Philippines: Local Government Financing and Budget Reform Program Cluster

Transcription

1 Completion Report Program Number: Loan Numbers: 2387, 2584 January 2013 Philippines: Local Government Financing and Budget Reform Program Cluster

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3 CURRENCY EQUIVALENTS Currency Unit peso (P) Subprogram 1 At Appraisal At Program Completion (30 October 2007) (09 April 2008) P1.00 = $0.027 $0.024 $1.00 = P44.02 P = $0.008 $0.010 $1.00 = Subprogram 2 At Appraisal At Program Completion (6 October 2009) (31 March 2010) P1.00 = $0.021 $0.022 $1.00 = P46.61 P45.14 ABBREVIATIONS ADB Asian Development Bank AFD APIS BIR Agence Française de Développement annual poverty indicator survey Bureau of Internal Revenue BLGF Bureau of Local Government Finance CCD Coordination Committee on Decentralization CLUP comprehensive land use planning DBM DENR DILG DMF Department of Budget and Management Department of Environment and Natural Resources Department of Interior and Local Government design and monitoring framework DOF Department of Finance FIES family income and expenditure survey GDP gross domestic product GFC global financial crisis GFI GPRA HUC government financial institution Government Procurement Reform Act highly urbanized cities IRA internal revenue allotment LGC LGFBR LGFPMS LGPMS LGU local government code Local Government Financing and Budget Reform local government financial performance management system local government performance management system local government unit MDFO Municipal Development Fund Office MDG MPI MTPDP Millennium Development Goal multidimensional poverty index Medium-Term Philippine Development Plan NDHS NEDA national demographic and health survey National Economic and Development Authority

4 NGA national government agency ODA official development assistance PDAF Priority Development Assistance Fund PDF PFM Philippines Development Forum public financial management PROLEND program lending facility SIE SRE TA statement of income and expenditures statement of receipts and expenditures technical assistance NOTES (i) (ii) The fiscal year (FY) of the Government and its agencies ends on 31 December. In this report, "$" refers to US dollars. Vice President S. Groff, Operations 2 Director General K. Senga, Southeast Asia Department (SERD) Director S. Hattori, Public Management, Financial Sector, and Trade Division, SERD Team leader Team members J.L. Gomez Reino, Senior Public Management Specialist, SERD R. Anglingkusumo, Financial Sector Economist, SERD R. Aquino, Associate Project Analyst, SERD K.M. Sanchez, Operations Assistant, SERD R. Ramilla-Siquijor, Operations Assistant, SERD S. Tukuafu, Principal Financial Sector Specialist, SERD In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

5 BASIC DATA CONTENTS Page I. PROGRAM DESCRIPTION 1 II. EVALUATION OF DESIGN AND IMPLEMENTATION 2 A. Relevance of Design and Formulation 2 B. Program Outputs 3 C. Program Costs and Disbursements 8 D. Program Schedule 8 E. Implementation Arrangements 8 F. Conditions and Covenants 8 G. Related Technical Assistance 8 H. Consultant Recruitment and Procurement 10 I. Performance of the Borrower and the Executing Agency 10 J. Performance of the Asian Development Bank 10 III. EVALUATION OF PERFORMANCE 11 A. Relevance 11 B. Effectiveness in Achieving Outcome 11 C. Efficiency in Achieving Outcome and Outputs 13 D. Preliminary Assessment of Sustainability 13 E. Impact 13 IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 14 A. Overall Assessment 14 B. Lessons Learned 15 C. Recommendations 15 APPENDIXES 1. Design and Monitoring Framework Performance of Local Government Financing and Budget Reform Program, Subprogram 1 Triggers Performance of Local Government Financing and Budget Reform Program, 22 Subprogram 2 Triggers 4. Status of Compliance with Loan Covenants Post-LGFBR Program Monitoring Framework Project Completion Report: Government Survey Results 28

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7 i BASIC DATA: LOCAL GOVERNMENT FINANCING AND BUDGET REFORM PROGRAM CLUSTER, SUBPROGRAM 1 A. Loan Identification 1. Country 2. Loan Number 3. Program Title 4. Borrower 5. Executing Agency 6. Amount of Loan 7. Program Completion Report Number Philippines 2387 Local Government Financing and Budget Reform Program (Subprogram 1) Republic of the Philippines Department of Finance (DOF) 34,253,100,000 equiv $300,000, B. Loan Data 1. Fact-finding Date Started Date Completed 2. Appraisal Date Started Date Completed 3. Loan Negotiations Date Started Date Completed 4. Date of Board Approval 5. Date of Loan Agreement 6. Date of Loan Effectiveness In Loan Agreement Actual Number of Extensions 7. Closing Date In Loan Agreement Actual Number of Extensions 8. Terms of Loan Interest Rate Maturity (number of years) Grace Period (number of years) 9. Terms of Relending (if any) Interest Rate Maturity (number of years) Grace Period (number of years) Second-Step Borrower 15 May June July July December December December February April April Mar April LIBOR-based lending rate 15 years 3 years Not Applicable Not Applicable Not Applicable Not Applicable

8 ii 10. Disbursements a. Dates Initial Disbursement 09 April 2008 Effective Date 07 April 2008 Final Disbursement 09 April 2008 Original Closing Date 31 March 2008 Time Interval - Time Interval - b. Amount Category or Subloan Original Allocation Last Revised Allocation Amount Canceled Net Amount Available Amount Disbursed Undisbursed Balance Local Government Financing and Budget Reform Program 34,253 million None - 34,253 million 34,253 million - USD Equivalent $300 million - $300 million $ million Local Costs (Financed) - Amount ($) None - Percent of Local Costs None - Percent of Total Cost None C. Program Data 1. Program Cost Cost Appraisal Estimate Actual 1 Foreign Exchange Cost $300,000,000 $337,552,086 Total 2. Financing Plan Cost Appraisal Estimate Actual Implementation Costs ADB-Financed Single Tranche $300,000,000 $337,552,086 Total $300,000,000 $337,552,086 ADB = Asian Development Bank 1 US$ equivalent of the actual loan disbursements of 34,253,100,000.

9 iii 3. Cost Breakdown by Program Component Component Appraisal Estimate Actual Single Tranche $300,000,000 $337,552, Program Schedule Item Appraisal Estimate Actual Other Milestones Single Tranche $300,000,000 $337,552,086 Total $300,000,000 $337,552, Program Performance Report Ratings Implementation Period Development Objectives Ratings Implementation Progress 07 Apr Apr 2008 S S S = satisfactory. D. Data on Asian Development Bank Missions Name of Mission Date No. of Persons No. of Person-Days Specialization of Members a Fact-Finding 15 May06 June a, b, c, d, e Appraisal 1027 July a, b, c, f a a public sector management specialist, b country specialist, c senior capacity development specialist, d social security specialist, e financial management specialist, f staff consultant.

10 iv BASIC DATA: LOCAL GOVERNMENT FINANCING AND BUDGET REFORM PROGRAM CLUSTER, SUBPROGRAM 2 A. Loan Identification 1. Country 2. Loan Number 3. Program Title 4. Borrower 5. Executing Agency 6. Amount of Loan 7. Program Completion Report Number B. Loan Data 1. Fact finding Date Started Date Completed 2. Appraisal Date Started Date Completed 3. Loan Negotiations Date Started Date Completed 4. Date of Board Approval 5. Date of Loan Agreement 6. Date of Loan Effectiveness In Loan Agreement Actual Number of Extensions 7. Closing Date In Loan Agreement Actual Number of Extensions 8. Terms of Loan Interest Rate Maturity (number of years) Grace Period (number of years) 9. Terms of Relending (if any) Philippines 2584 Local Government Financing and Budget Reform Program (Subprogram 2) Republic of the Philippines Department of Finance (DOF) $225 million June June July August September September November December December December March March LIBOR-based lending rate 15 years 3 years NA 10. Disbursements a. Dates Initial Disbursement 29 December 2009 Effective Date 29 December 2009 Final Disbursement 29 December 2009 Original Closing Date 29 December 2009 Time Interval 0 Time Interval 0

11 v Category or Subloan b. Amount Original Allocation Last Revised Allocation Amount Canceled Net Amount Available Amount Disbursed 1 $225 million None - $225 million $225 million Undisbursed Balance Total $225 million - $225 million $225 million 11. Local Costs (Financed) - Amount ($) None - Percent of Local Costs None - Percent of Total Cost None C. Program Data 1. Program Cost Cost Appraisal Estimate Actual Foreign Exchange Cost $441,000,000 $441,000,000 Total $441,000,000 $441,000, Financing Plan Cost Appraisal Estimate Actual Implementation Costs ADB-Financed Single Tranche AFD-Financed $225,000,000 $216,000,000 $225,000,000 $216,000,000 Total $441,000,000 $441,000,000 ADB = Asian Development Bank 3. Cost Breakdown by Program Component Component Appraisal Estimate Actual ADB-Financed (Single Tranche) AFD-Financed $225,000,000 $216,000,000 $225,000,000 $216,000,000 Total $441,000,000 $441,000, Program Schedule Item Appraisal Estimate Actual Other Milestones ADB-Financed (Single Tranche) AFD-Financed Total $225,000,000 $216,000,000 $441,000,000 $225,000,000 $216,000,000 $441,000,000

12 vi 5. Program Performance Report Ratings Ratings Implementation Period Development Objectives Implementation Progress 28 Dec Dec 2009 S S 01 Jan Mar 2010 S S HS = highly satisfactory, S = satisfactory. D. Data on Asian Development Bank Missions Name of Mission Date No. of Persons No. of Person-Days Specialization of Members a Fact-Finding 116 June a, b, c, f Appraisal 27 July 5 Aug a, b, c, f a a public sector management specialist, b country specialist, c senior capacity development specialist, d social security specialist, e financial management specialist, f staff consultant.

13 I. PROGRAM DESCRIPTION 1. Background. In the mid 2000s, under the umbrella of the Medium-Term Philippine Development Plan (MTPDP) , the Government of the Philippines initiated a wideranging and comprehensive program of reforms to address the long-standing problems of poverty and unemployment, and achieve the Millennium Development Goals (MDGs). 1 The Philippines Development Forum (PDF) 2 in 2007 reiterated the government s commitment to poverty reduction, through nurturing local growth, fostering local economic development, and promoting better service delivery by local governments. More specifically, the government sought to strengthen poverty reduction efforts by continuing with its reforms in fiscal management and service delivery by local government units (LGUs) Local government reform in the Philippines had started a decade and a half earlier with the enactment of the Local Government Code (LGC) in The LGC provided a comprehensive framework for local autonomy and decentralization. It re-assigned various service delivery responsibilities from the national government to LGUs and expanded the scope of local government taxing powers. As a result, the LGC opened up new sources of development financing, and stressed the key role played by LGUs in local development dynamics. The Local Government Financing and Budget Reform (LGFBR) program cluster has been an integral part of local government reforms. Prior to the LGFBR program, local government reforms had produced a number of well-performing LGUs. Yet, there was also considerable scope for improving the ability of LGUs to be more responsive to local development challenges. Areas that were perceived as reform priorities included (i) clearer and more streamlined expenditure assignments between national government agencies (NGAs) and LGUs, (ii) wider alternatives for LGUs resource mobilization, (iii) increased capacity of LGUs in tax administration, budgeting, and financial management, (iv) better structures, procedures, and information systems for NGAs to exercise their oversight roles in LGUs activities, and (v) a stronger legal and institutional framework for decentralization. 3. The need to enhance the pace of local government reform increased in , on the back of the global financial crisis (GFC). Hit by reduced access to capital markets, decreased remittances, and weakened global demand for exports, GDP growth slowed sharply and poverty reduction came to a halt. The deteriorating external environment and its impact on the domestic economy brought to the forefront the critical role that LGUs could play in cushioning the impact of the GFC, stimulating domestic demand, and sustaining the government s economic development agenda. It was envisaged that the effectiveness of the fiscal stimulus package in supporting growth and sustaining poverty reduction could be enhanced by strengthening the effectiveness and efficiency of LGUs in planning, funding, and delivering key government services at the local level. 4. Program s impact, outcome, and outputs. The LGFBR program cluster was expected to increase the efficiency and effectiveness of LGUs in delivering basic public services to their constituent communities. To bring about this expected impact, the program cluster s outcome 1 Government of the Republic of the Philippines, National Economic Development Authority Medium-Term Philippines Development Plan (MTPDP) Manila. 2 The Philippines Development Forum or PDF is the primary mechanism of the Government for facilitating substantive policy dialogue among stakeholders on the country s development agenda. Co-chaired by the Government (Department of Finance) and the World Bank, comprises representatives from development partners, civil society, academia, private sector, and the legislature. 3 LGUs comprise highly urbanized cities, independent component cities, provinces, component cities, municipalities, and barangays (villages).

14 2 was the enhanced resources and capacities of LGUs to plan and budget for the general welfare of their constituent communities in a transparent and accountable way. 5. The scope of the program included reforms to (i) improve the release of LGU shares in national government revenues; (ii) implement a financial reporting system; (iii) improve the local government performance measurement system; (iv) facilitate access of LGUs to development credit financing; and (v) improve the collection of local business and real property taxes. The Design and Monitoring Framework (DMF) of the LGFBR program is presented in Appendix 1. Policy measures undertaken under subprogram 1 and 2 are presented in Appendix 2 and 3, respectively. 6. Financing and cofinancing. The program cluster comprised two single tranche loans (or subprograms) from 2006 to Each subprogram was funded from the ordinary capital resources of the Asian Development Bank (ADB). Subprogram 1 ($300 million) was approved by ADB s Board on 26 December 2007, and subprogram 2 ($225 million) on 26 November Agence Française de Developpement (AFD) provided an additional $216 million equivalent for subprogram 2 through a collaborative cofinancing arrangement. Subprogram 1 ( ) was implemented with a well-defined, medium-term framework specified at the outset, including reforms prior to Board consideration. 4 Subprogram 2 ( ) was implemented based on the medium-term framework specified under subprogram 1, with adequate room for flexibility in the program s design to accommodate the progress made under subprogram 1 and changes in the external environment resulting from the GFC. 5 II. EVALUATION OF DESIGN AND IMPLEMENTATION A. Relevance of Design and Formulation 7. The design of the LGFBR program was highly relevant. The program was aligned with the government s reform agenda, as conceived in the MTPDP, to reduce poverty by emphasizing the effectiveness and efficiency of local governments in delivering basic public services. Through the government-led PDF, ADB and the government jointly defined the policy measures implemented under the LGFBR. 6 The program cluster consolidated key fiscal, expenditure, budget, and planning reforms in local governance under five key policy areas (described in subsection II.B below). The program also pursued capacity building initiatives, coordination among oversight agencies, and transparency in local fiscal governance. 8. The LGFBR program was also aligned with a core element of ADB s country strategy and program for the Philippines, and it was the first policy program that addressed major policy issues surrounding local governance. 7 Complementing the broader policy support provided by the Development Policy Support Program, the LGFBR program was central to 4 ADB Report and Recommendation of the President to the Board of Directors: Proposed Program Loan and Technical Assistant Grant to the Republic of Philippines: Local Government Financing and Budget Reform Program Cluster (Subprogram 1). Manila (Loan 2387-PHI). 5 ADB Report and Recommendation of the President to the Board of Directors: Proposed Program Loan to the Republic of Philippines for Subprogram 2: Local Government Financing and Budget Reform Program Cluster. Manila (Loan 2584-PHI). 6 PDF is a forum that serves as a venue for dialogue on core development issues, including those concerning local governments (finance, capacity development, performance benchmarking, and policy reforms on devolution). 7 ADB Country Strategy and Program: Philippines, Manila.

15 3 ADB s country operations business plan , which strongly underscored the role of decentralization and good local governance as outlined in the MTPDP. 8 B. Program Outputs 9. The expected outputs of the LGFBR program were grouped into five components or policy objectives: (i) improved completeness, timeliness, and transparency of releases of LGU shares in national government revenues; (ii) enhanced efficiency and accountability in financial management, planning, and expenditure management at the local level; (iii) enhanced effectiveness and transparency of critical public services at the local level; (iv) improved LGU access to public and private sources of capital for financing of policy reforms and development projects; and (v) reduced dependence on national transfer through additional sources of revenue developed at the local level. This subsection summarizes the sector analysis underpinning the program design at the time of processing, and the measures implemented under the cluster. 1. Intergovernmental fiscal relations: improved completeness, timeliness, and transparency of releases of LGU shares in national government revenues. 10. Government transfers to LGUs are of three types: (i) formula-based block grants (i.e., the internal revenue allotment (IRA); (ii) origin-based share in national government revenues (i.e., share in national wealth and other taxes); and (iii) ad hoc categorical grants. The IRA is the most significant revenue source, especially for the lower income class LGUs. 9 Under the LGC, the aggregate IRA of LGUs is set at 40% of the actual internal revenue tax collections of the government three years prior to the current year The effectiveness of national transfers to LGUs was constrained by several obstacles. (i) The quarterly IRA releases were not performed in a reliable manner. Despite the provisions of the LGC, the government retained considerable discretion in appropriating and releasing IRA. This turned the IRA into a highly unpredictable revenue source for LGUs when the government s fiscal position was unfavorable. At the same time, this limited LGUs ability to budget and plan effectively. It also hampered LGUs access to financial markets, since creditors made LGUs rely heavily on the IRA deposits as collateral. (ii) IRA allocations did not fix the substantial vertical and horizontal fiscal imbalances in LGU financing. Transfers did not adequately cover the cost of devolved functions, and discriminated between certain groups of LGUs, with provinces and municipalities complaining of unfavorable treatment. (iii) Widespread complaints were reported on the non-transparent allocation of the Priority Development Assistance Fund (PDAF). The PDAF is allocated to members of Congress for discretionary spending at the LGU level, and if these non-ira grants are not channeled to local investments in a transparent way, they can potentially undermine LGU planning for strategic use of the funds. 8 ADB Country Operations Business Plan: Philippines, Manila. 9 Bureau of Local Government Finance classifies LGUs in 6 classes based on a four year average of their regular income with 1 being the wealthiest. 10 The aggregate IRA is then divided among different local government levels as follows: 23% to provinces, 23% to cities, 34% to municipalities, and 20% to barangays. The IRA share of each tier of local government is then apportioned to individual LGUs within each level based on population (50%), land area (25%), and equal sharing (25%).

16 4 (iv) The release of LGU shares in national wealth taxes was neither timely nor complete. The reasons for this were: (i) problems in accurately estimating tax collections from natural resources since actual tax collections for the immediately preceding year are not yet known when the General Appropriation Act is prepared; and (ii) lack of information on the location of the taxable entity. 12. The government undertook reforms in intergovernmental fiscal relations to improve the ability of LGUs to plan and budget their resources: (i) The reforms improved the completeness, timeliness, and transparency of the release of LGU shares in national government revenues. Republic Act 9358 was passed in 2006, providing for automatic appropriation of the IRA from The predictability and transparency in the release of the IRA was further improved by the timely estimation and certification of the IRA shares by the Bureau of Internal Revenue (BIR), and distribution of the Local Budget Memorandum (LBM) to LGUs by June of every year, announcing their IRA share for the coming year. To improve the transparency framework, the government, through the Department of Budget and Management (DBM), also posted on its website the IRA share of each of the 43,704 local governments in line with the formulas prescribed by the LGC, and the releases of the PDAF. This enhanced transparency framework has allowed citizens to monitor the amount each LGU is receiving from the government and reduced uncertainty in fiscal planning at the local level. (ii) The reforms improved the release of LGU special shares in national wealth and other taxes. The LGFBR program supported the issuance and implementation of Joint Circular 20061, which provided a multidepartment framework for the release of LGU shares of national wealth in mining, forestry, and energy royalties. In addition, Joint Circular has streamlined the documentary procedure and delineated departments responsibilities for the prompt release of LGUs share of mining taxes. 11 With these actions, over the medium term, the amount of transfer resources flowing to LGUs has increased and the uncertainty over the releases of LGU shares of national wealth has been reduced. 2. Enhanced efficiency and accountability in financial management, planning, and expenditure management. 13. The LGFBR noted that the efficiency and accountability in financial management, planning, and expenditure management at the local level could be improved by addressing several key challenges. First, local planning and expenditure management needed to be improved by linking financial and budget reporting to local development planning. Second, the planning links between regions and provinces were weak as coordination between government and LGU planning units was lacking. Investment planning at the local level was formulated independently of regional and national investment plans and vice versa. Third, revenue estimates during budget formulation were very poor, distorting the integrity of local budgeting. In addition, LGUs reporting and procurement practices were totally inadequate. Accordingly, the objectives of this policy area were to (i) streamline the oversight and capacity development functions of NGAs,(ii) improve the fiscal management capacity of LGUs, and (iii) improve implementation of the Government Procurement Reform Act (GPRA). 11 The Joint Circular was issued by the Department of Finance (DOF), DBM, Department of Interior and Local Government (DILG), and Department of Environment and Natural Resources (DENR).

17 5 14. To streamline the oversight and capacity development functions of NGAs, the LGFBR program aimed to enhance local transparency and accountability in financial management, planning, and expenditure management. It attempted to improve debt management and the information base for LGU performance measurement and credit rating, and to improve also the competency of local financial managers. Specifically, the program supported: (i) the issuance of a Joint Circular to institutionalize a coordinated framework on harmonizing local planning, investment programming, revenue administration, budgeting, and expenditure management; 12 (ii) the issuance of an updated budget operations manual, with 90% of LGUs trained in its use; (iii) the completion and distribution of provincial planning guidelines and the training of local officials in using the guidelines to enable them to plan, identify, prepare, and prioritize critical programs and projects, and raise and allocate resources; and (iv) the preparation of provincial development and physical framework plans and a provincial development investment program using the guidelines on provincial and local planning and expenditure management. Under the LGFBR, the government was also able to: (i) implement the updated budget operations manual for provinces (81) and highly urbanized cities (HUCs) (28); (ii) complete and implement a debt monitoring system at the provincial, city, and municipal levels; and (iii) issue the barangay operations manual. 15. To improve the fiscal management capacity of LGUs, the LGFBR program supported: (i) the development, computerization, and implementation of the statement of receipts and expenditures (SRE) financial reporting system, and harmonization of the SRE with the new government accounting system; (ii) 2,551 mandatory and demand-driven training programs for 494 LGUs in project management, operations and maintenance, planning, and investment programming; and (iii) the development and implementation of a competency certification system for local treasurers. On this last measure, the government also provided assistance to the Mayors Development Center for the distance training of treasurers, the training of 228 LGUs in standardized project financing, and other demand-driven training. Over the medium term, these measures have improved the timeliness and accuracy of financial information for LGU financial managers, and the overall fiscal and financial management systems. 16. To improve implementation of the GPRA, the LGFBR program aimed to improve procurement efficiency and transparency at the local level, including the barangay level. To achieve this, the program: (i) provided training courses on the GPRA to 86% of all LGUs; (ii) prepared and pilot tested simplified procurement procedures for LGUs; (iii) developed and implemented the barangay procurement manual; and (iv) simplified procurement procedures and bidding documents. All LGUs implemented the GPRA with the help of the simplified guide to the Generic Procurement Manual. 3. Performance Measurement and Service Delivery: enhanced effectiveness and transparency of critical public services at the local level. 17. Development of an adequate framework for providing resources, including through private financing, based on LGU s performance in the delivery of local services, was identified as a reform priority. To address this issue, a two-track reform was implemented under the LGFBR to develop a framework for performance-based grants and simultaneously provide a link for improving the availability of credit financing to LGUs (see Program Output 4 described below). More specifically, this key policy area sought to: (i) enhance financing options as a way to improve infrastructure and the provision of social services at the local level; and (ii) improve 12 The Joint Memorandum Circular was agreed upon by the DOF, DBM, DILG, and the National Economic and Development Authority (NEDA).

18 6 efficiency in the devolution of key functions and services, and enhance the effectiveness of existing LGU performance monitoring systems, thus increasing private sector confidence in lending to LGUs. 18. To enhance financing options for improved service delivery in key sectors, the LGFBR program supported the government s plan to improve LGUs access to development credit, which would likely lead to improvements in the environment, local urban infrastructure, health, and rural and agricultural services. The program also assisted the government in completing a study on performance-based grants for LGUs, and in adopting a framework for such grants. The program supported the institutionalization of a coordination body, the Coordination Committee on Decentralization (CCD), at the national level to address recurrent and future issues on decentralization. The program expanded the coverage of the Local Government Performance Management System (LGPMS) and introduced the system to all LGUs. The system provided LGUs with a tool to assess their strengths and weaknesses in the performance of their roles and responsibilities. Indicators included in the system were derived largely from the LGC and measured performance in four key areas: governance, administration, social services, and economic development. The program also supported the integration of the Local Government Financial Performance Monitoring System (LGFPMS) into the LGPMS, enriching the performance monitoring framework for local governments in the country with the inclusion of financial performance indicators. 4. Improved LGU access to public and private sources of capital for the financing of policy reforms and development projects. 19. Given the expanded responsibilities of LGUs to provide a wide range of services to local constituents, such as services in basic infrastructure and health, they require access to both public and private sources of financing. Aligned to this, the government s long-term vision was for the capital market and private lending to play a vital role in local government financing, in order to diversify the sources of development credit for LGUs. Not all LGUs were able to borrow from banks because of their lack of creditworthiness. However, cities had better access to credit financing because of their creditworthiness. Thus, cities accounted for 54 percent of total outstanding LGU loans in 2004, while provinces accounted for 18.8 percent, and municipalities for 25.8 percent. Most LGUs relied primarily on Government Financial Institutions (GFIs) and the Municipal Development Fund Office (MDFO) to finance the development of infrastructure, capital investment, and a portion of operating expenses. In 2006, GFIs provided around 76% of LGU development credit financing and the MDFO 7%. The GFIs had an advantage in the LGU credit market because of their role as LGU depository banks. In the event of a default in the payment of interest and amortization of the principal, the GFI, through a back-to-back agreement with the LGU, can debit the LGU s IRA depository account in the GFI. This created a structural impediment to private banks entry into the market for lending to LGUs. 20. The LGFBR program supported the government s agenda to: (i) improve LGU access to private sources of financing, thus increasing LGUs ability to finance investments; (ii) increase the availability of development financing for LGUs to achieve service delivery objectives; and (iii) improve availability of financial information on LGUs to provide private investors with more accurate information for assessing their creditworthiness. 21. To improve LGU access to private sources of financing, the LGFBR helped in the adoption of the LGU financing framework as a national policy, and of the national government LGU cost sharing policy for the evaluation and processing of projects involving devolved activities for LGUs financed by MDFO. The program also supported the issuance of guidelines

19 7 for LGUs to open depository accounts in private banks. As a result, the DOF issued department order no , allowing private, thrift, rural, and cooperative banks to act as LGU depository banks. With the aim of increasing the availability of development financing for LGUs, the program supported the Program Lending (PROLEND) facility, as a program lending facility, providing concessional credit financing to LGUs. The LGFBR also assisted in (i) the design of a government financing window for projects supporting the MDGs, and (ii) the establishment of a Disaster Calamity Fund. As regards financial information on LGUs, the program supported the revision of the income classification system for LGUs, which considers only LGUs own-source revenues as an indicator, and integrated the system with the LGPMS. The LGFBR has assisted also in the computerization of the SRE financial reporting system and its harmonization with the New Government Accounting System, and the development of a debt certification system. These activities provide potential creditors and investors with a better picture of the LGUs ownsource revenue-generation capacity. 5. Development of additional sources of revenue at the local level, thereby reducing dependence on the IRA. 22. The LGFBR design noted that LGUs own source of revenue for development financing was limited, thus creating dependency on the IRA. In 2006, tax revenue accounted for only 25 percent of total LGU income. To generate additional revenues, the LGUs imposed a huge array of taxes, fees, and charges, with low collection rates and high administrative costs. The lack of professional staff and inadequate automation were the constraints faced by LGUs in their tax administration activities. These constraints affected all aspects of tax administration, including poor taxpayer registration, inadequate tax law enforcement, and the lack of records and audit, resulting in widespread tax delinquencies. This was further aggravated by the lack of implementing guidelines governing local taxation. Hence, there was a need to focus on taxes, fees, and charges that had high yield potential, and on improving their administration and collection. 23. The LGFBR supported the government in achieving two key reform objectives: (i) enhancing LGUs ability to generate revenues from local business taxes; and (ii) improving the collection of real property taxes. Under the first objective, an executive order was issued requiring the BIR and its regional offices to provide tax information to LGUs. Interpretation of the situs of tax rule for banks under Local Finance Circular 193 on the levying of a local business tax was revised in In addition, guidelines were issued on the situs of tax rule for mining firms in regard to the local business tax. A manual on creating a business taxpayers database and billing and collection system for LGUs was developed and distributed. In addition, 72 LGUs were trained under MDFO s Local Government Finance and Development project (LOGOFIND) and 11 LGUs availed of loans under the Business Tax Enhancement Program of MDFO s LOGOFIND initiative. 24. Under the second objective, the following was achieved: (i) 1,002 LGUs were trained under MDFO s LOGOFIND on revenue mobilization and updating the local revenue code;(ii) 60 LGUs availed of loans for real property tax improvements under MDFO s LOGOFIND projects; (iii) valuation standards for equipment and machinery were issued as an addendum to the assessors manual; and (iv) valuation training on machinery and equipment was completed for 70 LGUs. The manual includes revised valuation standards, a code of ethics, mass appraisal, and market values as the basis for valuation. With the implementation of the updated manual on valuation standards for machinery and equipment, the collection of property taxes was expected to improve.

20 8 C. Program Costs and Disbursements 25. The cost of the LGFBR program cluster was $525 million. This was funded from ADB s ordinary capital resources and consisted of two single-tranche loans of 34,263,100 or $300 million equivalent for subprogram 1 and $225 million for subprogram 2. The first tranche of 34,263,100 was valued at $337,552,086 on 9 April 2008 and was released on April 7, The second tranche of $225 million for subprogram 2 was released on December 28, AFD provided additional financing of $216 million for subprogram 2 through a collaborative cofinancing arrangement with ADB. D. Program Schedule 26. The implementation period for subprogram 1 was from January 2006 to 31 December 2007, while subprogram 2 was implemented from January 2008 to 31 December The loan accounts were closed on 9 April 2008 for subprogram 1 after one extension and 31 March 2010 for subprogram 2. E. Implementation Arrangements 27. DOF was the executing agency responsible for the overall implementation of the two subprograms, including compliance with the policy actions, program administration, disbursements, and maintenance of all program records. An LGFBR program coordination committee (the Committee) was established at the start of subprogram 1. It was chaired by the undersecretary of DOF and its members were officials from the implementing agencies, namely BLGF, MDFO, DILG, DBM, and NEDA. The committee was responsible for coordinating the implementation of LGFBR program policy actions with agencies supporting the program and met quarterly to monitor progress and oversee implementation of the program. F. Conditions and Covenants 28. The program cluster accomplished 42 policy triggers. The status of compliance with the policy triggers for each subprogram is shown in Appendix 2 and 3. In addition to the policy triggers, both subprograms had additional covenants on administering the program, all of which were complied with (Appendix 4). G. Related Technical Assistance 29. Two accompanying advisory TA projects, were approved to complement the LGFBR program. 13 The TA 7019 project that accompanied subprogram 1, funded by the Japan Special Fund, was designed to support implementation of the LGFBR program cluster by (i) building institutional capacity in the development and implementation of a medium-term reform agenda in local government financing and governance; (ii) providing the government with just-in-time policy advice; and (iii) facilitating achievement of the delivery targets and commitments in the LGFBR s policy matrix. The total cost estimate was $1.1 million, with ADB providing $0.8 million and the government the balance of $0.3 million for the remuneration and per diem of local consultants ($180,000) and office accommodation, transport, and other costs ($120,000). Actual disbursements amounted to $742,230 and the project was closed on 25 August The 13 ADB Technical Assistance to the Republic of the Philippines for Local Government Financing and Budget Reform Program. Manila. (TA 7019) and ADB Technical Assistance to the Republic of the Philippines for Support to Local Government Financing. Manila. (TA 7451).

21 9 executing agency for the TA was DILG. A project steering committee consisted of DILG, DOF, DBM, NEDA, and representatives of the League of Provinces, League of Municipalities, and League of Cities. DILG coordinated with DBM, DOF, NEDA, the LGU Leagues, and participating LGUs. The project steering committee met every quarter to review the written assessment of implementation progress and recommendations prepared by a technical committee, and discussed the review with ADB. 30. The TA was rated successful, 14 as it delivered a wide range of useful outputs and welltargeted activities for improved local fiscal management. The outputs of the TA were organized under three main components. 15 (i) Component I. A Coordination Committee on Decentralization (CCD) was established to strengthen the institutional coordination of decentralization reforms. The CCD promoted, coordinated, and oversaw the decentralization reforms, including the changes envisaged in the LBFGR policy matrix. The CCD has been very successful in defining a coordinated agenda of reforms and ensuring adequate dialogue across (ii) stakeholders, including government agencies, LGUs and development partners. Component II. Planning and budgeting management capacity at the city level has been strengthened through the implementation of: (i) an enhanced guide to Comprehensive Development Plan (CDP) preparation, (ii) training modules and session guides for the conduct of courses on CDP preparation, (iii) a cross-reference guide on suggested tools and techniques for planning, investment programming, and plan monitoring and evaluation, extracted from the various manuals and guidebooks prepared by the relevant NGAs, and (iv) reports on the consultations among all stakeholders on the harmonization of the Comprehensive Land Use Plan (CLUP) and CDP. (iii) Component III. Revenue generation and service delivery was enhanced through the improved implementation of the Local Governance Performance Management System (LGPMS). This was achieved through the improvements to the LGPMS manual, and through the widespread use of LGPMS data. In addition, the TA assisted in refining the LGPMS system design, and the system for monitoring and analyzing overall LGU performance. This TA initiated work on a number of key areas further developed with the LGFBR. 31. The TA 7451 project accompanying subprogram 2 was estimated at $1 million, with ADB financing $0.7 million from the Technical Assistance Special Fund. Total actual disbursements amounted to $0.607 million. The TA provided analytical inputs, system development, and institutional capacity building support to BLGF, MDFO, and DBM to further strengthen their capabilities to support LGUs in effecting key local resource mobilization, expenditure management, and service delivery reforms. This TA was completed in September 2012, and its associated TA completion report will be prepared in The TA has been very successful in providing continuity to reforms incorporated in the LGFBR s post program partnership framework. 14 ADB Local Government Financing and Budget Reform Program (TA 7019). Technical Assistance Completion Report. Manila. 15 See ADB TA 7019 PHI: Local Government Financing and Budget Reform Project, Final Report (Volume 1: Main Report and Appendices), Chapter 3, pp ADB Technical Assistance to the Republic Philippines for Local Governance and Fiscal Management Project (formerly Strengthening LGU Management and Administration). Manila (TA 4778).

22 10 H. Consultant Recruitment and Procurement 32. Implementation of the TA under subprogram 1 took place from August 2008 to May 2010 with a total of person-months of national consultants. The consultants were mostly engaged under ADB s contract with a consulting firm (Poyry IDP Consult, Inc.), but with the addition of three individual experts. The TA delivered most of the expected outputs and the performance of the consultants was satisfactory. The TA under subprogram 2 was also implemented by Poyry IDP Consult, Inc, from September 2010 to September 2012, with a total input of 64 person-months. I. Performance of the Borrower and the Executing Agency 33. The performance of the government is rated highly satisfactory. Through the CCD and the PDF, the government continued to refine its long-term vision for decentralization and reforms in local public financial management. Government ownership of the program was very strong, as shown by the number of quality policy triggers and measures completed on time during the program cluster period. 34. The commitment of the DOF (the executing agency) and the implementing agencies was also commendable, given the substance of the reforms undertaken by these agencies, which in many cases required solid inter-agency coordination to accomplish. The issuance of Joint Memorandum Circulars orchestrated by the DOF is one example of the strong cooperation among the implementing agencies. Other instances include the two-track reform under the Performance Measurement and Service Delivery component, which led to the adoption of performance-based grants and links to credit financing. The concerted efforts on interlinked components aimed at improving the availability of timely and accurate financial information systems for fiscal and financial management at the local level were equally commendable. These reforms continue to be pursued and refined by the oversight agencies. 35. In addition, the final subprogram 1 TA report indicates that the TA was used effectively by the DOF and implementing agencies to provide local officials with useful practical knowledge, tools, and skills that would further strengthen their capacity in designing, funding, and delivering quality government services at the local level. J. Performance of the Asian Development Bank 36. The performance of ADB has been highly satisfactory. During the processing of the program cluster, ADB staff conducted ample two-way dialogue and policy consultations with the DOF and implementing agencies to ensure that the program was demand driven, with solid government ownership. ADB also worked proactively with other donors, resulting in cofinancing from AFD, which continues to be a close partner in reforms for the forthcoming cluster. The design of the TA projects was also relevant and effective in helping the government accomplish the policy measures of the program cluster. 37. As part of the project completion review, ADB requested the government to provide its assessment of the program through a survey questionnaire completed by the implementing agencies. Overall, the government rated the program favorably in terms of relevance, efficiency, effectiveness, and likely sustainability. The full results of the survey are presented in Appendix 6.

23 11 III. EVALUATION OF PERFORMANCE A. Relevance 38. The program cluster was highly relevant to the government s reform agenda. The program s ultimate objective of increased efficiency and effectiveness of basic public services delivered at the local level was in line with the government s long-term vision for reform, as articulated by the MTPDP and the PDF. The LGFBR took into account the need to improve the ability of LGUs to be more responsive to local development challenges, by addressing the obstacles faced by LGUs in accessing financial resources. The LGFBR helped to ensure the efficient delivery of devolved functions, by building the institutional capacity of LGUs to plan and budget for the better delivery of key public services to their constituents. The program also complemented the broader policy objective of continued fiscal consolidation and public debt sustainability, provided by the Development Policy Support Program. 39. The relevance of the program was also characterized by a well-designed framework. The five key policy objectives were harmoniously interlinked, and they reinforced each other to bring about the main objective of enhanced governance and better delivery of public services through increased financial resources, improved fiscal management, and an effective performance management system. 40. The government s assessment based on the project completion review questionnaire shows that most implementing agencies rated the program as relevant or highly relevant both at the time of formulation and after its completion. This reflects the government s favorable view of the use of LGFBR-type reforms as a strategy to foster local growth and advance local development. The government s responses to the survey questionnaire also show that the implementing agencies plan to retain some of the key features of the LGFBR program for similar initiatives in the future. These include continued efforts to develop accountability and transparency systems, and increase local sources of revenue. B. Effectiveness in Achieving Outcome 41. The program is rated effective in achieving the outcome. 17 Overall, the program has built a strong foundation for improved flows of financial resources into the LGUs. The program contributed to improved completeness, timeliness, and transparency in the release of LGU shares of national government revenues and grants. It has also strengthened the framework for improving LGU access to private sources of capital for development projects, and supported measures aimed at developing LGUs own revenue sources. The reform on intergovernmental fiscal transfers was a difficult decision on the part of the government, because the change in legislation made the IRA releases not just "automatic" but "automatically appropriated." This effectively meant that the government retained no legal loophole to withhold any portion of the IRA or delay its release. The only other item that enjoys a similar status, in terms of being an automatic budget appropriation, is the payment of external debt obligations. On the nonfinancing side, the program helped build the institutional preconditions for improved efficiency and accountability of financial management, planning, and expenditure management at the local level. The adoption of the LGPMS, improvements in the competency of local officials, and enhancement of the financial reporting frameworks at the local level are some of the key accomplishments of the reforms. In due time, the reforms may generate even wider benefits. 17 ADB Technical Assistance to the Republic Philippines for Local Governance and Fiscal Management Project (formerly Strengthening LGU Management and Administration). Manila (TA 4778).