Regions and Countries

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p. 6 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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IV. ADB’s Strategy and Assistance Program

A. ADB’s Strategy

30. Almost 40% of Filipinos subsist on $2 or less per day, with many more vulnerable to falling into such poverty. Freedom from persistent, pervasive and intense poverty is the cornerstone MTPDP vision and for ADB’s development partnership with the Philippines. However, the magnitude of the fiscal imbalance raises a major challenge for resourcing the MTPDP. The fiscal imbalance injects uncertainty into the ADB-Philippines partnership, inhibiting the Government’s capacity to accommodate ADB’s main instruments of support—public sector loans. Broader and deeper economic reforms are necessary to allow fiscal space for development spending, and to improve the investment climate for greater private participation. Given these imperatives, the CSP modifies ADB’s mode of engagement to allow for greater focus and selectivity, introduces a results-based framework to upgrade its usefulness as a management tool, and pays greater attention to project quality-at-entry. The Government-ADB development partnership context is elaborated in Figure 2.
31. Refined focus. The CSP’s focus derives from the urgent need for supporting fiscal consolidation and an improved investment climate, which are currently preeminent among the six principal constraints (see para. 25 and Appendix 4) to more rapid poverty reduction and progress toward the MDGs. The other four development constraints remain valid for longer-term engagement, and will provide the broadened focus under a subsequent medium-term CSP.
32. Increased operational selectivity. To increase selectivity, the CSP will focus ADB support on activities (i) in high-priority areas²¹, (ii) with high likelihood of achieving intended outcomes, and (iii) compatible with ADB’s comparative advantage and capacity to deliver. The selection process is guided by the performance of the ongoing portfolio, post evaluation findings, activities of other development partners, and the suitability of sector policies and the institutional framework, among others, to maximize development impact. The three priority operational areas are power, finance, and governance (covering local government and the judicial system). While the fiscal constraints persist, direct support for the MDGs will be coursed through off-budget financing mechanisms. This will imply that ADB will disengage from some areas in which it has been active.

33. Quality at entry. To ensure quality-at-entry new project will be included only if it is fully supported by ADB and the oversight and executing agencies, and is socially acceptable to the community at large. At each stage of processing, assessments will be made whether to

    Box 1. Philippine Government Readiness Criteria in Screening Projects There are seven requisites or “filters,” designed to ensure project preparedness before loan approval, that have been adopted and strictly being implemented by the Government, namely: Investment Coordination Committee quality conditions met by executing agencies prior to Monetary Board approval. Projects designed with monitoring and evaluation. Funding for first year of implementation allocated in the budget. Projects with bidding documents ready before National Economic and Development Authority Board presentation for initial 12 months of Implementation. Land acquisition plan and payments equivalent to first year of civil works completed. Projects with Project Implementation Units established and staffed by appraisal. Projects complying with procurement/financial management requirements.

    continue based on (i) absorptive capacity of the implementing agencies in relation to the loan amount and scale of the project; (ii) funding for the first year of implementation is allocated in the budget and future budget requirements are included under the agency budget ceiling; (iii) designs which are results-focused on outcomes with identified monitoring and evaluation indicators; (iv) compliance with Government’s readiness criteria (including approval from the Investment Coordinating Committee); and (v) completion of land acquisition and resettlement plans.



34. Strengthening existing and developing new client partnerships. ADB will strengthen existing, and forge new, partnerships with selected off-budget entities (GOCCs, GFIs, LGUs, and civil society organizations) to avoid direct burden on the NG budget. The objectives are to enhance autonomy and resource mobilization of GOCCs and LGUs, improve financial intermediation of GFIs, and involve a broader range of stakeholders in ADB’s partnership with the Philippines through engagement with civil society. Greater engagement with LGUs will be based on their commitment to sound planning and public resource management, ability to borrow and service debt, and willingness to improve services and the local investment climate, including local public-private partnerships. Some good examples are arising from the ongoing Development of Poor Urban Communities Project²² which combines better city planning with slum upgrading and eradication, while lessons from successful slum upgrading pilots undertaken in partnership with NGOs are being incorporated to the design of a similar initiative for Metro Manila. Power sector entities are a primary focus, as they contribute most to the consolidated fiscal deficit. Support to GOCCs and GFIs will pay attention to the prudential limits for the agencies’ contingent liabilities, and may incorporate some financial engineering measures (e.g., debt management and restructuring) to ensure that agency borrowings do not further degrade the consolidated fiscal deficit. ADB has established a sound partnership with the Supreme Court, to improve governance through support for increased judicial autonomy and accountability. New partnerships have been established with the (i) Office of the Ombudsman to strengthen and carry forward anti-corruption iniatives and the (ii) Bangsa Moro Development Authority and other civil society groups in regard to development support for Mindanao.
35. Linked with these partnerships is an acceleration of our activities with other development partners. Not only for joint studies and shared work to support mutual frameworks of assistance, but also to expand on-the-ground cooperative efforts. The Philippines Development Forum working groups have been maintained, some co-chaired by ADB, that are preparing shared agendas for support in areas such as local government and anti-corruption; similar to the excellent cooperation for the Action Plan for Judicial Reform under the auspices of the Supreme Court. There is a growing linkage, through the sharing of design criteria and terms of reference, that provide for ADB operations to benefit directly from LGU capacity-building programs under bilateral grants, as well as discussions of shared personnel or consultant resources for joint project development, feasibility studies and implementation support. ADB is in close dialogue with the Philippines Economic Governance Facility (AusAid) to ensure complementarity in our support for results management, particularly in the Department of Budget and Management (DBM). While joint missions with the World Bank, JBIC, and some other bilateral partners maintain a consistent dialogue on harmonization and adoption of country systems.
36. Security, peace, and development in Mindanao. Mindanao has been plagued by a decades-old separatist movement, kidnappings by the Abu Sayyaf Group, and reports of training camps for the international terrorist group Jemaah Islamiyah. The price of war has been high, with Mindanao lagging behind Luzon and Visayas in all economic and social indicators, despite having rich natural resources. Five provinces in Mindanao are among the 10 poorest in the country while Autonomous Region of Muslim Mindanao (ARMM), where the separatist movement is based, is one of the poorest regions. ADB’s strategy for Mindanao rests on three pillars. First, it acknowledges a sustainable peace is essential to development, while development is needed to underwrite peace. Second, Mindanao’s low absorptive capacity means institution strengthening is as important as project investment. Third, the strategy positions for a quick response to a peace agreement. Building on the lessons of the Moro National Liberation Front (MNLF) peace process, a Joint Needs Assessment (JNA) is underway with development partners to assess the reconstruction and development priorities of Mindanao’s conflict-affected communities in preparation for a possible Mindanao Trust Fund to serve as a “peace dividend” to be activated once a peace agreement is signed.
37. Regional cooperation. There is strong complementarity between the CSP and ADB’s Southeast Asia regional cooperation strategy and program (RCSP).²³ The principal strategic objective of the RCSP is to enhance competitiveness of Southeast Asia to generate sustainable high rates of economic growth. This is supported by a second objective of integrating isolated poorer contiguous areas of Indonesia, Malaysia, and the Philippines into regional and extraregional trading networks, so that growth is balanced and pro-poor, thereby creating economic conditions to mitigate security problems posing a threat to regional prosperity. Erosion of Philippine economic competitiveness highlighted in the RCSP can be traced, in part, to the same factors the CSP identifies as inhibiting more rapid poverty reduction. Thus, the manner in which the CSP addresses those issues forges a direct link to the RCSP. The RCSP’s second objective aligns directly with the CSP’s strategic focus on the poorer, isolated areas of southern Philippines.
38. Portfolio management. The significant improvements in portfolio quality must be maintained. This will require close attention to quality at entry, and diligent monitoring of the ongoing portfolio. Effective downstream activities of portfolio management are integral to the quality of the development partnership. The portfolio management system, processes and oversight have been strengthened by both ADB and the Government over the past two years to make them less event driven and more continuous. The system–built around the key milestone activities of formal reviews–is proving effective, but staff intensive.

B. Strategic Thrust of ADB’s Policy Engagement

39. The large public budget deficits since 1997 impact all aspects of the ADB-Philippines partnership. The lack of adequate fiscal headroom constrains line departments’ capacity to implement ongoing projects according to schedule, delaying project outcomes, threatening to reverse improvements, and increasing loan commitment charges paid by Government to ADB. The fiscal imbalance also injects uncertainty into available capacity to implement proposed projects, making programming difficult. In 2004, full processing of public sector investment loans, many at advanced stages of processing, was suspended. Lending to GOCCs or channeling assistance through GFIs, which have been the mainstay for ADB lending operations since 2001, provides opportunities for “off-budget” support for high priority development projects. However, support for development projects of LGUs—another major area of the partnership—has been affected by the Government’s decision in 2000 to amend the nationallocal government financing mechanism, establish the Municipal Finance Corporation (MFC), and discontinue grant funding for devolved activities.²⁴
40. In the process of CSP formulation and policy dialogue, ADB has been developing a set of targeted sector policy reform packages, each of which is expected to have a direct impact on at least one of Philippines’ three most critical binding development constraints: (i) fiscal imbalance, (ii) poor investment climate and (iii) weak governance. Selectivity in the CSP is driven by sharpening ADB’s focus on these three thematic priorities and all policy based interaction and lending cluster under these priorities. This focused approach is designed to maximize the impact of ADB operations in the coming three years, provide a strong boost to the Government’s efforts to sharply reverse negative trends in these key policy areas, and set the stage for a broader program of investment and policy-based operations in the next planning period. In parallel, the choice of sector interventions has been prioritized by focusing on investments that meet income and non-income MDGs with former being supported by development of SME and microfinance developments as well as improving access to water supply, integrated coastal resource management and rural roads. Under this approach to selectivity, ADB has practically withdrawn from a number of sectors of which most significant areas of withdrawal are airports, rail construction, secondary ports, livestock, tertiary and nonformal education, and solid waste management.
41. Table 3 illustrates the links between the development constraints and the three targeted sector policy reform areas – power, financial markets (including microfinance), and governance (including local government and judicial systems). Of the five policy based operations covering these three areas, two operations will have a direct impact on fiscal consolidation. The Power Sector Development Program (PSDP) aims to address the largest sources of the public sector fiscal imbalance stemming from the losses incurred by public power agencies. PSDP aims to reduce the losses at the NPC and enhance the creditworthiness of Power Sector Assets and Liabilities Management Corporation (PSALM) and the energy companies, and to create conditions for privatization of major power assets, removing the responsibility for their operations from the public sector. The Local Governance and Finance Development Program(LGFDP) focuses on improved resource mobilization and budget operations at the LGU level, in order to: (a) reduce LGU dependence on NG transfers, which make up 16% of NG expenditures and (b) enhance the sustainability of fiscal consolidation by strengthening the ability of LGUs to deliver improved services to their people even under a tightening resource envelope.
42. Investment climate issues are a focus of all proposed program lending operations. Infrastructure weaknesses have been repeatedly identified by businesses as a key obstacle to investment in the Philippines, and the PSDP and LGFDP will both address infrastructure shortcomings, through putting the power sector on sounder financial footing and through enhancing LGU capacity and access to financing for infrastructure investment. The Financial Markets and Intermediation Program (FMIP) targets another central weakness in the investment climate by promoting a more efficient financial sector that can finance profitable private investment projects at lower cost and risk than at present. It will support the establishment of more effective financial sector regulation and governance, strengthening the financial condition of the banking sector through resolution of non-performing loans. Similarly, the Microfinance Development Program will help create a more efficient rural banking sector, strengthening access to investment and operating finance for small rural businesses. The proposed new Governance and Judicial Sector Reform Program directly targets another of the most serious weaknesses in the investment climate; the lack of transparent, reliable rule of law, and the related problem of corruption.
43. In addition to the direct impact on improved governance of the judicial and financial markets programs, as described above, two of the other lending operations also have major governance components. The PSDP focuses considerable attention on strengthening the regulatory regime for this sector, improving governance in this sector and establishing a precedent for independent regulation in other sectors. The LGFDP is built around the promotion of more transparent and participatory governance at the LGU level, including enhanced performance measurement, creation of new internal audit functions, and a more transparent and participatory budget process.

44. The linkages between the three strategic objectives of the CSP are significant. Successful fiscal consolidation will strengthen the investment climate, by building confidence in macroeconomic stability. There is also an important link between governance reforms and an improved investment climate, as these reforms will establish and enforce a rules-based business and regulatory environment that encourages investment and rewards fair competition. Governance reforms also contribute directly to fiscal consolidation, as they will enable the government to perform its functions more efficiently, and operate effectively despite the tight caps on expenditures that have to be imposed for the next several years.
45. Besides the high economic impact of holistic policy packages, the use of policy-based lending to leverage these reforms is particularly appropriate at this time, as the Government is intensely aware of the potential advantages of reducing borrowing costs by tapping ADB funds, rather than the commercial sources they have relied over the recent years. Each of the operations responds to this new Government perspective by incorporating conditionalities that are highly significant, so that their achievement will make a clear contribution toward the objectives of the CSP. Care has also been taken to design conditionalities that are feasible, so that they have the desired incentive effects.

C. Private Sector Strategy and Operations

46. As described in paragraph 16, results have been mixed from ADB’s private sector transactions in the Philippines since 1986. PSOD investments in the power sector, together with public sector loans, acted as catalysts to attract other financing and brought about a rapid resolution to the power crisis of the early 1990s. ADB’s public sector policy support and program lending for capital market development and governance in the nonbank financial sector provided the underpinning for an equity investment in LGUGC; while LGUGC bond guarantees provide a key financial instrument to support ongoing policy dialogue and operations to broaden the LGU borrowing capacities based on improved local planning, budget, expenditure and revenue management.
47. The CSP advocates increased synergy between ADB’s public and private sector operations to enhance investor confidence to promote private investment critical to offset fiscally-constrained public investment. The policy loans identified in the CSP support improved investment climate and seek to revolve sector efficiencies to attract private sector investment. ADB-supported private sector operations will be integral to their success. For example, the Power Sector Development loan support for a well-regulated, privatized power sector, together with financial viable investments, will amplify investor interest. Private sector operations will partner with the public sector to provide a partial credit guarantee (PCG) and investment for privatization of power sector assets under the program. The SME Development Support loan is an example of how the public and private sector instruments and TA grants can be used to support polity initiatives, and through different financial products, target distinct segments of the SME market. The loan will include a PCG to encourage private banks to expand their SME portfolios and technical assistance and equity to support establishment of a credit information bureau. The Microfinance Development Program also proposes a PCG Facility for qualified MFIs to issue a domestic bond and meet their requirements. The CSP’s support for Local Government Financing and Budget Reform will contribute to an improved investment climate at a subnational level, and strengthen potential for public–private partnerships involving private sector operations. Similarly, the CSP support for improved governance and efficiency in the judiciary and the improved financial market regulation and intermediation will strengthen the basis for private sector investment. Thus, ADB’s public and private sector operations will be both catalytic and reinforcing during the CSP period. They will reinforce the fiscal consolidation process by (i) placing less demand on public resources, (ii) reducing pressure on public debt by allowing Government access to foreign and local funds at competitive spreads and for longer maturity, and (iii) reducing the need for public spending by “crowding in” private participation.
48. ADB operations, both public and private, will contribute to the rehabilitation of the investment climate through providing multi-dimensional support to improve the enabling conditions for the private sector. The focus of ADB’s private sector strategy under the CSP is to (i) create enabling conditions for business, (ii) generate business opportunities for private sector in ADB-financed public sector projects, and (iii) catalyze private investment.²⁵ Central to this are governance reforms, i.e., establishing and enforcing a rules-based business and regulatory environment that encourages investment and rewards fair competition. Support to adequate physical infrastructure facilities and availability of finance as they allow business to operate, access markets and finance growth is coupled with fundamental governance reforms. While there is need for immediate private investment to generate employment and address infrastructure constraints, the long-term benefits of related investments will depend on the establishment of a much stronger legal, regulatory and institutional framework within each sector and the economy as a whole.

D. ADB Lending Scenario and Modalities

49. ADB, the World Bank, and International Monetary Fund (IMF), have been closely working on a macroeconomic framework utilizing a common analytical framework.²⁶ The tax measures and the power tariff revisions taken to date have the potential to resolve the fiscal deficit over the medium term. Full revenue potential of new tax measures has yet to unfold and the continued expenditure stringency would be a challenge in case the pressures on adjustment of civil services remuneration build up. As a result continued vigilance is required relative to budgetary outturns in line with expectations. During this transitional period of crucial implementation of the fiscal reforms, the ADB will provide program support to assist that implementation of the budgetary, power and related reforms as long as the transition remains on track. This process is buttressed by the fact that the new revenue measures to date are already on annual basis, equivalent to 0.8% of GDP. This is composed of P36 billon (or 0.7 % of GDP) from the power tariff increases to date and the revenue from the sin taxes which amount to P7 billion or 0.13 % of GDP on an annual basis already under collection. In addition to those receipts, P 28 billion or 0.5% of GDP is expected based upon the official estimates for the VAT collections in 2005.
50. Given this upfront adjustment, ADB lending level could be in the range of $1-1.5 billion for 2005-2007 including $100-$150 million project lending. Continued rapid progress on the fiscal front by the Government could also be supported by ADB through cofinancing the proposed single tranche Development Policy Loan which is contemplated under the high case scenario of the World Bank’s in its Country Assistance Strategy.²⁷ Any significant reversals in fiscal trends and policy or lack of sector policy reforms at the desired pace would reduce prospects for achievement of the proposed lending scenario. In this eventuality, ADB will be able to deliver a few selective and, if feasible, some down-sealed policy based operations which would be mainly for supporting the microfinance reform and local governance and finance reforms off budget project support for the GOCCs/GFIs and the sector national support programs in partnership with the World Bank. The average annual lending under this scenario would be in the range of $150-200 million.
51. Assistance instruments. To be responsive to client requirements, ADB will need to exploit the use of ADB’s full range of existing instruments flexibly as well as new products, policies and procedures that have been developed under the IEI. The approaches and modalities will have to involve a judicious mix of interventions that are custom-fitted to the needs of the country. Of most relevance under the IEI, would be the flexibility to adopt for the Philippines the Multitranche Financing Facility which would allow to phase in investments at an appropriate pace, Subsovereign and NonSovereign Public Sector Financing Facility, the Local Currency financing for public sector operations etc. as well as new cost sharing and expenditure financing for ADB projects in accordance with the policies as approved by the Board. ²⁸ To be supportive of the fiscal consolidation process, CSP envisages high proportion of policy based lending with judicious investment lending supportive of the public expenditure priorities as agreed upon within the national programs. Part of the investment lending will be also coursed through off-budget agencies (GOCCs and GFIs). This will remain important, even with a successful program to enhance tax revenues since the Government intends to use the incremental tax resources to reduce debt and not to finance projects.
52. The 2005–2007 lending program will focus on 10 operations (sequencing of these are presented in Figure 3 and Appendix 5).

    1. Policy-based loan operations: To complement fiscal consolidation, and revive private investment and reduce sector policy distortion, as a part of the CSP dialogue ADB has been working on a series of Sector Program Loans including Power Sector Development, Financial Regulation and Intermediation, Microfinance, and Local Governance and Finance. The pipeline includes program cluster operations with single tranches, an instrument ideally suited to the uncertain situation. Program loans will be provided under the usual safeguards, especially careful consideration of the strength of sector reforms and the sustainability provided by a conducive macroeconomic environment. Detailed due diligence will be undertaken on sector-level reforms to ensure effective leveraging of policy reform. The timing, size and sequencing of sector program loans would however depend on fiscal consolidation progress which will lead to greater absorbency, while ADB policy lending will contribute to that progress—thus forming a virtuous cycle to reduce the fiscal deficit.
    2. Investment loan operations provide direct support to the MDGs. Each involves lending through an off budget agency (a water and sewage GOCC; a GFI; and three with LGU involvement) with limited technical support and counterpart needed from the National Government. These projects will be part of the low case scenario and are shown as “below the line” in Figure 3. The Government has reconfirmed the priority of the projects; processing will continue to ensure readiness criteria are met. Unlike Program lending, progress against fiscal criteria is not required to process these projects, but rigorous due diligence will be undertaken on the borrowing agencies (GOCCs, GFIs and LGUs) to ensure they have the financial strength to service their obligations and that the contingent liability of the ADB loan does not become a

       Figure 3. MILESTONES FOR THE CSP

       
       Government direct liability. The LGU operations have been affected by Government’s decision in 2000 to amend the national-local government financing mechanism, establish the Municipal Finance Corporation (MFC), and discontinue grant funding for devolved activities.²⁹ As such some of the proposed project lending can only be channeled once the financing arrangements and procedures are in place.

53. To support key line agencies of the national government that face severe budget limits, the use of the Sector Wide Approach (SWAp) to finance activities within the specific agency’s existing budget, but linked to progress on an articulated reform agenda, is one modality under evaluation. Given ADB’s limited exposure in implementing SWAps, it is likely that ADB would join with the World Bank for the SWAp, so as to provide realistic and consistent support for the latter’s National Program Support Operations (NPSO)³⁰ in the Philippines.
54. The results framework provides the management tool to monitor progress and the contribution of ADB operations towards achieving the desired fiscal outcomes. The criteria for investment and policy lending link ADB’s operations to the results matrix (Appendix 5). For each operation, the results matrix outlines an expected level of fiscal progress or readiness to be achieved prior to processing for approval; an anticipated contribution derived from the ADBfinanced operation; and the targeted cumulative impact of all activities (of which ADB operations are only a part) measured against baseline indicators over the CSP period. Faster progress means opportunity for acceleration in ADB operations. The total impact should alleviate fiscal constraints, providing the underpinnings for a medium-term CSP and return to more “normal” ADB operations.
55. Transition to Normal Operations (2008-2012). The shift of the Philippines towards normal operations and the processing of projects that rely on budgetary resources would depend on the size of the actual adjustment effort achieved over 2005-2007 relative to 2004 and the introduction of new modalities. In aggregate the accumulated fiscal adjustment, as measured by the reduction in the National Government deficit, must be an achievement in the order of 1.5% of 2004 GDP and the power sector deficit would have to have been stabilized at a substantially reduced level, relative to its deficit in 2004. Future programs could then gradually shift to normal ADB operations as fiscal consolidation takes hold.
56. Knowledge Products and Services. To complement lending, ADB will continue nonlending and KPS activities, including technical assistance totaling up to $4 million in any year (Appendix 6), in areas that align strongly with the CSP’s thrusts of supporting fiscal consolidation, the investment climate, and the MDGs.

    • Fiscal Responsibility. Support is programmed for improving Government’s risk management of public debt, and assessment and management of the contingent liabilities. Additional assistance could be available to augment revenue generation and financial management capacity in selected GOCCs and LGUs.
    • Urban Development, Water Supply and Environment Management. There are good prospects for KPS activities to improve the regulatory environment in the water supply and sanitation sub-sector as a basis for attracting private sector participation.
    • Transport. The ongoing Intermodal Transport Development PPTA³¹ may be redirected to support economic and sector work for planning and prioritizing transport sub-sectors to identify project opportunities, including feasibilities for bidding for private sector participation on a competitive basis, and enhancing the regulatory environment for shipping and air safety network and services. The lull in project lending provides an opportunity to address long-standing constraints related to land acquisition, eminent domain, resettlement compensation, and development of institutional capacity to address land and right-of-way acquisition and management.
    • Agriculture and Natural Resources. ADB will continue dialogue on development of sustainable enterprises and livelihoods, credit or inputs assistance for localized community development, and basic social services and infrastructure for improving quality of life of coastal residents, and rural poor. Pilot projects financed through bilateral trust funds or alternatives will be explored. Sector work will focus on improving LGU capacity for devolved responsibilities, as well as capacity strengthening for communitybased organizations, NGOs, communal irrigation systems, and irrigator cooperatives.
    • Health and Education. Efforts will focus on implementing the Health Sector Development Program, and completion of the Early Childhood Development Project. In the education sector, the move towards devolution is undermined by lack of budget cover. Faced with budget cover shortage for the past 3 years, and for 2004-2005, it is unlikely that the projects will be completed on time (end 2006). Given the delays, budget constraints, and large number of activities in the sector financed by other development partners, no additional activities in the education sector are planned for the CSP period.

57. The close alignment of ADB’s operational program with the Government’s 10-point agenda and priorities of the MTPDP is indicated in Table 4.

E. External Funding Coordination and Partnership Arrangements

58. ADB’s financial and technical resources will complement those from development partners, under the paradigm of “moving from coordination to cooperation”. The range of development partners is widening to include more intensive dialogue with civil society, members of Congress, and the private sector. ADB will continue to increase the partnerships for joint analytical and advisory work (e.g., membership of the Joint Oversight Committee for postconflict Mindanao includes some new partnerships with the Islamic Development Bank, the Bangsa Moro Development Authority, and NGOs). In conjunction with its lending program, ADB will continue to pursue cofinancing from other official and commercial sources. Dialogue is ongoing with the World Bank to develop not only parallel and complementary operations, but also to pursue SWAps through cofinancing of National Program Support operations to line agencies in ADB’s priority areas. ADB will maintain dialogue with the Government and private sector cofinanciers to identify appropriate financing for projects supported during 2005-2007, specifically through the use of its credit enhancement products.
59. ADB works closely with the World Bank and Japan Bank for International Cooperation (JBIC) through joint portfolio reviews, and regular technical working group meetings. Cofinancing partners for TAs and loans are being sourced to reduce the burden of project

financing on the Government budget. The guiding principle in both programming and implementation has been to move beyond coordination to cooperation to optimize delivery of existing programs and achieve a multiplier effect by combining resources.³² ADB leads in policy dialogue for the power sector and capital market reforms, while the World Bank leads in areas such as public sector management reforms and rural electrification. JBIC cofinancing is being explored for the power sector, with KfW in urban development projects, with the OPEC Fund in water supply, and AusAID in education, among others. ADB has co-led, with JBIC and the World Bank, harmonization of procurement and financial management policies and procedures in the Philippines, which is a strong supporter of the effort to reduce transactions costs of dealing with development partners, and is a pilot for country-level harmonization under the global harmonization effort. A proposed TA on Harmonization and Management for Development Results will focus on financial management, audit, gender, environment assessment, resettlement, and procurement. ADB leads and participates in development partner working groups, including those under the Consultative Group Framework and of UN agencies, covering Mindanao, governance, SMEs, anticorruption, decentralization, LGU benchmarking, microfinance, and health. ADB and other partners supported World Bank’s Development Innovative Marketplace for the Philippines, which encouraged solutions to poverty reduction by civil society. ADB, UNDP, and the World Bank formed the JNA Secretariat to conduct a JNA to identify priority activities for conflict-affected communities in support of the peace process with the Government and MILF (Appendix 7 presents a matrix of development partner cooperation).
60. There is growing consensus among development partners and the Government of the benefits of harmonized policies and procedures. ADB and World Bank are working with the Government on a harmonized framework for assistance, including common approaches to economic and fiscal analysis, procurement, and results frameworks. The Government, ADB and the World Bank are also seeking to identify a common set of indicators to be used in monitoring the assistance programs and progress towards outcomes. A common framework for outcomes and indicators would reinforce the fundamental alignment of development assistance with country-driven strategies. This synergy among the development partners, but not necessarily identical approaches, allows each to utilize its comparative advantage to help optimize development assistance and progress towards development outcomes.

F. Managing for Development Results

61. The Government of the Philippines has played a leading role in the multilateral dialogues to accelerate the global reform agenda for Harmonization and Development Effectiveness, including serving on the drafting committee for the recent Paris Declaration. The Government has endorsed results-based management and is incorporating a results-based framework into its development planning, project implementation, and monitoring, of development impact. ADB’s CSP complements this with its parallel framework. To facilitate the flow of new ODA support for the fiscal responsibility agenda, during the 2005 Philippine Development Forum the Government agreed with development partners and local stakeholders to hold regular joint performance reviews of progress toward major benchmarks for fiscal consolidation, especially revenue mobilization and deficit reduction. The 3-year CSP framework departs from the approach appropriate for a longer-term CSP. Within its shorter time frame, the 3-year CSP framework looks to substantive and measurable results that improve the fiscal outlook and investment climate, with a view to allowing resumption of more normal operations to promote broad-based and inclusive economic development. For the 3-year CSP, the quantitative results focus on fiscal consolidation, as indicated for example by improvement in the expected deficit/GDP ratio. The results framework is designed as a management tool to guide ADB operations (Figure 4); detailed activities are provided in Appendix 8.
62. There are several other salient aspects of the CSP results framework. First, there is no hierarchy or annual timing for fully processing the projects in the pipeline. For example, the timing of Board consideration for policy-based operations is dependent on the results of fiscal consolidation progress, as measured by the expected reduction in the deficit/GDP ratio, and progress and content of sector reform agendas. Second, the CSP results framework is not based on annual lending levels achieved, but on the qualitative process of continuous engagement with stakeholders, and quantitative progress on reducing the fiscal deficit. This allows ADB to be flexible in its response. Once significant progress has been achieved in improving the fiscal outlook, the CSP will be replaced with a medium-term, fully outcomeoriented CSP. Third, actions to achieve the expected reduction in the deficit/GDP ratio will precede ADB lending operations, rather than actual results of the actions. The complex political economy of the Philippines does not enable a firm timetable for the delivery of the actions for fiscal consolidation, either tax measures needing legislative action by Congress or decisions by independent regulatory agencies on such things as user charges. Efforts by the administration to increase tax collection efficiency, reduce corruption in revenue agencies, cap borrowing by GOCCs, increase consumer tariffs and service fees, and reduce public procurement costs will take time to take hold.
63. During the CSP period, any near-term measurable improvements in key social indicators, poverty reduction, or progress in the MDGs is unlikely given the limited public investment resources available. Although the economy has performed well, it remains subject to shocks. The private sector continues to grow, but has not produced jobs commensurate with that growth. No real progress on the longer-term outcomes or MDG’s can be expected in the absence of an improved fiscal outlook and investment climate. Immediate progress on these reforms will cement the cornerstone upon which both public and private investment can be mobilized, jobs created, infrastructure built, and essential services delivered to the poor.
64. While ongoing projects have experienced delays due to budget constraints, they are still expected to support the longer-term development outcomes. Maintaining the gains achieved in portfolio management through constant project monitoring and restructuring will be essential to the achievement of development results in the near-term from this ADB-assisted operations. Continued improvement in the implementation of ongoing projects will support ADB's contribution to development outcomes over the next 4–5 years.

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