Completion Report

Project Number: 44253-013 Loan Numbers: 3111 and 3505 September 2019

Philippines: Local Government Finance and Fiscal Decentralization Reform Program

This document is being disclosed to the public in accordance with ADB's Access to Information Policy.

CURRENCY EQUIVALENTS

Currency unit – peso (₱)

At Appraisal At Program Completion

Subprogram 1 (Loan 3111) (13 January 2014) (15 August 2014) ₱1.00 = $0.02240 $0.02276 $1.00 = ₱44.59000 ₱43.93500

At Appraisal

At Program Completion

Subprogram 2 (Loan 3505) = (17 November 2016) (19 October 2017) ₱1.00 = $0.02027 $0.01951 $1.00 = ₱49.21000 ₱51.24300

ABBREVIATIONS

ADB – Asian Development Bank AFD

DBM DILG DMF DOF

– – – – –

Agence Française de Développement Department of Budget and Management Department of the Interior and Local Government design and monitoring framework Department of Finance

LGU NEDA P3F PFM PFMAT RRP TA

– – – – – – –

local government unit National Economic and Development Authority post-program partnership framework public financial management public financial management assessment tool report and recommendation of the President technical assistance

NOTE

In this report, “$” refers to United States dollars.

Vice-President Ahmed M. Saeed, Operations 2 Director General Ramesh Subramaniam, Southeast Asia Department (SERD) Director Jose Antonio R. Tan III, Public Management, Financial Sector, and

Trade Division, SERD Team leader Robert Boothe, Public Management Specialist, SERD Team members Loretta Jovellanos, Senior Economics Officer, SERD

Jenelyn Mendez-Santos, Project Analyst, SERD Joehanne Kristal Santos, Operations Assistant, 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.

CONTENTS

Page

BASIC DATA i

I. PROGRAM DESCRIPTION 1

II. DESIGN AND IMPLEMENTATION 3

A. Program Design and Formulation 3 B. Program Outputs 4 C. Program Costs and Financing 7 D. Disbursements 7 E. Program Schedule 7 F. Implementation Arrangements 7 G. Technical Assistance 8 H. Gender Equity 8 I. Safeguards 8 J. Monitoring and Reporting 8

III. EVALUATION OF PERFORMANCE 8

A. Relevance 8 B. Effectiveness 9 C. Efficiency 11 D. Sustainability 11 E. Development Impact 11 F. Performance of the Borrower and the Executing Agency 13 G. Performance of Cofinanciers 13 H. Performance of the Asian Development Bank 13 I. Overall Assessment 14

IV. ISSUES, LESSONS, AND RECOMMENDATIONS 14

A. Issues and Lessons 14 B. Recommendations 15

APPENDIXES

1. Performance of Local Government Financing and Fiscal Decentralization 16 Reform Program, Subprogram 1 – Triggers

2. Performance of Local Government Financing and Fiscal Decentralization 17 Reform Program, Subprogram 2 – Triggers

3. Design and Monitoring Framework 19

4. Status of Compliance with Loan Covenants 23

BASIC DATA

A. Loan Identification 1. Country Philippines 2. Loan number and financing source 3111 and 3505

ordinary capital resources 3. Program title Local Government Finance and Fiscal

Decentralization Reform Program

4. Borrower Republic of the Philippines 5. Executing agency Department of Finance 6. Amount of loan

Loan 3111 Loan 3505

$500 million (total) $250 million $250 million

7. Financing modality Program loan B. Loan Data

1. Appraisal Loan 3111

– Date started – Date completed

Loan 3505 – Date started – Date completed

18 June 2012 25 June 2012 17 November 2016 17 November 2016

2. Loan negotiations Loan 3111

– Date started – Date completed

Loan 3505 – Date started – Date completed

16 December 2013 16 December 2013 17 November 2016 17 November 2016

3. Date of Board approval Loan 3111 Loan 3505

13 February 2014 13 December 2016

4. Date of loan agreement Loan 3111 Loan 3505

14 February 2014 15 December 2016

5. Date of loan effectiveness Loan 3111 – In loan agreement

– Actual – Number of extensions

Loan 3505 – In loan agreement

– Actual – Number of extensions

14 May 2014 27 May 2014 1 14 March 2017 22 February 2017 0

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6. Program completion date Loan 3111 – Appraisal – Actual Loan 3505 – Appraisal – Actual

30 June 2014 15 August 2014 30 December 2016 19 October 2017

7. Loan closing date Loan 3111

– In loan agreement – Actual

– Number of extensions Loan 3505

– In loan agreement – Actual

– Number of extensions

31 December 2014 15 August 2014 0 30 June 2017 19 October 2017 1

8. Financial closing date Loan 3111

– Actual Loan 3505

– Actual

15 August 2014 19 October 2017

9. Terms of loan Loan 3111

– Interest rate – Maturity (number of years)

– Grace period (number of years) Loan 3505

– Interest rate – Maturity (number of years)

– Grace period (number of years)

LIBOR-based 15 3 LIBOR-based 15 3

10. Disbursements

a. Dates Category/Subloan Subprogram 1 (L3111) Subprogram 2 (L3505)

Initial Disbursement 11 July 2014

11 August 2017

Final Disbursement

11 July 2014

11 August 2017

Time Interval

0 months (single tranche)

0 months (single tranche)

Subprogram 1 (L3111) Subprogram 2 (L3505)

Effective Date 27 May 2014

22 February 2017

Actual Closing Date

15 August 2014

19 October 2017

Time Interval 2.65 months

7.86 months

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b. Amount ($ million)

Subloan

Original Allocation

(1)

Increased during

Implementation (2)

Canceled during

Implementation (3)

Last Revised

Allocation (4=1+2–3)

Amount Disbursed

(5)

Undisbursed Balance (6 = 4–5)

Subprogram 1 Subprogram 2

$250 $250

0 0

0 0

$250 $250

$250 $250

0 0

Total $500 0 0 $500 $500 0

C. Program Data 1. Program cost ($ million) Cost Appraisal Estimate Actual Foreign exchange cost Subprogram 1 (L3111) Subprogram 2 (L3505)

$250 $250

$250 $250

Local currency cost Total $500 $500

2. Financing plan ($ million)

Cost Appraisal Estimate Actual Implementation cost ADB financed Subprogram 1 (L3111) Subprogram 2 (L3505)

$250 $250

$250 $250

Cofinancing (Agence Française de Developpement) Subprogram 1 (L3111)

Subprogram 2 (L3505)a

$150 $119

$150 $119

Total implementation cost $769 $769 a Parallel cofinancing for subprogram 2 was provided in the amount of €100 million, which was converted to USD using an exchange rate of 13 September 2017 (date of confirmation letter to ADB).

3. Cost breakdown by program component ($ million) Component Appraisal Estimate Actual Subprogram 1 (L3111) Single tranche Subprogram 2 (L3505) Single tranche

$250

$250

Total $500

4. Program schedule Item Appraisal Estimate Actual Other milestones Subprogram 1 (L3111) Single tranche Subprogram 2 (L3505) Single tranche

11 July 2014

11 August 2017

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5. Program performance report ratings

Implementation Period

Ratings Development

Objectives Implementation

Progress Subprogram 1: From September 2010 to June 2013

No ratings in eOps for program loans Subprogram 2: From July 2013 to May 2016

D. Data on Asian Development Bank Missions

Name of Mission Date No. of Persons

No. of Person-Days

Specialization of Members

Subprogram 1 (L3111) Appraisal 18–25 June 2012 2 8 a, b Reconnaissance 18–22 February 2013 2 5 a, c Fact finding 18 Apr–21 May 2013 2 34 a, c Loan negotiation 13 December 2013 3 1 a, d, e Review 3 November–

17 December 2014 1 45 a

Subprogram 2 (L3505) Consultation mission 13–23 April 2015 1 10 a Fact finding 1–4 December 2015 1 4 a Loan negotiation 17 November 2016 3 1 e, f, g Program completion review May–June 2019 2 10 i, j

a = senior public management specialist, b = principal country specialist, c = principal portfolio specialist, d = counsel, e = financial control specialist, f = senior financial sector specialist, g = senior counsel, h = associate project analyst, i = public management specialist, j = consultant.

I. PROGRAM DESCRIPTION 1. The Philippines’ economy has grown significantly over the past decade, where gross domestic product (GDP) increased by an average of 6.4% during 2012–2015. However, national poverty rates remain high relative to regional peers, and national averages mask significant regional and urban–rural disparities. National law delegates major service delivery functions to local government units (LGUs). Because of disparities between LGUs and the significant geographic, cultural, and economic diversity in the Philippines, the country’s political landscape persistently features local autonomy and responsiveness to local conditions. 2. The Philippines was an early leader in the move towards decentralized local governance and fiscal decentralization in Southeast Asia. As early as the 1970s, the Philippines explored various institutional and legal arrangements for central–local fiscal relations. In 1991, the Local Government Code was passed, providing an ambitious mandate for local governments to deliver public services.1 The Philippine Development Plan, 2011–2016 identifies specific challenges for LGUs in achieving its main goals: promoting inclusive growth and generating employment, improving governance and human development standards, and achieving macroeconomic and fiscal sustainability.2 LGUs accounted for over a quarter of government expenditures in 2014. However, significant challenges and disparities in both access to and quality of services have resulted in major differences in development outcomes across the Philippines. Poverty rates vary greatly and are particularly high in Mindanao and Eastern Visayas; health and education outcomes exhibit similar variations.3 3. A number of issues have constrained the equitable provision of quality services in the Philippines under a system of decentralized local governance. First, flaws in the design of the revenue base of LGUs are partly responsible for the geographical disparities in access to services. LGUs collected an average of 24% of their operating income from their own revenue sources in 2008–2011. The balance of local revenues was derived from intergovernmental fiscal transfers and tax sharing from the central government, creating a strong dependence on the central government. Local revenue collection stagnated because of outdated and unproductive tax and non-tax instruments, as well as limited tax efforts from local governments. Second, public financial management (PFM) systems are not well calibrated to support efficient delivery of services. Without a strategic vision, a piecemeal approach focused only on reforming individual elements of the PFM system. Significantly outdated budget operation systems prevented the synchronization of planning and budgeting. An absence of initiatives to provide specific incentives for improved PFM limited the willingness of LGUs to voluntarily invest time and resources in upgrading core systems. Third, systems to promote and enhance local accountability and good governance were poorly developed. Citizens lacked the means to monitor and evaluate local government service delivery performance or provide feedback on the budget performance of their local governments. Existing performance evaluation systems did not provide useful data to guide investment decisions, nor did they support inter-local comparisons. The number of these performance measurement instruments has also multiplied, which has increased LGU compliance costs. Finally, the local government fiscal framework was not well-calibrated to

1 Government of the Philippines. 1991. The Local Government Code of 1991. Manila. 2 Government of the Philippines, National Economic and Development Authority 2014. Philippine Development Plan,

2011–2016. Manila. 3 For example, the average infant mortality rates in 2008 in the Eastern Visayas (45 deaths per 1,000 births) and

Cagayan Valley (38 per 1,000) were more than 50% above the national average. In 2009, six regions of the country reported that less than 80% of their population had access to electricity, compared to almost 99% in the national capital region, and less than 70% of the population of Central Visayas and Zamboanga had access to potable water in 2009, compared to some 97% in Central Luzon.

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support growth, autonomy, and accountability. After an ambitious start to decentralized local governance in the Philippines decades ago, the fiscal framework did not keep pace with the evolving vision of local government, resulting in an inequitable system of intergovernmental fiscal relations. 4. In response to these challenges, the government engaged in a major review and reform of central–local fiscal relations in the Philippines. The Good Governance and Anti-Corruption Cabinet Cluster coordinates the implementation of the government’s initiatives to strengthen public institutions, promote transparency, and increase accountability through participatory governance. Within this framework, the PFM road map provides a comprehensive reform agenda to ensure that the national government can maintain fiscal discipline, allocate funds efficiently, and provide efficient service delivery. For example, the road map calls for developing an integrated financial management information system that can provide web-based access to LGU information in a common format. It also emphasizes performance-informed budgeting to strengthen alignment with national priorities, reinforce accountability, and better engage civil society. While improving PFM has been a core pillar of the government’s reform efforts, initiatives to improve local governance, strengthen citizen voice and accountability, and promote transparency and responsiveness in the delivery of public services have also been important priorities. 5. The overarching objective of the Local Government Finance and Fiscal Decentralization Reform Program was to support the government’s commitment to improve LGU service delivery, and thus to reduce poverty and promote economic development across the Philippines.4 Specifically, the program helped develop adequate LGU financial capacity to fund improvement of service delivery. Subprogram 1 strengthened the demand side of decentralized governance by introducing performance-based monitoring systems and grants mechanisms, as well as developing a fiscal decentralization roadmap. Building on this foundation, subprogram 2 served as an umbrella to anchor support from the Asian Development Bank (ADB) for broader PFM reform and its expanding engagement with LGUs. Specifically, it operationalized new measures to incentivize service delivery performance, as well helping implement the medium-term LGU PFM reform strategy. It helped LGUs better access their own-source revenues and improved the regulatory framework for intergovernmental fiscal relations. 6. ADB has more than a decade of experience with policy-based loans in the LGU sector in the Philippines. Prior to the subject program, ADB financed the Local Government Financing and Budget Reform Program in two subprograms completed in June 2007 and June 2009.5 This programmatic approach focused on decentralization and local government finance by institutionalizing the timely and transparent release of LGU shares in national government revenues. In addition, the program developed the pillars of a performance-based LGU PFM framework, provided LGUs with limited access to credit financing, and strengthened the ability of national oversight agencies to monitor LGU finances. A future program, the Local Government Financing and Budget Reform Program, is planned for approval submission via two subprograms in 2019 and 2021. ADB also supported the government’s reform efforts through a series of technical assistance (TA) grants. These have focused on such tasks as establishing a framework

4 ADB. 2014. Philippines: Local Government Finance and Fiscal Decentralization Program – Subprogram 1. 5 ADB. 2007. 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; and ADB. 2009. 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.

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to improve the administration of real estate and property taxes, and helped complete a number of policy reforms under the program such as harmonizing national and local planning processes. 7. The program was divided into two subprograms, completed in 2014 and 2017. ADB funded each subprogram from its ordinary capital resources. ADB’s Board approved subprogram 1 of $250 million on 13 February 2014 and subprogram 2 of $250 million on 13 December 2016. Agence Française de Développement (AFD) provided cofinancing of $150 million for subprogram 1 and €100 million for subprogram 2. Both subprograms, separately, were implemented with a well-defined framework anchored by detailed policy reform outputs which were conditions to loan effectiveness.

II. DESIGN AND IMPLEMENTATION 8. Overall, the program was well-designed and implemented effectively, achieving its stated objectives. The program achieved or exceeded all four of its outcome performance targets within the expected timeframe, reflecting strong government commitment and a well-designed and implemented approach to ADB’s support. A more detailed discussion of achievement against targets at the outcome level is in para. 41. The detailed design for the program is fully elaborated in the individual outputs of the policy matrix for subprograms 1 and 2 in the report and recommendation of the President (RRP) for subprogram 2 (Appendixes 1–2).6 9. Subprogram 1 was designed to strengthen the demand side of the decentralized system of government by introducing performance-based monitoring systems and grants mechanisms; it improved the transparency and accountability of LGUs. Subprogram 1 also included the first comprehensive review of the Local Government Code of 1991 and provided a framework for further improving intergovernmental fiscal relations. Subprogram 1 contained 35 policy actions for reform, including 7 policy triggers and 28 milestones. 10. Subprogram 2 was designed to build upon the achievements of subprogram 1 and helped expand LGU capacity to generate own-source revenues, streamlined the LGU borrowing approval processes, accelerated the adoption of the revised LGU public management system, and advanced the review and reform of the legal framework for local governance in the Philippines, amongst other objectives. Subprogram 2 contained 26 policy actions for reform, including 14 policy triggers and 12 milestones. A. Program Design and Formulation 11. The program was well-grounded in the Philippine Development Plan, 2011–2016, which specifically recognized the critical role of LGUs in achieving inclusive growth and generating employment, improving governance and human development standards, and achieving macroeconomic and fiscal sustainability (footnote 2). The project formulation approach drew heavily on ADB’s experience on fiscal decentralization in the Philippines, particularly the successful Local Government Financing and Budget Reform Program, implemented between 2006 and 2010, which provided several natural entry points, particularly on PFM and intergovernmental fiscal finance.7 Program development was also supported through a project

6 ADB. 2016. Report and Recommendation of the President to the Board of Directors: Proposed Policy-based Loan

for Subprogram 2 to the Republic of Philippines for the Local Government Finance and Fiscal Decentralization Reform Program. Manila.

7 ADB. 2007. 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.

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preparatory TA which supported consultation with key stakeholders (discussed in more detail in section G of this report). At the time of design, the government’s strategy to equip LGUs to contribute to these objectives largely focused on improving PFM quality and efficiency to help better deliver public services at the local level. As such, the program design was highly relevant to the government’s reform agenda at appraisal. The design benefited from robust consultation with a wide spectrum of local governance stakeholders across both central and local government, as well as academia and civil society. This was particularly evident in the consultative process for legislative reform of the 1991 Local Government Code. Likewise, on PFM, a reform road map developed by the government and drawing on inputs from academia, provided a comprehensive reform agenda to ensure that the national government could maintain fiscal discipline, allocate funds efficiently, and provide efficient service delivery. The road map included such features as an integrated financial management information system to provide web-based access to LGU information in a common format, as well as the introduction of performance-informed budgeting to strengthen alignment with national priorities, reinforce accountability, and better engage civil society. The road map also attempted to address the gaps identified in the 2007 Public Expenditure and Financial Accountability Assessment through four sequenced reform clusters: (i) linking budget planning to policy priorities; (ii) developing reliable and predictable budgets; (iii) increasing transparency; and (iv) holding managers accountable. 12. The program was also well-aligned with the country partnership strategy for the Philippines, 2011–2016, which prioritized local government finance and fiscal decentralization reforms.8 By subprogram 2, ADB intended the program to serve as an anchor for a broader suite of engagements at the subnational level in the Philippines, including infrastructure investment as well as support for local private-public partnership project development and implementation. The program design was informed by the lessons learned from TA grants and by the sustained dialogue with national government institutions, local government representatives, private sector organizations, academia, and civil society. The loan processing teams coordinated program design with the European Commission’s LGU PFM reform program and the Decentralization and Local Government Trust Fund. B. Program Outputs 13. Both programs comprised four common pillars, outlined below. For subprogram 2, the team re-ordered and slightly reframed these outputs to streamline and strengthen the policy matrix. However, the technical content and focus remain unchanged. For ease of comparison and to reflect the streamlined approach, this report presents outputs as ordered in subprogram 2 (Appendix 3). 14. The expected outputs for subprogram 1 were: (i) conducive fiscal framework for inclusive growth created; (ii) an adequate and equitable resource framework for fiscal sustainability developed; (iii) PFM to assist efficient LGU service delivery strengthened; and (iv) good local governance, transparency, and accountability fostered. 15. The expected outputs for subprogram 2 were: (i) resource framework for fiscal sustainability developed; (ii) PFM system to assist efficient LGU service delivery strengthened; (iii) local governance, transparency, and accountability systems established; and (iv) fiscal framework for inclusive growth created.

8 ADB. 2011. Philippines: Country Partnership Strategy, 2011–2016. Manila.

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16. Ideally, performance targets and indicators for each program output of the design and monitoring framework (DMF) would have matched those attached to the policy reform outputs required for loan effectiveness in the policy matrix of each RRP. For this report, the attainment of each DMF performance target and indicator for subprogram 1 and subprogram 2 outputs is reviewed as follows.

1. Adequate and Equitable Resource Framework for Fiscal Sustainability

17. This output focused on helping LGUs to develop revenue sources to support service delivery and investment needs. In subprogram 1, the government established the Performance Challenge Fund on 19 July 2011 to incentivize efficient financial management. New creditworthiness and debt management modules for the electronic Statement of Receipts and Expenditures LGU system were also established by the Bureau of Local Government Finance by time of subprogram 2. With the bureau’s support, including issuance of guidelines and training conducted by regional offices, 29 provinces and 32 cities updated their schedule of market values for real property tax collections, growing to 37 provinces and 38 cities by the start of 2016. LGU investment incentives were rationalized to ensure neutral impact on LGU fiscal bases by 2014. 18. To improve LGU access to private credit, the Bureau of Local Government Finance took on the function of a single LGU loan monitoring agency. Some progress was made on the removal of limitations to access to private credit. The bureau undertook significant analytical work on debt issuance for LGUs and prepared debt management manuals for LGU use. However, a key impediment to access to private credit centered on the preferred status of government financial institutions for holding LGU deposits, with private finance institutions permitted to hold such deposits only with case by case approval. Loan Circular 1-2012 requires that private lending institutions issue a certification stating that it will not require that LGU deposits be held in government finance institutions, but this does not fully remove the large competitive advantage for government financial institutions in LGU account business (i.e. better credit rating for loan and associated account earnings). The result is that the government financial institutions control the LGU lending market, usually with 90% or more of loan volume. 19. Under subprogram 2, the government launched the Seal of Good Local Governance in 2015, creating additional incentives and monitoring mechanisms for good expenditure management and fiscal governance. The government also completed the module for electronic Statement of Receipts and Expenditures to better track and publicly report on LGU expenditures, supplying critical information for both central government oversight as well as citizen accountability. Finally, performance standards for local treasurers were introduced as per subprogram 2 policy action 5, introducing evaluation tools to gauge the competency of local treasurers.

2. Strengthened Public Financial Management for Efficient Service Delivery of Local Government Units

20. This output focused on the continuous improvement and refinement of public finance tools and systems for LGUs. Under subprogram 1, the government completed a medium-term LGU PFM reform road map, 2013–2015 to build PFM capacity in 2015. However, the PFM reform road map, while initially identified as covering 2013–2015 in the RRP, was eventually issued and approved for 2016–2022, significantly extending its coverage. The primary tool for assessing progress against the PFM roadmap is the LGU PFM assessment tool (PFMAT). While gender-specific capacity building targets were not explicitly included as originally specified, gender dimensions are reflected in two areas. First, PFMAT evaluates compliance with statutory

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budgetary provisions including that 5% of the General Fund of the LGU be attributed to Gender and Development programs, projects, and activities; failure to meet this requirement reduces an LGU’s PFMAT score. Second, the PFMAT evaluates citizen participation in budgeting exercises, particularly citing the participation of women’s groups. The government also implemented a bottom-up budgeting gender-sensitive project identification process by 2014 and addressed the gender sensitive dimension of this output in two areas: participation and project selection criteria. The government also completed revisions to the updated budget operations manual for LGUs by 2015, with significant changes to the cycle, process, and reporting requirements for local budgeting. Through a European Union-assisted program, the government harmonized the comprehensive development plan and bottom-up budgeting planning guidelines by 2014. To contain personnel salary growth, the government adopted a series of department orders via ceiling regulation in 2015. The government approved new guidelines for the establishment and operation of local economic enterprises in 2016 which was later than the expected date of 2014. Government also issued a new corporate and financial policy framework for LGU alliances by 2015 and submitted a policy framework recommendation to the Good Governance and Anti-Corruption Cabinet Cluster. 21. Under subprogram 2, the government approved a medium-term strategy for LGU PFM reform in 2014, gaining a well-articulated roadmap with trackable milestones. The Bureau of Local Government Finance completed guidelines for harmonizing LGU planning and budgeting processes, and implemented harmonization measures in 2015. The government fully implemented the Assistance to Local Government Unit Program, with ₱19.5 billion released through the program by 2014, superseding and expanding upon the bottom-up budgeting initiative. Finally, the government completed and released the local economic enterprise guidelines to improve governance of local economic enterprise.

3. Local Governance, Transparency, and Accountability Systems Established 22. This output focused on improving transparency, accountability, and responsiveness of local government systems. Under subprogram 1, the government issued a new full disclosure policy for local budgets and finances, bids, and public offerings. The government also introduced a new monitoring framework to gauge citizens’ happiness with public service delivery. By 2015, some 140 cities or 96.5% of total cities had adopted the Citizen Satisfaction Index System incorporating gender topics and promoting downwards accountability and greater transparency on public service delivery performance. The government redesigned the Local Government Performance Management System by 2015, including alignment with the Seal of Good Local Governance and mainstreaming gender aspects. 23. Under subprogram 2, the government expanded efforts by compiling citizen satisfaction index reports. The government also redesigned and revised the LGU productivity and performance measurement system, better aligning it with the Seal of Good Local Governance, and introducing improvements that expanded analytical capacity.

4. Fiscal Framework for Inclusive Growth Created 24. Under this output, the government initiated a major review of the 1991 Local Government Code—the first since its promulgation 30 years ago. During subprogram 1, the government included the review in its 2013–2015 workplan. The government completed the review by 2015 and filed two of the proposals (the Valuation Act and the LGU Low Income Classification Bill) with the 16th Philippine Congress, meeting the output requirement of proposal submission to the legislature. The government submitted recommendations for amending the code to the Good

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Governance and Anti-Corruption Cabinet Cluster and its executive secretary. The recommendations provided a comprehensive medium-term road map for subsequent administrations. C. Program Costs and Financing 25. The policy-based loans for the program total $500 million, funded by ADB’s ordinary capital resources and comprising two single tranche loans of $250 million each for subprograms 1 and 2. ADB released the loan for subprogram 1 on 27 May 2014 and for subprogram 2 on 22 February 2017. Through a cofinancing arrangement, the AFD provided cofinancing of $150 million for subprogram 1 and €100 million for subprogram 2. 26. Given the nature of program loans, the issue of a gap between financing plan and actual results does not arise. D. Disbursements 27. ADB made single disbursements for full utilization for the subprogram 1 loan on 11 July 2014 and the subprogram 2 loan on 11 August 2017. E. Program Schedule 28. The expected subprogram 1 completion date based on the signed loan agreement was 31 December 2014; the actual date was 15 August 2014. The actual program completion date of 19 October 2017 for the subprogram 2 loan was later than the 30 June 2017 date anticipated at loan signing. Per the RRP, the Department of Finance (DOF) had concerns about early drawdown on funds to avoid negative carry issues on unspent funds and may have delayed the loan effectiveness date accordingly. Closing date of subprogram 2 was extended to 30 December 2017 to accommodate the request of the government to disburse the final tranche tentatively in August 2017, which was beyond the original closing date of the loan. After government confirmed full disbursement, actual closing date was done on 19 October 2017. F. Implementation Arrangements 29. The DOF was the executing agency for the program and was responsible for the overall implementation of both subprograms. The Coordinating Committee on Decentralization served as the steering committee for the program, as a means of including all the implementing agencies and relevant stakeholders. The program’s implementing agencies included the DOF, the Department of the Interior and Local Government (DILG), the Department of Budget and Management (DBM), and the National Economic and Development Authority (NEDA). 30. Overall, the implementation arrangements functioned effectively to help the program deliver the intended outcomes. Given the complexity of local government reforms, effective coordination was a critical requirement for implementation arrangements. The DOF in particular played an important role in coordinating implementation. The achievement of cross-cutting outputs, such as citizen-centered accountability mechanisms and the medium-term LGU PFM road map (requiring inputs from DILG, DBM, and NEDA), demonstrate effective coordination across the executing and implementing agencies. The Coordinating Committee on Decentralization was particularly effective in providing a structured forum for dialogue on cross-cutting issues, such as the review of the 1991 Local Government Code.

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G. Technical Assistance 31. A project preparatory TA helped implement both subprograms.9 The TA was implemented from 17 December 2013 to 30 December 2017. ADB engaged a total of 18 individual consultants and 1 consulting firm to help implement the TA activities. National consulting inputs totaled 75.75 person-months and international consulting inputs totaled 8.59 person-months. The following TA reports directly contributed to achieving the program’s performance targets:

(i) Review of the 1991 Local Government Code (Inter-local Cooperation and Alliances in the Philippines, October 2014). This supports the DMF output under subprogram 1 for approval of a corporate and financial policy framework for LGU alliances by 2015.

(ii) Upgrading the performance management system (DILG, August 2015). This

supports the DMF output under subprogram 2 for redesign of LGU productivity and performance measurement system.

(iii) Learn for Local PFM Report (DILG, November 2017). This also supports the

DMF output under subprogram 2 for redesign of LGU productivity and performance measurement system.

H. Gender Equity 32. While the program is considered to include some gender elements, it is not classified as either gender equity as a theme or under effective gender mainstreaming. I. Safeguards 33. Both subprogram 1 and subprogram 2 are classified as Category C for environment, involuntary resettlement, and indigenous peoples. J. Monitoring and Reporting 34. The post-program monitoring framework (P3F) provides a framework under which to track medium-term achievement of program objectives. The government has complied with all general and special covenants of the loan agreement (Appendix 4).

III. EVALUATION OF PERFORMANCE A. Relevance 35. The program cluster was highly relevant to the government’s reform agenda. The Philippine Development Plan, 2011–2016 specifically identifies challenges for local governments in achieving the government’s priorities of promoting inclusive growth and generating employment, improving governance and human development standards, and achieving macroeconomic and fiscal sustainability (footnote 2). The program explicitly links to the government’s reform agenda by targeting improved governance and oversight mechanisms, improved fiscal performance, and resource mobilization to support local service delivery. In line

9 ADB. 2013. Local Government Finance and Fiscal Decentralization Reform Program Concept Paper and Project

Preparatory Technical Assistance. Manila.

9

with the government’s efforts to promote a sustainable approach to citizen-centered service delivery, the program supported capacity development tools and mechanisms. The program appropriately built on successful reforms undertaken during the previous program, ensuring continuity of the policy dialogue while expanding coverage to areas such as demand-driven accountability (para. 5). 36. The program’s relevance was also reflected in a carefully designed framework which incorporated four mutually reinforcing reform areas. While each reform area individually contributed to the overarching objective of improving governance and human development standards through more efficient service delivery, achievements in one area strengthened the impact of achievements in another, resulting in a collective impact that was greater than the sum of its parts. For example, improving the resource framework for fiscal sustainability helped ensure that LGUs had adequate resources for service delivery; improving the PFM system and introducing demand-driven accountability systems promoted more cost-efficient delivery of services in a more responsive and accountable manner, multiplying the value of these additional resources.

37. The program was highly transformative in that it led to the first systematic review of the Local Government Code in almost 30 years. The legal framework for fiscal decentralization in the Philippines has not kept pace with the evolving vision of local governance. Stakeholders at both central and local levels have identified the outdated legal framework as a major constraint to effective local service delivery. The program’s support to undertake this review, as well as the thoroughly consultative approach (involving central and local government, business communities, academia, and civil society), represented a transformative step in improving the framework for fiscal decentralization. 38. Based on the success of subprogram 1, an additional outcome indicator was added to the DMF for subprogram 2 related to citizen satisfaction levels with government performance on service delivery. The additional outcome indicator reflected the government exceeding expectations in their commitment to promoting demand-driven accountability. It also helped bridge the measurement gap between improvements in governance and accountability systems supported by the program, and the desired impact of improved service delivery. 39. The government also confirmed the program’s relevance at assessment and at completion. In particular, the program was recognized as an effective tool to coordinate a broad set of stakeholders on a complex, multi-sectoral reform agenda. The program provided a platform and mechanism for inter-agency coordination and dialogue, and many features of the reform program continue to be relevant for implementing agencies, which are expanding on these features with continued support from ADB. B. Effectiveness 40. The program is rated effective, meeting or exceeding targets for all DMF outcome indicators. Real property tax collections reached ₱41.4 billion by 2016, exceeding DMF outcome targets a full year before the close of the evaluation period.10 By 2017, real property tax collections by LGUs reached approximately ₱60 billion, more than 50% higher than the DMF outcome target.

10 Department of Finance, Bureau of Local Government Finance. Consolidated LGU Fiscal Performance 2010–2016.

Manila.

10

Local government recurrent expenditure had likewise increased to ₱380 billion by 2017, more than 20% higher than the DMF outcome target. As measured by the LGU PFM assessment tool, LGU PFM performance increased markedly from a baseline score of 2.34 in 2013, covering 550 LGUs, to a score of 2.78 by 2016, covering 1,404 LGUs, an increase of approximately 20%.11 The government gradually rolled out the citizen satisfaction indicator system across 140 cities, 97% of all cities in the Philippines. Using a weighted average of cities surveyed in 2013, 2014, and 2015, the national average score increased from a baseline of 58.85% in 2013 to 61.02% in 2015, the last year of measurement for cities (before moving on to a survey of municipalities).12 41. The program successfully achieved outputs across all four pillars, suggesting a meaningful contribution from program interventions to higher level outcomes. Measures such as the development of a local taxpayer database, issuance of guidance manuals, and capacity development for local tax assessors and property tax valuation directly contributed to growth in real property tax collection. Introducing a weekly tax watch report created strong incentives for local government officials to improve tax collection performance. Measures such as tax information sharing between the Bureau of Internal Revenue and LGUs helped strengthen compliance management and reduce avoidance schemes by taxpayers. Increased revenues alongside PFM reforms have increased both the volume and quantity of public spending on key services. Spending on social services almost doubled between 2010 and 2016 in nominal terms and grew from 23% to 26% as a share of current operating expenditures (footnote 11). Overall operating expenditures for LGUs grew at an average of 5.8% per year during the period.

Source: Bureau of Local Government Finance.

42. Program interventions have strengthened local governance and accountability. Implementation of a full disclosure policy for local budgets and finances, bids, and public offerings has improved local PFM transparency and accountability, especially in local procurement. The development and pilot of the Seal of Good Local Governance, with its associated financial incentives, dramatically improved LGU governance across key dimensions like public finance,

11 Department of Budget and Management, Local Government and Regional Coordinating Bureau. 2019. Manila. 12 Department of the Interior Local Government, Bureau of Local Government Supervision. 2019. Manila.

Figure 1: Operating Expenditures

11

citizen responsiveness, business friendliness, and environmental sustainability. These interventions helped improve perceptions of government efficiency and effectiveness, reflected in improved citizen satisfaction indicators. Finally, the review of the 1991 Local Government Code Book II identified several shortcomings in the legal code for accountable local governance and paved the way for preparing amendments that signal a new vision of decentralized local governance with greater autonomy and accountability for PFM. These interventions have helped significantly improve the quality of local PFM as observed in assessment scoring, as well as contributing to overall citizen satisfaction in the quality and responsiveness in local government. C. Efficiency 43. The program is rated efficient in achieving its outcome and outputs. The program incorporated in its design a very strong mechanism for coordination and implementation across the range of key stakeholders, including the DOF, DILG, NEDA, and LGU constituents. The government accomplished all policy triggers within the original time frame. Indicative triggers which were proposed for subprogram 2 during the processing of subprogram 1 were all completed and confirmed during fact finding for subprogram 2. Subsequently, the ADB team streamlined and consolidated the policy matrix for subprogram 2 in line with ADB’s evolving approach to measuring results for policy-based lending. D. Sustainability 44. The program is rated most likely sustainable. The majority of reforms undertaken through this program constitute significant institutional changes to strengthen the autonomy, accountability, and effectiveness of local government. The medium-term LGU PFM reform strategy and road map provide a concrete vision for responsibly managing public resources and a framework for evaluating progress and refining actions. The government has effectively rolled out tools and systems to help implement these reforms, strengthen PFM, and provide more timely and transparent data for central oversight. A specific focus on institutional capacity development—including training for newly-elected officials, a performance evaluation rating system, and accompanying capacity development for local treasurers—helps ensure that local officials and civil servants are equipped with the skills to successfully implement reforms. Finally, the introduction of performance-driven accountability systems alongside monetary incentives for performance, such as the Seal of Good Local Governance and Performance Challenge Fund, ensure that incentives of LGUs and central oversight agencies are aligned towards strong governance and service delivery performance. ADB’s ongoing support and planned new local governance program ensure that the policy dialogue with government is sustained and that resources are available to help implement reforms. E. Development Impact 45. The program’s development impact is rated satisfactory. Impact is evaluated using two variables: multidimensional poverty and variance of household poverty incidence by province. A multidimensional poverty index, developed collaboratively between the United Nations Development Program and NEDA, measures the level of multiple deprivations in health, education, and standard of living that the poor experience simultaneously. It can be seen as a composite index of overall well-being as perceived by the poor. To measure poverty in the Philippines, three surveys are inputs to the index: (i) the National Demographic and Health Survey; (ii) the Family Income and Expenditure Survey; and (iii) the Annual Poverty Indicator Survey. Based on these surveys, 13 indicators measure the degree of deprivation with respect to electricity, housing materials, tenure status of dwelling, source of water supply, toilet facility,

12

ownership of assets, health insurance, food consumption, hunger, working children not in school, underemployment, educational attainment, and school attendance. A Filipino is identified as multidimensionally deprived if he or she is deprived in at least one-third of the indicators. 46. Figure 2 plots changes in multidimensional poverty alongside changes in the traditional income-defined poverty for 2008–2017. Data are not available for each series in each year, nevertheless a significant decline in poverty is observed. Multidimensional poverty decreased from about 13% in 2008 to 7% in 2017; income-defined poverty levels declined from 26% in 2009 to just under 22% in 2015.13 The Philippine Statistics Authority is in the process of conducting the 2019 Family Income and Expenditure Survey to produce the latest set of poverty statistics, but early observations suggest the trend of declining poverty will continue. These data suggest that local government finance and fiscal decentralization reforms, in conjunction with other pro-poor reforms undertaken by government, may have had a positive impact on overall poverty incidence in the Philippines and should be sustained.

47. The variance of poverty incidence by province increased slightly from 187 in 2009, with a standard deviation of 13.7, to 199 in 2015, with a standard deviation of 14.1. Although disparities in poverty incidence across the Philippines are not rapidly increasing, the slight increase does suggest that more work is needed to help more impoverished provinces catch up.

48. Finally, as discussed in earlier sections, local governance performance increased significantly over the program. For example, following the introduction of the Seal of Good Local Governance as a local governance performance metric in 2015, the number of qualifying LGUs almost doubled, from 254 in 2015 to 449 in 2017. This suggests a steady improvement in the quality of local governance and LGU service delivery.

Source: Philippine Statistics Authority, World Bank.

13 Philippine Statistics Authority. 2018. Multidimensional Poverty Statistics (accessed 23 May 2019). Manila; 2017.

World Bank. Multidimensional Poverty in the Philippines 2004-13: Do Choices for Weighting, Identification and Aggregation Matter? Washington. p. 25.

0%

5%

10%

15%

20%

25%

30%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Figure 2: Multidimensional Poverty and Income-Defined Poverty in the Philippines

Multidimensional poverty index Income poverty

13

F. Performance of the Borrower and the Executing Agency 49. The performance of the government is rated highly satisfactory. The government has been vocal in its commitment to decentralization, going so far as to propose a constitutional amendment towards a federal model of decentralized local governance. The government also provided strong coordination through the Good Governance and Anti-Corruption Cabinet Cluster, which strengthened public institutions and promoted transparency and accountability through participatory good governance. Specifically, the Coordinating Committee on Decentralization and the Working Group on Decentralization of the Philippine Development Forum both provided critical mechanisms for interagency coordination on cross-cutting reform initiatives. The number of high-impact policy actions completed, and the consistency between proposed and actual policy actions in the period between subprogram 1 and subprogram 2, despite a change in administration, reflect the government’s high degree of ownership. The review of the 1991 Local Government Code, for the first time in 30 years, reflects the borrower’s level of ambition. The review process was a major undertaking, requiring broad consultation with a wide range of stakeholders at the central government level, local government level, and across academia and civil society. Two of the proposals stemming from this review were filed in the 16th Philippine Congress. 50. The DOF (the executing agency) in particular demonstrated strong ownership over the reform agenda, particularly where coordination of multiple agencies was required. For example, the development and passage of the medium-term LGU PFM reform road map was collectively undertaken by the DOF, DBM, NEDA, and DILG and orchestrated by DOF through a joint memorandum circular. This presents strong evidence of the cooperation and coordination among the various implementing agencies. The DOF also was very effective in ensuring LGU buy-in and ownership of reforms. The PFM reform road map was accompanied with a declaration of intent signed by more than 100 local chief executives from some of the Philippines’ most important cities and municipalities. G. Performance of Cofinanciers 51. The AFD provided parallel cofinancing of subprogram 1 and subprogram 2 in the amount of $150 million and €100 million respectively. ADB had a strong and constructive partnership with the AFD on developing the reform agenda and policy dialogue with the government. The AFD also provided TA in the amount of $500,000 to support green and sustainable urban planning for LGUs in the Philippines. This TA did not directly target support of specific policy actions under subprogram 1, but rather reinforced broader efforts to improve local planning and investment processes and urban resilience. H. Performance of the Asian Development Bank 52. The performance of the ADB is rated highly satisfactory. Preparation of subprograms 1 and 2 saw regular two-way policy dialogue between ADB and the executing and implementing agencies. ADB contributed substantively to more than half of the policy actions outlined in subprograms 1 and 2 by directly providing TA. Other policy actions were supported through TA from other development partners, particularly the European Union, with which ADB had regular contact and coordination. Close partnership with development partners led to (i) parallel cofinancing by the AFD for subprograms 1 and 2, and (ii) ongoing TA with implementing agencies to support sustainable infrastructure development at the local level. A strong P3F also provided the basis for ongoing policy dialogue and served as a foundation for developing a new program on local governance reform in the Philippines (currently under preparation). Many goals under the

14

P3F have been achieved, such as: (i) public reporting and disclosure of electronic statement of revenues and expenditures by the Bureau of Local Government Finance; (ii) significant increases in the number of LGUs complying with Seal of Good Local Governance requirements; and (iii) implementation of harmonized approaches to LGU planning and budgeting. By introducing the LGU integrated financial tools system in 2017, the government accomplished an ambitious goal of the P3F to reduce compliance costs and improve planning and budget formulation process through LGU financial management information systems. Collectively, this evidence suggests strong and continued engagement by ADB on fiscal decentralization and local government topics, even following disbursement of the subprogram 2 loan. I. Overall Assessment 53. The overall rating of the program is highly successful. The program cluster was a highly relevant program with strong linkages to the government’s reform agenda and to ADB’s overall partnership and operations business plan in the Philippines. The program was rooted in a strong government commitment to decentralized local governance and was well-coordinated and supported by other development partners. Program implementation relied on strong and effective coordination across multiple government agencies and was underpinned by effective and systematic coordination mechanisms such as the coordinating committee on decentralization. The program met or exceeded outcome indicators across all four pillars. The ready follow-through and achievement on P3F measures listed under subprogram 2, as well as the government’s ability to mobilize continued support from the development partner community, suggest a high likelihood of sustainability.

Overall Ratings Criteria Rating

Relevance Highly relevant

Effectiveness Effective

Efficiency Efficient

Sustainability Most likely sustainable

Overall Assessment Highly Successful

Development impact Satisfactory

Borrower and executing agency Highly satisfactory

Performance of ADB Highly satisfactory

ADB = Asian Development Bank. Source: Asian Development Bank.

IV. ISSUES, LESSONS, AND RECOMMENDATIONS

A. Issues and Lessons 54. Reform of central–local fiscal relations is extremely challenging, but preliminary results indicate the payouts from these reforms justify the effort involved. For example, real property tax collections have increased dramatically over the baseline, and further increases are expected to materialize as reforms continue, based on the foundation laid by this program. Likewise, the introduction of downward accountability mechanisms with concrete incentives like the Seal of Good Local Governance has led to a measurable improvement in local governance, from 254 LGUs receiving the seal in 2015 to 449 in 2017. There is a strong link between the TA activities, which were flexibly and responsively implemented over the programmatic approach, and achievement of the program’s outcomes and outputs.

15

55. Changes to tools and regulations must be accompanied with measures to align local incentives in order to maximize impact. This is clearly demonstrated when comparing improvements in the Seal of Good Local Governance (where a strong fiscal incentive was introduced through the Performance Challenge Fund), which almost doubled between 2015–2017, compared with improvements in the LGU PFM assessment tool scores (where a similar incentive mechanism did not exist), which rose just 20% in 2013–2016. One implication of this finding is that the impact of reforms to update regulations, manuals, and guidelines for managing public resources could be increased by a supporting incentivize mechanism. Given that low capacity of officials is a commonly identified constraint, an incentive mechanism related to a sustainable capacity development framework for core local PFM officials could help multiply the effect of reforms to PFM tools, guidelines, and regulations.

56. The program cluster, like the previous program cluster before it (para. 5), typically focused on PFM reforms and service delivery improvements which impact citizens on an individual level. Somewhat less obvious has been a focus on LGU services to the business community and improvements to the local investment climate in order to promote local economic development. If the goal is to continue to improve the autonomy and accountability of LGUs, and to strengthen their ability to provide opportunities for growth and development to local citizens, local economic development is an important task. Future support efforts should explore how to expand the scope of service delivery to include the business community, and to identify opportunities to better serve the private sector. B. Recommendations 57. Future monitoring. Despite the challenge and complexity of local government reform, the potential for positive impact is high. Sustaining and expanding on reforms initiated under this program cluster should be a priority of ADB and the government. The P3F provides a strong platform for continued policy dialogue and has laid the foundation for processing a new program cluster on local governance reform. Promoting local economic development has already been identified as one of three key pillars in the new country partnership strategy for the Philippines, 2018–2023, ensuring that ADB will continue to support the government and reflecting its priority in the government’s own list of reform priorities. Given the importance of TA resources in helping to deliver reforms under the program cluster, this review also encourages ADB’s ongoing provision of TA to help government sustain and expand reform efforts, particularly related to advancing the legislative reform agenda, sharpening PFM tools, and capacity development interventions. 58. Further action or follow-up. The subsequent programmatic approach represents a natural evolution from the program, carrying forward reform efforts in several key areas such as legal and institutional reform, PFM strengthening, and improvements in local accountability and transparency. It also adds to the reform agenda, focusing specifically on local economic development and business climate reform, as well as introducing a systematic competency framework for career development and assessment at the local level. TA should be prioritized to support these new reform areas. 59. Timing of the program performance evaluation report. Given achievement of all outcome targets in the DMF, the program performance evaluation report could be scheduled in 2020, with the suggestion to ensure that requests for government inputs do not conflict with preparation of the new programmatic approach.

16 Appendix 1

PERFORMANCE OF LOCAL GOVERNMENT FINANCING AND FISCAL DECENTRALIZATION REFORM PROGRAM, SUBPROGRAM 1 – TRIGGERSa

Original Triggers in Subprogram 1 Performance Output 1: Developing an adequate and equitable resource framework for fiscal sustainability 1. Establishing the Performance Challenge Fund.

Accomplished. The government issued a memorandum circular in April 2011 establishing the Performance Challenge Fund.

8. The BLGF has developed LGU creditworthiness systems that assist the accurate evaluation of prospective LGU borrowers by creditors.

Accomplished. The BLGF prepared an eSRE module incorporating a creditworthiness indicator and reporting system in 2012.

9. The BLGF has developed an LGU debt certification system that allows for facilitating the issuance of certificates on maximum borrowing and debt service capacities.

Accomplished. The BLGF prepared an eSRE module incorporating a creditworthiness indicator and reporting system in 2012. The system allows for issuance of debt certificates and debt service capacity reporting.

Output 2: Strengthening public financial management to assist efficient LGU service delivery 11. Approving and piloting the BuB, encouraging participatory planning, and gender-sensitive project selection

Accomplished. The government issued Joint Memorandum Circulars for the implementation of the BuB in 2012 and 2013.

14. Developing an eSRE module on LGU fiscal capacity (BLGF)

Accomplished. The BLGF rolled out an eSRE module on LGU fiscal capacity in 2011.

Output 3: Fostering good local governance, transparency and accountability 18. Issuing the Full Disclosure Policy of Local Budgets and Finances, Bids and Public Offerings

Accomplished. The government issued a memo instructed LGUs on full disclosure of local budgets and finances, bids, and public offerings in 2010.

Output 4: Creating a conducive fiscal framework for inclusive growth 28. The 2013–2015 work plan of the Cabinet Cluster on Good Governance and Anticorruption includes a review of the Local Government Code 1991.

Accomplished. The government through the Cabinet Cluster on Good Governance and Anticorruption prepared a workplan for 2013–2015 including a review of the Local Government Code 1991 for approval by President Aquino.

BLGF = Bureau of Local Government Finance, BuB = bottom-up planning and budgeting policy, eSRE = electronic Statement of Receipts and Expenditures, LGU = local government unit. a Note: The format and numbering of the policy matrix, including the order of outputs, was refined between Subprogram 1 and Subprogram 2. For consistency, the final numbering used in Subprogram 2 is reflected in this matrix. Source: Asian Development Bank.

Appendix 2 17

PERFORMANCE OF LOCAL GOVERNMENT FINANCING AND FISCAL DECENTRALIZATION REFORM PROGRAM, SUBPROGRAM 2 – TRIGGERS

Original Triggers in Subprogram 2 Performance Output 1: Developing an adequate and equitable resource framework for fiscal sustainability 1. The government approved and launched a system to monitor the utilization of LGU expenditures, including the Development Fund (DBM/BLGF).

Accomplished. The government approved and launched a new Computerized Fiscal Database System of LGU Oversight Agencies, including DBM, DILG, and BLGF. The business requirements document was prepared in September 2015 and implementation and test plans were prepared and delivered in January 2016.

2. The government completed and piloted the Seal of Good Local Governance for LGUs in 2015, incorporating the upgraded Seal of Good Financial Housekeeping and new core components covering competitiveness and business-friendly, disaster preparedness, environmental compliance (DILG).

Accomplished. The DILG issued a Memorandum Circular 2014-39 which implemented the revised Seal of Good Local Governance in 2015. The DILG also issued a memorandum circular 2016-01 incorporating the upgraded Seal of Good Financial Housekeeping.

5. To improve the efficiency of tax collections, the tax information sharing agreement between the BIR and the LGUs is now being enforced through the system of performance standards for local treasurers (BLGF).

Accomplished. The DOF Department Order 006-2015 was issued in 2015 to establish performance standards for assistant treasurers, incorporating provisions in BLGF Circular 53-2013 which established information sharing requirements between LGUs and the BIR.

9. The government completed the roll out of new eSRE modules on: (a) credit worthiness; (b) LGU debt certification; and (c) fiscal capacity system to BLGF regional offices (BLGF).

Accomplished. New modules for the eSRE were introduced in 2013 and 2014, enabling comprehensive reporting on LGU debt levels and debt service capacity, first prepared in 2014.

Output 2: Strengthening PFM to assist efficient LGU service delivery 11. The government approved and implemented the Medium-Term LGU PFM reform strategy and road map, with progress reports to be web-posted (DBM).

Accomplished. The Medium-Term LGU PFM reform strategy was approved in 2014.

12. The government finalized the updated guidelines to harmonize and synchronize local planning (including participatory processes, investment programming, revenue administration, budgeting and expenditure management) and submitted them for approval. (DILG).

Accomplished. The government issued a joint memorandum circular on the Updated Guidelines on Integration of Local Planning Investment Program, Revenue Generation, Budgeting, Expenditure Management and Performance Monitoring and Coordination in Fiscal Oversight in April 2016.

13. The government concluded the implementation of the ALGUP initiative and budgeting processes, processed improvements to participatory planning including changes to the budgetary allocation formula, and enhanced the engagement of civil society leading to an increase in the scope of the program to cover ₱21 billion and over 1200 LGUs by 2014 (DBM).

Accomplished. By 2015, the ALGUP initiative was expanded to include more than 1,514 LGUs with an aggregate expenditure of ₱25 billion/ $517 million.

14. The DBM amended the BOM to incorporate participatory budget processes at the LGU level, performance-based mechanisms and accountability measures, and Policy changes to the SEF and to

Accomplished. The DBM updated and revised the BOM with the referenced material, issuing to LGUs in June 2016.

18 Appendix 2

Original Triggers in Subprogram 2 Performance the Disaster Risk Management plan formulation (NEDA, DBM, DILG, BLGF). 15. The government completed and implemented the expenditure management module for LGUs (DBM, BLGF).

Accomplished. The expenditure management module for LGUs was launched in 2016 - business requirements document was prepared in September 2015 and implementation and test plans were prepared and delivered in January 2016. The module took the form of a Manual for the Local Public Financial Management Tool for the electronic Statement of Receipts and Expenditures, comprising two books: a manual on determining Local Government Fiscal Capacity and Reconciling Local Revenue Forecasts; and a Guidebook for the New Local Governments Recommended Activities.

16. The government improved data availability by integrating the LGFPMS and the LGPMS information systems, allowing for the creation of a common database of financial information for LGUs. (DILG and BLGF)

Accomplished. The LGFPMS and LGPMS were integrated under the new Computerized Fiscal Database System of LGU Oversight Agencies and Public Finance e-Tools for LGUs.

18. To strengthen the tax system, the government approved new guidelines for the establishment and financial management of LEEs to be incorporated as part of the BOM (DBM).

Accomplished. In March 2016, the government met to review and approved revised internal audit manuals for LGUs including a uniform definition of LEEs.

Output 3: Fostering good local governance, transparency and accountability 21. The government expands the coverage of the Citizen’s satisfaction index and distributes the first reports covering cities. (DILG).

Accomplished. National Consolidated Reports on the Citizen Satisfaction Index were prepared starting in 2014. The number of cities covered grew from 34 in 2013 to 140 in 2015.

25. The government revised the LGPMS, aligned it with the System of Seals of Good Governance and instituted improvements to the analytical capacity of the LGPMS using benchmarking tools developed for LGUs to assist and guide investment decisions. (DILG)

Accomplished. The government redesigned the LGPMS in 2015 to improve analytical capacity and introduce benchmarking tools for LGUs to assist investment decisions

Output 4: Creating a conducive fiscal framework for inclusive growth 26. The proposals for amendment of the Local Government Code, including expenditure and revenue assignments, and fiscal transfers of the LGUs were submitted to the Cabinet Cluster on Good Governance and Anticorruption, and to the head of the Oversight Committee on Devolution (DILG).

Two of the proposals (i.e. the Valuation Act and the LGU Income Classification Bill) were filed in the Philippine 16th Congress, reaching different stages of progress.

Accomplished. The government conducted a broad, inclusive consultation on proposed amendments to the 1991 Local Government Code. As noted, two proposals were filed in the Philippines 16th Congress, which sat from 2013–2016.

ALGUP = Assistance to Local Government Unit Program, BIR = Bureau of Internal Revenue, BLGF = Bureau of Local Government Finance, BOM = Budget Operations Manual, DILG = Department of the Interior and Local Government, DBM = Department of Budget and Management, eSRe = electronic Statement of Receipts and Expenditures, LEE = Local Economic Enterprise, LGPMS = Local Government Performance Management System, LGU = local government unit, PFM = public financial management. Source: Asian Development Bank.

Appendix 3 19

DESIGN AND MONITORING FRAMEWORK Design Summary Performance Indicators and Targets Program Achievements

Impact

Improve governance and human development standards through more efficient service delivery.

Not Applicable.

Outcome Efficient and transparent local government financial management systems developed

By 2017: Real property tax collection increased by 20%. (2010 baseline: ₱33.1 billion) Local government recurrent expenditures increased by 20%. (2011baseline: ₱266.2 billion). LGU PFM assessment tool average score improved by 20%. (2013 baseline: 2.34). Overall average national score for “satisfaction” in the Citizen Satisfaction Index improved. (2013 baseline: 58.85)

Achieved. By 2017, real property tax collections by LGUs reached approximately ₱60 billion, more than 50% higher than the DMF outcome target. Achieved. Local government recurrent expenditure increased to ₱380 billion by 2017, exceeding DMF target by more than 20%. Achieved. From a baseline score of 2.34 in 2013 covering 550 LGUs, by 2016, the average score had increased to 2.78 with a coverage of 1,404 LGUs, an increase of approximately 20%. Achieved. The CSIS has gradually been rolled out across 140 cities, representing 97% of all cities in the Philippines. Using a weighted average of cities surveyed in 2013, 2014, and 2015, the national average score has increased from the baseline of 58.85% in 2013 to 61.02 in 2015, the last year of measurement for cities (before moving on to a survey of municipalities).

Outputs Resource framework for fiscal sustainability developed

Subprogram 1 Establishment of the Performance Challenge Fund in 2011. Implementation of new credit worthiness and debt management modules for the eSRE LGU system in 2012. At least 35 cities and 25 provinces update their SMVs. Rationalization of investment incentives to ensure neutral impact on LGU fiscal bases by 2014. Establish a single LGU loan monitoring agency by 2014 and streamline procedures and remove limitations to access to private credit from LGUs.

Achieved. The government established the Performance Challenge Fund on 19 July 2011. Achieved. New creditworthiness and debt management modules for the eSRE LGU system completed in January 2011. Achieved. 37 provinces and 38 cities updated their SMVs for Real Property Tax Collections by the start of 2016. Achieved. LGU Investment Incentives were rationalized to ensure neutral impact on LGU fiscal bases by 2014. Substantially achieved. BLGF took on the function of a single LGU loan monitoring agency. Some progress was made on the removal of limitations to access to private credit.

20 Appendix 3

Design Summary Performance Indicators and Targets Program Achievements

PFM system to assist efficient LGU service delivery strengthened

Subprogram 2 Seal of good local governance completed and implemented by 2016. eSRE expenditure module completed and implemented by 2016. Performance standards for local treasurers introduced by 2016. Subprogram 1 Approval of the medium-term LGU PFM reform road map, 2013–2015 in 2014, incorporating gender targets for PFM capacity building. Over 1,200 LGUs participate in the BUB, with more than ₱20 billion budgeted in 2015. BUB gender-sensitive project identification process implemented by 2014. Revision of the UBOM by 2015. Harmonization of CDP and BUB planning guidelines by 2014.

Achieved. The government launched the Seal of Good Governance in 2015. Achieved. The government completed the eSRE expenditure module in 2015. Achieved. Performance standards for local treasurers were introduced providing evaluation tools to gauge the competency of local treasurers. Substantially achieved. A medium-term LGU PFM reform road map was completed in 2015. The PFM reform roadmap, while initially identified as covering 2013–2015 in the RRP, was eventually issued and approved for the period from 2016–2022.The primary tool for assessing progress against the PFM roadmap is the LGU PFMAT. Gender targets for capacity building were not implemented, however gender dimensions were reflected in two areas. First, PFMAT evaluates compliance with statutory budgetary provisions including that 5% of the General Fund of the LGU be attributed to Gender and Development programs, projects, and activities; failure to meet this requirement reduces an LGU’s PFMAT score. Second, the PFMAT evaluates citizen participation in budgeting exercises, particularly citing the participation of women’s groups. Achieved. BUB was fully rolled-out in 2014 for 1,233 LGUs. By 2015, budgeted amount reached ₱21 billion. Achieved. A BUB gender-sensitive project identification process was also implemented by 2014. The gender sensitive dimension of this output is addressed in two areas: participation and project selection criteria. Achieved. Revisions to the UBOM for LGUs were completed by 2015. Achieved. Harmonization of CDP and BUB Planning Guidelines was undertaken through an EU-assisted program and was completed by 2014.

Appendix 3 21

Design Summary Performance Indicators and Targets Program Achievements

Local governance, transparency, and accountability systems established

Containment of personnel salary growth through the use of job orders by 2015. Approval of new guidelines for the establishment and operation of local economic enterprises by 2014. Approval of corporate and financial policy framework for LGU alliances by 2015. Subprogram 2 Medium-term strategy and road map for LGU PFM reform approved by 2016. Guidelines for harmonization of LGU planning and budgeting processes completed by 2016. ALGUP fully implemented with ₱21 billion released through the program by 2014. BOM review completed by 2016. LEE guidelines completed and released by 2016. Subprogram 1 Issuance of the full disclosure policy in 2011. 90 LGUs adopt the CSIS in 2015, incorporating gender topics. Redesign of the LGPMS completed by 2015, including alignment with the Seal of Good Governance and mainstreaming gender aspects.

Achieved. To contain personnel salary growth, a series of department orders were adopted via ceiling regulation in 2015. Substantially achieved. New guidelines for the establishment and operation of local economic enterprises were also approved in 2016, later than expected in 2014. A new corporate and financial policy framework for LGU alliances was approved by 2015, and the government submitted policy framework recommendation to Good Governance and Anti-Corruption Cabinet Cluster. Achieved. A Medium-Term Strategy for LGU PFM reform was approved in 2014. Achieved. Guidelines for the harmonization of LGU planning and budgeting processes were completed, and harmonization measures were implemented in 2015. Substantially achieved. The ALGUP was fully implemented with ₱19.5 billion released through the program by 2014. Achieved. BOM review completed by 2015. Achieved. LEE Guidelines were completed and released by the government to improve governance of LEEs. Achieved. The government issued a new full disclosure policy for local budgets and finances, bids, and public offerings in 2011. Achieved. By 2015, some 140 cities or 96.5% of total cities had adopted the CSIS incorporating gender topics. Achieved. The government redesigned the LGPMS, which was completed by 2015. This included alignment with Seal of Good Governance and mainstreaming gender aspects.

22 Appendix 3

Design Summary Performance Indicators and Targets Program Achievements

Fiscal framework for inclusive growth created

Subprogram 2 CSIS completed by 2016. Redesign of the local government productivity and performance measurement system completed by 2016. Subprogram 1 Completion of a government-led review of the LGC by 2015. Subprogram 2 Recommendations for amendment of the LGC submitted to the Good Governance and Anti-Corruption Cabinet Cluster and executive secretary by 2016

Achieved. The government compiled CSIS in 2015 and 2016. Achieved. The government redesigned LGU productivity and performance measurement system through revisions to the LGPMS, better aligning it with the Seals of Good Local Governance. Achieved. The government included a review of the LGC in its 2013–2015 workplan. The review was completed by 2015. Achieved. Two of the Proposals (the Valuation Act and the LGU Low Income Classification Bill) were filed with the 16th Philippine Congress. Recommendations for amendment of the LGC submitted to the Good Governance and Anti-Corruption Cabinet Cluster and Executive Secretary.

ALGUP = Assistance to Local Government Unit Program, BLGF = Bureau of Local Government Finance, BOM = Budget Operations Manual, BUB = Bottom-Up Budgeting, CSIS = Citizen Satisfaction Index System, CDP = Comprehensive Development Plan, DMF = Design and Monitoring Framework, eSRe = electronic Statement of Receipts and Expenditures, EU = European Union, LEE = Local Economic Enterprise, LGC = Local Government Code, LGPMS = Local Government Performance Management System, LGU = local government unit, PFM = public financial management, PFMAT = Public Financial Management Assessment Tool, RRP = Report and Recommendation of the President, SMVs = Schedule of Market Values, UBOM = Updated Budget Operations Manual. Source: Asian Development Bank.

Appendix 4 23

STATUS OF COMPLIANCE WITH LOAN COVENANTS

Covenant Reference in

Loan Agreement Status of Compliance

Subprogram 1: The Borrower shall cause the Program to be carried out with due diligence and efficiency and in conformity with sound applicable technical, financial, business and development practices. In the carrying out of the Program, the Borrower shall perform, or cause to be performed, all obligations set forth in Schedule 4 to this Loan Agreement. The Borrower shall make available, promptly as needed the funds, facilities, services, and other resources, as required, in addition to the proceeds of the Loan, for the carrying out of the Program and for the operation and maintenance of the Program facilities. The Borrower shall ensure that the activities of its departments and agencies with respect to the carrying out of the Program are conducted and coordinated in accordance with sound administrative policies and procedures. The Borrower shall maintain, or cause to be maintained, records and documents adequate to identify the Eligible Items financed out of the proceeds of the Loan and to indicate the progress of the Program. The Borrower shall enable ADB's representatives to inspect any relevant records and documents referred to in paragraph (a) of this Section. As part of the reports and information referred to in Section 7.04 of the Loan Regulations, the Borrower shall furnish, or cause to be furnished, to ADB all such reports and information as ADB shall reasonably request concerning the implementation of the Program, including the accomplishment of the targets and carrying out of the actions set out in the Policy Letter. The Program Executing Agency shall be responsible for the overall implementation of the Program and shall coordinate with the Program Implementing Agencies, as required, to monitor progress of the Program. The Program Implementing Agencies shall be responsible for the day-to-day implementation of the Program.

Section 4.01. (a) Section 4.01. (b) Section 4.02. Section 4.03. Section 4.04. (a) Section 4.04. (b) Section 4.05. Schedule 4.1. Schedule 4.2.

Complied. Complied. Complied. Complied. Complied. Complied. Complied. Complied. The executing agency provided strong coordination across implementing agencies. Complied.

24 Appendix 4

Covenant Reference in

Loan Agreement Status of Compliance

The Borrower shall ensure that all policy actions adopted under the Program, as set forth in the Policy Letter and the Policy Matrix, continue to be in effect for the duration of the Programmatic Approach. The Borrower shall keep ADB informed of policy discussions with other multilateral and bilateral aid agencies that may have implications for the implementation of the Program and shall provide ADB with an opportunity to comment on any resulting policy proposals. The Borrower agrees to take into account ADB’s views before finalizing and implementing any such proposal. The Borrower shall ensure that the Counterpart Funds are used to finance the implementation of certain programs and activities consistent with the objectives of the Program. The Borrower, the Program Executing Agency, and the Program Implementing Agencies shall: (a) comply with ADB's Anticorruption Policy (1998, as amended to date) and acknowledge that ADB reserves the right to investigate directly, or through its agents, any alleged corrupt, fraudulent, collusive or coercive practice relating to the Program; and (b) cooperate with any such investigation and extend all necessary assistance for satisfactory completion of such investigation. The Borrower shall use its consultative mechanisms to facilitate dialogue among relevant stakeholders to evaluate progress of all policy actions adopted under the Program and to identify future areas of reforms in the public finance and management sector. Subprogram 2: The Borrower shall cause the Program to be carried out with due diligence and efficiency and in conformity with sound applicable technical, financial, business and development practices. In the carrying out of the Program, the Borrower shall perform, or cause to be performed, all obligations set forth in Schedule 4 to this Loan Agreement. The Borrower shall make available, promptly as needed the funds, facilities, services, and other resources, as required, in addition to the proceeds of

Schedule 4.3. Schedule 4.4. Schedule 4.5. Schedule 4.6. Schedule 4.7. Section 4.01. (a) Section 4.01. (b) Section 4.02.

Complied. Complied. Complied. Complied. Complied. The Borrower has promoted regular dialogue on progress of policy reforms and has helped to identify reform agenda going forward – inputs which have supported development of a new ADB program on local governance reform. Complied. Complied. Complied.

Appendix 4 25

Covenant Reference in

Loan Agreement Status of Compliance

the Loan, for the carrying out of the Program and for the operation and maintenance of the Program facilities. The Borrower shall ensure that the activities of its departments and agencies with respect to the carrying out of the Program are conducted and coordinated in accordance with sound administrative policies and procedures. As part of the reports and information referred to in Section 7.04 of the Loan Regulations, the Borrower shall furnish, or cause to be furnished, to ADB all such reports and information as ADB shall reasonably request concerning the implementation of the Program, including the accomplishment of the targets and carrying out of the actions set out in the Policy Letter. The Program Executing Agency shall be responsible for (a) overseeing all policy and regulatory actions to be taken in connection with the Program; and (b) ensuring that all policy reforms set out in the Policy Letter and the Policy Matrix are duly carried out in a timely manner. The Program Implementing Agencies shall be responsible for the day-to-day implementation of the Program The Borrower shall ensure that all policy actions adopted under the Program, as set forth in the Policy Letter and the Policy Matrix, continue to be in effect for the duration of the Programmatic Approach. The Borrower shall keep ADB informed of policy discussions with other multilateral and bilateral aid agencies that may have implications for the implementation of the Program and shall provide ADB with an opportunity to comment on any resulting policy proposals. The Borrower agrees to take into account ADB’s views before finalizing and implementing any such proposal. The Borrower shall ensure that the Counterpart Funds are used to finance the implementation of certain programs and activities consistent with the objectives of the Program. The Borrower, the Program Executing Agency, and the Program Implementing Agencies shall: (a) comply with ADB's Anticorruption Policy (1998, as amended to date) and acknowledge that ADB reserves the right to investigate directly, or through its agents, any alleged corrupt, fraudulent, collusive or coercive practice

Section 4.03. Section 4.04. Schedule 4.1. Schedule 4.2. Schedule 4.3. Schedule 4.4. Schedule 4.5. Schedule 4.6.

Complied. Complied. Complied. Complied. Complied. Complied. Complied. Complied.

26 Appendix 4

Covenant Reference in

Loan Agreement Status of Compliance

relating to the Program; and (b) cooperate with any such investigation and extend all necessary assistance for satisfactory completion of such investigation. The Borrower shall use its consultative mechanisms to facilitate dialogue among relevant stakeholders to evaluate progress of all policy actions adopted under the Program and to identify future areas of reforms in the public finance and management sector.

Schedule 4.7.

Complied.