The World Bank Philippines Promoting Competitiveness and Enhancing Resilience to Natural Disasters Sub-Program 3 (P176891) Program Information Document (PID) Appraisal Stage | Date Prepared/Updated: 12-Oct-2021 | Report No: PIDA32738 Page 1 of 6 The World Bank Philippines Promoting Competitiveness and Enhancing Resilience to Natural Disasters Sub-Program 3 (P176891) BASIC INFORMATION A. Basic Project Data OPS TABLE Country Project ID Project Name Parent Project ID (if any) Philippines Promoting Competitiveness and Philippines P176891 Enhancing Resilience to P170914 Natural Disasters Sub- Program 3 (P176891) Region Estimated Board Date Practice Area (Lead) Financing Instrument Macroeconomics, Trade Development Policy EAST ASIA AND PACIFIC 15-Dec-2021 and Investment Financing Borrower(s) Implementing Agency Republic of the Philippines Department of Finance Proposed Development Objective(s) The DPL series aims to support the Government of the Philippines in: i) promoting competitiveness and ii) enhancing resilience. Financing (in US$, Millions) FIN_SUMM_PUB_TBL SUMMARY Total Financing 600.00 DETAILS -NewFin3 Total World Bank Group Financing 600.00 World Bank Lending 600.00 Decision The review did authorize the team to appraise and negotiate B. Introduction and Context The Philippines is facing an incredible challenge in reverting the devastating effects of COVID-19 on the economy, but the macroeconomic policy framework is suitable for the purpose of the proposed operation. After tempering the rise of COVID-19 cases due to the Alpha variant in April-May, the Philippines faced a new surge of cases due to the Delta variant in August. The current surge is more worrying with the 7-day average new cases reaching 20,912 on September 12, higher than the 10,800 during the peak of the April surge. Cases have since declined to a 7-day average Page 2 of 6 The World Bank Philippines Promoting Competitiveness and Enhancing Resilience to Natural Disasters Sub-Program 3 (P176891) of 10,400 as of October 10, benefitting from the recent cycle of strict lockdown measures and vaccine rollout. The effort to flatten the infection curve while mitigating the impact of the pandemic on the economy remains a major policy challenge. The economy contracted by close to 10 percent in 2020 owing to broad-based reductions in agriculture, industry and services activities. There are signs of economic recovery in the first half of 2021, benefitting from a recovering external environment, but domestic demand remains generally muted. GDP growth is expected to reach 4.3 percent in 2021 and reach 5.6 percent over the medium term driven by the recovery in external demand and return of stronger domestic activity. The financial system has so far withstood the impact of COVID-19, partly supported by government policy and regulatory forbearance measures. The Bangko Sentral ng Pilipinas (BSP) maintains an accommodative policy stance despite elevated inflation in early 2021. Fiscal policy is expected to be supportive of economic recovery in the near term with a commitment to fiscal consolidation as the economy recovers. Public debt remains sustainable. However, there is considerable uncertainty, given the potential for prolonged COVID-19 infections and the recurrent episodes of lockdowns. This operation completes a cycle of structural reforms. The proposed US$ 600 million operation is the third in a series of three operations designed to support critical policy and institutional reforms by promoting competitiveness and strengthening resilience. Like its predecessor, this operation targets measures supporting economic recovery from the negative impact of COVID-19 while addressing several structural constraints to growth. The DPL series has progressively increased the scope and ambition of its reforms to reflect the government’s priority reforms and adjusted in response to the challenges arising from the COVID crisis. Reforms supported by this operation include the corporate tax and incentive reform to improve country’s competitiveness and boost private investment; the liberalization of Foreign Direct Investment (FDI) in retail sector to facilitate investments; and the broadband expansion policy to promote ICT investment. Despite the negative impact of the pandemic and increasing fiscal needs, the government is committed to the effective implementation of reforms with the financial and technical supports from the World Bank. The reforms supported by the DPL series are fully aligned with the Systematic Country Diagnostic (SCD) and Country Partnership Framework (CPF). The CPF covering 2019-2023 focuses on three development objectives: (i) job creation; (ii) improving human capital; and (iii) building resilience to conflict and natural disasters, which remain relevant in the current context. Cross-cutting themes include governance and digital transformation. This operation is fully aligned with the objectives of the CPF by supporting reforms towards improving business climate, promoting competitiveness, facilitating digitalization of the economy and government service provision, and strengthening financial inclusion, which are needed reforms to boost the quality of job creation. The DPL series also support reforms to enhance fiscal resilience through higher tax revenue collection effort. In addition, the DPL supports the government’s efforts to strengthen disaster and climate risk management, directly aligned with the third objective of the CPF. C. Proposed Development Objective(s) The DPO supported reforms align with government long term aspirations for development, as well as with immediate recovery needs, emerging from the COVID-19 shock. The DPL series aims to support the Government of the Philippines in: i) promoting competitiveness and ii) enhancing resilience. The proposed operation is the third in a series of three operations designed to support critical policy and institutional reforms, and their implementation to achieve the government’s development objectives by: (i) lowering trade cost and ease of doing business, expanding fixed broadband infrastructure, assisting rice farmers to become more productive; opening the retail sector to foreign investment, and (ii) enhancing country’s fiscal, social, and financial resilience to shocks through simplifying tax incentives, strengthening risk management of payment systems, scaling the national ID registration system, and improving the financial risk Page 3 of 6 The World Bank Philippines Promoting Competitiveness and Enhancing Resilience to Natural Disasters Sub-Program 3 (P176891) management to natural disasters and climate change. The set of policy actions supported by this third operation of the series were adjusted to increase their responsiveness to the new reality. Reforms that support the adaptation of firms to the new normal, such as digitalization, can promote a resilient recovery. Further to this, the Philippines is the third most vulnerable country in the world to weather-related extreme events and sea level rise. Prioritizing reforms to enhance resilience is crucial to get the country back to its inclusive growth path in a sustainable manner. Reforms supported by this operation will promote investment in telecommunications, reduce the cost of doing business, improve trade facilitation, boost agricultural productivity, promote foreign investment in the retail sector, rationalize tax incentives and increase tax efficiency, increase social resilience, increase the use of electronic payments, improved financial risk management to natural disasters and climate Change. D. Project Description The policy matrix of this operation has been updated to support government priority reforms that contribute to both economic recovery and structural reforms to achieve long term inclusive growth. The pillars have been designed to promote inclusive growth, competitiveness and resilience, key thematic areas of the government embedded in the GoP’s flagship development strategies, including the PDP 2017-2022, 0+10 points agenda, and Ambisyon Natin 2040. The DPL is structured around the following pillars and contains ten prior actions: • Pillar 1: Promoting competitiveness. PDO: Promoting competitiveness through a set of cross-cutting reforms in areas of trade and investment facilitation policy, ease of doing business, and promoting competition and investment in digital infrastructure. Prior actions are: (i) streamlined permitting requirements and defined infrastructure-sharing policies for fixed broadband network rollout, (ii) streamlined and automated the government processes for starting a business, (iii) modernized customs to enhance trade facilitation with the implementation of risk-based controls and enhanced cargo selectivity, and (iv) reduced the entry barriers for foreign investment in the retail sector. • Pillar 2: Enhancing resilience. PDO: Enhancing economic, social, and financial resilience through improved risk management and response systems, while rationalizing tax incentives and increasing tax efficiency, strengthening program delivery, and improved access to digital payments. Prior actions are: (i) rationalized tax incentives and increased tax efficiency through better monitoring and evaluation, (ii) adopted the PhilSys as the primary means for social assistance beneficiary identification and verification, (iii) strengthened the institutional framework for payment system governance and risk management, (iv) adopted claims management procedures for the national indemnity insurance program to link pre-arranged financing directly to pre-arranged funding channels, and (v) launched a pilot for the web-based national asset registry system. E. Implementation Institutional and Implementation Arrangements The DOF is the main liaison with the World Bank on the proposed operation and it will coordinate the implementation arrangements with other relevant departments and agencies. The government has designated the DOF International Finance Group as the Bank’s main counterpart in the policy dialogue and monitoring of the operation. However, policy dialogue and monitoring and evaluation of the program supported by this DPL are shared with DBM, as well as the BTr (which is an agency of the DOF), NEDA, PSA, BSP, ARTA, DICT, BOC, DSWD, PSA, and DA. Since the policy targets are aligned with regular programs of the relevant agencies, their reporting mechanisms will be used. Page 4 of 6 The World Bank Philippines Promoting Competitiveness and Enhancing Resilience to Natural Disasters Sub-Program 3 (P176891) The monitoring mechanism and accountability systems reflect defined areas of action and correspond to the expected outcomes of the prior actions and allow beneficiaries to voice potential grievances and concerns . Indicators selected to monitor progress toward achievement of the PDO include an appropriate mix of specific qualitative and quantified targets, which are attributable, relevant, and time-bound, and are expected to be sufficient to enable effective monitoring of the project’s achievement of the PDO. Moreover, the Pillars and result indicators in the policy framework are aligned with government priorities. In terms of accountability, communities and individuals who believe that they have been adversely affected by specific country policies supported as prior actions or tranche release conditions under a World Bank Development Policy Operation may submit complaints to the responsible country authorities, appropriate local/national grievance redress mechanisms, or the WB’s Grievance Redress Service (GRS). F. Poverty and Social Impacts, and Environmental, Forests, and Other Natural Resource Aspects Poverty and Social Impacts The DPL support reforms that directly and indirectly help to reduce poverty and reverse the devastating effects from the COVID-19 shock in the short, medium, and long term. Qualitative estimate on the impact of the reforms supported by this operation is positive on the poverty levels. Reforms under the competitiveness pillar will contribute to reducing poverty and inequality by increasing incomes through the generation of additional and high-quality jobs, supporting enterprise survival and adaptation to the new operating conditions, and enhancing consumer welfare through lower rice prices, among other drivers. Reforms under the resilience pillar, are expected to smooth incomes of vulnerable groups, and improving access to social services. However, the estimates also revealed that some reforms may present immediate negative impact on some portion of the population (i.e., rice farmers affected by import liberalization) in the short run, but that reform, at the aggregate is neutral on poverty. The environmental impact of the reform actions supported by the DPL are estimated to be positive overall. Ongoing World Bank operations and ASA are working with the government to address technical barriers to enable the adoption of risk informed approaches to development, including through the integration of climate change and disaster risk assessments in public investment projects and environmental risk and impact assessments. For example, the strengthening of the financial sector mechanisms for Climate and Environmental Risks has been incorporated in the current Financial Sector Assessment Program (FSAP) 2019. Arrangement of dedicated funding for asset rehabilitation will support the provision of sufficient funding for reconstruction to ensure that public investment projects can be carried out more rapidly and to the required level of design as set out in government environmental impact assessment and disaster management system requirements. G. Risks and Mitigation The overall program risk rating is substantial with high degree of uncertainty on the duration and depth of the COVID- 19 pandemic. The macroeconomic risk is substantial given the risk of a prolonged COVID-19 outbreak that may result in a deeper recession, pushing more people into poverty, and diverting attention away from structural and long-term reforms, which may affect the achievement of the PDOs. In addition, the political economy and governance risks can stall the reforms’ momentum, as political transition following the 2022 general election can affect the pace of structural reforms. Furthermore, institutional capacity for implementation poses a substantial risk, as the COVID-19 impact is overstretching the capacity of implementing agencies of the reforms supported by the DPL series. To manage and mitigate these risks, close and continuing dialogue between the Bank and the Government will help to ensure policy consistency and ownership of the reform objectives. In addition, timely technical assistance support provided by the Bank team will mitigate implementation risks due to capacity constraints. Numerous TAs and advisory works are ongoing Page 5 of 6 The World Bank Philippines Promoting Competitiveness and Enhancing Resilience to Natural Disasters Sub-Program 3 (P176891) in support of the key pillars of this proposed DPL operations. Similarly, the Bank’s timely provision of financial support through various programs (CAT-DDO4 and this operation) will help to mitigate macroeconomic and implementation . risks. CONTACT POINT World Bank Rong Qian, Jaime Andres Uribe Frias, Kevin C. Chua Senior Economist Borrower/Client/Recipient Republic of the Philippines Carlos Dominguez Secretary cdominguez@dof.gov.ph Implementing Agencies Department of Finance Mark Joven Undersecretary mdjoven@dof.gov.ph FOR MORE INFORMATION CONTACT The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 473-1000 Web: http://www.worldbank.org/projects APPROVAL Task Team Leader(s): Rong Qian, Jaime Andres Uribe Frias, Kevin C. Chua Approved By APPROVALTBL Country Director: Ndiame Diop 20-Sep-2021 Page 6 of 6