56769 v1 PHILIPPINES ­ SECOND MINDANAO RURAL DEVELOPMENT PROJECT LOAN 7440 Restructuring Memo 1. Proceeds for the Philippines, SECOND MINDANAO RURAL DEVELOPMENT PROJECT (LOAN 7440), P084967 will be reallocated as follows: Category of Expenditure Allocation % of Financing (US$ M) Current Revised Current1 Revised Current Revised 1 Goods, Works, 7 9.3 100 100 Consultants' Services under Parts A and D of the Project 2 Civil Works 2A Under Parts B1, 48.752 46.452 100% of the 100% of the B2, B32 and B4 of grant amount grant amount the Project disbursed disbursed 2B Additional sub- 10 10 100% of the 100% of the projects under grant amount grant amount Parts B2 and B3 of disbursed disbursed the Project3 3 Performance- 0 Based Grants under Part B 4 CFAD Block 18 18 100% of 100% of Grants CFAD Block CFAD Block grant amount grant amount disbursed disbursed TOTAL (US$ M) 83.752 83.752 2. Overall implementation progress has been upgraded to MS from MU after the last (4th) Implementation Review Mission. Although physical accomplishments and financial disbursements are still below target, project implementation continues to improve and is expected to further accelerate and eventually close the performance gap, especially in view of the proactive stance of the Department of Agriculture (DA) to provide counterpart funding support 1 The Loan Agreement was amended on January 12, 2010 to give way to the new NG-LGU cost sharing scheme for RI sub-projects and the reallocation of US$ 15.752 million from the removal of the Performance-Based Grant Scheme. 2 Please note that Part B3 (subprojects on Level 2 rural potable water supply systems) was added in this subcategory in view of Government's priority accorded to the financing of communal faucet subprojects in order to assist in the attainment of its millennium development goals on improving access to water supplies. 3 Please note that Part B2 (communal irrigation subprojects) was added in this subcategory in view of Government's priority accorded to the financing of communal irrigation subprojects in order to assist in the attainment of its food security objective. to the local government units (LGUs). This measure will expand the number of sub-projects that will be implemented by the participating LGUs and attract other LGUs to join the project. It was estimated that the PhP 191 million DA counterpart funding support to LGUs will ensure the implementation and completion of about PhP 640 million worth of market infrastructure sub- projects by March 2011. The Rural Infrastructure (RI) component has already managed to increase its portfolio, including those newly proposed by the LGUs, to PhP 3.9 billion as of end- July 2010. This pace of implementation should firmly bring the project back on track. The Natural Resources Management (NRM) component continues to perform satisfactorily and has successfully launched the NRM-GEF activities. In addition, the Department of Budget and Management (DB and the Municipal Development Fund Office (MDFO) are implementing additional measures and reforms that will facilitate access to project funds. 3. The proposed reallocation is necessary to shore up the funds needed for the day-to-day operations of the project. The project was approved by the Government of the Philippines (GoP) with the condition that loan proceeds for the Investments for Governance Reform and Program Administration (IGRPA) component, where the "soft" activities (e.g., capacity-building, training) of the project and the maintenance, operations and overhead expenditures (MOOE) were lodged, will be kept small and would only cover the first year of project implementation, with the remaining years to be financed from GoP funds. The Department of Agriculture (DA) is, however, experiencing difficulties in sourcing from its budget the needed funds for MOOE due to i) the fiscal difficulties being experienced by the new Administration; and ii) competing demands from several foreign- and locally-assisted projects it is simultaneously implementing. As a result, the DA estimates that the remaining budget for the project MOOE, sourced purely from the DA funds, is sufficient to cover requirements only until the end of 2010. The project is scheduled to close by end-December 2012. 4. This will be the second Level 2 restructuring of the project.