Regions and Countries

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p. 5 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

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III. The Development Context

A. Window of Opportunity

21. Between 1999 and 2004 the share of NG revenues set aside to cover interest expenditures rose from 22% to 37%. NG debt as a share of GDP increased from 55% to 74%. When the debts of GOCCs, such as the National Power Corporation, are included, the debt/GDP ratio rose from 84% to 101%. These numbers demonstrate two critical aspects of the fiscal challenges the Philippines face; first, the sharp decline in the share of government resources that can be used for development expenditures, and second, the growing perception that the Philippines has come close to fiscal unsustainability. These fiscal problems have had a negative impact on the investment climate. Investor perception of risk of macroeconomic instability has been one of the main obstacles to foreign investment. Furthermore, other weaknesses in the investment climate that have been identified by businesses are a direct result of inadequate government budget resources for infrastructure investment and for provision of essential public services.
22. Participants at the 2005 Philippines Development Forum¹⁵ acknowledged the limited window of opportunity for the Philippines to initiate the difficult measures needed to reduce fiscal vulnerability. Political uncertainty eased temporarily after President Arroyo’s election in May 2004 to a 6-year term, with solid majority support of pro-administration members of both houses of Congress.¹⁶ The new administration has been able to push through a number of key fiscal measures, including unpopular ones such as; elimination of many Value-Added Tax (VAT) exemptions and granting presidential authority to increase the VAT from 10% to 12% effective January, 2006; increases in excise taxes on alcohol and tobacco products (the “sin taxes”); and increases in power tariffs. On the economic front, the robust domestic growth of 2004 and a relatively favorable international environment provide a good platform for undertaking initiatives that have financial and economic short–term costs. However, conditions are likely to become less conducive for tough reforms as international oil prices and interest rates rise, with the prospect for slower global growth, and as the midterm Philippine elections approach.¹⁷

B. The Political Economy

23. The Philippines’ complex political economy impacts on the pace and quality of reforms. Political alliances do not always translate to legislative support needed for meeting the administration’s schedule for economic reforms. While public debate is vigorous and increasingly well-informed, reform initiatives are often subject to prolonged legislative due diligence, with outcomes uncertain, as illustrated by the divided views on tax initiatives to support fiscal consolidation. At the same time, consensus building is influenced by the effective lobbying of vested interests, including strong non-secular views that affect policy formulation. The three-year terms for local government officials affect incentives for strategic planning and project prioritization. The sound legal and institutional regulatory framework, an important determinant of the investment climate, is not always independent of political considerations. These all contribute to the uncertain context in which the ADB-Philippines partnership operates.
24. Low levels of private investment compound the fiscally constrained public investment and further compromise growth prospects in the Philippines. Opportunities for the country to successfully compete with its neighbors and attract private investment are undermined by governance issues. The 2004 ADB-World Bank Investment Climate Survey found corruption to be the second critical investment constraint, after the macroeconomic instability. There are strong perceptions of weak regulators and regulatory frameworks, and a still largely inefficient judiciary. Recognizing the cancerous impact of corruption on Philippine society, the Government is moving aggressively on a number of fronts — lifestyle checks, tax evasion, money laundering, smuggling, electoral fraud, and public procurement among others — but more needs to be done to address the debilitating effects of corruption on public administration and economic growth. There are also the issues of high utility rates, low public service efficiency, and inadequate infrastructure. Essential to combating these problems is the Government’s role in prescribing appropriate policy and regulatory frameworks, providing the necessary public infrastructure, and supporting broader governance efforts such as the reforms in the judiciary and anti-corruption prosecution, enhancing the rule of law, and supporting high profile efforts against tax evasion.

C. Six Constraints to More Rapid Poverty Reduction

25. Economic developments and prospects were reviewed comprehensively in the 2004 Country Economic Review,¹⁸ which highlighted the fiscal imbalance as the primary challenge for economic management in the near-term. The findings of the thematic assessments, lessons learned from operational evaluations, results and lingering issues arising from portfolio management and project administration, and other economic and sector work were coalesced to identify the major economic constraints to more rapid poverty reduction in the Philippines. The six constraints, distilled from the analytical work for preparing the CSP, include (i) fiscal imbalance, (ii) uncertain investment climate, (iii) inadequate infrastructure, (iv) poor management of assets, land and resources, (v) weak institutional capacity, and (vi) geographical inequalities (Appendix 4). These six constraints are viewed as fundamental strategic parameters to identify and define ADB interventions in the country. The six constraints serve as “design criteria” for each intervention that is formulated. The recognition of these constraints during the design process will provide guideposts to improve overall project quality at entry.

D. Government’s Enhanced Planning Process and Development Priorities

26. The Government’s development agenda centers on the MTPDP, prepared every 6 years to coincide with the term of the incoming administration. Previous plans provided sound conceptual frameworks for development strategies that did not always effectively set priorities. A common weakness was absence of a clear link between medium term planning and single-year budgeting. Strategies, policies, and programs in the MTPDP were formulated without clear resourcing, often resulting in overprogramming, insufficient human and financial support, constrained budgets, and shifting priorities. Thus, the MTPDP’s complementary Medium-Term Public Investment Program (MTPIP) of priority activities served more as a wish list of proposed—but unresourced—initiatives. A results framework was also not fully applied.
27. To improve the planning-budgeting nexus, and faced with the worsening fiscal imbalance, the Government’s public resource reforms¹⁹ focus on the Medium-Term Expenditure Framework (MTEF) to guide multiyear budgeting in line with the MTPDP, and the MTPIP’s priority investments. The MTEF includes a results framework for performance budgeting, and uses two instruments to improve allocative efficiency for scarce public resources—Sector Effectiveness and Efficiency Reviews (SEERs) and the Organizational Performance Indicator Framework (OPIF). Beginning with the 2005 budget, the Department of Budget and Management is using the instruments as strategic tools to reallocate resources from low to high impact activities, and from low to high priorities, by linking outcomes, performance evaluation, and budget planning. The SEERs and OPIF will enhance accountability for results, and improve service delivery in exchange for access to budgetary resources. The New Government Accounting System introduced in January 2002 supports periodic financial reports for better performance monitoring. Other reforms in initial stages of implementation include automation of budget releases (including publishing budgets on the internet to increase transparency), and a tracking mechanism to promote efficient cash management and facilitate project implementation and monitoring.
28. Consequently, the MTPDP for 2005–2010 establishes a new paradigm for development planning. Departing from a sector-based approach, it focuses on outcomes, and all agency activities (including projects) will be prioritized against their potential contribution to outcomes, regardless of sector. To improve operational efficiency, agencies will be streamlined to deliver core functions contributing to their mandated outcomes. As legislative measures will take time, the administration launched the rationalization program using administrative powers.²⁰ Supplementing the rationalization actions are measures to implement the Public Procurement Reform Act (2002), which promotes transparent and competitive bidding for public contracts. 29. Structured around the President’s Ten Point Legacy Agenda, the MTPDP focuses on (i) economic growth, and job creation; (ii) energy independence and power sector reforms; (iii) social justice and basic needs; (iv) education and youth opportunity; and (v) anticorruption and good governance. It identifies major challenges as the fiscal imbalance; insufficient infrastructure; rapid urbanization and congestion, especially in Metro Manila; the growing number of jobless; and inefficient delivery of basic services. Higher, sustainable economic growth, buttressed by greater efficiency, are emphasized as prerequisites for achieving the MTPDP’s targets, which incorporate the MDGs. Programs identified in the MTPDP will be fleshed out in greater detail as specific projects in the Medium-Term Investment Plan, now being prepared. One of the most challenging aspects of the MTPDP is its financing: almost 50% is expected to be funded by national government, requiring a significant improvement in fiscal performance. Similarly, to meet their expected funding contributions, government corporations will need to improve their financial health, and LGUs their own-revenue mobilization.

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