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p. 1 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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Executive Summary

Circumstances coalesce to provide an opportunity to revitalize the ADB-Philippines development partnership. The second Arroyo administration has settled in though economic and political vulnerabilities remain. In the first year of its new term the Government has shown strong ownership and commitment to formulate and implement a conducive macroeconomic management framework for achieving its development agenda. A beginning has been made to reduce the consolidated fiscal deficit through a combination of new revenue measures, improved tax administration and actions to address inefficiencies of government corporations, especially in the power sector. The new strategy capitalizes on this framework, the Government’s Medium-Term Philippine Development Plan for 2004-2010, and derives from lessons-learned that flow from recent evaluations of the effectiveness of ADB’s past operations.

The strategy will benefit from ADB’s emerging responses to addressing in new ways challenges faced by middle-income countries. The Philippines has crossed the threshold of per capita incomes (beyond ADF norms of $925 in 1997 prices) but exhibits high poverty incidence. Growth has been stifled by the weak investment climate, distortions in industrial competitiveness, and governance problems in the administration and regulatory frameworks. The ADB-Philippines partnership is defined in the context of the emerging managing for results framework and application of best development practice coupled with the anticipated adoption of new financial approaches and modalities as well as new cost eligibility sharing arrangements. The strategy reinforces and complements support from other development partners, and corresponds to the capacity and comparative advantage of ADB to deliver its program.

The strategy builds ADB’s responses cautiously on the changing economic scenario. There is cause for optimism on grounds that fiscal reforms are being legislated and efforts launched to address sector reforms to revitalize infrastructure. However, the pace of reforms has yet to gain full momentum and in some areas structural reforms have yet to unfold to take stronger hold. In this emerging situation ADB has discussed engagement for a 3 year CSP which aims to be fiscally-responsive and investor friendly by addressing the country’s short, medium, and long-term structural reforms in key sectors. In addition to these broad objectives, the CSP proposes selective project interventions—health, water supply, slum upgrading, and SME development—to support progress toward MDG targets and poverty reduction.

Foremost, the CSP aligns with the priorities of the Government, supporting the focus on “fiscal responsibility” and the need to act urgently before the narrowing window of opportunity precludes effective corrective measures. The fiscal imbalance affects all aspects of the ADBPhilippines partnership, and requires ADB to eschew a “business as usual” approach. For example, the persistent annual negative net resource transfers since 1998 from ADB to the Government, despite evident large financing needs, reflects ADB’s difficulty to respond to a client in fiscal stress. Second, the CSP supports development of an enhanced investment climate and improved governance, as a necessary complement to the constraints on public spending. Policy engagement will stimulate private activity and improve productivity and competitiveness. ADB’s public sector operations support reforms that improve the fiscal outlook, investment climate, governance and the judicial system, while private sector operations will help mobilize resources into the improved business environment. Thus, ADB’s public and private sector operations will be catalytic and reinforcing. Third, the CSP supports faster achievement of the Millennium Development Goals. Fourth, the CSP aligns ADB’s operations with Government priorities, as well as with the operations of other development partners, to ensure synchronized and coordinated responses that reinforce economy-wide structural reforms. The CSP for Philippines contextualize the focus of ADB’s Poverty Reduction Strategy on pro-poor sustainable growth, good governance, and inclusive social development.

The CSP enhances the quality of the ADB-Philippines partnership to accelerate poverty reduction. It rests on embodying a break with past practice. First, the CSP has greater strategic focus. Second, it adopts tighter selectivity for operational activities—a clear set of criteria determines what activities qualify for ADB support. Third, it emphasizes quality-at-entry for all new activities. Fourth, it is anchored in a results framework. The CSP process involved high levels of rigor and participation, based on relevant facts and significant issues; the product introduces significant change in the mode of engagement.

ADB assistance for fiscal consolidation, an improved investment climate, strengthened governance and judicial system, and the Millennium Development Goals, will involve support for

• deeper structural reforms—(i) in the power sector to enhance financial solvency, regulation, and governance; (ii) in finance, to improve efficiency of intermediation; and (iii) for local government units, to strengthen fiscal management, capacity and governance;
• private investment—to offset shortfalls in public investment due to fiscal consolidation, while restoring investor confidence, especially by (i) strengthening governance through legal and judicial reforms; and (ii) promoting infrastructure and finance development;
• the Millennium Development Goals—through (i) improved health sector management and administration; (ii) water supply and sanitation; and (iii) microfinance, and small and medium enterprise development;
• mitigating economic and social disparities—through sub-regional development, which will be reinforced by ADB’s Regional Strategy and Program.

• investment lending that does not encroach on national Government finances;
• policy lending for sector reforms. This will depend on a conducive macroeconomic environment and commencement of substantive sector reforms; it will not run ahead of the necessary political cover, macro-economic fundamentals, and sector readiness;
• Use of ADB’s sub-sovereign, own recourse, and guarantee operations and private sector instruments;
• new financial instruments, approaches, and new procedures being adopted by ADB, including those being considered under the innovation and efficiency initiative;
• Technical assistance for knowledge management products.

The CSP’s three year coverage is flexible: rapid fiscal consolidation will diminish uncertainties sooner and a medium-term CSP will be produced earlier. The reverse holds for less successful fiscal consolidation. The CSP’s results framework will assist in determining timing for a medium-term CSP.

Over the three years, ADB’s lending scenario is critically linked to the pace of fiscal adjustment and sector reforms which help to reinforce and contribute to alleviate the fiscal burden by reducing the key sectors reliance on budget for financing their operations and investments as well as strengthening Local Government’s public finances. ADB, the World Bank, and IMF, have reached a common understanding of the fiscal consolidation process. Since the Government has taken adequate tax measures including reforms of VAT to lead to fiscal sustainability, ADB’s lending level support the upfront fiscal adjustment while reinforcing additional measures to feed into fiscal consolidation. Subject to continued improvements in fiscal consolidation process, ADB is contemplating lending levels could rise to the range of $1- $1.5billion to be supported sequentially by a set of cluster program loans during 2005-2007. 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.

The CSP has six chapters: (i) the introduction provides its rationale, summarizes the five thematic assessments supporting its preparation, and describes stakeholder participation; (ii) chapter 2 reviews experience and lessons of the ADB-Philippines partnership; (iii) chapter 3 describes the development context, and the major constraints to more rapid poverty reduction; (iv) chapter 4 provides the strategy and program, coordination with development partners, and the results-based management framework; (v) chapter 5 assesses risks to implementation and achievement of outcomes; and (vi) chapter 6 considers the resources needed to deliver the CSP.

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