRD Population and Human Resource Development Grant (of Japan)PGB Policy Governing BoardPSA Project Support AccountPSC Project Steering CommitteeRPTA Real Property Tax AdministrationRPTU Real Property Tax UnitSPAR Subproject Appraisal Report

Vice President: Mr. Jemal ud-din Kassum, EAPVPCountry Manager/Director: Mr. Vinay Bhargava, EACPF

Sector Manager/Director: Mr. Keshav Varmna, EASURTask Team Leader/Task Manager: Mr. Toru Hashimoto, EASUR

IMPLEMENTATION COMPLETION REPORTPHILIPPINES: THIRD MUNICIPAL DEVELOPMENT PROJECT

CONTENTS

Page No.1. Project Data 1

2. Principal Performance Ratings 1

3. Assessment of Development Objective and Design, and of Quality at Entry 24. Achievement of Objective and Outputs 4

5. Major Factors Affecting Implementation and Outcome 9

6. Sustainability 11

7. Bank and Borrower Performance 12

8. Lessons Learned 169. Partner Comments 17

10. Additional Information 17Annex 1. Key Performance Indicators/Log Frame Matrix 24

Annex 2. Project Costs and Financing 27

Annex 3. Economic Costs and Benefits 31

Annex 4. Bank Inputs 32

Annex 5. Ratings for Achievement of Objectives/Outputs of Components 34

Annex 6. Ratings of Bank and Borrower Performance 35

Annex 7. List of Supporting Documents 36

Project ID: P004592 Project Name: Third Municipal Development ProjectTeam Leader. Thomas L. Zearley TL Unit: EASUR

ICR Type: Core ICR Report Date: June 28, 2001

1. Project Data

Name: Third Municipal Development Project L/C/TF Number: CPL-34550;SCL-3455A

CountryiDepartment: PHILIPPINES Region: East Asia and PacificRegion

Sector/subsector: UM - Urban Management

KEY DATESOriginal Revised/Actual

PCD: 04/24/1990 Effective: 08/03/1992Appraisal: 06/13/1991 MTR:Approval: 03/31/1992 Closing: 06/30/1999 12/31/2000

Borrower/lmplementing Agency: GOP/DPWHOther Partners:

STAFF Current At AppraisalVice President: Jemal ud-din Kassum Attila KaraosmanogluCountry Manager: Vinay K. Bhargava Callisto MadavoSector Manager: Keshav Varma Jeffrey GutmanTeam Leader at 1CR: Thomas Zearley Yoshine UchimuraICR Primary Author: Lito League; Toru Hashimoto

2. Principal Performance Ratings

(HS=Highly Satisfactory, S-Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=HighlyUnlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, NI=Negligible)

Outcome: S

Sustainability: L

Institutional Development Impact: SU

Bank Performance: S

BorrowerPerformance: S

QAG (if available) ICRQuality at Entry: S

Project at Risk at Any Time: YesThe OAG had not been esrablished at the tinme of project preparation, so a rating is not available.

3. Assessment of Development Objective and Design, and of Quality at Entry

3.] Original Objective.

Background. The Third Municipal Development Project (MDP III) was designed to assist citiesand municipalities in the Philippines to address existing deficiencies and improve priority infrastructure,services and facilities for their residents by strengthening the National Government's institutionalframework for assisting local governments, including their planning and management capabilities. It wasthe third in a series of Bank-assisted projects to promote local government development and improve localgovernment access to credit financing. Based on the success of the first two MDPs, MDP III was tosupport the further evolution of the system applied in the previous MDPs, which adopts a demand-driven,bottom-up approach to determining participants.

Objectives: The principal objectives of the loan were to assist Philippine cities and municipalitiesin expanding and upgrading their infrastructure, services and facilities by: (a) strengthening the NationalGovenmment's institutional framework for assisting local governments; (b) strengthening the localgovernments' investment planning, financing and implementation capacity; (c) strengthening the localgovernment's maintenance capacity; and, (d) improving local fiscal performance.

The objectives were clearly defined and generally consistent with the Bank's evolving strategy forthe urban/local government sector in the Philippines. The project was generally responsive to theborrower's circumstances and priorities, as it coincided with the passage of the Local Government Code(LGC) of 1991 in which many national government functions were devolved to the Local GovernmentUnits (LGUs). In this regard, the project provided the much needed support for LGUs in upgradinginfrastructure facilities, capacities, and revenue-generating programs. The project was consistent andresponsive to the Government's decentralization program by targeting assistance to LGUs. By adopting abottom-up, demand-driven approach, the project's objectives were realistic because LGUs were given theresponsibility of selecting projects that they could complete within the context of their technical andfinancial capabilities, as well as the project's implementation period. The project's design adopted theapproach of the two previous MDPs and, therefore, did not involve any major project risks. The potentialproject risks identified in the Staff Appraisal Report (SAR) included:

(a) acceptability of moving toward market rates for municipal lending;(b) technical and managerial limitations of the local governments;(c) project office's capability to handle a larger number of cities/municipalities than in the past; and(d) political uncertainty surrounding the upcoming (1992) presidential elections.

The project was not designed with perfonnance indicators such as those included in current docurnentation,nor was it retrofitted with indicators when the logframe tool was introduced in the late 1990s, because itwas felt the project's closing date was too soon to make a significant difference.

3.2 Revised Objective:n.a.

3.3 Original Components:The objectives above were to be achieved through a series of physical investments by the

Department of Public Works and Highways (DPWH) and LGUs, local resource mobilization efforts forReal Property Tax Administration (RPTA) and technical assistance to the main national implementingagencies such as DPWH, and Department of Finance (DoF). The project was a continuation and expansionof the approach developed under MDP I and MDP II and consisted of:

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(a) Subprojects. Subprojects included basic infrastructure (installation of communal faucets;construction of wells; construction of communal sanitation facilities; construction andrehabilitation of drainage canals and pipes; and improvement of existing alleys, footpaths andlocal roads); public facilities (construction and rehabilitation of public markets,slaughterhouses and motorpools) and equipment (provision of road and drainage maintenanceequipment; utility vehicles and computers for record management). These subprojects weredivided into local component-funded projects, which refer to projects that are implemented andmaintained by the LGU, and the national component-funded projects, which include projectsthat are implemented and maintained by the DPWH;

(b) Maintenance Program: Improved rnaintenance planning and implementation in selected pilotcities and municipalities;

(c) Real Property Tax Administration: Assistance to LGUs to improve the preparation of taxmaps, to improve real property tax records management, to increase real property taxcollection and to computerize the management of real property information;

(d) Municipal Training Program: Training of local officials in, among others, municipal planning,fiscal management, contract management and environmental assessment; and

(e) Technical Assistance: for (i) a study of institutional options for further lending to localgovernments; and (ii) an environmental sanitation and solid waste study.

The project components were aptly designed to address the needs of LGUs as well as strengtheningthe capacity of national government agencies in assisting them. By adopting a bottom-up, demand-drivenapproach, the reasonableness of achieving the project objectives within the implementation period wasassured. In addition, the combination of project components was appropriate to ensuring that LGUs hadaccess to the necessary technical and financial assistance to achieve the project's objectives. Theexperience of the implementing agencies with the previous MDPs improved their capacity in dealing withthe problems that arose during implementation of MDP3. In particular, the Central Project Office (CPO)was instrumental in ensuring smooth vertical and horizontal coordination during implementation.

The project design incorporated key lessons leamed in the previous urban sector projects in thePhilippines. More specifically it aimed at: (a) introducing approaches to optimize limited local resources;(b) strengthening LGU capacity to plan investments, implement projects, operate and maintain services,and institute proper pricing policies to ensure cost recovery; and (c) providing LGUs essential access tofinancial and technical resources for basic municipal services.

3.4 Revised Components:The Technical Assistance component was dropped from the project when funding was made

available through a grant from the Japanese Govermment. The Municipal Lending Study was undertakenthrough an IDF Grant, while the Urban Environmental Solid Waste Management Study was completedthrough a PHRD Grant. This component was dropped after the project became effective, and the loanfunds of US$1.3 million were reallocated in 1998 to fund the consultancy and training requirements ofother project components.

3.5 Quality at Entry:Overall. quality at entrv is rated satisfactorv. The project was consistent with the Bank's CAS

objectives of strengthening municipal management and increasing the level of resources available to localgovernments through improved access to loan financing. At the same time, it also supported theGovernment's priorities and decentralization policies with the timely passage of the Local GovermmentCode of 1991. Overall, the project's design, incorporating a participatory, demand-driven selection

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process, was instrumental in its successful implementation. The combination of the project'scomponents-namely subproject selection, project-related training and strengthening real property taxcollection-was suited to meet its objectives. The design appropriately addressed the needs of LGUs forupgrading infrastructure facilities, technical capacities of LGUs, and improving municipal managementthrough improved resource mobilization and fiscal management, investment planning, projectirnplementation and maintenance operations. The assumptions with regard to potential risks to projectimplementation were reasonable and were appropriately identified at appraisal. The project componentswere evaluated as having minimal environmental impacts at appraisal. Specifically, the subprojectscomponent, which includes the construction of infrastructure facilities, met the Bank's standards forenvironmental and social concerns and therefore complied with the Bank's safeguard policies.

Risk Assessment. The project risks with regard to generic assumptions about external risks to theproject were very reasonable and had a negligible impact on the project. The Asian financial crisis of 1997and its impacts on the project and the country as a whole could not have been forecast at appraisal. Projectspecific risks were also identified early on at appraisal and had limited impacts on the project. Specifically,the reorganization following the local and national elections held in 1995 and 1998 caused implementationdelays due to changes in priorities, delay in assigning signatories, and submission of incompletedocumentation. It was during this period (June 1995 to June 1996) that the project was ratedunsatisfactory.

4. Achievement of Objective and Outputs

4.1 Outcome/achievement of objective:The overall project outcome is rated satisfactorv. The project successfully achieved its physical

objectives of assisting LGUs to provide basic municipal infrastructure, services and facilities. Inparticular, revenue-generating projects, such as public markets, have in most cases, expanded the revenuebase of LGUs and provided income-generating opportunities for residents, in addition to improvedfacilities. Based on sample calculations, the project has satisfactory economic (EIRRs) and financial ratesof return (FIRSs). Sample economic and financial rates of return calculated for four projects revealEIRRs between 10-29%, as against the EIRR of 15% established at appraisal. (See details in annex 3.) Theproject has sustained the achievements of previous MDPs in attaining institutional development objectives.It successfully continued the development and strengthening of national support mechanisms for financialand technical assistance to LGUs.

The institutional development impact on participating LGUs as in previous MDPs has beensubstantial. LGUs gained both knowledge and hands-on experience in various aspects of municipalmanagement and development such as project planning and preparation, development and capitalinvestment planning, detailed engineering design, procurement and contract supervision, implementationsupervision, financial management, resource mobilization, environmental management and operation ofmunicipal services and enterprises, that can be applied to future capital investment and municipal serviceoperations. The skills acquired by the participants were not only useful as they related to the project, butalso set the foundations for improved municipal governance and LGU performance. The trainingcomponent highlighted the gaps in the technical capacity of the country's LGUs and brought to fore theimportance of extending financial as well as technical assistance in improving local govemrnmentperformance. More than anything, the project emphasized the need for LGUs to re-evaluate theirmanagement styles to adapt to the needs of rapidly urbanizing centers in light of the govemment'sdecentralization policies.

In addition to upgrading their skills, the project successfully established national support

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mechanisms for financial and technical assistance to LGUs. The MDF has established itself as a long-termcredit window for eligible LGUs. Although this objective has not yet been fully achieved, the groundworkhas been laid for its originally envisaged function as a revolving fund facility for LGUs. The CPO becamea capable technical agency to support LGUs in municipal infrastructure planning and provisions.

The project also achieved its financial objectives. The real property tax component enabled thesignificant expansion of the tax bases in rapidly urbanizing LGUs and emerging urban centers and provideda basis for increasing locally generated resources. The project also substantially achieved the national fiscalobjective of shifting gradually from grant financing to loan financing for capital investment projectsundertaken by LGUs. The maintenance component of the project, however, did not substantially achieveits objective of strengthening the local govenmment's maintenance capacity, as exhibited by the diminishingsupport it generated as the project progressed. While the project's design was intended to institutionalizethe importance of maintenance in LGU development, it failed to take into account the ability of LGUs toprovide increasing equity over the implementation period, and therefore was not able to sustain LGUparticipation in the project.

The project partially achieved its sector policy objectives and public sector management objectives.The separation of national support functions among three agencies, namely the CPO (technicalintermediary), Bureau of Local Government Finance/Municipal Development Fund (financial intermediary)and LGAIMTP (capacity building) created some constraints in overall project implementation.Furthermore, the project design of the MDP III provided little incentive for LGUs to extend coverage ofnon-revenue generating infrastructure in social and environmental sectors, especially to the lower incomecommunities.

4.2 Outputs by components:Subproject Component

The project substantially achieved and, in some participating LGUs, exceeded its physicalobjectives. A total of 75 LGUs spread throughout 11 regions benefited from the subproject component ofthe MDP Ill. As in the previous MDPs, the majority of the sub-projects included revenue-generatingfacilities such as the construction and rehabilitation/expansion of public markets (56 units) andslaughterhouses (six units). Other subprojects included transport terminals, water supply systems, amunicipal port, school buildings, health centers, traffic management systems, roads and bridges, and shoreprotection facilities which were classified as local components, while other national level subprojectsincluded roads and bridges, drainage and flood control systems, shore protection and water supply systems.The public markets had the most visible benefits by providing more sanitary and hygienic facilities, bettercirculation and ventilation, increased market capacity to meet the demand for stalls, and improved mobility,comfort and convenience for both users and stall owners. Moreover, public markets triggered thedevelopment of adjacent areas into commercial spaces resulting in increased real property values andsubsequently real property tax collections.

Through the subprojects component, MDP satisfactorily achieved its objective of assisting LGUsin the provision of priority infrastructure facilities and services for their respective constituents. Moreimportantly, the projects had significant impacts on the fiscal and political autonomy of LGUs. Throughthe construction of revenue-generating projects, participating LGUs increased their fiscal autonomythrough improved local revenue collections. This improved their access to further MDF funds, and otherloans and grants. Politically, more autonomy gives municipalities a greater role in decentralizeddecision-making, and therefore supports the goals of the Local Government Code.

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Maintenance ProgramThe maintenance program component was implemented in eight project centers (municipalities of

Bauan, Pulilan and Los Banos and the cities of San Fernando (La Union), San Jose, Dipolog, Butuan andTagum) as targeted in the SAR. These subprojects undertaken under this component included therehabilitation of drainage systems, dredging of rivers and creeks, fabrication of canal and concrete covers,rehabilitation of municipal grading equipment, street lighting, electrical facilities, and market facilitiesamong others. Over the four-year implementation period of this component, the participating LGUsassumed an increasing share in the cost-sharing scheme with the national government. During the firstyear, the government assumed 70% of the funding requirements, followed by 50% and 30% in the secondand third years respectively, after which the local government assumed full funding for the project. Theobjective of the graduated investment scheme was to instill the ethic of maintenance and to developtechnical skills. Participating LGUs were selected from those who were willing to comrnmit the necessaryresources to improve their maintenance performance and had satisfactorily completed projects under MDPI.

The project only partially achieved its objective of strengthening the maintenance capacity ofLGUs through the implementation of the maintenance component. The primary reason was the inability ofinterested LGUs to provide the required counterpart funds as a pre-requisite for participation in the project.At the same time, participating LGUs experienced difficulties in meeting the equity contributions, in spiteof the graduated cost-sharing scheme with the lending agency. During implementation, the participation ofthe LGUs diminished as their share in the costs increased. This experience points to a design issue whichmay not have been the most appropriate means for achieving the intended objectives. Aside from notproviding appropriate incentives for participants to finish the four-year program, the component did notinclude a system for penalizing participants for not providing the scheduled counterpart funds.

Municipal Training Program (MTP)Between 1993 and 2000, the MTP component conducted 219 training courses with 9,169

participants from 74 participating LGUs, exceeding the appraisal estimate of 156 training courses. About87% of the participants included technical staff, while the remaining 11.89% were elected officialsincluding mayors, vice mayors and councilors. The range of courses conducted by the Local GovernmentAcademy were directed towards improving and strengthening the management, technical, and financialcapabilities of local government staff of its project centers, particularly as they relate to the planning,implementation and management of local infrastructure projects. Over a seven year period, the courseswere conducted in a classroom setting coupled with project site visits in various locations by in-house staffof the MTP-LGA and contract trainers. The most successful innovation thus far, the MTP component,was developed and implemented as training cum technical assistance, utilizing a tested pool of experts andconsultants in the various fields of local governance.

Conducted in 1999, a survey of 27 out of the 36 project centers revealed that the objectives of thecomponent were satisfactorily achieved as shown in the improved performance of technical staff and localgovernment units, particularly in the aspects of financial management and project implementation. Thelinkage between specific aspects of the sub-project implementation and operations, such as municipalfinance and revenue administration, construction supervision, contract management and procurement, andpublic enterprise administration further enhanced the "on-the-job" training aspect of the sub-projects andenhanced the demand for and relevance of the training. In particular, a number of LGUs have alreadyrevised and implemented their Local Revenue Code as the first step in improving local fiscal performance.At the same time, another positive outcome of this project is the institutionalization of teamwork within theLGU, which was the approach adopted in the conduct of the training courses and the promotion of

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inter-LGU cooperation where LGUs shared their newly acquired skills and experiences with other LGUs.The inclusion of elected officials and career employees in the training courses institutionalized the need forcooperation and coordination among the different departments in the LGU.

The experience with the training program under this project brings to fore the need to examineother modes of delivering the training courses to ensure the sustainability of the experience and knowledgelearned. MTP, in sustaining the gains of MDP III, has started to develop a wide range of trainingmethodology innovations that will suit the requirements of first to sixth-class LGUs. On the whole, all thetraining programs of the Municipal Training Program at the Local Government Academy (MTP-LGA)consistently and continuously sustained the gains of local autonomy. Particularly with the conduct of localelections every three years and the corresponding reorganization of the local staff, there is a need to ensurethat the gains of the project are carried over through subsequent administrations.

Real Property Tax Adniinistration (RPTA)The RPTA component of MDP III is a continuation of the same program implemented under

MDPs I and II. The objective of the program was to enhance real property tax administration in LGUsthrough the improvement of real property tax records management and the computerization of real propertydata. The program was implemented in 13 regions encompassing 427 LGUs and covering more than6.645M real property tax units (RPTU), exceeding the targets of 233 LGUs and 3.3 M RPTUsrespectively.

The component satisfactorily achieved its objectives, particularly in terms of exceeding the targetednumber of LGUs and RPTUs. Records show that total assessed values in participating LGUs increasedfrom PhP61.385B before project implementation, to PhP139.lB in CY 2000. This represents an increaseof 128%. Moreover, collectibles and actual collections, when compared with pre-implementation andpost-implementation figures, reveal an increase of 75% and 63% respectively for LGUs that implementedtax mapping, records conversion and tax collection, and an increase of 46% and 31% respectively forLGUs that conducted data conversion activities. It should be noted, however, that the growth may havealso resulted from the reclassification of properties from rural to urban uses, thereby increasing the numberof properties and value of the land, discovery of undeclared property units, and collection of delinquencies.Therefore, there is a need to further look into more detailed indicators, particularly in the longer-termimprovement of fiscal performance of LGUs.

Technical AssistanceAbout US$1.3M was allocated to conduct studies on municipal lending and urban enviromnent

solid waste management. The Municipal Lending Institution study was a review of the current status ofmunicipal lending in the country and identified options for institutionalizing it. The urban environmentalstudy deemed to review the legal framework governing solid waste operations in order to formulatemeasures for strengthening policy guidance, supervision, technical assistance to local governments, andtraining of local officials at the national level.

This component was eventually dropped from the project when funding to conduct the studies wasmade available through a grant from the Japanese Government. The Municipal Lending Study wasundertaken through an Institutional Development Fund (IDF) Grant, while the Urban Environmental SolidWaste Management Study was completed through a Japanese Population and Human ResourcesDevelopment (PHRD) Grant. This component was dropped after effectiveness, and in 1998 the loan fundswere reallocated to fund the consultancy and training requirements of other components.

Other Achievements

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The project only partially achieved its sector policy objectives and public sector managementobjectives. In particular, the project design provided little incentive for LGUs to extend coverage ofnon-revenue generating infrastructure in social and environmental sectors to the lower income communities.In addition,_ due to the perceived potential cost recovery risks, few public goods type infrastructure werefinanced in MDP III. The MDP 11I did not completely achieve the objective of evolving the MDF as aself-sustaining financial intermediary as envisaged in the SAR. Under the MDP III, the MDF beganoperating as a special revolving fund through the operationalization of the Local Loans Account (LLA)account to finance part of the loan. At closing, it was estimated that about 27% of the project was fundedfrom second generation funds.

4.3 Net Present Value/Economic rate of return:Sample EIRR and FIRR for four revenue-generating projects were calculated. These include two

public markets, one integrated terminal and one slaughterhouse. Of the four projects, three had EIRRsranging between 14% to 29%, a figure which is higher than the 14% opportunity cost of capital in thePhilippines. This is however slightly lower that the 15% EIRR targeted at appraisal. (See annex 3 for moredetails.)

4.4 Financial rate of return:On the other hand, two of the four projects sampled showed FRRs ranging between 22% to 26%.

Due to low occupancy rates, one public market had an EIRR and FRR below 14%. Its performance isexpected to improve in the next few years when the market attains 100% occupancy of market stalls.Annex 3 shows the detailed cost benefit analysis for the four project centers.

4.5 Institutional development impact:The institutional development impact of the subproject component was substantial, particularly in

the aspect of providing "on-the-job" training for participating LGUs. The combination of going through thesubproject selection process, as well as the participation in the training programs conducted established agood training ground for fostering LGU autonomy in project preparation and irnplementation, as well asmobilizing local financial resources. The CPO of the DPWH established itself as a capable projectimplementation agency at the national level and acted as an effective technical intermediary in assistingLGUs in the preparation of subproject proposals and their subsequent implementation. The MTP providedthe needed training in project-related skills, such as municipal finance and revenue administration,construction supervision, contract management and procurement, public market administration, etc., whichwere aptly applied in a hands-on manner in the subprojects.

The institutional development impact of the maintenance component, however, was modest unlikethe other components, because it was not able to effectively inculcate the need to invest in the maintenanceof infrastructure facilities as intended. Instead of encouraging LGUs to raise revenues to fund maintenanceprojects, participating LGUs drew funds from their Intemal Revenue Allocation (IRA) to providecounterpart funding, thereby defeating the purpose. Furthermore, the project's design did not provideappropriate incentives, as well as penalties for participating LGUs to sustain the four-year program. Had itbeen successful in doing so, it should have been able to sustain LGU participation until project completion.But as it were, participating LGUs were not able to provide the required equity for the project towards thelatter part.

The MT? program's institutional development impact was also substantial in that participantsacquired the skills necessary to effectively carry out the project, from sub-project preparation toimplementation. Moreover, the training programs set the foundation for improved municipal govemanceand highlighted the need to expand technical capacity at the local level with respect to empowering LGUs in

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light of the government's decentralization policies and the country's rapid urbanization.

Through tax mapping, records conversion/management and improved tax collection, the project'sRPTA component contributed to improving the participating LGUs fiscal performance and management.As the LGUs primary source of revenue generation, the RPTA component effectively promotedinstitutional development at the local level where it was needed most.

5. Major Factors Affecting Implementation and Outcome

5.1 Factors outside the control of government or implementing agency:The Bank's delays in approving pro forna contract docurnents and in approving the policies for

determining the loanable amounts to LGUs set back project start-up by almost two years. Although theproject was approved in March 1992 and became effective the following August, actual releases began onlyin the first quarter of 1994 when the documents were finally approved. The contract docunents, whichconsisted of the sub-project and sub-loan agreements, and the bid documents for consultancy and civilworks, underwent a series of reviews and revisions by a succession of Bank officers from 1992 to late1994. It should be noted, however, that during the review period (1993-1994), the Bank was in the processof revising its Standard Bidding Documents for consultancy and civil works contracts for all Bank-assistedprojects, which at least partly explains the reasons for these delays. Assuming the pro-forma documentswere approved earlier, the project still would not have been able to meet the original target closing date, asother problems also hampered project implementation as discussed below.

Political changes following the local and national elections also caused substantive delays to theproject's implementation schedule. Changes in administration resulted in a shift in priorities in someparticipating LGUs, and in some cases led to their dropping out of the project. This was particularly truefor 10 LGUs which experienced changes in the composition of their local councils following the 1995 and1998 elections. As stipulated in the sub-loan agreement, participating LGUs had to secure a CouncilResolution indicating their commitment to the project. But because of the lack of support from theCouncil, these 10 mayors were not able to secure a resolution from the board and were, therefore, forced tocease participation.

Natural disasters such as typhoons, earthquakes, and volcanic eruptions interfered with theimplementation of sub-projects. In particular, the eruption of Mt. Pinatubo and the succeeding economicdifficulties that followed, required changes in the scope and costing for the three pilot centers (Bauan,Tanauan and Panabo) as these were prepared prior to the eruption. In addition, regular weatherdisturbances, particularly typhoons during the monsoon season, adversely affected project progress. Uponsuch occasions, some subprojects experienced work stoppages either due to the adverse weather conditionsor to delays in the delivery of construction materials. However, none of the subprojects were damaged bythese natural disasters.

The Asian Financial Crisis of 1997/98. The onset of the crisis saw the rapid devaluation of thePhilippine peso from the appraisal exchange rate of P24 to the dollar to P44 to the dollar in March 1998.Because of this, there was a need for additional peso counterpart or budgetary requirements for 1999 and2000, thereby necessitating expansion of the project's coverage. The additional funds could accommodateseven more project centers, but they had physical completion dates beyond the original completion/loanclosing dates. The loan closing therefore was extended by 18 months to accommodate the additionalLGUs.

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5.2 Factors generally subject to government control:

Cash/fund flow due to ceilings on loanable amount and the government's reimbursementprocedures. The cash flow problem was a two-pronged issue concerning the loanable amounts LGUs wereallowed to borrow according to the LGC, and the reimbursement procedures of the national govermment.These cash flow issues had already been identified in MDP II as the project suffered a similar fate.

The government's policy on loanable amounts for LGUs emerged as an issue in early 1994. TheDepartment of Finance (DoF) recognized the need to revise the formulas to determine the borrowingcapacity of LGUs, following the passage of the LGC, which stipulated a limit to the LGUs debt servicecapacity. (The provisions required that the annual debt service of LGUs should not exceed the estimatedrevenue of the LGU in the current fiscal year.) The Policy Governing Board (PGB) approved the revisedformula after one year in 1995. As a result, the sub-loan proposals of seven LGUs had to be revisedaccording to the new formula, which subsequently dictated a revision in their investment proposals due tothe reduction in their allowable sub-loans, not to mention necessitating changes in project scope and costs.

Fund releases following the Government's reimbursement procedures were also constrained by the GOPmonthly cash disbursement ceiling requirements. The National Government had monthly disbursementceilings for each of its agencies and for the entire government as a whole. Because of this provision, inaddition to the fact that the MDF sub-loans were included as on-budget items, fund flows to LGUs wereconstrained as the concemed agencies often exceeded their cash disbursement ceilings. Non-reimbursementof LGUs eventually led to project implementation delays.

Budgetary controls. Budget constraints presented a major cause of implementation delays, theprimary reason being that foreign assistance funds are included as part of a national agency's budget, inthis case the DoF, and therefore, are subject to budgetary ceilings set by the annual appropriations. Assuch, subloan releases were constrained by the ceilings, which more often than not exceeded thedepartment's annual budget. Subsequently, these issues resulted in the delay of release of funds for ongoingprojects and the deferment of those which had previously been scheduled. These combined factorssubstantially affected the pace of implementation and level of disbursement of the project. To address theseissues, the implementing agency, through the DoF and the Department of Budget Management (DBM),removed the MDF subloans from the budget lines of the DoF and put them in the queue for unprogrammedfunds. With regard to the cash flow issues, MDF tapped the PSA funds to provide bridge financing whilereplenishment requests were processed.

Local government reform The passage of the Local Government Code in 1991 presented anincreased number of opportunities for LGUs to direct their development, as well as raise much neededrevenues. The passage of this law had both positive and negative impacts on the project. Specifically, thesubstantial increase of the IRA under the LGC made the LGU's less dependent on locally generatedrevenues. It also had the effect of downgrading the significance of RPTA in the municipal finance systemand provided a disincentive for RPTA component expansion.

Self-selection process. Given the demand-driven, bottom-up approach, LGUs had positiveincentives to select priority sub-projects, and to manage their implementation effectively. The project hadbuilt-in public consultation mechanisms to secure positive support by affected vendors and beneficiarypatronage for most of the new facilities.

5.3 Factors generally subject to implementing agency control:

Proiect management. At the national level, project implementation was effectively carried out bythe CPO. Most of the participating LGUs cited the timely and appropriate technical support from the

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CPO as the single most important reason for timely subproject completion. As the project framework wasreplicated from MDPs I and II, the staff of the CPO and BLGF were able to deepen their understanding ofthe Barnc's procurement guidelines and disbursement procedures. The CPO was very proactive in its roleas the implementing agency and in most cases implemented timely solutions to issues hampering projectimplementation. On the other hand, at the local level, problems such as the weak technical capabilities atthe LGU level to manage and supervise civil works contracts, unfamiliarity of LGU officials with BankProcurement Guidelines, delays related to land acquisition, inappropriate feasibility studies and detailedengineering designs by consultants, and delays in completion of documentation for liquidations of loanreleases figure among the factors that adversely affected project implementation.

5.4 Costs andfinancing:Overall, the total financing requirements amounted to PHP3,480 M, which is slightly below the

appraisal estimate of PHP3,983 M. Total Bank financing amounted to PhP2,199 rmillion or 63% of thetotal project financing cost of PhP3,480 million. (Details are indicated in Annex 2.) Despite thecancellation of various components, the reallocation of funds from the maintenance program to the othercomponents, and the peso devaluation, the appraisal estimate was not met because: (a) the approvedsubloan estimate was not fully utilized by LGU's due to cost-savings during bidding; and (b) threesubproject centers (Dipolog City, Cagayan de Oro City and Bislig) did not complete their respectivesubprojects by closing resulting in cancellation. The project's original closing date was June 30, 1999; thefinal closing was December 31, 2000. The causes for implementation delays are elaborated upon in thepreceding paragraphs.

As indicated in the financing by component, this project was an effort towards strengthening LGUdevelopment from both the national and local levels through the provision of funds at various levels.Specifically, the creation and strengthening of MDF supports the Bank, as well as the govenmuent's shifttowards improving access to LGU funds. While the project did not completely achieve the objective ofevolving MDF as a self-sustaining financial intermediary as envisioned in the SAR, it set the stage for theunit's functioning as one through the use of second generation funds under MDF to finance part of the loan.As of Loan closing, it was estimated that about 27% of the project was funded from MDF funds.

6. Sustainability

6.1 Rationale for sustainability rating:Overall project sustainability and sustainability of the sub-projects are likely. All the participating

LGUs maintain local ordinances to impose appropriate public market and slaughterhouse fees. The newlycreated municipal facilities are generating sufficient revenues for operations and maintenance. There is aneed for a perfornance evaluation mechanism to provide an incentive framework to encourage LGUs toimprove maintenance, revenue mobilization and service delivery and overall local govemance.

Sustainabilitv of the MDP institutions. namely the MDF and the CPO is likely. The GOP'scomrnmitment to overall decentralization and national out-reach support programs remains high. Highdemand for MDF financing has resulted in a large number of LGUs receiving sub-loans, with a consequentsubstantial increase in MDF's accumulated repayments of interest and principals (second generation fund).The MDF started to function as a revolving fund under the MDP III with 30% of the sub-loans comingfrom this second-generation fund. The MDF has also experienced relative success as a long-term municipalfinance mechanism. At project closing, the MDF sub-loan collection rate was 100%. Of this total, 98% ofcollections camne through normal LGU sub-loan repayments of principal and interest due. The remaining2% of collections have been obtained through the application of the Internal Revenue Allotment intercept.

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The CPO has continuously upgraded the skills of its staff and established itself as a capabletechnical intermediary for LGU capital investment planning and execution. Under the MDP III, the CPOand BLGF staff in charge of the MDF have begun to work more closely. The BLGF/MDF staff are gettingmore involved with the CPO's appraisal activities, and both the BLGF/MDF and the CPO staff arecooperating to determine loanable amounts to sub-projects and to monitor the financial performance ofLGUs. A key question that remains to be answered is how to retain qualified staff in the public sector.The MDP III project staff of the CPO were hired on a co-tenninus bases with the project and less than halfthe MDP III staff are still retained in the CPO.

6.2 Transition arrangement to regular operations:The participating LGUs started the operation and maintenance of the assets created in the project

according to the respective sub-loan agreements. The main conditionalities of the sub-loan agreementswhich have direct implications on future operations are: (a) full repayment of the sub-loan; (b) maintaininglocal ordinance on market and slaughterhouse fee structures; and (c) sustaining the LGU MaintenanceTrust Fund. Most of the LGUs had some experience in operating and maintaining similar assets in thepast. The basic institutional framework already exists, staff are mostly on board and generally familiarwith their roles and functions.

MTP has continually upgraded its training courses to meet the needs of the participating LGUs.MTP-LGA has already identified the need to conduct orientation seminars for the Local Government UnitFinance and Development Project (LOGOFIND, Ln. 4446). The unit has also proposed to providenon-project related training, such as strategic planning, environmental planning and management,development planning, resource mobilization, financial management and others in an effort to sustain thegains experienced from this project.

The technical training conducted under the RPTA program can now be continued with thedevelopment of the CDRom/compendium on BLGF Fiscal Reference Tools, which can now be accessed byLGUs. In addition, the MTP, Ateneo University and RMA conduct training sessions for newly appointedLocal Treasurers, incumbent Provincial/City Treasurers and selected BLGF staff, ensuring that the RPTAprogram would continue to improve the quality of service, data, and most importantly, enhance LGUrevenue sources. Adequate operation and maintenance of the assets created in the project need to bemonitored during the follow-up projects with the MDF.

Performance evaluation. The implementing agency and their partners are in the process ofdeveloping performance indicators to evaluate the subsequent impacts of the project. These, however, haveyet to be finalized. Under the RPTA program, annual reports will be compiled to measure: (a) realproperty tax collections; (b) real property tax collectible; (c) expenditures through RPTA program; and (d)recurrent expenditures of the assessor's office and land tax division.

Bank follow-up. The GOP envisaged undertaking further strengthening of MDP institutions underLOGOFIND. To improve the efficiency and effectiveness of the MDF operations, GOP has consolidatedits financial and technical functions into the MDFO which is a separate unit in the DOF. GOP also intendsto strengthen the policies and institutional capacity of the MDFO overtime to carry out its newresponsibilities. Currently, MDFO focuses its attention more on the resource-poor LGUs and encourageslocal social and environmental projects.

7. Bank and Borrower Performance

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Bank7.1 Lending.

The Bank's performance in identification was satisfactory. The concept and design of the MDPIII effectively incorporated the innovative institutional framework devised in the MDP I, and the lessonslearned from the previous urban sector projects. As in the MDP II, & I the Bank designed a simple andfocused project with a limited number of components unlike the early urban sector projects. It relied on theinnovative "bottom-up" demand-driven approach, which induced strong local participation and projectownership. The design of the project was consistent with the Government and the Bank strategies tostrengthen the financial autonomy of LGUs and to improve their capacity for managing urban growth.

The Bank's performance in project preparation was satisfactory. In preparation the Bankprovided ample guidance to the borrower in all major aspects of the project: technical, financial, economic,institutional. The Bank made sure that the relevant safeguard policies were adhered to which, for MDP IIImeant only environmental assessment. Two preparation missions were conducted with an economist, afinancial expert and an engineer represented. The personnel in the mission were very familiar with theresults of the first two MDPs, and successfully incorporated that experience and lessons learned into MDPHiI.

The Bank's performance in appraisal was satisfactory. The Bank's appraisal team had a wellrounded skill mix consisting of an economist, a financial analyst, and an engineer. With the solidbackground gained during the implementation of the two previous MDPs, the appraisal team was familarwith the lessons from those projects and successfully incorporated them into MDP m. In addition, theteam's experience enabled it to correctly assess the strong commitment of the government, implementingagencies and beneficiaries. The tean's experience also allowed a correct appraisal of the agencies'procurement, financial and institutional capacities. As discussed in the Assessment section above, theproject design was relatively simple and straight-forward, and the project's risks were few. Compliancewith the Bank's environmental safeguards, notably on environmental assesment, was assured upstreamthrough close supervision of subproject designs to avoid and mitigate any potential harmful impact, anddownstream through review of the borrower's assessment of possible environmental impact and mitigationplans. This project was appraised before the advent of the logframe and performance indicators relative tothe project's development objectives, so no indicators such as those currently used were incorporated in themonitoring and evaluation aspects.

As discussed earlier, a few of the incentives built into the project were inadequate. Incentives forLGUs to choose subprojects that had public benefits (health clinics) and not just economic benefits(markets) were lacking. Also, the incentive for LGUs to continue to participate in the maintenancecomponent were either not strong enough or were inappropriate. On the whole however, the incentives forthe LGUs to sustain the project's benefits are in place.

7.2 Supervision:The Bank's perfonrance in supervision is rated satisfactory. The Bank provided sound advice

and guidance throughout implementation. Early on, it gave appropriate guidance on the procedures to befollowed for the procurement of civil works. The Bank closely monitored and provided extensivecomments on the quality and contents of Sub-Project Appraisal Report (SPARs) in order to accelerate thesub-project approval process and enhance the sub-project quality. Through close dialogue, the Bankhelped the CPO improve staff skills and streamline the sub-project preparation process. The Bankrecommended a more "impact-oriented" approach to the RPTA component. Subsequently, the BLGFstarted monitoring progress in terms of actual revenue yield materialized through the RPTA and revised theLGU selection criteria so that assistance would receive premiums. The Bank regularly monitored

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compliance with Loan covenants. However, it had difficulty in ensuring compliance with financialcovenants due mainly to lack of appropriate municipal accounting and national monitoring systems. Thisissue is being addressed under the follow-on project, LOGOFIND.

The Bank's supervision plan scheduled two missions a year with approximately four specialistsrepresented. In practice, fornal supervision missions were generally conducted twice a year, and informalexchanges took place during intervening periods. The Bank's missions were generally staffed with threeskills, including an urban planner, financial analyst and procurement specialist. Less well represented wasmunicipal engineering, although subproject construction quality does not appear to have suffered for lackof regular visits by an engineer. Regular contact between the Bank and the borrower's implementingagencies ensured that implementation issues that arose during the course of the project were immediatelyidentified and addressed jointly. Recommendations were recorded in mission aide memoires. Projectreporting was done at regular intervals, and project ratings adequately reflected the project's status.

The Bank office in Manila was instrumental in its continual support of the CPO, BLGF, MDFOand MTP staff, in reviewing project implementation progress and in addressing issues in advance to avoidproblems in project implementation. Late in implementation, the actual task management of the projectwas decentralized to the Manila office.

One aspect of Bank supervision that could have been improved was the timeliness of approval ofpro-forma contracts. As mentioned in the Major Factors section, the Bank's protracted review ofpro-forma contracts caused major implementation delays. From the time the project became effective inAugust 1992, almost two years had passed before the first Notice to Proceed was issued in July 1994. Thisconfirms the need for completed procurement documents for the first year's activities, which is now astandard requirement under the project readiness filter.

No significant deviations from Bank policy were seen during implementation except that projectcost savings due to the dropped technical assistance component and due to the Peso devaluation werereallocated to other components rather than cancelled. These additional funds were well directed towardactivities that expanded the project's capacity to achieve its development objectives.

7.3 Overall Bankperformance:Overall, the Bank's performance in all aspects of the project from identification, through

preparation, appraisal and supervision, is considered satisfactory for the reasons discussed above. TheBank, the GOP and the executing agencies worked well together. Although the task manager changed threetimes from the time of project identification to the time of completion, the Bank continued to provideeffective guidance with smooth transitions. Close interaction between the Bank and the implementingagencies ensured that implementation issues were immediately identified and jointly addressed.

Borrower7.4 Preparation:

The borrower's performance in project preparation was satisfactory. The Govemment tookinitiatives to combine elements from the Metro Manila Infrastructure, Utilities and Engineering Programfrom the Third Urban Project and the institutional framework developed under the previous MDPs. Theproject scope covered essentially the same types of sub-projects as MDP II such as non-revenue generatinginfrastructure, including roads, drainage, water supply systems, health centers, school buildings andcommunal sanitation facilities; and revenue-generating projects such as public markets andslaughterhouses.

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7.5 Government implementation performance:The GOP was able to maintain an appropriate multi-agency institutional framework for project

implementation. The DPWH was the lead agency for the project and chaired the Project SteeringCommnittee (PSC). The PSC provided policy guidance and coordination arnong the various projectagencies. The CPO, under the DPWH, appraised and evaluated sub-projects for financing, providedtechnical assistance, monitored project implementation and acted as liaison with the Bank. The MDF wasset up under the DoF as the principal mechanism responsible for channeling long-term credit to LGUs, andwas supervised by the DoF's Bureau of Local Government Finance (BLGF). The Municipal DevelopmentFund Office (MDFO) was organized in 1998 to assume admninistration of the MDF from BLGF. TheMDFO has a full time Executive Director and is supervised directly by a DoF Undersecretary. The BLGFalso successfully supervised and administered the RPTA component. LGUs were the executing agenciesand were responsible for the identification, preparation and implementation of the sub-projects. Thisensured that LGUs would select projects they considered a priority. However, this often led to LGUs toselect revenue-generating projects instead of maintenance and non-revenue-generating infrastructureprojects.

Despite some delays during project start-up, the subsequent implementation of MDP III proceededsmoothly. Much of this success can be attributed to the CPO, which was able to anticipate potentialproblems and address these accordingly. In particular, the highly competent CPO staff provided timelytechnical assistance to LGUs, particularly in the preparation of feasibility studies that were critical forsubloans. Many participating LGUs cited the instrumental role of CPO in facilitating the project'simplementation. These proactive measures included: (a) strengthening technical capacities within its ranksto supervise sub-project implementation and assisting PLOs in streamlined operations; (b) establishing acontract review commnittee within the CPO; (c) monitoring and assisting PLOs in procurement of civilworks and services in accordance with Bank procedures; and (d) continuously streamnlining the sub-projectpreparation process.

Some of GOP's more noteworthy actions included: (a) the CPO initiated regular monthly PGBmeetings to approve loan applications; and (b) the MDFO was created to assume administration of theMDF and strengthen the MDFO as a government development institution.

The Borrower complied with most legal covenants in a timely fashion except for the recurrentdelays in submitting project audit reports and the separate audit on SOEs and special accounts. As aparallel effort under MDP EII, the Bank started to provide assistance to the Government that will assist theComrnission on Audit (COA) to strengthen its capability to perform its constitutional mandate.

7.6 Implementing Agency:The performance of the LGUs on the whole was satisfactory. A large number of LGUs

experienced extensive difficulties in the preparation of the SPARs and feasibility studies because many didnot have the technical capacity to prepare such documentation. With the invaluable assistance of the CPO,most of the participating LGUs complied with project requirements for documentation and provision ofLGU equity. The quality of works constructed is satisfactory with sound rates of return. Quite a number ofthem experienced some reimbursement delays due to the submission of incomplete documents. In addition,some LGUs were not able to provide their local counterpart funds, thereby necessitating some delays, andin some cases, cessation of project activities.

7.7 Overall Borrower performance:The overall Borrower performance is rated satisfactory in both preparation and implementation for

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the reasons discussed above.

8. Lessons Learned

The experience with MDP III, as with the previous MDPs, highlight a number of lessons that maybe applied to future urban projects in the Philippines and elsewhere. The following is a summary of theproject-specific lessons that were revealed in the preparation of this ICR. For a more detailed discussion ofthe lessons leamed from this experience, see section 10 on additional information or the ICR Mission'saide-memoire.

The demand-driven. "bottom-up" proiect structure proved to be a most effective and efficientmeans of harnessing LGU participation. Through this process, LGUs were able to select the size andcomplexity of projects that were most suited to their technical and fiscal capacities. Smaller sub-projectsand shorter time frames reduce the financial burden on LGUs and the risk that they will not meet theirrevenue targets. The project structure not only encourages competition among LGUs for limited funds, butmore importantly, it fosters a greater sense of ownership of the project and of commitment to achievehigher performance. As part of LGU overall improvement, technical assistance provided through MDPoperations helped municipalities become more entrepreneurial, think more about fiscal adjustment, valuetheir staff more highly, interact more closely with private companies and the local communities, and bemore environmentally conscious.

The presence of national support mechanisms is instrumental to achieving proiect success. Theintermediary roles of CPO, BLGF and MDFO were instrumental in the smooth vertical implementation ofthe project. Given the substantial role that national institutions play in project implementation, it is veryimportant that they remain continually responsive to the needs of LGUs. The MDFO, as the key financialintermediaiy for LGUs, should play a key role in the overall LGU development program. As such, it mustbe given a corporate institutional identity and culture; institutional autonomy and decentralized decisionmaking; and sufficient resources to operate as an efficient and effective LGU financing and developmentinstitution. In support of the MDFO's activities, expanding the capacities of the other MDP institutionsthrough the hiring of private consultancy firms would also be conducive to project success. Privateconsultancy firms, with their expertise, could assist LGUs in the preparation of feasibility studies, detailedengineering and construction supervision, assist MDF processes and appraise LGU applications andsub-loan releases, and provide capacity building services to both MDFO and LGUs.

Limited availability of funds at the local level points toward the need for comprehensive revenueenhancement and mobilization for LGUs. Although the RPTA component succeeded in providing abuoyant own-generated tax bases for the participating LGUs, its accomplishment was undennined by thepassage of the Local Governnent Code, particularly with the annual release of the IRA. Future Bankprojects should assist LGUs in exploring a wider range of revenue enhancement and mobilization of fundsthrough user charges, business licensing and private sector participation through exaction, developmentimpact fees, management contracts, franchises, concessions (including BOT, BTO, BOO, etc.) and others.

Grants should be targeted to induce LGUs to consider investments in areas they do not traditionallyaddress such as social and environmental proiects. The experience of MDP III indicates that LGUs havelittle incentive to borrow for non-revenue generating infrastructure. The provision of these infrastructureservices tends to be sub-optimal from an economic point of view, as there is a disparity between costs toindividuals and costs to society as a whole. The limited success of the maintenance program reveals thatinvestments in these types of infrastructure may be more attractive if they are tied to an incentive plan toensure continued participation in the program.

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In conclusion, the experience with MDP III and the Bank's other urban projects in the Philippinesreinforces the Bank's new strategy, which focuses on developing a more comprehensive and integratedapproach to urban development. LGUs must have a long term vision and development strategy for theirrespective cities/municipalities to better define their priorities and optimize resources. The lack of technicalcapacity at the local level, particularly with respect to strategic planning and network analysis was aconsistent issue in the MDP projects. As such, there is great difficulty in planning for national projects,which are intended to encompass a wider range of beneficiaries. At the same time, maximization of capitalinvestment is also limited due to the short-term solutions to the problems being addressed.

The Bank's recent success with the City Development Strategy (CDS) supports the finding that along-term vision is more effective when it is backed with a development strategy. As shown by thecountry's success in this program, CDS incorporates a city's long-term vision, strategy for achieving thisvision, and an investment plan that prioritizes needs with fiscal capacities and investment requirements.This ensures that projects provide the most benefit to the community, and conform to the prioritiesidentified by them. The participatory nature of CDS formulation ensures that it reflects the vision of aswide a constituency as possible, thereby fostering ownership of a vision and continuity of policies beyondthe terms of local chief executives. The Philippine CDS experience has been cited as among the mostsuccessful in the world. It has brought to the fore the need to broaden the perspective of local chiefexecutiveslurban managers to encompass more medium and long term development plans as opposed toshort-term solutions presented by project-specific assistance programs. More than fostering the importanceof long-term planning, CDS promotes the understanding of cities/municipalities as economic space ratherthan merely govemable space, thereby encouraging innovative thinking in local governance.

9. Partner Comments

(a) Borrower/implementing agency:

Partner Comments.doc

(b) Cofinanciers:

(c) Other partners (NGOs/private sector):

10. Additional Information

Lessons Learned from the Proiect - Expanded Version

1. Local political commitment is essential to ensuring proiect success and sustainability. Thesubstantial impact of MDP III was largely based on strong local commitment exhibited by the LGUs, suchas adhering to their obligations and imposing required institutional and fiscal reformns. Through thebottom-up, demand driven approach, the commitment to the project was inculcated as LGU participantswere given the responsibility for project identification, preparation, financing and implementation and thusensuring the project's sustainability.

2. The MDFO must be made more responsive to the needs of LGUs. For MDP III, the processingtime for LGU sub-loan applications on average takes more than a year. Procurement, pre-construction andconstruction take more than two years. These add up to more than three years and far longer than thethree-year term of LGU officials. The MDFO must cut the review process and speed up approval of

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sub-loan applications to enable LGUs to complete more projects within the three-year term. The MDFOmust be transformed into a development and financing institution rather than simply a unit of the DoF. Itcontinues to operate as a small govemment unit impeded by a centralized decision making system, andbogged down by bureaucratic and a highly personalized operations process. There is an urgent need for theMDFO to play a central role in the overall LGU development program. It must be given a corporateinstitutional identity and culture; institutional autonomy and decentralized decision making; and sufficientresources to operate as an efficient and effective LGU financing and development institution.

3. Improved fiscal perforrance goes hand-in-hand with management strengthenin . As part of theoverall improvement, technical assistance provided through MDP operations helped municipalities becomemore entrepreneurial, think more about fiscal adjustment, value their staff more highly, interact moreclosely with private companies and the local communities, and be more environmentally conscious.

4. By providing a menu of sub-projects to choose from, LGUs were able to select the size andcomplexity of projects that were most suited to their technical and fiscal capacities. Smaller sub-projectsand shorter time frames reduce the financial burden on LGUs and the risk that they will not meet theirrevenue targets. LGUs should be presented with a range of investment options consistent with theirdevelopment visions and strategies rather than specific or individual sectoral projects to ensure the greatestimpact and sustainability. In addition, the short three-year term of local officials necessitate a speedyprocessing of sub-loan applications and equally fast proiect implementation. This could be facilitated bythe expansion of the capacity of MDP institutions such as the MDFO, CPO and MTP through the hiring ofprivate consultancy firms. Private consultancy firms could assist LGUs in the preparation of feasibilitystudies, detailed engineering and construction supervision, assist MDF processes and appraise LGUapplications and sub-loan releases, and provide capacity building services to both MDFO and LGUs.Projects should be packaged and designed to be completed in 3-year cycles that coincide with the 3-yearterm of local officials; this would foster ownership and commitment and avoid any political repercussionson the project.

5. Small projects lead to bigger ones. In light of the conservative nature of LGUs, the participantsopted to undertake rather simple, low risk, revenue-generating projects such as public markets. After theseare successfully implemented, they tend to enhance their creditworthiness with a stronger financial base,and expand their investments to non-revenue generating public-goods type infrastructure projects (e.g.drainage and sanitation). By starting small, participating LGUs gain more confidence and experience andmove towards more challenging projects.

6. Capacity building for LGUs should go beyond the traditional classroom training mode utilized inMDP II. Capacity building programs for LGUS must encompass a full range of knowledge enhancementand action leaming modalities such as on the job training and technical assistance; distance learning;computer based information networks among others. The capacity building programs must be madeavailable to LGUs as needed, when needed. Thus, there is a need to expand the scope and modalities ofcapacity building programs for LGU to address varied needs of LGUs.

Lessons learned from workin2 with LGUs which mav be applied to future urban Rrojects in thePhilippines

7. LGUs must have a long term vision and development strategy for their respectivecities/municipalities to better define their priorities and optimize resources. The lack of technical capacityat the local level, particularly with respect to strategic planning and network analysis was a consistent issuein the MDP projects. As such, there is great difficulty in planning for national projects which are intended

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to encompass a wider range of beneficiaries. At the same time, maximization of capital investment is alsolimited due to the short-term vision of the problems to be addressed.

8. The Bank's recent success with the City Development Strategy (CDS) Project supports the findingthat a long-term vision is more effective when it is backed-up with a development strategy. A CDSincorporates a city's long-term vision, strategy for achieving this vision, and an investment plan thatprioritizes needs with fiscal capacities and investment requirements. This ensures that projects provide themost benefit to the community, and conform to the priorities identified by them. The participatory natureof CDS formulation ensures that it reflects/embodies the vision of as wide a constituency as possible,thereby fostering ownership of a vision and continuity of policies beyond the terms of local chiefexecutives. The Philippine CDS experience has been cited as among the most successful in the world. Ithas brought to fore the need to broaden the perspective of local chief executives/urban managers toencompass more long and medium-term development plans as opposed to short-term solutions presented byproject-specific assistance programs. More than fostering the importance of long-terrn planning, CDSpromotes the understanding of cities/municipalities as economic space rather than merely governable space,thereby encouraging innovative thinking in local governance.

9. Need for development strategies to coordinate national level investments in inter-municipalinfrastructure. Due to the lack of technical expertise and limited financial resources, municipal investmentin infrastructure has been limited to minor projects. At the same time, the contribution of nationalgovernment agencies, such as the DPWH, have been limited to ad-hoc projects that fail to maximizepotential benefits to the LGU and surrounding municipalities. The presence of development strategies areeffective in identify,ing large-scale infrastructure projects that individual LGUs cannot undertake on theirown. In this respect, national agencies are better able to coordinate inter-municipal investments thatsupport the development initiatives of a larger number of municipalities as a whole.

10. Bank assistance to LGUs must be on a longer-term basis. This is to ensure sustained developmentof the municipalities and cities through a multi-year investment and capacity building plan tied toinstitutional and resource improvement conditions. In the Bank's experience, it has been found thatproject-focused interventions do not necessarily result in long-term development. More than anything, theybasically fill service gaps that would have limited impacts on the development of the city/municipality. Onaverage, the three MDPs have had at least one project in more than 150 LGUs that have participated andthe program and there is a need to provide more long-terrn support to individual cities and towns. Just asLGUs need to formulate their long-term strategies, so should the Bank consider extending assistancebeyond the limited support of project specific interventions. Therefore, there is a need for the Bank toconsider providing longer-term support. As exhibited by the MDPs and the CDS, these projects set thefoundation for successive intervention programs that need to be addressed on a more comprehensive scale.The Bank is in a unique position to channel needed support to LGUs to continue the gains of previousprojects. Specifically, the Bank should consider more long-term support arrangements in providing (a)investments, (b) technical assistance, and (c) broker for other technical assistance and investments fromother intemational aid agencies.

12. Need to adapt Bank's assistance strategv to address the evolving role of the LGU. The Bank'sexperience in working with local govenmment units brings to light the changing role of the LGU in nationaleconomic development. Particularly in the Philippines, which is included among the fastest urbanizingcountries in the world, there is an urgent need to strengthen capacities and fiscal performance of LGUs.Local government units in the Philippines have an advantage over their counterparts with the enactment ofthe Local Govenmnent Code, which provided them with a myriad of opportunities to promote localeconomic development. However, as revealed by this and previous MDPs, the lack of technical capacity as

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well as access to funds have limited the ability of LGUs to take advantage of these opportunities. It hastherefore come to light for the need to contextualize the Bank's assistance strategy in light of these changes.Assistance at the local level should be cover both infrastructure and non-infrastructure requirementsincluding support to capacity building, institutional development and knowledge enhancement in the fullrange of LGU functions and needs. Thus, the assistance should be multidisciplinary as well as integrated.

13. Need to re-evaluate current policies regarding the role and function of LGUs. The LGUinstitutional structure was established 50 years ago. There is a need to modify, reorganize and reengineerthe LGU structure to enable them to respond more efficiently and effectively to changing demands forimproved govemance to bring about equity and growth to their respective constituencies. The LGU role isexpanding from the traditional service provider to a broker of growth and managers of development.However, the local institutions and operating systems are not suited to the current needs. There are nounits in the LGUs which can handle new functions such as environmental management, economicdevelopment and business promotion, information technology and networking among others . These arehandled by ad hoc units under the Office of the Mayor if at all.

14. The wide range of investments needed at the local level necessitates effective resource mobilizationprograms. LGUs are at the forefront of directing urban development and providing needed services. Whilethe LGU has the ability to generate its own funds, these are not maximized. Previous MDPs haveconcentrated too much on real property tax administration.. While real property tax is a major source oflocally generated revenues, it is just a part of a range of local resource mobilization modalities. Thus, thereis need to expand the scope of succeeding resource mobilization programs to include other componentssuch as business taxes, licenses, user charges, permits and fees. Moreover, there is a need to focus onimproving collection of existing taxes, which can be enormous considering the current low collection ratesfor local taxes. Furthermore, there is a need to highlight other options for improving resource mobilizationsuch as various modes of private -public partnerships such as build-operate and transfer scheme and jointventures; and various forms of credit financing including bond flotation among others. The LGC hasopened up a wide range of opportunities for access to funding and mobilizing resources. Future Bankassistance should therefore be focused on maximizing these opportunities.

15. Rationalize LGU financing framework. Along with stepping up resource mobilization efforts atthe local level, there is a need to open up windows for LGU financing from the national govemrnment,government financial institutions (GFIs), and even the private sector. In the context of promoting localeconomic development, there is a need to detemine the roles that various financial institutions can take.The policy on grants to LGUs must be reviewed and possibly revised to encompass sectors which areequally vital to LGUs such as the brown environmental concerns including solid waste management,sanitation and sewerage, water and air quality management. Moreover, national govermment agencies rolein local development should be defined more clearly.

16. There is a need to provide LGUs and communities the means to address non-infrastructure relatedproblems. This include among others the increasing incidence of street children, homelessness, drug abuse,street violence, peace and order and such other social problems which tend to erode the social fabric ofcities and towns particularly the more urbanized areas. Thus a mechanism for addressing these types ofproblems need to be formulated to enable LGUs to cope and mitigate such problems in a more decisiveway.

17. Need to expand assistance programs to include focus on economic growth and management ofdevelopment. Most of the LGU projects focus on providing LGUs the means to address currentinfrastructure and service gaps. However, there is also the need to support their efforts to spur economic

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growth and eventually to manage development. As such the package of assistance should enable LGUs themeans to access financing, technical assistance and capacity building to address these.

18. Need to address poverty alleviation at the local level. Poverty is a pervasive issue among allLGUs. Ironically LGUs, who are in the best position to address the problem, seldom if ever formulateprograms to stem it. The core of the problem lies in the fact that many LGUs are not cognizant of the trueproblem, and if they are, they do not have the resources to solve it. Future Bank assistance programsshould therefore be targeted at fostering awareness of the issues, developing effective programs foraddressing it, and providing the needed technical and financial assistance to implement them.

19. Active participation of the community in development. There is a need to provide conmmunitieswith access to financing, technical assistance and capacity to enable them to address specific communityproblems, including community-upgrading initiatives that may alleviate and reduce poverty moresignificantly. Moreover, there is a need to develop new mechanisms, which will enable communities toaccess financing, technical assistance and capacity building more directly. Previous Bank programs havebeen directed at establishing physical and institutional reforms in national and local governments. Whilethey have been successful in providing the needed infrastructure to carry out these reforms, they fail toaddress the problems rooted in the social fabric that translate themselves into the LGUs physical andinstitutional problems.

20. Need to strengthen capacitv-building at LGU level. The Philippines has more than 1,500 cities andmunicipalities, each of which has its own unique capacities. While some have exhibited the capacity toraise themselves above the others, a large number of them do not have the capacity to undertake theresponsibilities and duties that the Local Government Code has bestowed upon them. In order to maximizethe LGUs advantageous position for addressing the country's core economic and social problems, there is aneed to provide technical assistance to improve the overall administration and management of LGUstowards promoting national economic development.

21. E-govemance. Electronic governance or e-govemance is now an emerging trend among localgovernment units all over the world. Its application has proven to be instrumental in improving access toinformation, knowledge sharing, and promoting efficiency and transparency in government procedures.Future Bank urban projects should enable LGUs to improve capacity though the provision of bothhardware and software support for information technology.

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Annex 1. Key Performance Indicators/Log Frame Matrix

Indicator 1992 1993 1994 1995 1996 1997 1998Municipal LendingNo. of Cumulative 15 25 35 50 78 78 78Sub-LoanApprovalsCumulative 270 468 685 1,045 1,782 1,782 1,782Sub-LoanCommitments (PhPM)Cumulative 18 285 570 873 1,319 1,586 1,782Sub-loan Releases(PhP M) l

Real Property Tax Administration

Cumulative 837 1,503 1,984 2,090 3,340Completed RealProperty Tax Units(No.#) _

Municipal Training Program rCumulative 42 84 120 156Courses Conducted

(No. #)Total Participants 2,620 5,240 7,140 9,040

Actual/Latest EstimatesIndicator 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001MunicipalLending I

No. of 7 17 27 45 46 65 75 74CumulativeSub-LoanApprovalsCumulative 229 460 630 1,103 1,122 1,565 1,722Sub-LoanCommitments(PhP M)Cumulative 29 142 353 567 853 1,148 1,581 1,669Sub-loanReleases (PhPM)

Real Property Ta Administration _

Cumulative 1,004 1,812 2,786 3,548 4,736 5,564 6,471 6,645Completed RealProperty TaxUnits (No.#)

Municipal Training Program _

Cumulative _ 7 21 44 70 106 130 166 219CoursesConducted (No.

Total 290 915 2,078 3,550 4,959 5,954 7,440 9,169Participants

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Output Indicators (By Component)Subprojects and Maintenance Program

Output Indicators Appraisal | ActualLatest Estimate1. Amount of Project Cost PhP 2.244 million PhP 2,731 milliona. Subloans PhPl,722.5 million PhP 1,669 millionb_ Grant PhP 815.7 million PhP 790 millionc. Equity PhP 272 million2. Number of LGUs participating 78 743. Project Componentsa. Local1. Rehab and construction of markets 50 units 56 units2. Construction of slaughterhouses and 6 units 6 units

procurement of equipment3. Construction of transport terminal 4 units 5 units4. Rehab of water supply system 4 LGUs 4 LGUs5. Construction local ports 2 units I unit6. Construction of school building 3 units 4 units7. Construction of health center 0 units I unit8. Traffic management system I unit I unit9. Construction and improvement of 10 kms 11.8 kms

roadsIO. Shore protection improvement - 0 km 0.195 kmb. National1. Construction and improvement of 55 kms 96 kms

roads2. Improvement of drainage system 55 kms 52 kms3. Flood control improvement 30 kms 3 kms4. Shore protection improvement O km 4 kms5. Improvement of water supply system 8 LGUs 10 LGUs

Maintenance Program

|Indicator Projects in SAR Actual/Latest EstimateI Maintenance Program Participation 8 project centers 8 project centers

Real Property Tax Administration (RPTA)

Indicator Projects in SAR Actual/Latest EstimateNumber of successful applications 233 427Increase in number of RPUs 3.30M 6.645 MExpansion of area assessed by assessor PhP 61.385B or 40% PhP139.153B or 127%bIncrease in tax collection PhP 486.633B or 40(/o PhP739.399 or 52%Decrease in cost to collection ratio 1:0.75 1:0.495 = 0.5Number of staff trained in RPTA 1,398 2,562(capacity building)

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Annex 2. Project Costs and Financing

Project Cost by Component (in US$ million e uivalent)Appraisal Actual/Latest Percentage ofEstimate Estimate Appraisal

Project Cost By Component US$ million US$ millionSubprojects 69.80 77.50 111Maintenance 8.10 2.90 36Real Properly Tax Administration 12.00 10.70 89Municipal Training 2.40 3.30 137Technical Assistance 6.80 5.20 76

Total Baseline Cost 99.10 99.60

Price Contingencies 14.60Total Project Costs 113.70 99.60

Total Financing Required 113.70 99.60

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Project Costs by Procurement Arrangements (Appraisal Estimate) (US$M equivalent) a/

Expenditure Procurement MethodCategories

v__________ ICB NCB Other NBF Total1. Subprojects1.1 Works 77.1 77.1

_______________ __ (43.9) _ (43.9)1.2 Goods 4.2 4.2

(2.5) (2.5)1.3 Services 0.6 b/ 0.6

(0.3) (0.3)2. Maintenance2.1 Works 5.9 2.0c/ 7.9________________ (2.0) (0.6) (2.6)2.2 Materials 1.9d/ 1.9

________________ ________________ ~~~(0.6) (0.6)

3. RPTA Services 13.5e/ 13.5(9.5) (9.5)

4. ConsultingServices4.1 Implementation 4.4b/ 4.4

(4.4) (4.4)4.2 Municipal 2.7b/ 2.7Training (2.7) (2.7)4.3 Studies 1.3b/ 1.3

(1.3) (1.3)TOTALS 87.2 26.4 113.7

(48.4) (19.6) (68.0)

a/ All amounts include contingencies. Numbers in brackets are the respective arounts financed by the Bank.b/ Services to be procured in accordance with the World Bank Guidelines for the Use of Consultants, August 1981.c/ Force accountd/ Required for force accounte! Additional personnel required for the RPTA would be hired by the local government as contractual staff for the duration of theRPTA program using their own procedures for hiring such labor.

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Project Costs by Procurement Arrangements, Actual/Latest Estimate (US$million equivalent)

Expenditure Procurement MethodCategeries

ICB NCB Other NBF Total1. Subpiojects1.1 Works 73.7 73.7

._______________ (43.2) (43.2)

1.2 Goods 0.1 0.1(0.1) (0.1)

1.3 Services 3.7 3.7(2.4) _ (2.4)

2. Maintenance2.1 Works 1.2 1.7 2.9

(0.7) (0.8) (1.5)2.2 Materials

3. RPTA Services 10.7 10.7(7.2) (7.2)

4. ConsultingServices4.1 Implementation 5.2 5.2

(5.2) (5.2)4.2 Municipal 3.3 3.3Training (3.3) (3.3)4.3 Studies

TOTALS 97.9 1.7 99.6______________________________ _ =(62.1) (0.8) (62.9)

A total of US$5,649,563.93 was cancelled from the Loan following the completion of disbursements.

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Project Financing by Compo ent (PhP Million) - Appraisal EstimateComponent ___Subprojects Total LGU DPWH MDF Bank Loan SharesNational 848 424 424 50%Local 1,980 198 594 1,188 60%Maintenance 350 236 114 33%Program.RPTA 438 132 307 70%Municipal 90 90 100%TrainingProjectImplementation .ConsultanciesDPWH 119 119 100%DOF 16 16 100%DILG 13 13 100%

TechnicalAssistanceInstitutional 17 17 100%StudyEnvironmental 21 21 100%StudyTOTAL 3,983 565 424 594 2,309 59%

_ _ 100% 15% 11% 15% 59% _

Project Financing by Component (PhP Million) - Actual EstimatesComponent I 1 1 iSubprojects Total LGU DPWH MDF Bank Loan Loan SharesNational 790 331 459 58%Local 1,941 272 508 1,161 60%Maintenance 105 48 r 57 54.2%RPTA 366 122 _ 244 66.7%Municipal 96 96 100%Training |ProjectImplementation _ _ _

ConsultanciesDPWH 164 _ 164 100%DOF 4 4 100%DILG 14 1 4 100%

TechnicalAssistance* _ ____.

InstitutionalStudy

EnvironmentalStudy I I I

TOTAL 3,480 442 331 508 2,199 6%100% 0 13% 9.5% 14.5% 63%

* Completed thnugh a PHRD Grant

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Annex 3. Economic Costs and Benefits

Project Economic Analysis Financial Analysis Net Present Value IncJDec. RemarksCenter Actual/App

L ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~r.I ~~~~App. Est. App. Est. App. Est.

1. Tagum 21% 23% 17% 22% 6.71 24.76 Increase HighCity collection(Public efficiency;Market) introduce

new schemein collection

2. San Jose 21% 10% 17% 8% 70.37 -9.48 Decrease Lowde occupancyBuenavista rate(PublicMarket) .3. Surigao 33% 29% 29% 26% 31.33 24.07 Decrease Due to 65%City occupancy(Integrated rate ofTerminal) commercial

stalls;terminal feecollectionrate is100%.

4. San Jose 22% 14% 16% 13% 3.040 0.042 Decrease EstimatedCity number of(Slaughterho animalsuse) slaughtered

=______________________ _ _________ __________ ___________ ___________ is no t m et.

Starts of Operations for each project center:1. April 19972. December 19973. February 19994. February 1999

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Annex 4. Bank Inputs

(a) Missions:Stage of Project Cycle No. of Persons and Specialty Performance Rating

(e.g. 2 Economists, I FMS, etc.) Implementation DevelopmentMonth/Year Count Specialty Progress Objective

Identification/Preparation06/1990 1 1 Economist10/1990 2 1 Economist, 1 Engineer2/1991 3 1 Economist, I Financial

Analyst, 1 Engineer

Appraisal/Negotiation07/1991 3 1 Economist, I Financial

Analyst, I Engineer02/1992 4 1 Economist, 1 Counsel, I

Disbursement Officer, 1Operations Assistant

Supervision08/1992 2 1 Municipal Engineer, I HS HS

Economist12/1992 3 1 Financial Analyst, 1 Engineer, S S

I Economist8/1993 4 1 Financial Analyst, 1 Engineer, S S

2 Economists4/1994 2 1 Urban Financial Analyst, I S S

Economist7/1994 2 2 Financial Analysts S S02/1995 3 2 Urban Planners, I Financial U S

Analyst12/1995 2 2 Urban Planners U S05/1996 3 2 Urban Planners, I Financial S S

Analyst05/1997 2 1 Urban Planner, 1 Financial S S

Analyst02/1998 3 1 Urban Planner, I Engineer, I S S

Financial Analyst10/1998 2 1 Urban Planner, 1 Procurement S S

Specialist03/1999 2 1 Urban Planner, I Financial S S

Analyst05/1999 2 1 Urban Planner, I Procurement S S

Specialist12/1999 3 2 Urban Planners, 1 Procurement S S

Specialist04/2000 3 2 Urban Planners, I Procurement S S

Specialist

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ICR 04/2001 3 1 Urban Planner, I S S

Operations officer, Iconsultant

(b) Staff

Stage of Project Cycle Actual/Latest Estimate

No. Staff weeks US$ ('000)Identification/Preparation 14.5 56,125Appraisal/Negotiation 34.5 138,750Supervision 236.3 698,917ICR 13.3 52,337Total 298.6 946,129

Costs incurred before the introduction of SAP in 2000 were adjusted upward by 25% to reflect full costs.

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Annex 5. Ratings for Achievement of Objectives/Outputs of Components

(H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable)Rating

D Macro policies C H CSUOM O N * NAO Sector Policies O H *SUOM O N O NAO Physical O H *SUOM O N O NAO Financial O H * SU O M O N C NAO Institutional Development C H * SU O M 0 N 0 NA

O Environmental C H O SU * M O N O NA

SocialZ Poverty Reduction 0 H 0 SU * M 0 N 0 NAO Gender O H OSUOM O N * NAO Other (Please specify) 0 H 0 SU 0 M 0 N 0 NA

0 Private sector development 0 H 0 SU 0 M 0 N 0 NA0 Public sector management 0 H 0 SU 0 M 0 N 0 NAOOther (Please specify) O H SU O M O N * NA

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Annex 6. Ratings of Bank and Borrower Performance

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory)

6.1 Bank performance Rating

2 Lending OHS *S OU OHUF Supervision OHS OS OU OHUZ Overall OHS OS O U O HU

6-2 Borrower performance Rating

Z Preparation OHS OS O U O HUZ Government implementation performance O HS O S 0 U 0 HUZ Implementation agency performance OHS OS 0 U O HU7 Overall OHS OS O U O HU

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Annex 7. List of Supporting Documents

1. ICR Mission's Aide-Memoire

2. Borrower's ICR

@3Borrowers ICR.doc

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PARTNER' S COMMENTS

(File from icon on p. 17)REPUBi.C OF THE *iULIPPNESY L HWpARTMENT OF PUBLIC WOXKS AND HIGHWAYS

PRIE3IUIEp ItPROGRM FOU PSEAMAL UMIRPAL IN$MATRUCTUREf,

_ UT3L.t^ MAIPltIMAMtlF o NIENO CIRINI 0E> OPLNT -

M90A , PlL PrwM 4 IDF - OIM(WORLD siAN- - 958I6FD IT UICIPPA bFV(LOPMENT PR4JIECT5)

MR- VINAY BHARGAVACtiom y Dirwo:r

RviNeni Msanila. Phitl#nos

Itkar Mr, Ihurx"va;

SUtBJE : Commrnri an n th3 Bankd' Paf Verxiao on twIC£ fbr MIDP 111 (l..oNts- 34-MS5-Pll

We havc roceived uob o ws wrl sion artfe mDP h I IT'R and we arc gcally poleo1with tIa aevwenwt- nn the impkementatiorn rft-ilM. Iesons teasnd Anmi

ruzonmChdhfintLn of the ICR Misori Ilowevcr, we hhlcwc t:hi the Tfnag Yi th1 Dr,pTje- cuinme sbould h*ve been rated ji.fsf;y bccsc of Ih: Lrrp.indicnirs1. n the aciev*m *o ifbtl deve1orStl t reUlts- P'oa a

oudie ort [tiic pt4io iequIt bad dcwmented tib sigpificant cmaTibutions nf thoMIUPs ihe sabprojec( notably Ihic rvwntre gencrniinL. pnotia su 5h as pibIicsnarketm ha tsi0ficant dirmt and iunditet impacts on imirmving the Iivitng t*ditiov's

tbi; pwducItvity of ih r$identf in tIhr pzilopafing I Citls, Thc Sbprojpt*i havT

sko becn noed tin hwsy unfiSbed sigiifir-mne imp vrowf1ts itn loca infrsruc£tkreand tloca rcvcre gemtiou- InTtvieviws mtde by ('P with varituu paWxic'p wt LGtIMayms gnd their financial offiiaJis uinfinned that tierc. vxi' suhsttial incnm in0wr ovwn revenue soumead income mch n4 rgA prnpet1y taxes, busineS taxes and

ofher Ltl and fe bcsv of thsc Wi";*c opporilnttie5 gercaSted, frotn ¶t

opetions oi thc MDIP fwanerd pmj*Iq ()oMPw14ijw onalysis undwr a 'befo andfitler 1he proi4 Souo (' oh lbe 1fioncial perfrmance nf selected MD? pn*t

ctmlc4h indicaied sub niJi positijV prta6 chanes fim dic intwco gencrMedfi-m ihc prnecl. Thcs positive rcsdts recontinned t4h p vious Iinldings in itew

ctt<C oumpletion Repmrit (PC.Rks) and Pdlbrwroatir Audit Rqpm (PARl) hti

previous MWP J and II. Marcov, tiDSihs oFthe aJculaied UKs, FtWks and NrPV'a#Cdw rcvcPm gmmting pnjects indicated tbat tht t5i.pted MDP III prw)cas

ait considered ghIly UCi;cvstwIi proicct s,

Similarly. ttis ins a.ttiowl di opmcTi impct was bighly su.bstaial. T'he resulaB orpast4txinrin eftctivcness survey-, Oilwr=d ibeh peiilher tKiabulxtin nf MT1 Iraininps tot miawesefu prntjed impirnenitation thwLu4 mniuajril and terhiail jkitkcnhanraent risknlg in tapWglld rvnuhs such as "(i) improvcrncnt in projecilimplemcntalion pcduucs eqmially procurcmem antd cmaa rwnaemfnt andsIservisinn, (h) edoptim of effotive and cfrfi'nt finatuxil m emnc plr*ceunosrsAneii m increae in 31g rev nmcs, (t:) innsutdirnmwAIJo rt of team work within the

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Iullio4 jn [t rea;W 1S. (:) instiD0lizi1tiorn Oftetm work wkihn thtl(iUs, (d) improvo& sntcr-L(ti copetaion and sharing of piujmA cpenenscpcsially an oDmplianc to proi:l conditiondties; and (o) eQficrnt IlUi pmo

implJcm=aio. modefling si sui sinailty. The MiP moduigs wcr cited hy LC;UreMpCndML as VIWYtUseiR4 aid cliccu3e in impmving their 1OCa1 AoVcnantxcaptlt¢

On Lhc o*hcr hand, the fi¢tw Oku"tou of the Municipal Develupment F1td (NI4F)unde; th MfN isn o n y.s it beamcstn ct tvc fiaaneiai macmi nim f

IU' rtady aamet ic c fintawingiwg. Si*= sf reim in 1984, tha MIlF [so bowendod to become Ie maim cehnn im m= thm than 3Ol asift= P VA a i n1I.-XU in the l Phpirins. both fof foreign Md local finds under dw r =i9edprJvetd It hasgrauly apdedits opc i nh tw Urba mm tora des ndto socal and envir40evlmJ ptojetrs AR, nf Docatber -11, MM, colleeion etfcincywas r.z-JlIkt At 100 perced. UIaJ3 MDP IlIL the MlDF sarted t rinctio a nrevolving tid with 370 pefted of U* RibkOa corning from the i uowu f NIWPLUzU' ,morization pymeUt. SUSIttWity of the MIW IF tnff is MO51 lhikely Wiikthe fwther vMm_Wahezg ofth MDP IfstinAiS iunder the LJDOFINI) pfRcI. In1 99, thc Gkwen.metx ntauized t.h IMwuiipal Deviolpnuctit fund Office. (MT*'F) Inss$tume [ adninatiuan af ti Mr* operafims Likowist. to Wlbher imprw the

nyd effci"n or Ihe MIW M pF pcrzior*n t (iavemment rnuoll4id thefmnaial and tmhnka finctions into the MDFO urgarnalionlI sumure. Thuks undtrthc l.ofiO(]OJIl, thus (io'vcrsupjif azins to achieve! fuTther sirhng1hctnp of policiesan trLsitulioIl *iapwties of the M1VFl0 >O tnw to csny out is eprnded

ftpmkiliies,

Pmfjcct reoinab;ity ofthe MPs bave beeo motn evident in subsoepsa du r aist, dmknding ptmoae su xasc As the PIClP, PRtTW, Sub$i MDP, C'lark MTP). CRB1 andLOGOTFJND. amvag Ohtm The saice* of the MD:? prOeas bave also b9 citedboth in ninny koa and imanit*ea cmfi==. notMly us Bes Prauie m¶ UAwnInfta%ud IvlCmkenl by thlINCRD (1997); Global Best Pmaace 1OD list iotImprowrIg the U1Ag lnviftomii bY the UNCIIS HAfITAT (19), &a Ps4x*Suceei ¢on Municipid Fiflance ProjectR ly the Wotid 1lirk (1998), an*M Vber.

anwMet. wt owr wk Lhc KCR Mis"on f tino that the MainiangicVonpum*t did nuwI hontiiy xohievw iLt objeive of erng irg tumucattme UcSilty of I GUa. 'tinciy projed hmpknentwi= wai greatly afedhy the dclays in the provitn of cash cauterpat requitumnents. The par*ipan LGU;ScnlMmd Ihat the delays in the releawe of their IRA which was the piini1y sawme ofthir oquity corMbiu1ix deayel the timely comnpliance in the provision of ihcrequired aquity.

We hre .lwo exsnoaly pleased no the rnany and varid lesaon leared fnom ilwtprojea inciding the acommanKnpons thetein cited by 1he ICR Mission In baet, wzt

- 35 -

find 1ha junring experim we sfful in furtha imprving our drldoprowlstrattieVs and in aw*ing bgue our tieveopiotl twnrship with l.GJi Wehoip Iuo lhat lbe: pra i nwj expatin and 'zrn<ndationu will guide the

Bank in zuh ue &i 3mcnt inifiawc.st in the Pft1ipt-Ans.

We wijl flaniAh you 4 copy of the Rfiowcr's Final VeisIc of te ICR in ieparate]cttor. The tios daR eapy wtrch was received by the flank on May 4, 2 1 had soeminDflr rmiuons.

htflRty, we wish to .qi@ our doepest Lppreqcaion to tthe &nk (br its oxinuwssuppm t a dinet the dorvpmenmt f nur LiTh in the Phiippiu.m

very twIy ymow

.RNESTO S. CRtGORJO, 3OJC. P .uimc

C' Mr. Toru Hhitnato,k Tem Iftder, MM? tilMr. Jos Atitoo Leape, Cptsaiios Offkm-

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