Regions and Countries

	Table of Contents
p. 4 of 9 BACK | NEXT Executive Summary Map I. Introduction II. The ADB-Philippines Partnership Experience III. The Development Context IV. ADB’s Strategy and Assistance Program V. Risks and Assumptions VI. Resourcing the Strategy and Program Appendixes

Country Strategy and Program Update 2005-2007: Philippines

---

II. The ADB-Philippines Partnership Experience

7. The CSP takes into account lessons from the partnership experience, covering upstream strategy formulation and programming, and downstream portfolio management and project implementation. It is informed by ADB’s assistance assessments, the intensive portfolio cleanup of the past two years, and economic and sector work.

A. Lending Level and Modality

8. The Philippines is a major client of ADB. With cumulative borrowing since 1966 of $8.1 billion for 177 public sector loans, Philippines ranks fifth largest among ADB’s borrowers, accounts for 8% of public sector lending, and has one of ADB’s largest loan portfolios under administration (Appendix 3, Table 1). It is an active client for credit enhancements; it accounts for 19.3% of ADB’s private sector lending and equity investments; and has one of the largest active private sector loan portfolios. Public sector annual lending levels have been highly variable, ranging from $853 million in 1998 (in part, a response to the regional financial crisis) to as low as $3 million in 1999. Smoothing the large annual fluctuations, three-year moving average lending levels show a decline: from $505 million during 1996–1998 to $146 million during 2002–2004 (Figure 1). Investment lending averaged $29 million per year during 2001–2004. Concurrently, close to 90% of public sector lending during 2001-2004 was off budget through Government Owned and Controlled Corporations (GOCC)/Government Financial Institutions (GFIs). Over 1990-2000, only one fourth of lending was being channeled through GOCC/GFIs. The fall and shifts in lending commitments is explained by (i) low absorptive capacity, especially due to the growing fiscal constraint, (ii) the slower-than-expected pace of policy reforms, and (iii) a low quality portfolio and the overhang of implementation problems affecting opportunity for new loans.
9. With the persistent decline in lending, there has been negative net resource transfers from ADB to the Government each year from 1998 to 2004. The Philippines graduated from access to Asian Development Fund resources in 1998. The Government converted all outstanding eligible pool-based loans to the ADB’s market-oriented LIBOR-based loans¹ which was introduced in July 2001. Other adjustments to ADB’s loan products include changing the cost-sharing formula from January 2003²—when ADB’s guideline limit for project loans to the Philippines was increased from 40% to 65% of total cost; and waiving the front-end fee from 1 January 2004 to 30 June 2005.
10. The usefulness of, and increasing Government preference for, policy-based support is reflected in the steep rise of program lending: program loans comprised only 4% of lending during 1990–1997, but 60% of lending during 1998–2004. Sector development program (SDP) loans have been an important component of total program lending; although recently the Government has become cautious of the SDP modality due to its experience with the Grains SDP.³ The Government’s demand for non-traditional support modalities is reflected in the significant (but irregular) use of ADB credit enhancements (e.g., a partial credit guarantee of $500 million in 2002).
11. Based on the cumulative value of transactions, the Philippines is ADB’s largest client for private sector operations. Although there was a hiatus of new activity during 1995–2002, momentum has since developed considerably. Private sector loan and equity projects are innovative and promote development impact when aligned strongly with ADB’s public sector operations and the country’s needs.

B. Development Impact of ADB Assistance

12. The impact of ADB’s assistance is assessed in the Country Assistance Program Evaluation (CAPE).⁴ The CAPE acknowledges past strategies as appropriately flexible and pragmatic to respond to macroeconomic crisis, as well as the country’s development agenda in more normal times. It also confirms they closely tracked national priorities and provided a useful framework for ADB’s assistance program. Highlighting the difficulties of achieving sustained impact from official development assistance (ODA) in the Philippines, the CAPE finds that, although there are exceptions, in the aggregate ADB’s significant volume of support has not translated to a commensurate level of intended outcomes. Causes of the less than expected outcomes include: (i) lack of prioritization; (ii) overly complex design of project and program loans; and (iii) lack of government human and financial resource capacities. From a comprehensive diagnosis of what has worked well, and what has not, the CAPE questions the lack of discrimination in pursuing a highly diversified portfolio, and cautions against being overambitious. It recommends ADB provides lending which is steady, modest, and selective, with relatively simple project designs; and it supports continuing with nonlending activities/knowledge products and services (KPS) for policy reform, capacity building, and institutional strengthening, each of which is found to be an area of weakness for the country. To enhance more inclusive development, the CAPE recommends ADB to deepen its relationships with broader society (NGOs, women’s groups, and ethnic societies). At a more specific level, the CAPE finds merit in supporting microfinance for income-generating activities for the poor, education and health facilities, potable water supplies, road transport in rural areas, and development of lagging regions, particularly in southern Philippines.
13. The Philippine power sector has been a major area for support, and ADB’s consistent and comprehensive involvement—both in financial terms and as a lead interlocutor on the reform agenda—sets it apart from other development partners. The sector’s technical and financial performance is of critical importance to the health of the economy; while the nature, size and timing of support impacts significantly on ADB’s relationships with the Government and other development partners. A Power Sector Assistance Program Evaluation (PSAPE)⁵ highlights the often complex political economy of the Philippines, brought into strong relief by the way in which resolution was sought for the extreme difficulties experienced during the power shortages of the mid-1990s, and preparation of the landmark omnibus Electric Power Industry Reform Act (2001) which set the ground work for unbundling the sector, establishment of an independent energy regulator, and the development of a wholesale spot market for electricity. Preliminary findings of the PSAPE suggest ADB has pursued responsive sector strategy, but the ADB investment programs were overly ambitious based on complex project formulation and weak implementation. A combination of lack of effective prioritization of investments, heavy financial burden of Independent Power Producers (IPPs) and inefficiencies of sector entities and their accounting practices together generated financial difficulties which have economy wide impacts. Especially relevant to the present financial difficulties, the PSAPE notes the need for ADB to strengthen the quality of its financial review of the sector’s performance. The report recommends that ADB should address perceptions of collusion in the procurement process, even when ADB procedures have been followed and there is no “hard evidence” of corrupt behavior. The lessons of the PSAPE have helped formulate ADB’s response to the priority needs of the sector. Given its overwhelming impact on the consolidated fiscal deficit, close attention has been focused on the assessment of the financial viability of the sector which has called for adjustment of power tariffs and upfront debt absorption by the National Government (NG) of close to P200 billion of the NPC liabilities, strengthening of regulatory framework and greater transparency in both regulation and the privatization process. Planned interventions will support actions that will immediately reduce the fiscal drain, improve the financial status of sector agencies, accelerate the privatization process, and reduce debt and debt service commitments.
14. Geographic Focus. Southern Philippines, especially Mindanao, lags the rest of the country significantly in most development indicators. To address the geographic inequality, ADB has had a special focus on Mindanao.⁶ With other development partners, ADB is fully involved in the initiating work for establishing the Mindanao Multi-Donor Trust Fund, as a “peace dividend” to communities affected by the Government-Moro Islamic Liberation Front conflict, and coordinating its implementation. During the first stage, ADB contributed substantively to, and hosted finalization workshops for, the Joint Needs Assessment (JNA) for conflict-affected communities in Mindanao, which identified priority reconstruction and development activities, and effective delivery mechanisms. However, the development impact of the high level of ODA support to Mindanao⁷ has not been fully realized because of relatively low absorptive capacity, implementation problems and poor security. Absorptive capacity is especially weak in the six provinces of the Autonomous Region in Muslim Mindanao (ARMM)—the only regional government in Philippines, established in 1998 as part of the peace accord with the Mindanao National Liberation Front—where congestion of development support and the need for a high degree of coordination are evident.
15. The development impact of ADB’s completed loans for Mindanao is mixed, with many projects facing implementation problems, thus delaying benefits delivery—until recently, a characteristic of the Philippines portfolio at large. The uncertain peace and order adversely affected implementation of some components and complicated preparation of forward programs. Implementation problems associated with the civil disturbances have been most intense in the ARMM, as well as in conflict-prone areas where the MILF has been active. In the past 3 years, Mindanao-directed loans have also accounted for a disproportionately large amount of program attrition; of six that were dropped, two were exclusively for Mindanao⁸ and three others had Mindanao components.
16. Private Sector Development and Operations. ADB’s private sector operations in the Philippines since 1986 have had mixed results in terms of performance and development impact.⁹ BOT power plants supported by ADB were profitable, a loan to the Philippine Long Distance Telephone Company has been fully repaid, while loans approved for water services and an air terminal encountered serious difficulties and were cancelled before financial close. Of the seven operations with financial institutions, one was a line of equity not drawn, another was fully divested, and the remaining five each have a positive rating. Two country-focused venture capital funds have been comparatively successful. The BOT power projects—highly demonstrational, as they were undertaken with the most progressive legal framework in the region—played an important role in addressing the power crisis of the early 1990s. Together with public sector loans, they acted as catalysts to attract other financing and brought about a rapid resolution to the crisis. ADB’s public sector support for capital market development led to restructuring of the Philippine Stock Exchange, and improved its efficiency, transparency, and accountability, thus making a contribution to enhancing governance in the financial sector and fostering private sector development. Public sector policy support and program lending for financial markets provided the underpinning for the recent equity investment in the Local Government Unit Guarantee Corporation (LGUGC).¹⁰ LGUGC bond guarantee operations provide a key financial instrument to support ADB’s policy dialogue and operations to broaden the LGU revenue base and improve local planning and budget expenditure and revenue management.

C. Portfolio Management and Development Impact¹¹

17. The Philippines active loan portfolio has been transformed from what was for a long time one of ADB’s weakest performers to what is today among the best. The achievement represents a major shift towards results-based portfolio management, paving the way for more effective future assistance. ADB and Government counterparts have learned valuable lessons about project design, implementation, and monitoring procedures, positioning both to maintain portfolio quality and, looking forward, to improve quality at entry. The cooperative ADBGovernment effort has substantially raised understanding on both sides of the development partnership, and the sorts of hard decisions needed to get there and stay there. A snapshot of how the portfolio’s quantitative indicators have improved is provided in Table 1, which shows that, for the first time in many years, some portfolio performance indicators for the Philippines are better than ADB averages.
Table 1: Improvement in Portfolio Quality Indicators

*By end April 2005, there were only 2 projects at risk, representing 8 percent of loans in portfolio.
Source: ADB, Loan Financial Information System.

Portfolio Quality Indicator	2004	2000
Disbursement ratio (%)     All loans     Project loans	22.9 13.6	11.3 10.4
Implied average implementation period for project loans (years)	7	10
Undisbursed loan balance ($’000)	740	1,779
Number of active loans	27	51
Projects at risk - number     - % of loans in portfolio	3* 11*	15 29
Commitment fees paid by the Government ($ million)	4.3	7.2 (av., 2000-2003)

Table 2: Structure of the Reduction in the Undisbursed Loan Balance

Source: ADB Loan Financial Information System

Item	Contribution (2003-2004)
	$ million	% of total
Undisbursed balance Jan 2003	1,177
Plus new loans approved	409
Total available for disbursement	1,586
Project loan disbursement	184	21.1
Program loan disbursement	310	38.5
Cancellation     - project loan proceeds     - program loan proceeds	282 70	31.7 8.7
Reduction in un-disbursed amount	846	100.0
Undisbursed balance (Dec 2004)	740

18. Over the past two years, the undisbursed loan balance has been reduced through a combination of activities (Table 2), including (i) improving the pace and quality of policyimplementation under program loans, and achieving successful program completion;¹² (ii) redesign and restructuring to improve the scope of project loans; (iii) removing impediments to facilitate effective disbursement; and (iv) partial cancellation of loan proceeds and closure of poorly performing loans. Most projects have picked up momentum in terms of improved implementation and resource mobilization, yet project implementation still suffers from a number of weaknesses. To address this, during 2004, the Government and ADB strengthened portfolio monitoring and performance evaluation through the semi-annual Country Portfolio Review (CPR) and quarterly joint ODA reviews (Government, ADB, Japan Bank for International Cooperation, and World Bank), supplemented by introduction of a monthly portfolio monitoring mechanism. There is also a gradual shift to bring a greater focus on management for results and development effectiveness—monitoring for development impact, not simply implementation performance. This should reinforce the planning-budget-implementation linkage and ensure activities align with the MTPDP, promote performance-based budgeting, and encourage both ownership and quality-at-entry.
19. Achieving and maintaining a quality portfolio highlights the need to treat its management as a continuous process, not as event driven. The portfolio cleanup integrated the downstream lessons of portfolio implementation with the upstream efforts of strategy formulation and programming, and forged heightened understanding between ADB and Government counterparts. In the short term, this has been an important means for generating greater fiscal space for Government for priority spending in a period of severe budget constraint. Of longerterm significance, the overriding lesson of the portfolio cleanup is that quality-at-entry (including project readiness in terms of establishment of project management office, budget allocation, securing rights-of-way and preparation of resettlement action plans) is prerequisite for high development impact.¹³

D. Program Attrition

20. There has been a significant level of program attrition: a high proportion of programmed projects (43% by number, 47% by value since 2000) were not brought for Board consideration, despite being partially or nearly fully processed. This erodes the effectiveness of the partnership as it causes inefficient and expensive use of ADB and Government resources, with greatly reduced or no development impact. The causes relate to (i) difficulties the Government has in providing budget cover, particularly during the current period of fiscal stress; (ii) less-than-fullownership by either oversight or executing agencies; and (iii) the appropriateness and competitiveness of ADB’s loan modalities. ADB has already addressed insufficient budget cover through more careful screening of TA and loan projects proposed to enter the program. However, their resolution needs to be complemented by a better match between client demands and services offered by ADB. The enhanced Poverty Reduction Strategy¹⁴ acknowledges this issue; and the working group on ADB’s engagement with middle-income countries and the Innovation and Efficiency Initiatives (IEI) are considering new instruments to support the changing needs of clients.

Back I. Introduction	Next III. The Development Context