report and recommendation of the president to the board of ... · in preparing any country program...

Report and Recommendation of the President to the Board of Directors

Project Number: 41076-044 November 2011

Proposed Loan and Administration of Loan Philippines: Road Improvement and Institutional Development Project

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.

CURRENCY EQUIVALENTS (as of 4 November 2011)

Currency unit – peso (P) P1.00 = $0.0232 $1.00 = P43.07

ABBREVIATIONS

ADB – Asian Development Bank DPWH – Department of Public Works and Highways EMP – environmental management plan IEE – initial environmental examination km – kilometer LIBOR – London interbank offered rate OFID – OPEC Fund for International Development OPEC – Organization of the Petroleum Exporting Countries PAM – project administration manual PMO – project management office TA – technical assistance

NOTE

In this report, "$" refers to US dollars.

Vice-President S. Groff, Operations 2 Director General K. Senga, Southeast Asia Department (SERD) Director J. Lynch, Transport and Communications Division, SERD Team leader J. Miller, Principal Transport Specialist, SERD Team members M. Buendia, Senior Safeguards Specialist (Resettlement), SERD C. Buentjen, Principal Country Specialist, SERD N. Farrofo, Senior Project Officer, SERD

A. Velasquez, Safeguards Specialist (Environment), SERD Peer Reviewer

S. Zaidansyah, Senior Counsel, Office of the General Counsel N. Davis, Senior Planning and Coordination Specialist, Office of Administrative Services

CONTENTS

Page

PROJECT AT A GLANCE

MAP

I. THE PROPOSAL 1

II. THE PROJECT 1 A. Rationale 1 B. Impact and Outcome 4 C. Outputs 4 D. Investment and Financing Plans 5 E. Implementation Arrangements 6

III. DUE DILIGENCE 7 A. Technical 7 B. Economic 7 C. Governance 7 D. Poverty and Social 8 E. Safeguards 8 F. Risk and Mitigating Measures 9

IV. ASSURANCES 10

V. RECOMMENDATION 10

APPENDIXES

1. Design and Monitoring Framework 11

2. List of Linked Documents 13

PROJECT AT A GLANCE 1. Project Name: Road Improvement and Institutional Development Project 2. Project Number: 41076-044

3. Country: Philippines 4. Department/Division: Southeast Asia Department/Transport and Communications Division 5. Sector Classification:

Sectors Primary Subsectors Transport, and information and communication technology

Road transport

6. Thematic Classification: Themes Primary Subthemes Economic growth Promoting economic efficiency and

enabling business environment Governance Economic and financial governance Capacity development Organizational development

6a. Climate Change Impact No Climate Change Indicator available.

6b. Gender Mainstreaming Gender equity theme (GEN) Effective gender mainstreaming (EGM) Some gender benefits (SGB) No gender elements (NGE)

7. Targeting Classification:

General Intervention

Targeted Intervention Geographic dimensions of inclusive

growth

Millennium development

goals

Income poverty at household

level

8. Location Impact: National High

9. Project Risk Categorization: Low

10. Safeguards Categorization: Environment B Involuntary resettlement C Indigenous peoples C

11. ADB Financing: Sovereign/Nonsovereign Modality Source Amount ($ Million)

Sovereign Project loan Ordinary capital resources 62.0 Total 62.0

12. Cofinancing: Financier Category Amount ($ Million) Administration Type OPEC Fund for International Development

Official-Loan 30.0 PARTIAL

Total 30.0

13. Counterpart Financing: Source Amount ($ Million) Government 38.0

Total 38.0

14. Aid Effectiveness: No Aid Effectiveness available.

Project Area

Manila Bay

LagunaDe Bay

LingayenGulf

MANILA

Pililla

Sual

Baguio

Botolan

Hermosa

Lingayin

Bolinao

Dagupan

CamilingPaniqui

San Carlos

Sta.Cruz

Iba

Masinloc

San Narciso San Marcelino

Dinalupihan

Olongapo

San Antonio

OraniSamal

BalangaMorong

Limay

Mariveles

Malolos

Hagonoy

Tarlac

Capas

Bamban

AngelesArayat

Gapan

San Miguel

Baliuag

San IldefonsoCandaba

Apalit

San Fernando

Guagua

Lubao

Valenzuela

Antipolo

Alaminos

Villasis

SisonRosario

La Trinidad

San FernandoBauang

Aringay

Agoo

Naguillan

San Fabian

Caba

Urdaneta

Rosales

San Jose

Carranglan

Palayan

Cabanatuan

Santa RosaDingalan

BalerSan Luis

Pantabangan

Munuz

Lagawe

Cabarrobias

Bayombong

SolanoBagabag

Bambang

SantiagoCordon

Aritao

Santa FePozorrubio

TalaveraBongabon

Rizal

Gerona

Victoria

La Paz

San Leonardo

Castillejos

Cabangan

San Felipe

BagacPilar

Burgos

Infanta

San Clemente

Candelaria

Bayambang

Tagudin

Bacnotan

Suyo

Santa Cruz

Balaoan

Banaue

Lamut

Polia

Tayug

Palauig

Mabitac SiniloanBinangonan

TaytayReal

Infanta

General Nakar

San Mateo

NoveletaCavite

Imus

Pasay City

Caloocan Quezon City

TARLAC

ZAMBALES

PAMPANGA

NUEVA ECIJA

NUEVAVIZCAYA QUIRINO

ISABELA

BULACAN

AURORA

Polillo Islands

Corrigedor Islands

P A N G A S I N A N

LAGUNA

CAVITE

BATAAN

QUEZON

RIZAL

LA UNION

MT PROVINCE

KALINGAILOCOS SUR

BENGUET

LUZON

VISAYAS

MINDANAO

Manila

Subic

NCR

NCRCALABARZON

CARMIMAROPA

- National Capital Region- Cavite, Laguna, Batangas, Rizal, Quezon- Cordillera Administrative Region- Mindoro, Marinduque, Romblon, Palawan

REGION IV-ACALABARZON

CAR

REGION IIlocos

REGION IICagayan Valley

REGION IIICentral Luzon

National Capital

Provincial Capital

City/Town

Project Road

North and South Luzon Expressway

National Highway

Provincial Road

Provincial Boundary

Regional Boundary

Boundaries are not necessarily authoritative.

PHILIPPINES

ROAD IMPROVEMENT AND INSTITUTIONALDEVELOPMENT PROJECT

Luzon Project Area

0 10 20 30 5040

Kilometers

N

11-2

971a A

V

Map

1

121 30'Eo

121 30'Eo

120 00'Eo

120 00'Eo

16 00'No

16 00'No

16 00'No 16 00'No

8 00'No8 00'No

126 00'Eo

126 00'Eo

118 00'Eo

118 00'Eo

This map was produced by the cartography unit of the Asian Development Bank. The boundaries, colors, denominations, and any other information shown on this map do not imply, on the part of the Asian Development Bank, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries, colors, denominations, or information.

Project Area

P a n a y G u l f

L e y t e G u l f

Vi s a y a s S e a

B o h o l S e a

Manila

Mabinay

Bais

Tanjay

Santa CatalinaBayawan

Dumaguete

Hinoba-an

SiatonZamboanguita

Sipalay

Cauayan

Himamaylan

Kabankalan

Hinigaran

Binalbagan

Castellana

Guihulngan

Bago

La Carlota

Bacolod

SilayTalisay

CadizSagay

Escalante

Calatrava

Victorias

Toledo

San Carlos Danao

Naga

Lapu-Lapu

MandaueCebu

Daanbantayan

Bogo

Carmen

Talibon

UbayTubigon

Jagna

Loon Guindulman

San Jose

Miagao

Culasi

Batan

Passi

Roxas

Ibajay

Banga

Jamindan

Kalibo

Cartes

Panitan

Sara

Ajuy

Pilar

Pandan

Caticlan

Patnongan

Iloilo

Jordan

Pontevedra

Calinog

Barotac

Dingle

TigbauanOton

Tuburan

Maasin

Sogod

Bontoc Libangon

Hilongos

Liloan

San Ricardo

Malitbog

Tanauan

Abuyiog

BurauenOrmoc

Baybay

San Francisco

Naval

Biliran

Leyte

Tacloban

Dulag

Jaro Palo

AllenCatarman Mondragon

Laoang

Calbayog

Catbalogan

Gandara

Gamay

Oras

Borongan

Basey

Guiuan

Homonhon

MaydolongLlorente

Bantayan

San Remigio

Tabango

Villaba

CarigaraUban

Calbiga

Wright

Palapag

Las Navas

Giporlas

Tudela

Isabela

Sibalom

Dao

Barotac Viejo

Anini

San Joaquin

Pan-ay

Badian

Santander

Dalaguete

Argao

Tagbilaran

Vallehermoso

La Libertad

Manjuyod

Tolosa

NORTHERN SAMAR

SAMAR EASTERNSAMAR

BILIRAN

LEYTE

SOUTHERNLEYTE

CEBU

NEGROSOCCIDENTAL

NEGROSORIENTAL

GUIMARAS

ILOILO

ANTIQUE

CAPIZ

AKLAN

BOHOL

LUZON

VISAYAS

MINDANAO

REGION VIIIEastern Visayas

REGION VIWestern Visayas REGION VII

Central Visayas

National Capital

Provincial Capital

City/Town

Project Road

National Highway

Provincial Road

Provincial Boundary

Regional Boundary


PHILIPPINESROAD IMPROVEMENT AND INSTITUTIONAL

DEVELOPMENT PROJECTVisayas Project Area

0 25 50 75 100

Kilometers

NN

11-2

97

1b A

V

Map

2

16 00'No 16 00'No

8 00'No8 00'No

126 00'Eo

126 00'Eo

118 00'Eo

118 00'Eo125 00’Eo

125 00’Eo

123 00’Eo

123 00’Eo

12 00’No

12 00’No

10 00’No

10 00’No


Project Location

M o r o G u l f Davao

Gulf

ButuanBayB o h o l S e a

S u l u S e a

Tagoloan

MontevistaPulangi

Maramag

Kibawe Asuncion

Agus

Midsayap

Balingoan Butuan

Nasipit

Badas

Surigao

Bislig

Cateel

Tindalo

Cotabato City

Tacurong

Kiamba

Maasim

Gen. Santos

Digos

Mati

TagumNabunturan

Sangali

Zamboanga City

Dipolog

Oroquieta

Pagadian

Ipil

MarawiTubodMalaybalay

Cagayan de Oro

Shariff Aguak

Isulan

Koronadal

Alabel

Kidapawan

Davao City

Tandag

Prosperidad

LUZON

VISAYAS

MINDANAO

Manila

AGUSANDEL SUR

DAVAODEL NORTE

COMPOSTELAVALLEY

DAVAOORIENTAL

ZAMBOANGASIBUGAY

ZAMBOANGADEL SUR

LANAODEL SUR

BUKIDNON

MAGUINDANAO

NORTH COTABATO

SULTANKUDARAT DAVAO

DEL SUR

SOUTH COTABATO

SARANGANI

LANAODEL NORTE

ZAMBOANGADEL NORTE

AGUSANDEL NORTE

MISAMIS ORIENTAL

MISAMISOCCIDENTAL

SURIGAODEL NORTE

SURIGAODEL SUR

REGION IXZamboanga Peninsula

A R M M

REGION XIIICARAGA

REGION XIDavao Region

REGION XIISOCCSKSARGEN

REGION XNorthern Mindanao

ARMMCARAGA

SOCCSKSARGEN

- Autonomous Region in Muslim Mindanao- Agusan del Norte, Agusan del Sur, Surigao del Norte, Surigao del Sur- South Cotabato, North Cotabato, Sultan Kudarat, Sarangani, General Santos

National Capital

Provincial Capital

City/Town

Project Road

National Highway

Provincial Road

Provincial Boundary

Regional Boundary


PHILIPPINES

ROAD IMPROVEMENT AND INSTITUTIONALDEVELOPMENT PROJECT

Mindanao Project Area

0 25 50

Kilometers

N

11-2

97

1c A

V

Map

3

16 00'No 16 00'No

8 00'No8 00'No

126 00'Eo

126 00'Eo

118 00'Eo

118 00'Eo

126 00'Eo

126 00'Eo

122 00'Eo

122 00'Eo

7 00'No

7 00'No

9 00'No9 00'N

o


I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on (i) a proposed loan and (ii) proposed administration of a loan to be provided by the OPEC Fund for International Development (OFID),1 both to the Republic of the Philippines for the Road Improvement and Institutional Development Project.2 2. The project will result in improved accessibility of transport infrastructure and services. The outcome of the project will be more effective management by the Department of Public Works and Highways (DPWH) of the road network in the project areas. The project outputs include (i) periodic maintenance of nine national roads in the west coast of Luzon, the Visayas, and Mindanao; (ii) detailed engineering design of roads to be maintained or improved under the project and future projects; and (iii) strengthening institutional capacity in the road subsector.3

II. THE PROJECT

A. Rationale

3. Strategic context. An efficient road subsector is crucial for the Philippines’ economic growth and poverty reduction. An Asian Development Bank (ADB) analysis of roads in the Philippines and other countries found that roads are critical as social arteries for the delivery of government services, penetration of ideas and cultures, and dissemination of technology to the people.4 4. The Philippine Development Plan, 2011–2016 envisions “a safe, secure, efficient, viable, competitive, dependable, integrated, environmentally sustainable, and people-oriented Philippine transportation system.”5 It specifies six activities necessary to achieve this overall objective: (i) adopt a comprehensive long-term national transport policy; (ii) develop strategic transport infrastructure, and maintain and manage transport infrastructure assets; (iii) develop an integrated multimodal logistics and transport system; (iv) separate the regulatory and operation functions of transport and other concerned agencies; (v) comply with safety and security standards; and (vi) provide links to bring communities into the mainstream of progress and development. The project will contribute to achieving the plan’s objective by helping to maintain and manage transport infrastructure assets, and to strengthen the institutional capacity of DPWH, one of the primary agencies in the transport sector. 5. The project supports the key objective of ADB’s strategy for the Philippines of helping the country achieve high, inclusive, and sustainable growth.6 The project has been included in the ADB lending program to assist in improving the investment climate and expanding private sector development through the scaling up of infrastructure investments and supporting policy reforms.7 The project is also fully consistent with ADB’s Strategy 2020 through its focus on improving the delivery of infrastructure services as well as investing in physical assets.8 The

1 OPEC = Organization of the Petroleum Exporting Countries. 2 The design and monitoring framework is in Appendix 1. 3 ADB. 2008. Technical Assistance to the Republic of the Philippines for Preparing the Road Sector Improvement

Project. Manila (TA 7093‑PHI, $660,000, approved on 2 July). 4 ADB. 2006. When Do Rural Roads Benefit the Poor and How? An In-Depth Analysis Based on Case Studies.

Manila. 5 National Economic and Development Authority. 2011. Philippine Development Plan, 2011–2016. Manila. 6 ADB. 2011. Country Partnership Strategy: Philippines, 2011–2016. Manila. 7 ADB. 2011. Country Operations Business Plan: Philippines, 2012–2014. Manila. 8 ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank, 2008–2020.

Manila.

2

project supports ADB’s transport sector strategy for the Philippines by focusing on maintaining existing roads and improving institutional capacity in the subsector. 6. Road subsector. The Philippines road network carries about 58% of all domestic freight traffic and 98% of domestic passenger traffic. The national road network comprises 29,630 kilometers (km), or 14% of the total road network in the country, of which 73% is paved. The national road network includes the main trunk roads running the length and breadth of the country, the main arterial roads (which provide direct access to important population and production centers), and national secondary roads (which provide access to other population and production centers). 7. Despite its importance to the national economy, the road subsector has not received adequate funding. During 1999–2008, investment in the transport sector averaged less than 1% of gross domestic product compared with 4% for other Asian countries. While roads received a substantial share of the available investment funds, expansion or improvement of the network has been limited in recent years. In addition, many roads deteriorate prematurely due to inadequate maintenance. Around 23% of the national road network is in poor condition and in need of rehabilitation. 8. Road maintenance. Inadequate financing for the road subsector in general is clearly evident in the lack of maintenance of existing road assets. The annual requirement for maintaining national roads is estimated at about P16 billion. However, annual expenditures through 2009 are estimated at about P5 billion, about 30% of the required amount. Financing for the maintenance of national roads is provided from the general budget. Budget allocations for road maintenance have increased significantly since 2008, and such allocations are expected to rise in the future. The Philippines does have a special road fund for maintenance and designated revenues are deposited in the fund, however, in recent budgets only about half of the deposited revenues have been appropriated for national roads. The World Bank is addressing the issue of insufficient financing for road maintenance by (i) strengthening the operation of the road board and utilization of the motor vehicle user charge special funds; (ii) reviewing and updating the mandate and implementing rules and regulations of the road board and special road fund; and (iii) supporting efforts to recover road user costs in order to expand the revenue base to a sustainable level. 9. Institutional capacity. Weak institutional capacity of government sector agencies has long affected the transport sector. Institutional capacity constraints within DPWH, the main government agency responsible for road management, have hampered development of the road subsector. ADB’s 2003 country assistance program evaluation for the Philippines found that aside from the weakness of DPWH in maintaining the national road network, it has also not addressed its own institutional weaknesses.9 In particular, DPWH is aware of the increasing gap between the technical capacity of its central office in Manila and the regional and district offices of DPWH. This situation has compounded the problem of inadequate funding, as capacity limitations have resulted in available budgets not being fully disbursed or not being used most effectively. 10. Efforts are being undertaken to strengthen DPWH’s institutional capacity. Many of these efforts are being supported by external development partners.10 The inadequate institutional capacity, low efficiency in road administration, and weak governance are being addressed through a number of initiatives financed by the World Bank, Australian Agency for International Development, and Japan International Cooperation Agency. The World Bank's National Roads 9 ADB. 2003. Country Assistance Program Evaluation in the Philippines. Manila. 10 Development Coordination (accessible from the list of linked documents in Appendix 2).

3

Improvement and Management Program Phase 2, approved in 2008 with a cofinancing grant from Australian Agency for International Development, is providing assistance for (i) supporting operations of the road board, including improving road cost recovery; (ii) improving DPWH's business processes, including expansion of communications networks and computerization and strengthening internal controls and internal audits; (iii) strengthening partnerships with NGOs and other road subsector stakeholders; and (iv) supporting pilot trials of commercializing operations of district offices, including road maintenance. These activities build on the progress made in these reform areas under the completed World Bank National Roads Improvement and Management Program Phase 1. Japan International Cooperation Agency’s Road Upgrading and Preservation Project, approved in April 2011, is focusing on (i) controlling vehicle overloading, (ii) the enhancement of the quality assurance system for maintenance and construction projects, (iii) improving disaster recovery capacity, and (iv) expansion of communications networks and computerization of district offices. Although there is progress in addressing institutional weaknesses and lack of capacity, more substantial efforts to implement new methods and technologies are necessary to ensure that DPWH's capacity is sufficient to plan, construct, maintain, and manage the national road network. 11. Governance. As with many other sectors of the economy, governance issues have adversely affected transport development, with DPWH identified as one of the main agencies where corruption is perceived to be prevalent. A summary of financial management, procurement, corruption, and governance risks in the road subsector is provided in the supplementary linked document. 11 The assessment carried out for the project concludes that corruption risk is above average (para. 29). DPWH has begun intensive efforts to address governance issues with assistance from ADB, Australian Agency for International Development, the World Bank, and other development partners. First, DPWH adopted an Integrity Development Action Plan in 2005. Second, an Integrity Development Review was conducted in 2006, which resulted in an action plan on which DPWH reports to the Office of the Ombudsman. Third, a separate integrity development action plan consisting of 22 steps was proposed to prevent corruption through education, deterrence, and partnerships with NGOs and civil society. Fourth, an integrity strengthening action plan was prepared for the World Bank's National Roads Improvement and Management Program Phase 2, incorporating a comprehensive range of measures designed to build institutional capacity and governance, to strengthen the fiduciary controls over the use of loan proceeds, and to strengthen social accountability and the demand for good governance from civil society. ADB has also provided technical assistance to support DPWH’s efforts to improve governance through provision of a procurement advisor, and strengthening internal and external accountability. 12 12. The project will reinforce joint efforts to improve the maintenance, investment, capacity, and governance issues facing the road subsector. The project will address the maintenance financing shortfall by financing periodic maintenance of nine national roads. The periodic maintenance, primarily through the provision of new overlays on the existing road surfaces, will ensure that these infrastructure assets are preserved, while other development partners will focus on improving the sustainability of road maintenance funding. The project will address the inadequate investment in the national highway network by financing detailed engineering design for improvement of national roads to be implemented under future projects. The large institutional capacity development component of the project will address capacity shortcomings in DPWH central planning and monitoring functions, as well as in district offices, thus supporting the government’s decentralization initiative. As part of the project, DPWH has agreed to implement the Anti-Corruption Action Plan, which focuses on increasing the transparency of 11 Sector Governance Risk Assessment (accessible from the list of linked documents in Appendix 2). 12 ADB. 2009. Technical Assistance to the Republic of the Philippines for Strengthening Transparency and

Accountability in the Road Subsector. Manila (TA 7434-PHI, approved 10 December, $1 million).

4

DPWH operations, improving accountability to oversight agencies, and eliminating procurement irregularities. 13. The project provides the means for ADB’s reengagement in the Philippine road subsector, and is ADB’s first loan for the Philippines road subsector since 1996. 13 The reengagement will enable ADB to support the government’s initiatives to address issues hindering subsector performance and to improve the subsector productivity. As part of this re-engagement, ADB provided an advisory technical assistance (TA) to address governance issues in the road subsector and ensure successful implementation of future projects (footnote 12). The project is designed to facilitate ADB’s engagement in the subsector over the medium-term through readiness to utilize additional financing based on project performance criteria (para. 23). B. Impact and Outcome

14. The impact will be improved accessibility of transport infrastructure and services. The outcome will be that DPWH manages the road network in the project area more effectively. C. Outputs

15. The outputs will include (i) periodic maintenance of about 340 km of nine national roads, (ii) detailed engineering design of 3 roads to be maintained under the project and other roads to be maintained or improved under future projects, and (iii) strengthened institutional capacity in the road subsector. 16. Periodic maintenance. Periodic maintenance will be carried out on about 340 km of nine national roads, consisting of 11 road sections, located in the west coast of Luzon, the Visayas, and Mindanao. The roads proposed for inclusion in the project were selected through a prioritization exercise carried out by the project preparatory technical assistance consultants in collaboration with DPWH. The selection was based on economic return and the minimization of safeguard issues. The selected roads are part of a major effort to preserve and improve the national road network, included in the Philippines Development Plan, 2011–2016 and part of a larger group of roads chosen for improvement by development partners including the World Bank and the Japan International Cooperation Agency. 17. Detailed design. The project will finance preparation of detailed engineering design for 101 km of 3 road sections to be maintained under the project and 847 km of national roads to be maintained or improved as part of future projects proposed for ADB financing, including through the use of additional financing if the project performs well. 18. Institutional capacity development. A key output of the project will be institutional capacity development of DPWH. Activities to be financed by the project under this output are part of a joint effort by development partners to improve DPWH’s capacity and performance of the road subsector. Capacity development activities were developed in coordination with the other key development partners and DPWH to ensure that they are complementary and do not overlap. Core activities include (i) institutionalizing the road maintenance and management system; (ii) enhancing the traffic accident recording and analysis system and improving the road safety audit system; (iii) developing and installing a project management information system; (iv) strengthening DPWH's environmental and social impact assessment capability and mainstreaming gender in DPWH's infrastructure development; (v) improving communication 13 ADB. 1996. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the

Republic of the Philippines for Sixth Road Project. Manila.

5

between the DPWH central office and the 47 DPWH district engineering offices; (vi) improving information technology capacity through the procurement of computer equipment and software for 47 DPWH district engineering offices; (vii) comprehensively developing human resources; and (viii) supporting infrastructure development and DPWH's quality assurance system. Terms of reference for the capacity development subcomponents are in the project administration manual (PAM). 14 19. Lessons. The project design incorporates lessons from the experiences of ADB and other development partners in the road subsector. Based on the experience of World Bank-financed road projects, ADB is financing a procurement advisor to monitor the integrity of project procurement and to assist DPWH in the procurement. To address the lessons from ADB’s last road subsector project (footnote 13), the institutional capacity development component will strengthen DPWH’s capacity for safeguards compliance through improvement of right-of-way and environmental management. D. Investment and Financing Plans 20. The project is estimated to cost $130.0 million, including taxes and duties estimated at $16.5 million equivalent (Table 1).

Table 1: Project Investment Plan ($ million)

Item Total A. Base Costsa 1. Civil works 63.8 2. Institutional capacity development 18.6 3. Administration cost 3.2 4. Project implementation consultants 13.3 5. Taxes and duties 16.5 Subtotal 115.4 B. Contingenciesb 11.1 C. Financing Charges during Implementationc 3.5 Total 130.0 a In mid-2011 prices. b Physical contingencies computed at 2.5% of base cost. Price contingencies computed based on Asian

Development Bank forecast international and domestic inflation rates applied to foreign exchange and local currency cost; includes provision for potential exchange rate fluctuation under the assumption of a purchasing power parity exchange rate.

c Includes interest and commitment charges. Interest during construction for the Asian Development Bank loan was computed at the 5-year forward London interbank offered rate plus a spread of 0.40%. Commitment charges for the Asian Development Bank loan are 0.15% per year to be charged on the undisbursed loan amount.

Source: Asian Development Bank estimates.

21. The government has requested a loan of $62 million from ADB’s ordinary capital resources to help finance the project. The loan will have a 25-year term, including a grace period of 5 years, an annual interest rate determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility, a commitment charge of 0.15% per year (the interest and other charges during the implementation to be capitalized in the loan), and such other terms and conditions set forth in the draft loan agreement. The loan will not be used for taxes and duties or for land acquisition. The government has provided ADB with (i) the reasons for its decision to borrow under ADB’s LIBOR-based lending facility on the basis of these terms and conditions, and (ii) an undertaking that these choices were its own independent decision and not made on reliance on any communication or advice from ADB.

14 Project Administration Manual (accessible from the list of linked documents in Appendix 2).

6

22. The financing plan is in Table 2. The government has also requested a loan of $30.0 million equivalent from OFID, to be provided as joint cofinancing for the project. The OFID loan has been approved and will be partially administered by ADB. The OFID cofinancing will be used exclusively for civil works and contingencies for civil works. The government will provide $38.0 million for the project, including all taxes and duties.

Table 2: Financing Plan

Source Amount

($ million) Share of Total (%)

Asian Development Bank 62.0 47.7 OPEC Fund for International Development 30.0 23.1 Government 38.0 29.2

Total 130.0 100.0 Source: Asian Development Bank estimates.

E. Implementation Arrangements

23. DPWH will be the executing agency. It will establish a project steering committee to provide overall guidance for project implementation. The existing ADB project management office (PMO) will be directly responsible for the implementation of civil works, engineering designs, and project coordination. The PMO director will act as full-time project director and be responsible for the day-to-day management of the project. The environment and social services office of DPWH will be responsible for implementation of the environmental and social aspects of the project. Additional financing by ADB may be considered if the project performs well. The project includes detailed design of future road periodic maintenance and improvements to facilitate readiness for additional financing and to provide a strong incentive for successful project implementation. 24. The implementation arrangements are summarized in Table 3 and described in detail in the PAM.

Table 3: Implementation Arrangements Aspects Arrangements Implementation period December 2011–December 2015 Estimated completion date December 2015 (loan closing date: June 2016) Management

(i) Oversight body DPWH Undersecretary for PMO operations (chair) Representatives from Department of Finance, Department of Budget and Management, and National Economic and Development Authority (members)

(ii) Executing agency DPWH (iii) Key implementing

agencies DPWH will be the lead implementing agency. The environment and social services office of DPWH will be responsible for implementation of social and environmental safeguards of the project. The PMO will be responsible for day-to-day project management.

(iv) Implementation unit ADB-PMO Building, 2nd Street, Port Area, Manila, 44 staff Procurement International competitive bidding 11 contracts $83.65 million

National competitive bidding 1 contract $3.88 million Consulting services QCBS 2,553 person-months $ 28.39 million Advance contracting Goods, civil works, and services Disbursement The loan proceeds will be disbursed in accordance with ADB's Loan Disbursement

Handbook (2007, as amended from time to time) and detailed arrangements agreed upon between the government and ADB.

ADB = Asian Development Bank, DPWH = Department of Public Works and Highways, PMO = project management office, QCBS = quality- and cost-based selection. Source: Asian Development Bank.

7

III. DUE DILIGENCE

A. Technical

25. The project will support the existing national road network and road subsector through periodic maintenance of selected national roads and strengthened institutional capacity. The project will implement periodic maintenance of existing national roads and prepare detailed engineering designs of roads to be maintained or improved under the project and future projects. The maintenance of national roads under the project will result in longer asset lives, lower transport costs, shorter travel times, and improved road safety. The selection of roads for inclusion in the project and the development of investment costs were carried out in collaboration with DPWH. B. Economic

26. The project will benefit road users and communities living within the areas of influence of the national roads to be maintained under the project. Road users will benefit directly from reduced vehicle operating costs, shorter travel times, and improved road safety. Communities in the areas of influence will benefit indirectly through improved connectivity with better access to markets, economic opportunities, and government and other social services (such as education and health). The project will also generate economic benefits by strengthening the institutional capacity of DPWH. This will lead to lower costs for future road projects and better quality of road construction and maintenance, resulting in longer lives for road assets. These benefits will accrue to road users in general and to the Philippine economy. 27. Each of the investments under the project is economically viable when costs are compared with the expected benefits to road users from reduced vehicle operating costs and savings in travel time. The project as a whole has an economic internal rate of return of 36.2% and a net present value of $161.2 million, using a 12% discount rate. Sensitivity analysis shows that these results are robust with respect to negative changes in the key parameters determining benefits and costs. Under the worst-case scenario of a 20% increase in costs and a 20% decrease in benefits, the project still yields an economic internal rate of return of 27.1%. 28. Continuing routine maintenance for the roads covered by the project is essential for the achievement of the anticipated economic benefits. Inadequate funding of road maintenance has been a long-standing problem. The government, with the support of the World Bank, is addressing the issue of sustainable funding for road maintenance by strengthening the operation of the road board and expanding the revenue base for and efficiency of use of the special funds collected from the users of motor vehicles. The project will also support improved implementation of road maintenance through institutionalization of the road maintenance and management system. C. Governance

29. A governance assessment for the transport sector was undertaken as part of the due diligence process and is summarized in the sector governance risk assessment (footnote 11). It concluded that the corruption risk for the project is above average and that DPWH is widely perceived as an agency where corruption is prevalent. Risks identified relate to poor public expenditure and financial management, weaknesses in public procurement, and corruption. A governance risk mitigation plan is included in the risk assessment and risk management plan. 15 15 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

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30. DPWH is committed to implementing various reforms and introducing measures to reduce these risks and to mitigate their effects, particularly through the introduction of e-based systems for procurement and financial management practices that will increase transparency and reduce the potential for corruption. ADB and other development partners are supporting DPWH in these efforts by building capacity and strengthening the role of civil society in the monitoring of DPWH performance. ADB has provided TA to support the implementation of the governance components included in the risk assessment and risk management plan (footnote 12). This includes assistance with project procurement through provision of a procurement advisor and other measures related to internal auditing and civil society monitoring. The Project includes specific measures to deter corruption and increase transparency, included in an anticorruption action plan. 16 DPWH has agreed to implement the anticorruption action plan by project completion. 31. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government and DPWH. The specific policy requirements and supplementary measures are described in the PAM (footnote 14). D. Poverty and Social

32. The project is a general intervention with indirect poverty reduction impacts which will result from the lowering of transport costs for local people and agricultural produce, and improving access to social services and economic opportunities. The project will also provide some opportunities to recruit local labor during construction and road maintenance. The project is classified as some gender benefits. Potential gender equity benefits are women’s improved access to social services and income opportunities. For project-related employment, men and women will be equally paid for work of equal value, and no child labor will be employed. The institutional capacity development output will also include raising the awareness and prominence of gender issues in DPWH activities. 33. A potential adverse social impact is the increased risk of exposure to HIV/AIDS and other sexually transmitted infections, given that improved transport infrastructure can provide the opportunity for people to interact and engage in behaviors that put them at risk of such infections. Also, the presence of construction workers during implementation of civil works can contribute to the spread of such infections in communities near construction camps and in the workers’ communities of origin. To address this risk, DPWH will ensure that HIV/AIDS awareness and prevention activities are conducted for local communities and construction workers. E. Safeguards

34. The project is classified as environment category B and an initial environmental examination (IEE) 17 was prepared consistent with the requirements of ADB’s Safeguard Policy Statement (2009). The IEE does not identify any major environmental concerns due to construction and operation of the project roads. Works will be undertaken within existing rights-of-way with no road widening or realignment. The IEE includes an environmental management plan (EMP), which details the mitigation measures, environmental monitoring activities, institutional responsibilities, and environmental management capacity building. Public consultations were held in all project provinces and along all project roads and included interviews and meetings with the affected people. The results of the consultations were positive, with people considering that the roads will bring significant economic benefits to the region and 16 Anticorruption Action Plan (accessible from the list of linked documents in Appendix 2). 17 Initial Environmental Examination (accessible from the list of linked documents in Appendix 2).

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will increase trade flows. DPWH will ensure that relevant EMP provisions are included in bid and contract documents for detailed design, project supervision, and civil works. During construction, the supervision consultant will assist the environment and social services office of DPWH in monitoring the contractor’s environmental performance and overall EMP implementation. DPWH will submit semiannual environmental monitoring reports to ADB; these reports will be posted on ADB’s website for public disclosure. DPWH will establish a grievance redress mechanism to ensure that complaints of affected persons and other stakeholders regarding the project’s environmental performance are promptly addressed. 35. The project is classified as category C for involuntary resettlement and indigenous peoples. No resettlement will be required as the project provides only periodic maintenance on existing alignments. No impacts on indigenous peoples are expected to occur as a result of the project. F. Risk and Mitigating Measures

36. The main risks associated with the project relate to poor governance and, in particular, corruption. DPWH has shown strong commitment to improve governance in the transport sector and is committed to implementing the risk assessment and risk management plan with the support of an ADB-funded TA (footnote 12). The risk assessment and risk management plan targets risks that are (i) considered of critical importance to the project and to the transport sector, and (ii) likely to occur in the absence of mitigation. The governance component of the plan focuses on preventing corruption during procurement, and strengthening internal and external accountability mechanisms. It builds on and complements DPWH’s ongoing efforts to improve governance in association with other development partners. In addition, the project includes an anticorruption action plan, which details specific actions that DPWH will undertake to mitigate the risk of corruption during project implementation. 37. Failure to improve funding for, and delivery of, road maintenance would pose a technical risk for the project and undermine the sustainability of its investments. The government is strongly committed to increasing the funding available for road maintenance and is seeking to mitigate this risk through strengthening the road board and widening its revenue base from road-user charges, with assistance from the World Bank. Delivery of road maintenance will be improved through the implementation of the road maintenance and management system under the institutional capacity development output of the project. 38. A social risk is the possible spread of HIV/AIDS and other sexually transmitted diseases during and after project implementation. This risk will be mitigated by an HIV/AIDS awareness and prevention campaign aimed at civil works contractors and their workers, and local communities. 39. Major risks and mitigating measures are summarized in Table 4 and described in detail in the risk assessment and risk management plan. The benefits and impacts of the mitigating measures are expected to outweigh the costs associated with their implementation.

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Table 4: Summary of Risks and Mitigating Measures Risks Mitigating Measures Poor financial management Implementation of the governance components of the risk assessment

and risk management plan and technical assistance (TA) Weaknesses in procurement process Implementation of the governance components of the risk assessment

and risk management plan and TA Corruption Implementation of the governance components of the risk assessment

and risk management plan, and TA Inadequate road maintenance Strengthening of the road board and widening of its revenue base from

special funds; institutionalization of the road maintenance and management system

HIV/AIDS Awareness and prevention activities to be undertaken Source: Asian Development Bank.

IV. ASSURANCES

40. The government and DPWH have assured ADB that implementation of the project shall conform to all applicable ADB policies including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the PAM and loan documents. 41. The government and DPWH have agreed with ADB on specific covenants for the project, which are set forth in the loan agreement. No disbursements for civil works will be made until the OFID loan agreement has been signed and made effective.

V. RECOMMENDATION

42. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and, acting in the absence of the President, under the provisions of Article 35.1 of the Articles of Agreement of ADB, I recommend that the Board approve

(i) the loan of $62,000,000 to the Republic of the Philippines for the Road Improvement and Institutional Development Project, from ADB's ordinary capital resources, with interest to be determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility; for a term of 25 years, including a grace period of 5 years, and such other terms and conditions as are substantially in accordance with those set forth in the draft loan agreement presented to the Board; and

(ii) the administration by ADB of a loan not exceeding the equivalent of $30,000,000 to the Republic of the Philippines for the Road Improvement and Institutional Development Project, to be provided by the OPEC Fund for International Development (OFID).

Bindu N. Lohani Vice-President

24 November 2011

Appendix 1 11

DESIGN AND MONITORING FRAMEWORK

Design Summary Performance Targets and Indicators with Baselines

Data Sources and Reporting

Mechanisms Assumptions and

Risks Impact Improved accessibility of transport infrastructure and services

Weighted average travel time on project roads maintained at 1.2 hours through December 2018 from 1.6 hours in 2009

DPWH Planning Service

Outcome DPWH manages the road network in the project area more effectively

Average vehicle operating costs for cars on project roads reduced from weighted average of P12.2/km in 2009 to P10.3/km by December 2015


Assumption Continued commitment by DPWH to improving governance and strengthening capacity

Risks Inadequate maintenance of project roads

Departure of trained staff from DPWH

Axle loads are not controlled on project roads

Outputs 1. National roads on

the west coast of Luzon, in the Visayas, and in Mindanao periodically maintained

Periodic maintenance of 340 km of 9 national roads completed by July 2015

Road roughness index of 3.0 attained on 9 national roads by 2015

Supervision consultants' quarterly progress reports

DPWH road status reports

Assumptions TA7434-PHI: Strengthening Transparency and Accountability in the Road Subsector TA implemented successfullya

Sufficient budget for maintenance of new software systems and equipment

2. Detailed engineering design of selected roads to be maintained or improved under the project and future projects

Detailed design drawings and bills of quantities for periodic road maintenance of 466 km of national highways completed by August 2014

Detailed design drawings and bills of quantities for improvement of 482 km of national highways completed by August 2014



3. DPWH operations in the road sector are strengthened

National roads in 2 regions are maintained according to plans generated by the improved road maintenance and management system by December 2015

Electronically generated comprehensive road accident data are published by December 2015

Road safety projects are implemented in 2 districts by December 2015

Road sector statistics are available to the public by December 2015

Infrastructure rights-of-way are managed using geographic information systems in 13 additional districts by December 2015

DPWH adopts gender action plan by

DPWH Bureau of Maintenance

DPWH Traffic Accident Recording and Analysis System reports

DPWH website

DPWH Environment and Social Services Office

DPWH Planning

12 Appendix 1

Design Summary Performance Targets and Indicators with Baselines

Data Sources and Reporting

Mechanisms Assumptions and

Risks December 2015

Data on required expenditures are submitted electronically to DPWH headquarters by the 47 DPWH District Engineering Offices by December 2015

10 new training courses based on new comprehensive human resource development plan are conducted by December 2015

DPWH road construction projects are monitored according to enhanced quality assurance system by December 2015

Service

DPWH Comptrollership and Financial Management Service

DPWH Administrative and Manpower Management Service

DPWH Bureau of Research and Standards

4. Project completed on time and within budget

Project completed by December 2015

Costs for completed project do not exceed $130 million

No cases of misprocurement declared for project procurement

DPWH and project supervision consultant's benefit monitoring report

Activities with Milestones 1. Implementation of civil works 1.1 Civil works contracts awarded by September 2012 and completed by July 2015 2. Detailed engineering design 2.1 Consultant recruited by August 2012 and services completed by September 2015 3. Implementation of institutional capacity development program 3.1 Consultants for institutionalization of the road maintenance and management system

recruited by February 2013 and services completed by July 2015 3.2 Consultants for enhancement of the traffic accident recording and analysis system

and improvement of the road safety audit system recruited by February 2013 and services completed by January 2014

3.3 Consultants for development and installation of a project management information system recruited by August 2012 and services completed by December 2015

3.4 Consultants for strengthening DPWH's environmental and social assessment capability and mainstreaming gender in DPWH's infrastructure development recruited by January 2013 and services completed by December 2015

3.5 Procurement of communications equipment for linking the DPWH central office and 47 DPWH district engineering offices completed by April 2015

3.6 Procurement of computer equipment and software for 47 DPWH district engineering offices completed by April 2015

3.7 Consultants for comprehensive human resource development recruited by January 2013 and services completed by December 2015

3.8 Consultants for support for infrastructure development and DPWH's quality assurance system recruited by July 2012 and services completed by June 2015

4. Project implementation 4.1 Project supervision consultants recruited by August 2012 and services completed by

September 2015 4.2 Project anti-corruption action plan implemented by 30 June 2015

Inputs ADB: $62 million

– Civil works: $19.1 million

– ICD: $18.6 million – Supervision and

design: $13.3 million

– Other: $11.0 million

Government: $38 million – Civil works: $15.4

million – Taxes: $16.5 million – Other: $6.1 million

OFID: $30 million

– Civil works: $29.3 million

– Other: $0.7 million

ADB = Asian Development Bank, DPWH = Department of Public Works and Highways, ICD = institutional capacity development, km = kilometer, OFID = OPEC Fund for International Development, P = peso, TA = technical assistance. a ADB. 2009. Technical Assistance to the Republic of the Philippines for Strengthening Transparency and

Accountability in the Road Subsector. Manila (TA 7434-PHI, approved 10 December, $1 million). Source: Asian Development Bank.

Appendix 2 13

LIST OF LINKED DOCUMENTS (http://adb.org/Documents/RRPs/?id=41076-044-3)

1. Loan Agreement 2. Sector Assessment (Summary): Road Transport 3. Project Administration Manual 4. Contribution to the ADB Results Framework 5. Development Coordination 6. Economic and Financial Analysis 7. Country Economic Indicators 8. Summary Poverty Reduction and Social Strategy 9. Initial Environmental Examination 10. Risk Assessment and Risk Management Plan Supplementary Documents 11. Sector Governance Risk Assessment 12. Anticorruption Action Plan 13. Technical Assistance: Strengthening Transparency and Accountability in the Road

Subsector (TA 7434-PHI)