ASIAN DEVELOPMENT BANK RRP: 33278

REPORT AND RECOMMENDATION

OF THE

PRESIDENT

TO THE

BOARD OF DIRECTORS

ON

PROPOSED LOANS

TO THE

REPUBLIC OF THE PHILIPPINES

FOR THE

HEALTH SECTOR DEVELOPMENT PROGRAM

November 2004

CURRENCY EQUIVALENTS (as of 19 November 2004)

Currency Unit – Peso (P)

P1.00 = $56.280 $1.00 = P0.0178

ABBREVIATIONS

ADB – Asian Development Bank BHS – barangay health station CPFPG – Compensation Policy Framework and Procedural Guidelines CPG – clinical practice guidelines CQI – continuing quality improvement DOH – Department of Health GTZ – Deutsche Gesellschaft für Technische Zusammenarbeit

(German Agency for Technical Cooperation) HSDP – Health Sector Development Project HSRA – Health Sector Reform Agenda ICHSP – Integrated Community Health Services Project ILHZ – interlocal health zone IPPF – Indigenous Peoples Policy Framework LAR – land acquisition and resettlement LGU – local government unit LIBOR – London interbank offered rate MDG – Millennium Development Goal MDFO – Municipal Development Fund Office MFC – Municipal Finance Corporation MOA – memorandum of agreement MPDO – municipal planning and development office NGO – nongovernment organization NHIP – national health insurance program PhilHealth – Philippines Health Insurance Corporation PMU – project management unit RHU – rural health unit UPMD – Unified project management division UPMU – Unified project management unit USAID – United States Agency for International Development WHSMP – Women's Health and Safe Motherhood Project

NOTES

(i) The fiscal year (FY) of the Government and its agencies ends on 31 December. (ii) In this report, "$" refers to US dollars.

This report was prepared by a team consisting of M. Lindfield, HY Zhai, Y. Shiroishi, J. Jeugmans, L. Blanchetti-Revelli, and X. Liu.

CONTENTS

Page

LOAN AND PROGRAM SUMMARY iii MAP ix I. THE PROPOSAL 1 II. THE SECTOR: PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1

A. Sector Description and Performance 1 B. Issues and Opportunities 4

III. THE PROPOSED SECTOR DEVELOPMENT PROGRAM 10

A. Objectives and Scope 10 B. Important Features 10 C. The Program Loan 11

D. The Project Loan 14 IV. PROGRAM BENEFITS, IMPACTS, AND RISKS 22 A. Benefits and Beneficiaries 22 B. Social and Poverty Analysis 23 C. Environment 24 D. Economic and Financial Analysis 24 E. Risks and Assumptions 25 V. ASSURANCES 26 A. Specific Assurances 26 B. Conditions for Loan Effectiveness of the Project Loan 27 C. Conditions for Disbursement of the Project Loan 27 VI. RECOMMENDATION 27 APPENDIXES 1. Program Framework 29 2. Sector Analysis 33 3. Lessons Learned 36 4. External Assistance to the Sector 39 5. Program Policy Matrix 41 6. Policy Letter 44 7. Sector Financing and Targets 47 8. List of Ineligible Items 49 9. Summary Initial Environmental Examination 50 10. Cost Estimates and Financing Plan 54 11. Financing Arrangements and Funds Flow 55 12. Implementation Schedule 56 13. Contract Packages 57 14. Outline Terms of Reference for Consultants 58 15. Summary Poverty Reduction and Social Strategy 62 16. Resettlement Framework 65

17. Indigenous Peoples Framework 67 18. Economic Analysis 69 SUPPLEMENTARY APPENDIXES (available on request) A. Detailed Sector Analysis B. External Assistance C. Detailed Program Framework D. Detailed Policy Matrix E. Initial Environmental Examination F. Social Analysis and Safeguards G. Financial and Economic Analysis

LOAN AND PROJECT SUMMARY Borrower The Republic of the Philippines Classification Targeting classification: Targeted intervention

Sector: Health, nutrition, and social protection Subsectors: Health systems Themes: Good governance; inclusive social development; Gender and development.

Environment Assessment Category B Rationale To improve their health, poor people in the Philippines require

improved access to health insurance, and better quality and efficiency in the provision of accessible primary health care. Although the health status of Filipinos has continuously improved over the last decades, the common illnesses of poverty, such as infectious diseases, have not been reduced to acceptable levels. Social and economic changes have created new challenges in terms of degenerative and lifestyle diseases. Further, the organization of the health sector itself suffers from an inappropriate delivery system, inadequate regulatory mechanisms, and inappropriate health care financing methods. The Philippine Government has established the Health Sector Reform Agenda (HSRA) to address issues. The HSRA defines key reforms and strategies that address inequities and inefficiencies in the sector. In 1999 the Department of Health (DOH) was charged with implementing the HSRA. Although some reform measures have been tested successfully, most of the HSRA strategies in the areas of health insurance, provider payment, quality of care, and governance have not been operationalized and tested. The Government has requested assistance to fully implement these reforms. The Health Sector Development Program (HSDP) comprised two loans. A Program loan to support the financing of comprehensive sector reforms and a project loan for implementation of the reforms in selected provinces. The program loan policy reforms and actions outlined in the policy matrix will remove obstacles for HSRA implementation and catalyze future investments. The project loan will support design and initial implementation of reform interventions by local government units (LGUs) level in five selected provinces.

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The Sector Development Program The goal of the HSDP is to improve the health status of the

population, especially of the poor, and to achieve the health-related Millennium Development Goals (MDGs) of the United Nations. Implementing an integrated set of health sector reforms that benefits the poor will include system-wide changes and the design and implementation of project interventions in selected pilot provinces that build on the HSRA. The HSRA delineates the range of issues to be addressed to accelerate reduction of poverty caused by and contributing to ill health.

Important Features The Program will address the root causes for the lack of substantial changes since the publication of the HSRA in 1999 by putting into place the appropriate incentives for change in systems, processes, and rewards. The Program takes into account the lack of fiscal space available to Government for investing in health and in poverty reduction, and proposes a refocus of health spending and higher expenditures in areas that directly benefit the poor. The Program follows a strategy, which invests in people and primary health facilities and that focuses on cost containment and cost efficiency. The envisaged policy actions and reform interventions emphasize performance-based resource allocation, increased accountability and good governance, and consumer participation.

The Program Loan

Objectives and Scope The program loan supports the overall goal of the Program by promoting cost-effectiveness of health services and equity of health status through implementation of an integrated set of health sector reforms. The system-wide changes will largely concern improving the ways that HSRA reforms are implemented and managed at all levels in the health sector. The Program follows three fundamental objectives deriving from the sector analysis and lessons learned. These are (i) improving focus on the poor and on primary health care, (ii) structural reforms in the sector organizations, and (iii) operationalizing regulatory reform and improved governance in the sector.

Cost Estimates The adjustment and other costs of the policy reforms addressed by the program loan are estimated to be at least $280 million equivalent.

Loan Amount and Terms The Program will be financed by a loan of $200,000,000 equivalent from the ordinary capital resources of ADB will be provided under ADB’s London interbank offered rate (LIBOR)-based lending facility. The loan will have an amortization period of 15 years including a grace period of 3 years, and such other terms and conditions set forth in the draft loan agreement.

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Program Period and Tranching

The loan will be utilized from 1 January 2005 to 30 June 2007. The first tranche of $100 million will be released upon loan effectiveness, expected in December 2004. The second tranche of $100 million is expected to be released by June 2006 (or about 18 months after the first tranche). Throughout implementation, the steering committee and the UPMU will monitor quarterly the implementation of policy and institutional reforms envisaged under the HSDP. In cooperation with the UMPU, ADB will carry out semiannual review missions to assess implementation of the policy agenda and discuss major policy developments with the concerned agencies. Such missions will be fielded to assess whether conditions for the release of the second loan tranche have been fulfilled. To obtain the release of the second loan tranche, the Government will be required to carry out actions identified in the policy matrix as conditions for tranche release, and to demonstrate satisfactory progress in implementing the project loan.

Executing Agency and Implementation Arrangements

The Department of Finance (DOF) will be the EA of the program loan. DOF will chair a program interagency steering committee to coordinate the program loan activities.

Procurement, Disbursement, and Counterpart Funds

The loan proceeds will finance the foreign exchange costs of eligible items produced in and procured from ADB's member countries. Procurement of eligible items finance under the program loan will be carried out in accordance with standard government procedures or normal private sector commercial practices acceptable to ADB. The Government will use the counterpart funds to be generated from the loan proceeds to finance the costs of implementing the HSRA.

Period of Utilization From 1 January 2005 to 30 June 2007.

The Project Loan

Objectives The project loan will result in more affordable and better quality health care, and thus increase utilization through cost savings and output enhancing health sector reforms in six areas: (i) rationalizing health care financing and increasing health insurance coverage of the poor; (ii) improving governance, operational efficiency, and service provision of public hospitals; (iii) increasing utilization of improved public health care services; (iv) strengthening regulatory functions for improved quality, efficiency, and safety; (v) promoting service integration in local health systems; and (vi) promoting organizational effectiveness and public accountability in the health sector.

Components and Outputs While policy actions will address national reform issues, the project loan will create outputs related to the five principle reform areas and support cultural change in the health system. Through the special purpose entity, nominated as the Municipal Finance

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Corporation (MFC), it will also finance required investments of DOH and LGUs. Conditions suitable for project implementation exist in five provinces surveyed during project preparation: Ifugao, Ilocos Norte, Nueva Vizcaya, Oriental Mindoro, and Romblon. Final selection of participating areas will be conducted on a competitive basis, based on willingness and capacity to undertake the required reforms. In the selected provinces, support will be provided to cities and municipalities with the highest incidence of poverty.

Cost Estimates Five provinces have been surveyed and are eligible for project support: three neighboring provinces in the north of Luzon (Ifugao, Ilocos Norte, and Nueva Vizcaya); and two poor island provinces (Oriental Mindoro and Romblon). The Project will have five components: health sector governance, regulatory reform, local health sector reform, hospital reform, and public health reform. Project costs of the investment package for five selected provinces are estimated at $23.3 million equivalent.

($ million)

Financing Plan Source Foreign Exchange

Local Currency

Total Cost

%

ADB 6.25 6.75 13.00 56 Government 0.00 10.33 10.33 44

Total 6.25 17.08 23.33 100 ADB = Asian Development Bank.

Source: Asian Development Bank estimates. Loan Amount and Terms The project loan will have a 26-year term, including a grace period

of 6 years, an interest rate determined in accordance with ADB’s LIBOR-based lending facility, a commitment charge of 0.75% per annum, and such other terms and conditions set forth in the draft loan agreement.

Allocation and Relending Terms

Participating LGUs will share the costs of the Project in terms of counterpart funds for civil works and equipment in accordance with their fiscal capacity of borrowing. MFC will lend to LGUs at market interest rates.

Period of Utilization From 1 February 2005 to 30 June 2011 Executing Agency DOH will be the executing agency for the project loan. Implementation Arrangements

The Bureau of International Health Cooperation of DOH through the Unified Project Management Division (UPMD) will be responsible for overall management under the overall guidance of a program inter-agency steering committee, headed by the DOH secretary. UPMD will be assisted by a team of management consultants comprising the unified project management units (UPMU). At the provincial level, project management units (PMUs)

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will be responsible for the implementation of the Program with the governor as the provincial project director, assisted by teams of management and technical consultants. The MFC will establish a PMU to assess and administer loans to the LGUs.

Procurement DOH, through UPMD and the LGUs, will procure goods and

services. Equipment (medical and non-medical), vehicles, and supplies will be procured in accordance with ADB’s Guidelines for Procurement, on the basis of international competitive bidding for contracts over $500,000, international shopping and local competitive bidding for contracts between $100,000 and $500,000, or direct purchase. Civil works will be partially funded and contracted by the local governments. For civil works, contracts of over $2 million will be procured through international competitive bidding, all other contracts will be based on local competitive bidding.

Consulting Services DOH, through UPMD, will engage international and domestic

consultants, either individually or through consulting firms. Recruitment of consultants will follow ADB’s Guidelines on the Use of Consultants and other arrangements acceptable to ADB for domestic consultants. ADB’s Quality- and Cost-Based Selection method will apply for consulting firms.

Benefits and Beneficiaries

The main benefits will be (i) reduced poverty and improved health status of the poor, (ii) improved governance (iii) consumer empowerment, and (iv) strengthened local government capacity. The main beneficiaries will be poor people who benefit from expanded health insurance coverage and from improved access to and higher quality of health service.

The HSDP will contribute to the overall reform process as defined by the HSRA. In particular, it will facilitate changes in organizational and professional cultures, introduce continuous improvement processes, and empower health service personnel and consumers. The Project loan will benefit over 725,000 people in selected LGUs in the Philippines by upgrading local health care services and facilities and increasing access to care.

Risks and Assumptions Although supported and endorsed by leading advocates and

analysts in the health sector in the Philippines, the main risk is that the reform approach of the HSRA and the Program will not be accepted by those that carry the main responsibility for program implementation, particularly the hospitals and LGUs. The HSDP is structured to offer the appropriate incentives for these stakeholders and to mitigate this risk. Capacity constraints in LGUs will require support from DOH. The HSDP has resources to undertake the required capacity building for HSRA implementation in its areas of focus.

I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on proposed loans to the Republic of the Philippines for the Health Sector Development Program (HSDP). The program framework is in Appendix 1.

II. THE SECTOR: PERFORMANCE, PROBLEMS, AND OPPORTUNITIES A. Sector Description and Performance 1. Sector Structure and Financing 2. The Government’s role and presence in the health sector is a constitutional mandate. Under the 1987 Constitution, health is both an objective of, and the instrument to, achieve economic development. To fulfill its constitutional mandate, each government administration outlines, among others, its health objectives, policies and strategies in the Medium Term Philippine Development Plan—the master plan on which the specific objectives, programs, activities and projects of each government agency are anchored. According to the 2000–2004 plan, Filipinos of all ages should have access to health, nutrition, and population management services that are essential to achieve full human potential leading to a sustainable improvement in the quality of life. The sector analysis is provided in Appendix 2. 3. The Philippine Government has not provided sufficient support to meet the health care needs of the poor. Total health expenditure in 2001 was estimated at P119.4 billion, 3.5% of gross domestic product. Of this, 75.8% was spent on personal curative health care and only 13.2% on public health (the balance being used in research, training, and administrative costs). Public health is only 31% of the Government health budget, while curative health is 48%, which means that the Government is directly providing support for curative services at provincial and teaching hospitals that could more efficiently be provided at a much lower level of the health system. The Government spends 6.2% of its budget on health, and only 0.8% on public health programs. It seems unlikely in the current economic climate that the percentage allocated to health can be increased or that the total Government budget will expand. However, the amount allocated to public and preventive health (which disproportionately benefits the poor) is very low and a reallocation of the currently available funds can have a significant impact on the delivery of services for the poor. Curative/personal health expenditures are paid mainly from household out-of-pocket sources, with social insurance covering only 9% of the costs (2001). The national Government covers 12% of curative costs and local government 9%. Household out-of-pocket spending amounted to 42.8% of total health expenditures, while social health insurance spent P9.3 billion, or only 7.8% of the total. Government sources (national and local governments) accounted for 37.4% of total health care spending. Efficiency in the system would be improved if additional costs for curative care could be shifted from the national Government to local governments by providing first-line curative services and referral at the barangay health stations (BHSs) and rural health units (RHUs) instead of burdening the Department of Health (DOH)-retained hospitals with this level of health care. The percentage of curative personal health care covered by social insurance should be greatly increased and increased amounts of government health funds allocated to public and preventive health programs. 4. For the wide variety of public, private and non-profit hospitals, clinics, and medical practices, financing sources include local and central governments, various agencies within governments, locally and centrally operated health insurance schemes, foreign and in-country

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donations, and several channels of formal and informal self-pay. The private health sector is financed principally from user fees and health insurance proceeds; government subsidies are the main source of revenue for public health facilities and programs. Disadvantages of this complicated mix include high administration costs, weak information systems, cost-shifting (and consequent penalties in terms of mistrust), and conflicting financial incentives for care providers and patients. Health insurance contributed less than 10% from 1991–2000, although it has been steadily growing in the past 3 years, driven by special programs of national and local government that have been targeting the poor. Almost half of the money spent on health came from direct out-of-pocket payments by individuals. This is of great concern because self-pay decisions, especially of the poor, are often poorly informed, increase supplier-induced demand, and reduce the degree of progressivity of health care financing. 5. The Government decided to address these weaknesses in 1995 by establishing the National Health Insurance Program under the management of a new government agency, the Philippines Health Insurance Corporation or PhilHealth. This brought together several existing health insurance schemes and provided a vehicle for later aggregation of financing mechanisms. Attempts to increase the proportion of health financing through this channel have been only partially successful and less so for the informal sector, which represents a huge part of the Philippine economy. Coverage of the poor has increased since 2000, but membership by other sections of the population has grown only marginally—their participation is desirable to offset some of the costs associated with coverage of the poor. 6. DOH controls service quality through various health regulations. The 1963 Food, Drug, and Cosmetic Act created the Food and Drug Administration, which ensures the safety and purity of foods, drugs, and cosmetics made available to the public. The Generic Act of 1988 mandated the establishment of the Philippines National Drug Policy in response to the inadequate provision of affordable quality drugs to the people. The 1965 Hospital Licensure Act requires that all hospitals in the country be licensed by DOH. PhilHealth plays an important role in maintaining service quality through its accreditation mechanisms: only those health facilities meeting PhilHealth accreditation criteria are reimbursed for health services provided to insured patients. 7. Since the passage of the Local Government Code in 1991, national public health programs such as tuberculosis control, immunization and family planning are delivered by local government units (LGUs) with national Government support in the form of medical supplies and technical assistance. Private health services providers, both nongovernment organizations and for-profit private providers, have been progressively involved, in particular in the tuberculosis and family planning programs.

2. Health Status

8. The health status of Filipinos has improved in the last two decades. Infant mortality declined from 57 to 29 per 1000 live births between 1990 and 2003, and under-5 mortality from 80 to 40. Maternal mortality fell from 209 to 172 per 100,000 live births between 1990 and 1998. However, there are reasons for concern. First, the common illnesses of poverty (such as infectious diseases, and malnutrition) have not been reduced to acceptable levels, while social and economic changes are creating new costly challenges in terms of lifestyle diseases. Second, improvements in health status have been less significant than in many similar countries. Third, while avoidable mortality has declined, many non-fatal health problems have received less attention. For example, malnutrition in children under-5 only declined from 34.5% to 32% between 1990 and 1998. Fourth, the improvements have not been equally shared: for

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example, the national infant mortality rate is 29 per 1,000 live births, but it varies from 22 in Manila to 61 in Eastern Visayas. 9. Filipinos are suffering from a double burden of illness from infectious and lifestyle diseases, some of which are new to the country. The country has not successfully rid itself of infectious diseases, such as pneumonia, tuberculosis, gastroenteritis, malaria, and measles, which continue to be leading causes of morbidity and mortality. Acute respiratory infection still claims the highest number of lives of children under-5 years of age. Tuberculosis remains a major public health threat: with 297 tuberculosis cases per 100,000. However, lifestyle diseases, such as cardiovascular diseases, malignancies, and pulmonary disorders (e.g., asthma and chronic obstructive lung disorders), are moving up in the top 10 causes of mortality and morbidity. A growing incidence of HIV/AIDS (human immunodeficiency virus/acquired immunodeficiency syndrome), and emerging diseases such as SARS (severe acute respiratory syndrome) and avian flu also pose a potential threat to the country and require particular attention. 10. Malnutrition and nutrition deficiencies, major factors influencing the health of mother and children remain public health issues. Iron deficiency anemia affects 29% of the population, with women constituting a majority of those afflicted. Among pregnant women, the prevalence of vitamin A deficiency increased from 16.4% in 1993 to 22.2% in 1998. Fertility continues to decline gradually, but the Philippines’ total fertility rate1 of 3.7 and population growth rate of 2.4% are still considerably higher than the 1998 rates in neighboring Southeast Asian countries. With a national contraceptive prevalence rate of only 45%, much lower than its neighbors, the Philippines has a high unmet demand for effective family planning. With poor reproductive health, sexually transmitted diseases are not satisfactorily controlled. Many risk factors for the rapid spread of HIV/AIDS are present. 3. Poverty and Health 11. The poor have less access to quality health care and consequently are in worse health than the rich. The Philippines has one of the highest income disparity ratios in Asia, with the richest population decile commanding more than 20 times the income of the lowest population decile in 2003. Public health delivery systems have deteriorated in recent years and support for preventive health serving the rural and poor segments of the population has not kept up with the increases in the number of people that must be served. Poor people reported seeing a doctor only 25% of the time when they were sick while the rich saw a doctor 48% of the time. Over 90% of poor women deliver their children at home with traditional birth attendants, while the rich deliver in hospitals where the risk is much lower. This is one of the factors contributing to the fact that the infant mortality rate among the poorest 20% of the population is more than double that of the richest 20%. The under-5 mortality rate among the poor is nearly three times higher than among the rich. The Philippines has the lowest use of contraceptives and the highest fertility rates and population growth rates in Asia (2.36% per year). The poor have much less access to family planning methods than do the rich. The poor have 6.5 births per woman (1998) while the rich have only 2.1 births. Only 20% of the poor use contraceptives as opposed to 30% of the rich. Malnutrition and maternal mortality are health issues linked to poverty and high population growth. In the Philippines, malnutrition has not declined significantly during the past 20 years from 34% in 1990 to 32 % in 2001. Maternal mortality has declined less in the Philippines than in the neighboring countries of Southeast Asia. Access to quality care, especially for the rural poor, has been declining. This is due to overcrowding of higher level 1 The total fertility rate gives an indication of the average number of births per women during her childbearing age.

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public hospitals, reduced health expenditures, and a shift of public resources away from the locally-funded primary and secondary health centers and hospitals, including BHSs and RHUs in favor of larger centrally-funded health institutions and tertiary care facilities. B. Issues and Opportunities

1. Overview 12. In contrast to the undeniable achievements in improving the health status of the rapidly increasing population during the last decades, progress in recent years has slowed. The proportion of fully immunized children over the past 10 years has not reached the desired level of at least 80%. In 2001, only 62.9 % of children were fully immunized. Although deaths from diarrhea for all ages declined from 1980 to 1990, its rate of prevalence among children increased sharply in 1998 to 1 out of 14 children under 5. Variations in life expectancy and infant and maternal mortality are significant for different regions in the country. These variations reflect the inequitable sharing of health services among regions and among segments of the population within each region: there is inequity in geographical access to health facilities and health providers, but also in the quality and the cost of available health services. As a consequence, the overall performance of the Philippine health sector lags far behind those of its Southeast Asian neighbors. 13. Despite significant external assistance (para. 29) and relatively successful implementation of narrowly focused programs, inequity and inefficiency remain the major issues of the Philippines health sector. The large variations in health status among social classes and among regions reflect unequal access to health services and, in particular, to quality health services and affordable drugs. Quality health services and drugs are available, but too often only in the private sector, are expensive and are concentrated in urban areas. Physical access is limited in non-urban areas and many people, in particular the poor, can only afford health services provided by public facilities, which in most cases are not able to provide quality services because of resources constraints and inefficiencies in the delivery system. 14. Much inefficiency is due to the fact that the Philippines health system has not yet adapted to the conditions created by devolution under the Local Government Code (1991). The devolution of health services from the national government to the LGUs resulted in fragmentation of the public health care delivery system, with provincial governments taking responsibility for referral hospitals, and municipal and city governments managing primary health care facilities (RHUs and BHSs) and providing some public health services. At present, no formal referral and patient gate-keeping arrangement is in place for DOH-retained and LGU hospitals. Patients tend to by-pass lower level referral centers and proceed directly to higher-level facilities, often because of the lack of drugs and competent health personnel at lower facilities. Drug procurement for public health facilities, no longer centralized, is also fragmented among LGUs, resulting in logistics problems, stock outages, and increased drug prices because drugs are ordered in small quantities. Health personnel are also affected, as they no longer have a clear career path to advance in the ranks of DOH and thus are more hesitant to practice in remote areas and among the poor. Moreover, a salary ceiling (50% of the local budget) imposed by the Department of Budget and Management reduces LGUs’ capacity to hire additional staff. Studies suggest a wide variance in health system status across LGUs. The LGUs that gave priority to health have significantly better systems and health outcomes while those that did not suffered.

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15. The poor are mainly using public health services and public hospitals, because that is all that is available in remote areas or because private providers are too expensive. Improving the quality of services provided by public hospitals and facilities is essential if the needs of the poor are to be addressed. However, besides severe under-funding of public hospitals, the present administrative system provides few incentives for public hospitals to improve cost-efficiency. This situation is aggravated by a significant lack of managerial and administrative skills in public hospitals. 16. Government action is needed to coordinate the diverse actors in the sector under decentralization. In 1999, DOH developed the Health Sector Reform Agenda (HSRA), which defines key reforms and strategies required to address inequity and inefficiency, and achieve the millennium development goals (MDGs). The HSRA has the following goals: expand the effective coverage of public health programs; increase access and utilization, especially by the poor, of hospital services from both public and private health care providers; and reduce the financial burden on individual families in need of health care. To achieve these goals, several underlying structural constraints need to be addressed by (i) increasing public resources and the efficiency with which they are used, (ii) improving in the health insurance system, (iii) improving hospitals and local government health systems, and (iv) introducing regulatory reforms. A description of the structural reform requirements in these areas follows. 2. Structural Issues 17. At 3.5% of gross domestic product in 2001, health care spending in the Philippines is still below the 5% benchmark set by the World Health Organization. The spending pattern raises concern for the efficiency, equity, and adequacy of health care provision. The disproportionate spending on personal health care (75.7%) is inefficient because, relative to public health, personal health care is less cost-effective and benefits much fewer people per peso of investment. Placing the largest burden of payment on household out-of-pocket payments (42.8%) is both inefficient and inequitable considering that a large segment of the population is poor. 18. By law, the health insurance premium of the poorest (some 25% of the population) should be paid by LGUs, but severe budget constraints prevent LGUs from fully covering their poor populations. The national Government has extended an earlier decision to provide subsidies to the poorest LGUs to help them cover the poor. However, several issues need to be addressed. First, national subsidies are only provided to LGUs that commit their own funds for the insurance premium; many LGUs still need to be convinced to allocate enough resources to cover their poor. Second, another 25% of the population, mostly poor, are not covered by the law and cannot afford to pay the full cost of health care. Third, even those poor who are covered are not aware of the benefits and are not utilizing health services effectively. Finally, the benefit packages of PhilHealth need to be improved to better respond to the needs of the poor. Health insurers are still studying how to establish adequate mechanisms for specifying the volumes and types of services; appropriate prices; and control of utilization, costs, and quality of care. PhilHealth has made some progress in the last 2 or 3 years but much remains to be done. For example, the basis for payment for inpatient care is still mainly on the basis of days of stay, which encourages prolongation of the period of hospitalization. Fee for service is always problematic to the extent that few patients are sufficiently well-informed to judge whether the services are appropriate or reasonably priced. Given the particular relations between service providers and patients in the health sector, there are many opportunities for supplier-induced demand and unnecessary or otherwise inappropriate care.

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19. The Philippines is fortunate to have many skilled and dedicated health professionals who do a good job in the circumstances. However, the many workforce problems include low motivation, poor working standards, lack of flexibility of roles and functions, and poor training in some clinical areas. The uneven distribution of clinical staff is a major problem. One distributional aspect is the concentration of health professionals in urban areas, and acute shortages in some of the more remote rural areas. Another aspect is the sometimes inappropriate mix of staff. The Government’s target for barangay health workers is 1 per 20 households, but the actual ratio was 1 per 72 households in 2000.2 The doctor to population ratio is also below the target (1 per 26,000 compared with the target of 1 per 20,000). There is a similar trend in the nurse to population ratio. The issue is to retain a portion of the overseas contract workers who are well-trained health professionals. Lifting of human resource constraints is critical for improving performance of the health system and deserves urgent attention. These constraints are linked to conditions of service, training, remuneration, and incentives; and will fundamentally determine capacities for sustained improvement in health services. 20. In total, problems of efficiency and effectiveness are significant at all levels of health care facilities, whether Government or private. One reason is that few incentives are provided to encourage care providers to be aware of, and comply with, best practice. Community-based care is reasonably well regulated with regard to selected services (such as child immunizations), but many health care providers are inadequately trained or motivated. At the other extreme, many highly trained medical specialists believe they have the right to autonomy in their practices, and may resist attempts to conduct auditing processes. This is reflected in the relatively high degree of clinical practice variation in both cost and method of care. Second, clinical teamwork is often unsatisfactory. This is reflected in poor communications between clinical professions—and especially between doctors and nurses. It is also evident between health care settings. For example, communications and coordination are typically weak between hospitals, community health centers, and general practitioners. Third, consumers are seldom adequately involved in the health care process. This means they may be provided with care about which they have been poorly informed, and that they do not feel empowered to provide feedback on their health care service experiences in the interests of service improvement. 21. Clinical pathways and clinical practice guidelines (CPGs)3 have emerged as critical components of well-run health systems in the last 20 years. Some use is made of CPGs in the Philippines. For example, midwives in rural health units have simple pathways for common case types that are based on national designs. A few of the more innovative hospitals are progressively introducing clinical pathways of their own volition, for reasons of quality control, competitive advantage, and reduction of risks of litigation. PhilHealth has mandated the use of pathways for a small number of case types, including uncomplicated pregnancies, ambulatory treatment of tuberculosis, and cataract removal. However, most health care remains uncovered by CPGs and clinical pathways. 22. Only 13% of total health expenditures are used for public health. Public health programs, such as family planning (as part of reproductive health), the program against tuberculosis, and healthy life-style promotion, lack adequate financing despite their high benefit for the poor and 2 Department of Health. 2000. Field Health Service Information System. Manila. 3 A clinical pathway is a form used in the management of an individual patient’s care (and there are different forms

for each case type). It guides the care team (thus increasing efficiency and quality of care), serves as an integrated health record of the care actually given by all types of clinicians, and informs patients of the care they may expect to receive. Clinical practice guidelines outline a more broad description of case specific treatments. Clinical protocols is a more generic term for both, clinical pathways and clinical practice guidelines.

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their significant positive externalities for society. Moreover, these programs suffer from inefficient organization and incentives. Yearly budgetary allocations prevent adequate planning and, combined with lack of management skills at the local level, result in logistics problems and rupture of stock of supplies. National subsidies are allocated to the LGUs responsible for implementing the program, but subsidies are allocated on a per capita basis without taking into consideration LGU need or fiscal capacity. And despite progress in recent years (e.g., in addressing tuberculosis) tremendous opportunities still exist to better involve the private and non-profit health sector, for example in the family planning and tuberculosis programs. 23. Devolution has resulted in many improvements. For example, several LGUs (including those in Capiz, Pangasinan, and Pasay City) have been remarkably successful in enrolling indigents in the national health insurance scheme. Some LGUs (and particularly in Capiz and Pangasinan) have improved methods of drugs procurement and management in response to gaps in supply. Bukidnon LGU made some innovative changes in contracts for hospital staff to overcome recruitment difficulties under the national payment rules. Other local initiatives have concerned facilities and resource sharing between public and private health facilities in Makati City, Negros Oriental, and South Cotabato; integration of several development activities (in Negros Oriental); improvements in continuity of governance (in South Cotabato); and improved referral systems (through interlocal health zones [ILHZs]). 24. Many problems have resulted from the failure to give adequate consideration to the complexities of devolution. One obvious initial problem was that of disagreement about the cost of services transferred to the LGUs in relation to the additional revenues allocated to the LGUs. Another issue relates to the fragmentation of referral systems and the coordination and integration of services. The longstanding problems of service coordination at the local level were accentuated by the devolution process. Although greater local autonomy created opportunities to integrate services within each LGU, it had several unintended adverse effects, including a weakening of coordination between LGUs. One corrective measure was to develop the concept of ILHZs, whereby LGUs could agree to collaborate to improve the quality, efficiency, and effectiveness of health service provision. Details of the design were specified in a DOH administrative order in 2001 (AO 37). The idea was partially tested in a few provinces and particularly in South Cotabato in the Integrated Community Health Services Project (ICHSP),4 which was implemented from 1997 to 2003. But evidence regarding the cost-effectiveness of the specified design is lacking. 25. Many regulations are outdated, predating devolution. This has a particularly significant impact for the procurement of drugs and development of an efficient public-private partnership in the health sector. With devolution, drugs are procured locally, resulting often in more expensive drugs and creating problems for quality control of drugs and medical supplies. Lack of clear regulations for coordination with the private health sector has resulted in missed opportunities for better coordination and complementarity and sometimes led to a chaotic supply of hospital services (facilities and medical equipment) across provinces. 26. In summary, the structural issues, which require reforms, revolve around access of the poor to the insurance system, funding and quality of both hospitals and local health systems, access to quality public health care, and provision of regulatory incentives and capacity for increased efficiency. To implement these reforms effectively, coordinated interventions are

4 ADB. 1995. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and

Technical Assistance Grant to the Republic of the Philippines for the Integrated Community Health Services Project. Manila.

8

required across these areas in terms of investments, administrative reforms and perhaps most importantly, fostering cultural change within institutions. ADB has been involved in the Philippines health sector for many years and in a number of fields focusing on the community, and women's health. This experience has reinforced the need for structural reform and provided the basis for design of needed interventions. 3. Lessons Learned 27. In the Philippines, several projects have piloted some of the proposed reforms of the Government's HSRA. ADB's ICHSP provided very important lessons for the HSRA. The problems and issues are not unique to the Philippines. A number of key lessons have been learned both from developing and developed country experience (Appendix 3). While health systems vary enormously, these lessons are nevertheless applicable across most systems. First, in developing countries any initially focus should be on the poor and basic health services, knowing that the poor are benefiting most from basic health care at the community level. Second, the structure of health-care systems must be changed so that competitive pressures push them in a more useful direction, enhancing the power of purchasers and increasing competition in the supply of medical care. Another lesson is that just because governments finance so much of health care, they do not necessarily have to deliver it themselves. Governments should also review their role as regulators. A better role for regulators would be to sponsor competition. Regulators should set out quality standards and monitor performance, building on some positive initiatives in other countries. The re-engineering of health care will require reform in the way medical providers are paid. Successful reform will involve rewarding quality and performance, and paying directly for better outcomes, and for steps that reduce costs of care. 28. Experience in implementing the ICHSP and other Philippine health sector projects has shown that successful implementation of development-supported projects in a devolved context requires a well-planned effort to build stakeholder partnerships. The ICHSP initially experienced confrontations between the central Government agencies and the LGUs, and between LGUs themselves. The challenge was to change confrontation into collaboration; this occurred as the stakeholders saw the benefits of partnership. The ICHSP eventually became an effective vehicle to re-establish collegial partnership between DOH and the various levels of LGUs in planning, managing, and financing health services within a devolved set-up. In a significant way, it helped to break barriers, bridge gaps, and bring about a new partnership in managing health services in the country. Additional recurrent issues hampering effective project implementation in the Philippines include a prolonged approval process and time consuming procedures for procurement of goods and civil works encountered at the central level. Implementation of the ICHSP tested the initiative of empowering LGUs: bidding of civil works was entirely managed by LGUs, including opening of bids in the project provinces. This positive experience demonstrates that contract award processing can be made significantly more effective and efficient. 4. External Assistance 29. External assistance to the sector has been extensive but has not had significant structural impact as it was mainly piloting and testing technical improvements under devolution. United States Agency for International Development (USAID) provided the initial support for the HSRA through the Health Sector Reform Technical Assistance Program. With the assistance of the World Bank, DOH has developed comprehensive reform proposals for social health insurance, drug procurement and, as part of the Second Women’s Health and Safe Motherhood

9

Project (WHSMP II), reproductive health-family planning. The World Bank also supports the Early Childhood Development Project, jointly financed by ADB,5 and the Social Expenditure Management Project 2, used for budgetary support in procuring vaccines, tuberculosis drugs and oral contraceptives. USAID provides technical assistance to the tuberculosis program, the Infectious Disease Surveillance and Control Project and the Integrated Family Planning and Maternal Health Program. The family planning program has also been supported by Deutsche Gesellschaft fur Technische Zusammenarbei (German Agency for Technical Cooperation, GTZ) and USAID. GTZ has tested community participation mechanisms in local financing and supports reproductive health and family planning. Japan International Cooperation Agency is involved in tuberculosis control, the Philippine Pharmacopeia project, measles elimination, and community health. Other partners include the United Nations agencies (Wolrd Health Organization, United Nations Children's Fund [UNICEF], United Nations Population Fund, and United Nations Development Programme), Australian Agency for International Development, and the Austrian, Spanish, and Belgian cooperation. ADB has been a long time partner of DOH with its cofinancing of the Women's Health and Safe Motherhood Project6 and the Integrated Community Health Services Project7 cofinanced by Australian Agency for International Development. ADB partnered with DOH in other projects: Early Childhood Development Project and the Rural Water Supply and Sanitation Sector Project. Details are provided in Appendix 4. 5. Opportunities 30. As a consequence of the technical focus of much assistance, many of the strategic objectives of the HSRA still to be operationalized. Only some reforms have thus been tested with the assistance of DOH’s development partners and lessons learned. The Government has authorized collection of user fees and retention of revenue in DOH hospitals, and some provinces have successfully tested financial and managerial autonomy in their provincial hospitals. The enrollment of some indigents in PhilHealth by the LGUs has taken place in most convergence sites.8 Pooled procurement of drugs in a few provinces has significantly reduced prices. In several LGUs, public and private hospitals have forged agreements to share high-tech medical equipment, or to use a private hospital as a referral hospital for the area. Some LGUs have provided tax incentives to the private sector to facilitate services to the poor by private hospitals. In several parts of the country, LGUs have initiated the establishment of ILHZs involving all health services providers in the area. Involvement of the community and the development of a functional community-based referral system have been successfully introduced in several ILHZs. One ILHZ in Negros Oriental registered with the Security Exchange Commission, facilitating independent management with for example independent hiring of additional health personnel with increased salaries. These experiments have provided important insights for DOH and LGUs. 31. DOH has asked all its development partners to support the HSRA. The ADB health sector policy,9 with its emphasis on access for all to essential health services that are effective, cost-efficient and affordable, fully supports the HSRA's objectives. In view of this, ADB has

5 ADB. 1998. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the

Republic of the Philippines for the Early Childhood Development Project. Manila. 6 ADB. 1994. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the

Republic of the Philippines for the Women's Health and Safe Motherhood Project. Manila 7 The ADB-financed Integrated Community Health Services Project in particular has identified and tested several

important reforms that are now incorporated in the Health Sector Reform Agenda. 8 Convergence sites are clusters of local government units designated as pilot sites for the HSRA. 9 ADB. 1999. Policy for the Health Sector. Manila.

10

proposed the Health Sector Development Program (HSDP) taking into account the lessons learned. The key principles utilized are: (i) shift public spending to the poor and vulnerable; (ii) decrease costs by encouraging competition among providers, increasing use of

efficient clinical protocols, and focusing at basic levels of care; and (iii) increase quality of human resources in clinical areas, facility management, and

policy. Initially, the interventions supported by the HSDP will be budget neutral and after the Philippines recovers from its current fiscal constraints, expenditures will rise to international norms. The program loan will provide support for defraying the adjustment costs of regulatory changes, and the investment loan will assist the Government to implement the changes.

III. THE PROPOSED SECTOR DEVELOPMENT PROGRAM

A. Objectives and Scope 32. The overall goal of the HSDP is to improve the health status of the population, especially of the poor, and achieve health-related MDG targets. The purpose of the HSDP is to increase utilization of affordable and financially sustainable quality health services by the poor based on the progressive implementation of cost-saving and output-enhancing health sector reforms that are guided by the HSRA. The focus is on results, emphasizing improved access to health services and better outcomes for the poor, and including greater access to essential drugs, strengthened health systems and better management. The HSDP consists of a program loan to support national health sector reforms and an investment loan to finance specific interventions. The program loan will catalyze the implementation of health sector reforms by creating a supportive policy environment for substantial changes in sector operations and for investments at the national and local levels. The project loan will advocate, design, initiate, and evaluate specific interventions in support of the HSRA at the national level and in five selected provinces with the objective to translate agreed policy reform into changes in corporate cultures and in concrete improvements of health services, especially for the poor. The program framework is in Appendix 1. B. Important Features 33. ADB has been at the core of policy dialogue in the sector over a number of years. The key policy reforms targeted under this Program have been discussed at donor forums and, together with DOH, the key agenda items have been developed. As other development partners may become involved in implementing HSRA in other provinces, it is also essential that DOH be able to coordinate efficiently all external assistance for HSRA and institutionalization of this coordination is required. This refers particularly to grant funds that may become available from bilateral donors and the European Union.10 The HSDP will address the root causes of the lack of substantial changes since the publication of the HSRA in 1999 by putting into place the appropriate incentives for change in systems, processes, and rewards. The HSDP takes into account the lack of fiscal resources available to the Government to invest in health and poverty reduction; and proposes a refocus of health spending and higher expenditures in areas that directly benefit the poor. The HSDP follows a strategy that invests in people and primary health facilities, and focuses on cost containment and cost efficiency. The envisaged policy actions

10 The European Union has earmarked EURO32 million in support of implementing HSRA and has expressed its

intention to cofinance the Program.

11

and reform interventions emphasize performance-based resource allocation, increased accountability and good governance, and consumer participation. The structure of the program loan, based on the five pillars of the HSRA, enables these strategies, and the lessons learned (paras. 27 and 28), to be integrated with ongoing and future investments in the sector (Appendix 4). The Program aims at system-wide changes of organizational and professional cultures, methods of health care financing, resource allocation and health care regulation. 34. The Program reforms will be supported by the project loan, which will implement all proposed policy changes in selected pilot LGUs (convergence sites). Convergence sites comprise clusters of LGUs in the provinces of Ifugao, Ilocos North, Nueva Vizcaya, Oriental Mindoro, and Romblon. In order to learn a maximum of lessons for national replication, the Project area includes provinces with high and low fiscal capacity. HSDP however was designed as a poverty intervention, and in all provinces, the focus will be on the needs of the poor and marginalized groups with special attention to indigenous people. The Project loan is also structured by the five pillars of HSRA. The two loans of the Program are the first external assistance supporting a systematic and comprehensive implementation of the reforms at national level and in selected convergence sites. DOH intends to implement HSRA in ten more provinces during the coming years. Close collaboration among development partners under DOH’s leadership has been going on during the last years and will form the basis for analyzing lessons learned before additional external assistance will help to extend the implementation of the HSRA to other provinces. C. The Program Loan

1. Objective 35. The program loan supports the overall goal of the HSDP by promoting cost-effectiveness of health services and equity of health status through implementation of an integrated set of health sector reforms. The system-wide changes will largely concern improving the ways that HSRA reforms are implemented and managed at all levels in the health sector. The program loan support three fundamental objectives: (i) improve the focus on the poor and primary health care, (ii) support structural reform of sector organizations, and (iii) operationalize regulatory reform and improve governance in the sector.

2. Components and Outputs 36. The policy matrix and the development policy letter in appendix 5 and 6 describe the reforms considered important and necessary to achieve the HSRA objectives and specific sector investments. The reforms are grouped into the five HSRA reform areas: (i) social health insurance, (ii) hospital autonomy, (iii) public health programs, (iv) ILHZs, and (v) regulatory functions. The program loan will also support reform in health sector governance, although the main thrust of activities in this area will be undertaken through the project loan. a. Health Care Finance Reform 37. Social health insurance reforms aim at expanding PhilHealth coverage to at least 85% of the population, with universal coverage of the poor. The objectives of the reforms are to increase membership and improve benefit packages. To increase coverage of the poor, national subsidies that complement local governments’ partial payment of the health insurance premium for the poor will continue, and the Department of Budget Management will establish appropriate mechanisms to ensure that national funds are timely remitted to PhilHealth. The establishment

12

by PhilHealth of progressive premium contributions based on one’s capacity to pay will improve fairness and facilitate increased coverage of the informal sector. PhilHealth will pilot a low health insurance premium for the poor and vulnerable, who cannot benefit by law from government subsidies (about 25% of the population). PhilHealth will multiply enrollment and payment centers and authorize group enrollment through cooperatives, unions, and other community groups. The benefit package will be improved, with better coverage of hospital services, catastrophic and expensive illnesses, and outpatient services. Treatment and prevention of diseases that still represent a public health threat (tuberculosis, rabies, and vaccine-preventable infections), and family planning will progressively be covered. To increase utilization of services, PhilHealth will develop and implement an information campaign, especially targeting the poor. b. Hospital Reforms 38. The reforms will enhance the sustainability and efficiency of hospitals by restructuring them into corporations and supporting participation of the private and nonprofit sector. They will also encourage the upgrading of lower tier hospitals to provide better quality care, relieving the stress on regional hospitals. Hospital reforms will ensure that quality health services are provided cost-efficiently, linking hospital revenue to quality of services. Financially autonomous public hospitals are expected to become less dependent on direct budget subsidies from DOH. A first step is to secure authority for public hospitals to earn, retain and utilize all their revenues. The two main sources of revenues will be: users’ fees and reimbursement of hospital services by PhilHealth.11 Hospital autonomy, however, will require building management capacity of hospital administrators and developing good corporate governance through various guidelines, regulations and accountability mechanisms. Various management tools such as business plans, continuing quality improvement programs and use of clinical protocols will be introduced. While subsidies will still be required, they will become performance-based rather than facility-based. c. Public Health Reforms 39. The objective of these reforms is to increase financial resources for, and effectiveness of, primary health care. Public health programs such as immunization, the tuberculosis program and the reproductive health and family planning program are cost-effective approaches to improve the health of the Filipinos and achieve the MDGs. With devolution, DOH continues to plan, monitor and finance these programs, but LGUs are responsible for delivering the services. Reforms will secure continuous financing of the Program through multi-year, performance-based budgets. To improve equity and efficiency, DOH subsidies to the LGUs to implement the programs will no longer be allocated on a population-based formula, but rather based on the LGUs’ fiscal capacity and poverty prevalence. The reforms will be tested by focusing first on the program against tuberculosis and the family planning program, both high priority programs for the Government. d. Local Health System Reform 40. The fragmentation of the local health systems, an unforeseen result of devolution, needs to be addressed. ILHZs will be established—and ultimately legally registered as autonomous entities—by convincing neighboring LGUs in specific catchment areas to cooperate

11 PhilHealth only reimburses hospitals, public or private, that are accredited. Lack of investment (rehabilitation and

medical equipment) in many public hospitals sometimes prevents accreditation and most often reduces the quality of services they can offer. The investment loan will provide the needed resources for hospitals in the five selected project provinces.

13

and share functional facilities and services in a local health network involving the private health providers. To increase efficiency and as an incentive for the LGUs to collaborate, PhilHealth will develop accreditation criteria and mechanisms that specifically apply to ILHZs. e. Regulatory Reform 41. Health-related regulations will be updated to answer new requirements related to devolution. Focusing on the need to guarantee quality of services, regulatory reforms will first streamline licensing and accreditation procedures for health facilities, strengthening in particular primary health care services and ensuring an equitable and cost-effective distribution of hospitals and high-technology medical devices across the country. High priority is also given to developing regulations and incentives that will ensure availability of quality drugs at a cheaper price. Another priority, highlighted by the recent SARS and avian flu outbreaks in Southeast, and Eastern Asia, is the need to strengthen the national disease surveillance system.

3. Financing Plan 42. The proposed loan size is based on the estimated direct short- to medium-term costs of the reform program net of $280 million. In addition, associated restructuring costs resulting from HSRA implementation are substantial and include the following (Appendix 7): (i) according to the law, national Government and LGUs share the costs for subsidizing the payment of PhilHealth premiums of the poor. With the HSRA and in accordance with the law, the Government is aiming at universal coverage from the current estimated 50% coverage; (ii) the cost of nationwide social marketing and information campaigns addressing all relevant stakeholders, including DOH personnel at central and regional level, local authorities, professional organizations, and the population at large are significant; and (iii) additional efforts of testing, monitoring, and evaluating reform interventions by DOH and LGUs will require strong inputs in terms of staff years and operational costs. The Government estimates that implementation of the reforms may eventually cost more than $2.2 billion. 43. The Government has requested a loan of $200,000,000 equivalent from ADB's ordinary capital resources to help finance the HSDP and cover adjustment costs. The loan will have a 15-year term, including a grace period of 3 years, an interest rate determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility, a commitment charge of 0.75% per annum, and such other terms and conditions set forth in the draft Loan Agreements. 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 ondependent decision and not made in reliance on any communication or advice from ADB. The loan, expected to be utilized over 16 months, from 1 January 2005 to 30 June 2007, will be released in two tranches. The first tranche of $100 million will be made available upon meeting the conditions of the first tranche and upon loan effectiveness. The second tranche of $100 million is expected to be released in mid-2006 or about 15 months after first tranche release. Prior to the release of the second tranche, the Government will be required to meet the agreed upon conditions described in the policy matrix summarized in Appendix 5 to demonstrate satisfactory progress with program implementation.

4. Implementation Arrangements 44. DOF will be the Executing Agency for the program loan. DOH and its agencies as well as other concerned departments will be responsible for implementing the reforms described in the policy matrix and reporting implementation progress to ADB. The loan proceeds will be used

14

by the Government for the coverage of the poor by PhilHealth; to implement nation-wide social marketing and information campaigns; and to cover the additional costs of testing, monitoring, and evaluating reform interventions by DOH and LGUs.

45. The Government and ADB will review program implementation; and assess the implementation and impact of the policy, legal, and institutional reforms, and other changes envisaged under the HSDP. To facilitate such a review the Government, through DOH, will provide relevant data and information in a quarterly report. DOH will submit to ADB a detailed report on the progress and impact of policy reforms during the first year of the HSDP within 3 months after the end of the first year of implementation. The measures specified as conditions for the release of the second tranche of the loan are set out in the program policy matrix (Appendix 5). 5. Procurement 46. The policy loan proceeds will be used to finance the equivalent foreign exchange costs of items produced and procured in ADB member countries, excluding listed ineligible items and imports financed under other official development assistance. The Government will certify that (i) if the loan proceeds will finance imports already made, the value of eligible imports in the period concerned exceeds the amount of the requested withdrawal, or (ii) if the loan proceeds will finance items to be imported, the value of eligible imports in the immediately preceding 1-year period is equal to or greater than the amount of the requested withdrawal plus all other amounts expected to be withdrawn during the succeeding 1-year period. Appendix 8 provides the list of ineligible items. 6. Monitoring and Tranching 47. Throughout implementation, the steering committee and the UPMD will monitor quarterly the implementation of policy and institutional reforms envisaged under the HSDP. In cooperation with the UMPD, ADB will carry out semiannual review missions to assess implementation of the policy agenda and discuss major policy developments with the concerned agencies. Such missions will be fielded to assess whether conditions for the release of the second loan tranche have been fulfilled. The first tranche will be released upon loan effectiveness, expected in December 2004. The second tranche is expected to be released by June 2006 (or about 18 months after the first tranche). To obtain the release of the second loan tranche, the Government will be required to carry out actions identified in the policy matrix as conditions for tranche release, and to demonstrate satisfactory progress in implementing the project loan.

7. Counterpart Funds 48. The Government will use the local currency funds generated by the HSDP loan to meet program expenditures and associated costs of reform and to help maintain current levels of social expenditures. D. The Project Loan

1. Objectives and Scope 49. Based on the goal of the HSDP, the Health Sector Development Project aims to make significant improvements in the health status of poor, marginalized, and vulnerable groups of the

15

population in selected provinces by increasing their access to, and utilization of, quality health services. The Project will improve the efficiency and effectiveness of delivery of health care to the poor by focusing on the investments and HSRA reforms needed to implement a number of CPGs critical to the health of the poor. Interventions will support the implementation of these CPGs in selected convergence sites, and in DOH, PhilHealth and other agencies at the central and regional levels. Project loan implementation will be progressive and performance-based, responding to identifiable outputs and achievements of the convergence sites, to demonstrate the effectiveness and the cost-efficiency of the HSRA in the selected provinces and thus provide the foundation for expanding the HSRA package into other provinces. 50. The Project is designed as a sector project and is expected to cover five provinces. Currently, five provinces have been surveyed and are eligible for project support: three neighboring provinces in the north of Luzon (Ifugao, Ilocos Norte, and Nueva Vizcaya); and two poor island provinces (Oriental Mindoro and Romblon) although other provinces may participate. These provinces are convergence sites identified by DOH as having a strong LGU commitment to health reforms including a willingness to borrow and to provide counterpart funds. This will be confirmed by contracts between DOH and the LGUs before the start of project activities in the concerned provinces. These provinces are relatively easy to access from Manila, a major advantage for project administration as learned from previous ADB supported projects.

2. Components and Outputs 51. The Project consists of five components implemented through two funding streams. DOH will finance consultancy and sector capacity building activity and investments to support HSRA implementation. The special purpose entity nominated as the Municipal Finance Corporation (MFC) will provide finance to LGUs to undertake required civil works and equipment purchase. The integration of activity and outputs across the five components is set out below. a. Health Sector Governance 52. This component will strengthen participating provinces and LGUs to implement the HSRA. Focusing on the promotion of a cross-disciplinary culture promoting efficient and effective care, it will enhance appropriate administrative and clinical skills, encourage adoption of improved clinical protocols (CPGs and clinical pathways), facilitate participation in health management and planning, and strengthen monitoring systems that allow effective oversight. To strengthen DOH, capacity building at all levels will be supported by a master plan, specific staff development activities, fellowships and information campaigns. Crucial expertise in areas like health financing and economics, management, sociology and anthropology, and marketing will be needed at national, provincial, and municipal health offices. The Project will help DOH design and develop a national resource center. The center will be established (i) to provide policy analysis and advice, (ii) to spearhead operations research, and (iii) as a repository of HSRA resource materials. The center will systematically document lessons learned from HSRA implementation in the provinces, as well as compile and disseminate health-related information based on a revamped health information system. Consumer satisfaction surveys, reflecting the perceived quality of services, will be initiated and the results published to support informed choice and foster competition. Support for more effective public-private partnerships will include hospital area planning and improved implementation of CPGs including public health programs, in particular the program against tuberculosis and the reproductive health program including family planning. This component will provide the resources to design the systems for extension of PhilHealth coverage to lower income groups, implemented through the following components.

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Other activities under this component are more logically discussed in relation to the components they support and are set out in the following sections. b. Regulatory Reforms 53. This component will provide systems to DOH and LGUs to bolster cost-efficiency in the health sector. DOH will institute systems to help provinces and LGUs increase efficiency and reduce the cost of essential drug purchases, promoting the use of generic drugs. The devolution of some functions of the Bureau of Food and Drugs, such as monitoring and rapid preliminary testing of drug quality, will be piloted in the project area. DOH will help LGUs and ILHZs to establish already successfully tested mechanisms for the procurement and distribution of pharmaceuticals, such as outsourcing the procurement of drugs and pooled procurement. Activities under the health sector governance component will design and test approaches like social franchising in the pharmaceutical sector, currently tested in more than 10 provinces, which is regarded as appropriate for procurement and distribution of low-cost quality medicines to remote areas and supporting involvement of the private health sector. Also under the health sector governance component, DOH will carefully monitor LGUs and ILHZs to ensure satisfactory performance before continuing and extending the new policies. 54. To support these initiatives, performance will become the basis for resource allocation through the PhilHealth insurance system. Designed under the health sector governance component, other cost-containment measures such as the introduction of competition into the provision of services, guidelines on the procurement of high-tech medical equipment, and the provision of expensive health services, will also be implemented to avoid oversupply and cost- inefficiencies. The Project will provide systems to PhilHealth so it may adopt a fee schedule for reimbursement of services and pharmaceuticals, which contains appropriate incentives to make health care service provision more accessible, competitive, and equitable both in public and in private facilities. c. Local Health Sector Reform 55. The third component will invest in improved health care systems and facilities at the LGU level, enhancing their sustainability and effectiveness. Project resources will be used to implement an agreed package of CPG-focused interventions in a sequenced manner, based on a business plan and the actual performance of the concerned LGUs. The Project will support the development of systems to administer ILHZs, establishing an efficient and effective referral network of health facilities linking primary health care services with hospital services and public health programs. In return for project assistance, the LGUs will have to first ensure the coverage of the local poor under PhilHealth. Enrollment of people in the non-formal sector will be encouraged using a range of locally appropriate incentives, including group enrollment through organized groups. The existing means test will be reviewed to improve targeting of government subsidies. When LGUs meet the coverage conditions, project funds will be released to rehabilitate local primary and secondary health care facilities to conform to licensing and accreditation requirements. The availability of affordable quality drugs is a major problem in the health sector, and the Project will integrate mechanisms for the procurement and management of drugs (logistics management, inventory control, and rational use of drugs) established under the health sector governance and regulatory reform components in every ILHZ. In agreement with the concerned LGUs, the Project has undertaken 13 case studies of ILHZ implementation in Ifugao, Ilocos Norte, Nueva Vizcaya, Oriental Mindoro, and Romblon. ILHZ will involve both public and private health sector providers.

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56. As the Project concentrates on the needs of the poor, marginalized and vulnerable, specific project activities will focus on building their capacity to help themselves, facilitate their representation in local health boards, and increase their utilization of health services taking advantage of PhilHealth coverage. Information campaigns specifically designed for the poor and marginalized groups will be implemented, explaining PhilHealth benefits besides the traditional health information campaigns related to disease prevention and promotion of healthy life-style. Through ILHZ outreach activities, community financing to cover health costs not reimbursed by PhilHealth (transport to hospital, outpatient drugs, etc), and group activities in support of health-related activities such as water supply, sanitation, and nutrition-related improvements will be encouraged. The health sector governance component will establish a community-focused database, building on the Department of Interior Local Government initiative started in 2002, to improve identification of poor and vulnerable groups.

d. Hospital Reform 57. The objective of this component is to enhance sustainability and efficiency of hospitals by restructuring them into corporations and support participation of the private and nonprofit sector integrated into CPGs. ILHZ and coordination mechanisms have been developed, and hospital financial autonomy and capacity building activities will be undertaken through the governance reform component. Project funds will be used to rehabilitate local public hospitals, with the objectives to (i) provide better quality services, particularly for the poor, and (ii) stimulate healthy competition between public and private health sector providers based on the quality of services offered. Civil works will mainly consist of rehabilitating and upgrading existing health facilities. In some cases, hospitals will be expanded and some primary health care facilities will be built in poorly served remote areas (particularly in areas with indigenous people). An initial environmental examination was performed for the civil works to be financed by the HSDP (Appendix 9). The Project will also finance the procurement of medical and office equipment, and vehicles. Recurrent costs generated by these investments in the local health system will be compensated by efficiency gains and resulting cost savings. The governance component will assist PhilHealth to design benefit packages and systems to reinforce the objectives of hospital reform. e. Public Health Reform 58. This component will provide cost-efficient systems for effective public health programs integrated into CPGs. The Project will support in particular the implementation of the program against tuberculosis and the reproductive health. Program implementation and subsidies will be linked to performance in the ILHZs and project LGUs. For tuberculosis, the Project will strengthen the World Health Organization-recommended DOTS.12 For reproductive health and family planning, the Project will support the implementation of a core package of services developed by DOH under the Second Women’s Health and Safe Motherhood Project. The governance component of the Project will provide systems design and support for effective operation of public health systems at LGU and provincial levels, and for related PhilHealth systems.

12 Directly Observed Therapy Strategy (DOTS) is the most effective strategy available today for controlling the

tuberculosis epidemic. DOTS combines five elements: political commitment, microscopy services, drug supplies, surveillance and monitoring systems, and use of highly efficacious regimes with direct observation of treatment.

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3. Project Cost Estimates 59. The project costs amount to $23.3 million, with $14.1 million accruing to national organizations and $3.6 million for LGUs. The remaining $1.3 million covers contingencies, interest, and other charges. Of the total, $6.3 million (27%) is the foreign exchange cost and $17.1 million equivalent (73%) represents the local currency costs. Table 1 presents a summary, and details are in Appendix 10.

Table 1: Project Cost Estimatesa

($ million) Components Foreign

Exchange Local

Currency Total Cost

A. Base Costs 1. At the National Level 3.95 10.15 14.11 2. At the Local Level 0.00 3.62 3.62 3. Taxes and Dutiesa 0.00 1.29 1.29

Subtotal 3.95 15.06 19.02 B. Contingenciesb 1. Physical Contingencies 0.13 0.52 0.65 2. Price Contingencies 0.00 1.51 1.51

Subtotal 0.13 2.03 2.16 C. Interest and Other Charges During

Construction 2.16 0.00 2.16

Total Cost 6.25 17.08 23.33 a Taxes and duties are computed at 10% civil works and equipment costs.

b Physical contingencies are estimated at 5% of civil works and equipment costs. Price contingencies are estimated at 0% of foreign exchange costs and over 5% of local currency costs during the 6-year project period.

c Interest and commitment charges are based on 5-year LIBOR-based swap rate of 4.36% (inclusive of 0.4% spread), and 0.75%.

Source: Asian Development Bank estimates.

4. Financing Plan 60. The Government has requested a loan of $13,000,000 from ADB’s ordinary capital resources to help finance 56% of the Project. The loan will have a 26-year term, including a grace period of 6 years, an interest rate determined in accordance with ADB’s LIBOR-based lending facility, and a commitment charge of 0.75% per annum, and such other terms and conditions set forth in the draft Loan Agreements. 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 in reliance on any communiction or advice from ADB. ADB will fund 100% of the foreign exchange cost, totaling 28% of the estimated project cost, and 40% of the local currency cost. The Government will provide the remaining $10.3 million equivalent as counterpart financing, which accounts for 44% of the total costs. This includes financing civil works, in-country training, workshops, materials and consumables, project management, and taxes and duties. DOH will finance consulting and sector capacity-building actitvity. The loan proceeds will be utilized over 6 years fro the date of loan effectiveness. The financing plan is summarized in Table 2.

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Table 2: Financing Plan ($ million)

Source Foreign Exchange

Local Currency

Total Cost

Percent

ADB 6.25 6.75 13.00 56 Government 0.00 10.33 10.33 44

Department of Health 8.88 8.88 Local government units 1.45 1.45

Total 6.25 17.08 23.33 100 Source: Asian Development Bank estimates. 61. $7.77 million of the loan proceeds will be lent to LGUs at market rates in accordance with the Local Government Code and based on LGUs’ fiscal capacity. Participating LGUs will share the costs of the Project in terms of counterpart funds for civil works and equipment. The nominated special purpose entity, the Municipal Finance Corporation (MFC) will provide the loan financing to LGUs from the loan proceeds to undertake required civil works and equipment purchases, MFC, a wholly Government-owned development finance institution, was established as the Municipal Development Finance Office of DOF in 1984, and has gained relevant capacity ofr LGU financing by implementing a wide variety of World Bank and ADB projects. In 2004, the Government corporatized the organization creating MFC. It is scheduled to commence corporate operations in February 2005. Its mission is to provide medium- and long-term financing to Philippine LGUs. It is capitalized at P1 billion. The funds flow for the Project is set out in Appendix 11.

5. Implementation Arrangements

62. DOH will be the Executing Agency for the Project and provide overall guidance for project implementation. The DOH’s undersecretary for external affairs will be the project director. The director of the Health Policy Development and Planning Bureau will be the overall project technical coordinator. The Bureau of International Health Cooperation through the Unified Project Management Division (UPMD) will be responsible for the overall management of the Project. The head of UPMD will be the overall project manager. A team of consultants will be recruited to assist UPMD as the unified project management unit (UPMU), which will be directly responsible for project implementation. MFC will establish a project management unit to undertake assessment and maintenance of loans to LGUs. This unit will be supported by UPMU consultants. The secretary of DOH will lead a steering committee providing overall guidance to the Project. Members will include DOF, MFC, PhilHealth, representatives of the private sector (nongovernment organizations, professional associations, private health care providers), and consumer groups. The director of the Center for Health Development or DOH’s regional health office will be the regional project supervisor and will designate the existing regional unified project management team as the regional supervisory unit for the Project. The regional unified project management team will (i) ensure coordination between UPMD at the national level and the project province(s) in their jurisdiction; (ii) provide technical support when appropriate, and (iii) be responsible for monitoring, evaluation and auditing of project activities. 63. In the project provinces, the provincial governor will be the project director and the provincial health officer the project coordinator. The provincial steering committee will comprise the governor, project director, and chairs of the ILHZ boards. The provincial project coordinator will assign one of his or her permanent staff as provincial project manager assisted by a team of consultants and technical health experts, who will form the provincial PMU, which will be directly responsible for implementation of project activities in the province. The provincial project

20

director will facilitate establishment of an ILHZ. Each ILHZ will have a board and permanent secretariat. The HSDP will be implemented over 6 years. Every year, each ILHZ will prepare an operational plan (comprising a plan of action, a program of activities, and a financial plan) that will be submitted to the national UPMD for approval via the provincial project coordinator, with a copy to the Health Policy Development and Planning Bureau via the regional health office. The implementation schedule is in Appendix 12. 6. Procurement 64. The procurement of goods and services will be done in accordance with ADB's Guidelines for Procurement and following existing standard operating procedures established by UPMD. ADB and Government procedures and rules in calling for tenders, whether for international or local competitive bidding, will be followed. The existing bids and awards committee of DOH will handle bid evaluation and contract awards. Civil works will be awarded by the LGUs on the basis of local competitive bidding. Procurement for most of the project goods will be consolidated at the national UPMD level, with a limited number of procurements taking place at the regional or provincial levels. Equipment (medical and non-medical), vehicles, and supplies will be procured on the basis of international competitive bidding for contracts over $500,000, international shopping and local competitive bidding for contracts between $100,000 and $500,000, or direct purchase. Civil works will be partially funded and contracted by the local governments. For civil works, contracts of over $2 million will be procured through international competitive bidding; all other contracts will use local competitive bidding. Philippines experience has shown that local companies alone will bid below these thresholds, local capacity is adequate, domestic procurement processes are satisfactory, and the Government has requested local competitive bidding be used where appropriate. For certain types of specialized medical equipment, international shopping may be appropriate as the number of suppliers in the field is limited. Indicative procurement packages are set out in Appendix 13.

7. Consulting Services 65. DOH will recruit a team of management consultants consisting of experts in financing, procurement, civil works, monitoring and evaluation, and good governance and a technical team to provide advisory assistance to the Project. The technical advisory group of consultants will include experts in relevant health sector reform areas. Total input is estimated at 523 person-months of international and domestic consulting, comprising 86 person-months for international specialists and 437 person-months for domestic specialists. The total cost of such services will be $7.25 million with staff comprising $2.44 million and the remainder comprising training in health care reform and clinical and managerial training for staff of DOH, the participating LGUs, and the health facilities involved. The consultants will be engaged through an international consulting firm following the quality and cost-based selection or through individual consultant selection in accordance with ADB Guidelines on Consultant Selection or other arrangements satisfactory to ADB for the engagement of domestic consultants (outline terms of reference are in Appendix 14). 8. Disbursement Arrangements 66. To expedite disbursement for project expenditures, the Government will establish two imprest accounts for eligible expenditures with the Bangko Sentral ng Pilipinas, one each for DOH and MFC. The imprest accounts will be managed, liquidated, and replenished in accordance with ADB's Guidelines on Imprest Fund and Statement of Expenditures Procedures. The initial amount to be advanced under the imprest account will be the maximum of the

21

equivalent of $1 million for MFC and $500,000 for DOH. ADB's statement of expenditures procedure may be used for reimbursing eligible expenditures and liquidating or replenishing advances up to a maximum amount of $200,000 per contract. The imprest account and statement of expenditures records will be audited annually separately by auditors acceptable to ADB. 9. Auditing 67. Project expenditures will be recorded according to the standard requirements of the Commission on Audit. All agencies involved in project implementation will prepare and maintain separate accounts for project-related disbursements. UPMD will consolidate the accounts from the various national offices and provinces and submit them to the DOH Finance Service, which will review the consolidated accounts and, after audit, submit them to DOF and ADB. The audit report will include a statement verifying that funds disbursed by ADB against statements of expenditures have been used for the purpose for which they were provided. Project accounts, together with disbursement documents, will be audited annually by independent auditors acceptable to ADB, and will be submitted to ADB within 6 months of the end of each fiscal year. A separate audit opinion on the imprest account and statement of expenditures procedures should be included in the annual audit report. 10. Reports 68. Quarterly progress reports will be prepared by every provincial project management team, duly signed and endorsed by the governor as the provincial project director. These teams will be responsible for coordinating project activities and for preparing reports on their status and outcomes. The reports will be furnished simultaneously to UPMD and the DOH regional health office (regional project supervisor), and will be consolidated at the national level. UPMD will prepare its own report on the implementation of national activities funded by the Project. It will prepare a single report on project accomplishments to be submitted quarterly to the project director and subsequently forwarded to ADB.

11. Project Performance Monitoring System 69. The project performance monitoring system will contain data and information on each health sector reform area, relevant management data and in particular detailed financial data documenting Project progress and adherence to principles of good governance. Achievement will be checked against performance targets set by DOH at the beginning of each year. The performance parameters will include (i) activities and outputs realized vis-à-vis plans and targets, (ii) independently verified physical accomplishments, and (iii) actual costs against budgeted amounts. 70. Specific monitoring forms13 will be developed and used to monitor progress and accomplishments. The monitoring system will be designed to enable prompt remedial action. Evaluation of the Project will be carried out primarily through a set of baseline and end-of-Project surveys. While a poverty survey has been undertaken during project preparation, a general population-based survey is needed on the current status and outcome of the HSRA initiatives in all five provinces to validate the indicative levels of outcome and impact indicators reflected in the HSDP framework. Available data in existing DOH and provincial reports are

13 Under the leadership of DOH, donors and financing institutions are expected to agree on common formats of

reports and monitoring forms for all externally funded projects that are supporting implementation of HSRA.

22

insufficient to establish detailed objectives and targets for project activities in the next 5 years. A survey at the end of the Project will evaluate the impact of the HSDP on the overall health status in the five provinces at the time. UPMD will contract nongovernment organizations to undertake the baseline and end-of-project evaluation surveys. 12. Project Review 71. A Project Inception Mission comprising ADB and DOH staff will be fielded shortly after the project loan becomes effective. Yearly project review missions will (i) monitor progress of project implementation; (ii) identify areas of concern; and (iii) suggest remedial actions. A comprehensive midterm review of project performance will be conducted to identify problems and constraints encountered during the first half of the Project and to adjust the design and the project framework or take remedial actions as required. Technical or budgetary changes of the Project based on the results of the project performance monitoring system will be considered, as will additional activities, or expansion of activities and sites for the remaining project period. 13. Anticorruption Policy 72. The Project will comply with ADB’s anticorruption policy and guidelines. DOH and the implementing agency will ensure timely submission of project accounts. Subprojects will be selected, components approved, and goods and services procured according to the agreed guidelines and criteria. ADB’s anticorruption policy was explained to the national and the preselected local governments, DOH, and PhilHealth during project processing. The anticorruption provisions added to ADB’s Guidelines on the Use of Consultants were also discussed, and the section on fraud and corruption in ADB’s Guidelines for Procurement were emphasized. A strict project performance monitoring system will allow DOH and ADB to confirm the appropriate use of project funds.

IV. PROGRAM BENEFITS, IMPACTS, AND RISKS A. Benefits and Beneficiaries 73. The HSDP will contribute to the improvement of the health status of the population, particularly the poor and other marginalized and vulnerable population groups, through implementation of a package of reforms that will improve quality of health services, and facilitate their availability to the poor. Improving the health status of the population will impact on their human capital and thus on their productive capacities. For women, in particular, improved health status and reduced fertility through enhanced family planning and reproductive health services are anticipated to improve individual productivity. The HSDP will facilitate the empowerment of poor, marginalized, and vulnerable groups by supporting their participation on local health boards. 74. The Project directly targets approximately 175,000 poor and subsistence poor households, or close to a million people, in the five preselected project provinces: Ifugao, Ilocos Norte, Nueva Vizcaya, Oriental Mindoro, and Romblon (in 2000, the five project provinces had a total population of approximately 2.1 million people, or 400,000 households). These beneficiaries are composed of poor families, and vulnerable, and marginalized groups such as women of reproductive age (15-49 years of age), households headed by women, children under 5, and indigenous people. Of the total number of project beneficiaries, more than half of the female beneficiaries will be women of childbearing age (15-49), and 13% will be children under 5. The Project will ensure that at least (i) 95% of children in the project areas are fully

23

immunized; (ii) the contraceptive prevalence increase by 15%; (iii) 90% of the poor are enrolled in the National Center for Health Promotion, either as indigent, sponsored, or individually paying members; (iv) 80% of births are delivered in a certified or accredited health facility and attended by a trained health care professional; (v) 70% of the poor and indigenous population are located within 5 km or 1 hour from a primary health care service provider; and (vi) 50% of the poor are using primary health care facilities (BHSs and RHUs) or hospital out-patient departments for treatment or preventive services. B. Social and Poverty Analysis 75. The primary source of income in the five provinces is farming followed by wage employment in the formal and informal sectors. Other sources of income include rents, and remittances (from family members who are working abroad or domestically). Poor households spend almost 50% of their income on food items. Because of their meager incomes, investing in health is simply not a priority for poor households. Improved access to quality and affordable health services is identified as a high priority among the poor in the provinces. Distance, bad roads, and inadequate transportation hamper access to health facilities, services, and providers. 76. To maximize the benefits for the poor, the Project will (i) construct approximately 160 BHSs, and upgrade and expand RHUs and BHSs; (ii) establish an effective mechanism for identifying and prioritizing the poor, and determine their unmet needs for essential health services; (iii) strengthen or help organizations/associations of the poor so that they can be appropriately represented in at least 70% of local health boards at project sites; (iv) train and organize barangay health workers and family health volunteers to promote healthy lifestyles and disseminate information on essential health services that are made available at BHSs and RHUs in barangays with a majority of poor and indigenous people; (v) provide health insurance coverage for at least 90% of the poor and indigenous households in the areas covered by the Project, and facilitate provision of social health insurance coverage to at least 90% of poor people; (vi) provides technical and financial support for community-based health programs and projects targeting poor and other marginalized groups in particular; and (vii) upgrade the capacity of frontline health workers. 77. One of the main objectives of the HSDP is to make quality health care accessible and affordable for the poor and to meet the health needs of women in particular. A gender analysis was conducted during HSDP preparation. Main aspects constraining women’s access to health service facilities are (i) lack of privacy in health facilities and inappropriate scheduling of health service provision, (ii) lack of mobility and efficient transport, and (iii) lack of female health professionals. The gender analysis stresses that because of the constraints for women’s access to health service facilities and their economic situation, women will benefit particularly from the upgrading and/or expansion of BHSs and RHUs into birthing and lying-in clinics in areas where the core referral hospitals are more than 1.5 hours away. Aside from the existing health programs being implemented by the BHSs and RHUs, core health packages for these facilities will include enhanced services for family planning and reproductive health counseling. Women will also be the major participants and beneficiaries of information, education and communication campaigns. They will be actively involved in setting up the community-based information system for identifying and prioritizing the needs of poor women for essential health services and social health insurances. Women will also be selected for skills upgrading in health care since the majority of health caregivers in the communities are women. Finally, groups of poor women will receive limited financial assistance in the form of seed money to set up community-based projects for health.

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78. To ensure that the gender aspects are mainstreamed in the Project, a poverty and gender specialist will be included in the technical team of consultants. This specialist will (i) work with DOH and other relevant stakeholders to design a community-based information system that integrates gender and poverty issues in coordination with the community-based information system specialists; and (ii) develop a gender and development plan, monitoring and evaluation indicators; and specific gender and development reporting requirements. While not expected to have significant resettlement impacts, implementation of the Project may involve limited resettlement and involvement with indigenous peoples. Participatory strategies for dealing with these issues have been developed. The summary initial poverty and social assessment, including gender, resettlement, and indigenous peoples is in Appendix 15, the summary resettlement framework is in Appendix 16, and a summary indigenous peoples framework is in Appendix 17. C. Environment 79. The HSDP will rehabilitate and upgrade health facilities in the project area, such as hospitals, health centers, sub-health centers, and village health posts. An initial environmental examination for project activities was completed during project preparation (the summary is in Appendix 9). The assessment and evaluation of the interventions showed that none would require the preparation of an environmental impact assessment. No interventions/activities proposed can be considered environmentally critical or are projected to create significant adverse or negative impacts on the environment. Although proposed activities/interventions, specifically the upgrading of existing health facilities, may be significant in degree, albeit temporary in nature, these impacts are avoidable, localized in scope, and mitigable through proper planning and the employment of appropriate construction methodologies. Positive socio-economic impacts are predicted to occur as a result of the implementation of the activities and interventions. Hospital waste management will become part of the capacity-building program leading to improvements in the environmental management of health facilities. All building and civil works will be designed to minimize damage to the environment. D. Economic and Financial Analysis 80. The HSDP finances crucial structural changes in the sector, which have previously frustrated HSRA implementation, specifically through (i) more efficient health spending; (ii) pro-poor restructuring of health budgets; (iii) rationalization of local health, public health and hospital systems; and (iv) improvement of regulation, organization, and governance of the health sector. Overall, the implementation of policy measures will result in additional costs totaling $280 million. In annual terms, the net impact is equivalent to nearly $100 million per year (a figure to be compared with the 2001 recurrent health budget of about $702 million). The HSDP is assumed to increase the proportion of the population with access to quality health care, particularly among the poor and marginalized. Improvement of the referral system and organizational reform of the management system toward integrated care, from the first point of contact to the referral hospital, should have a beneficial effect on the overall system’s efficiency at the provincial level. The sustainability of funds for sector reform has been considered and, in addition to the assurances in the policy letter, the contribution of the Government has been structured to have no budget impact in the first 2 years and to increase with projected growth thereafter. In addition, the Project is structured to be affordable and revenue generating for the LGUs, thus providing an incentive for replication and a means of enhancing the sustainability of health care provision. The HSDP is expected to yield an economic rate of return of about 28% (Appendix 18). Considerable social return on investment is anticipated through: (i) resource cost savings, and (ii) productivity benefits from a population in better health.

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81. Financial analysis was also conducted on the nominated special purpose entity, MFC. MFC is scheduled to commence corporate operations in February 2005 with capital of P1 billion. To ensure the financial viability of the MFC loan and sound financial management, MFC will maintain a capital adequacy ratio of at least 10%—in keeping with the requirement of the Bangko Sentral ng Pilipinas for similar institutions—and provide solid provisioning for asset quality. The financial projections for MFC are in Appendix 18. E. Risks and Assumptions

1. Political Risks

82. The governance of organizations involved in the health sector is weak and constitutes a risk at the policy and management levels; both are subject to political interference. The HSDP will therefore provide consultants to upgrade systems and train staff, and change organizational and managerial cultures through training, improved coordination, and involvement of the public in monitoring progress. 83. Political commitment by all parties is fundamental to progress toward the MDGs and to successful implementation of a new vision for health; and requires the finance, economic planning, and health departments to collaborate at all levels to create an environment of sustained attention to the challenges linking macro-economy and health. A pre-requisite to risk minimization is anticipation and open discussion of the problems and the taking of actions that directly address them. In addition, the project loan provides appropriate incentives in the form of staff and investment resources to the involved organizations to support them in HSRA implementation.

2. Macroeconomic and Financial Risks

84. The economic and financial risks are considered less prominent as the HSDP does not intend to substantially increase health care spending. The lack of a viable credit market for financing the investment needs of the aggregate LGUs has inhibited infrastructure investment, which has affected the construction or rehabilitation of hospitals and other health infrastructure. For much of the health sector expenditures, LGUs will undertake cost savings and quality improvements financed through efficiency gains and new operations’ modalities that allow sharing of facilities and services and economies of scale at the local level. Without the HSDP, the likely success of such pathways could not be demonstrated and poverty reduction and achievement of MDGs would remain a distant objective.

3. Capacity Constraints 85. The capacity of organizations involved in the health sector is weak and constitutes a risk in three dimensions. Skills are limited and are constantly being eroded through emigration. Further, inappropriate organizational and professional cultures also constrain reform. The HSDP will therefore provide consultants to upgrade systems and train staff, and address organizational and professional cultures in various ways—both directly and indirectly—through training, better coordination, and increased public accountability. Although the beginning of devolution in the Philippines dates back to 1991 and the HSRA was published in 1999, the HSDP is the first intervention that aims at full implementation of the reform agenda in all its complexity. The devolved functions of several components of the HSRA need to be operationalized and DOH

26

and UPMD should provide full support in the context of the project loan to mitigate the risks associated with the limited capacities of many LGUs.

V. ASSURANCES A. Specific Assurances 86. In addition to the standard assurances, the Government has given the following assurances, which are incorporated in the legal documents.

(i) The policies adopted and actions taken prior to the date of the HSDP Loan Agreement, as described in the development policy letter, will continue in effect for the duration of the HSDP loan period, and the Government will promptly adopt the other policies and take the other actions included in the HSDP, as specified in the development policy letter and HSDP Loan Agreement, and ensure that such policies and actions continue in effect for the duration of the HSDP loan period.

(ii) The Government will seek prior approval of ADB to any change of UPMD Project

Manager and of Provincial Project Coordinators, and will ensure that UPMD and provincial PMU staff will be transferred no more than once in 2 years.

(iii) The Government will ensure that (i) an environmental assessment is carried out

for each Subproject in a participatory manner as part of the planning process of the Subprojects and in accordance with the Environmental Assessment Framework prepared for the Project; (ii) based on such environmental assessments, an environmental management plan, including mitigation measures, institutional arrangements, monitoring plan and sufficient budget for its implementation, is developed by the LGUs and approved by the UPMD; (iii) an environmental impact assessment, where necessary, is undertaken for each Subproject and submitted to ADB for concurrence prior to Subproject approval; (iv) adequate environmental mitigation measures are incorporated into all Subproject design, construction, operation, maintenance and monitoring arrangements in accordance with the Borrower’s environmental laws, regulations, and standards, and ADB’s Environment Policy (2002); and (v) mitigation measures and monitoring plans required in the subproject management plans are implemented effectively and in a timely manner satisfactory to ADB.

(iv) In the event that land acquisition and/or involuntary resettlement are required for

any subproject, the Government will ensure that (a) such land acquisition and involuntary resettlement are undertaken in accordance with the Borrower’s applicable laws and regulations, ADB’s Involuntary Resettlement Policy (1995) and the Project’s Resettlement Framework as agreed between the Borrower and ADB, and disclosed to public in accordance with the relevant procedures of ADB; (b) where necessary, resettlement plans acceptable to ADB are prepared, with appropriate participation of and disclosure to the affected people, and submitted for ADB’s approval; (c) measures indicated in such resettlement plans are duly carried out prior to award of the respective civil works contract; and (d) all

27

compensation payments and resettlement assistance are provided to the affected people prior to displacement and/or dispossession.

(v) The Government will ensure that the Project is implemented in accordance with ADB’s Policy on Gender and Development (1998) and take all necessary actions to encourage women living in the Project provinces to participate in planning and implementation of the subprojects. Furthermore, the Government will (a) make every effort to identify and assign suitable qualified women to undertake Project implementation activities at national or provincial levels; and (b) cause DOH to monitor the effects of the Project on women through collection and compilation of gender-disaggregated data, where relevant, including in the resettlement plans for the subprojects and the project performance monitoring system established for the Project.

(vi) The Government will ensure that, in accordance with ADB’s Policy on Indigenous

Peoples (2003) and the Indigenous People Framework prepared for the Project, (a) adverse impacts on indigenous people are avoided or adequately mitigated in a timely manner; (b) indigenous people are provided with opportunities to benefit from the Project in an equitable and sustainable manner; (c) affected indigenous people are adequately consulted and provided with full opportunity to participate in the planning and implementation of any mitigation and enhancement measures; (d) sufficient budget is made available and funds are disbursed in a timely manner for effective implementation of the framework and any indigenous people development plan that may be required; and (e) implementation of the framework and development plans are monitored and reported to ADB through quarterly progress reports.

(vii) The Government agrees that no disbursement will be made from the loan

account for any subproject scheme that is not based on transparent procurement methods.

(viii) The special purpose entity for the project loan to be nominated as MFC, will

maintain financial ratios required by the appropriate regulator. (ix) DOH agrees to assist LGUs to initiate a province-wide media campaign to

emphasize the Project’s benefits and to stimulate community participation in its implementation.

B. Conditions for Loan Effectiveness of the Project Loan 87. The following are conditions for project loan effectiveness:

(i) The project steering committee will have been established. (ii) The Government issues the Forward Obligational Authority for project

counterpart funds.

C. Conditions for Disbursement of the Project Loan 88. The following conditions for loan disbursement:

28

(i) An implementation agreement in a form acceptable to ADB has been signed between ADB and the special purpose entity nominated as MFC.

(ii) A subsidiary loan agreement in a form acceptable to ADB has been signed

between the Government and the MFC. (iii) The coordinators for participating provincial PMUs have been appointed.

VI. RECOMMENDATION 89. I am satisfied that the proposed loans would comply with the Articles of Agreement of ADB and recommend that the Board approve:

(i) the loan of $200,000,000 to the Republic of the Philippines for the Health Sector Development Program from ADB's ordinary capital resources, with interest to be determined in accordance with ADB's LIBOR-based lending facility; a term of 15 years, including a grace period of 3 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft Program Loan Agreement presented to the Board; and

(ii) the loan of $13,000,000 to the Republic of the Philippines for the Health Sector

Development Project from ADB's ordinary capital resources, with interest to be determined in accordance with ADB's LIBOR-based lending facility; a term of 26 years, including a grace period of 6 years, and such other terms and conditions as are substantially in accordance with those set forth in the draft Project Loan Agreement presented to the Board.

Tadao Chino President

23 November 2004

Appendix 1 29

PROGRAM FRAMEWORK

Narrative Summary Performance Targets1 Monitoring Mechanisms

Assumptions and Risks

Goal Improve health status of the population, especially of the poor2 and achievement of health-related Millennium development Goals (MDGs).

Indicators related to global MDG targets3: • Reduce maternal mortality rate to

90/100,000 live births by 2010. • Reduce infant mortality to 17/1,000 live

births by 2010 • Reduce under-5 mortality rate to 24/1,000

live births by 2010 • Have halted by 2015 and reversed the

prevalence of malaria, tuberculosis, and other major diseases

National demographic health surveys

Purpose Increase utilization of affordable and financially sustainable quality health services by the poor based on progressive implementation of the Health Sector Reform Agenda.

Increased utilization • At least 95% of children fully immunized

before 1 year of age by end 2010 • At least 80% of high-risk pregnant women

deliver babies at health facilities by end 2010

• Contraceptive prevalence rate increased to 60% by year 2010

• At least 80% of health facilities implement tuberculosis-directly observed therapy strategy (DOTS) and achieve at least 70% detection rate and 85% success rate by end 2010

Improved access • At least 70% of the targeted poor

population are within 5 kilometers or 1 hour from a primary health care facility/providers by end 2010

• At least 75% of the targeted poor households in each province are enrolled in the Sponsored Program of National Health Insurance by end 2010

Improved quality of services • At least 90% of health facilities have no

shortage of essential drugs throughout the year by end 2010

National demographic health surveys4

Surveys on health service accessibility, targeting of the Sponsored Program and drug availability to be conducted by Department of Health

Public expenditures for health sector financing stagnate or are even reduced due to fiscal and financial problems of national Government and local government units (R) Quality of health service provision can be improved even in view of increased utilization of services (A) Increased health awareness and health seeking behavior of the poor result in higher utilization rate of primary and public health services (A)

Outputs A. Health Financing

Reform Financial sustainability of the national health insurance improved and insurance coverage of the poor extended

Policy Loan (selected indicators) • Republic Act 9241, which guarantees

national Government subsidies to LGUs to support Philippine Health Insurance Corporation (PhilHealth) enrollment of the poor fully implemented by end of 2005

• Revenues and payments of PhilHealth are based on a financially sustainable long-

• National health account

• PhilHealth assessment report of targeting the poor

1 Key indicators for national agencies and provinces implementing the Health Sector Reform Agenda. 2 Disaggregation of data will be made where possible to assess achievement of goal and purpose related to the poor

population. 3 Health-related MDG targets are (i) target 5 of goal 4: Reduce by two thirds, between 1990 and 2015, the under-5

mortality rate; (ii) target 6 of goal 5: Reduce by three quarters, between 1990 and 2015, the maternal mortality rate; (iii) target 7 of goal 6: Have halted by 2015 and begun to reverse the spread of HIV/AIDS; and (iv) target 8 of goal 6: Have halted by 2015 and begun to reverse the incidence of malaria and other major diseases.”

4 Conducted every 5 years.

Continued on next page.

Appendix 1 30

Narrative Summary Performance Targets1 Monitoring Mechanisms

Assumptions and Risks

• term plan approved by PhilHealth board in 2006

• Benefit packages of PhilHealth reviewed aiming at increased membership and financial sustainability

Investment Loan (selected indicators) • National Government subsidies and

contributions of selected LGUs for PhilHealth's Sponsored Program made available in time to achieve 100% coverage of the poor in 2011

• Information campaign on benefit package of ‘sponsored program’ of PhilHealth conducted until end 2006 in all selected LGUs

• National financial plan • LGU database • Consumer survey

report

Communities are willing to accommodate improved targeting methods that use enumeration data (A)

B. Hospital Reform Improved governance, operational efficiency, and service provision of public hospitals

Policy Loan (selected indicators) • Governing boards for public hospitals

established based on DOH policy documented in administrative order (AO) by end 2005

• Systemwide introduction of Continuing Quality Improvement program and performance-based budgets initiated by the end of 2005

• Corporatization of public hospitals tested in selected hospitals by end 2005

Investment Loan (selected indicators) • Unified management information system

designed, tested, implemented, and revised in all hospitals of selected LGUs by end 2007

• Lower-tier hospitals upgraded to provide better quality care by 2009

• Unified management information system review report

• Detailed human resource development plan

• Revised quality improvement program guidelines

• Revised waste management guidelines

C. Public Health Reform Increased utilization of cost-effective public health programs and primary health care services

Policy Loan (selected indicators) • Targets for increased public expenditures

for public health care services as part of a multiannual performance-based budget set by DOH using 2001 as the baseline.

• Contraceptive self-reliance strategy developed by DOH

• End-of-project

evaluation report

Investment Loan (selected indicators) • Improved quality services of upgraded

health centers create an attractive alternative for consumers to utilize such services

• Where new RHU and BHS programs include seed funds, women will comprise 50% of recipients

• 90% of health workers of barangay health stations (BHSs), rural health units (RHUs), and provincial hospitals in selected LGUs trained by end 2008 in clinical practice guidelines, clinical pathways, quality assurance, client

• Reports of project

review missions • Consumer feedback

as part of independent monitoring

Continued on next page.

Appendix 1 31

Narrative Summary Performance Targets1 Monitoring Mechanisms

Assumptions and Risks

consultation, social marketing, promotion of PhilHealth's sponsored program, and financial management

D. Regulatory Reform Improved quality, accessibility, and safety of health care-related products, facilities, and services

Policy Loan (selected indicators) • DOH report on new licensing and

accreditation criteria based on comprehensive stakeholder consultations published by the end of 2005

• New laws drafted to grant quasi-judicial functions to regulatory agencies of DOH by the end of 2005

• DOH reports • Draft laws

Investment Loan (selected indicators) • Price of 80% of drugs reduced by 20%

from 2004 level by end 2010 based on economies of scale in purchasing drugs and competition among drug manufacturers

• 80% of government pharmacists in selected LGUs trained in the application of new drug regulations by 2010

• Revised national drug formulary

• Midterm review and post-project review

E. Local Health System Reform

Rational delivery of local health services through formation of interlocal health zones (ILHZs) and private sector partnerships

Policy Loan (selected indicators) • Administrative order of DOH defines

policies on (i) ILHZ governance, (ii) resource sharing arrangements among participating LGUs, (iii) core referral system, (iv) pooled procurement of drugs, (v) promotion of public-private partnerships, and (vi) development of strategic business plans for improved health service delivery

• End-of-project

evaluation report • End-of-project

evaluation report

Investment Loan (selected indicators) • At least two third of ILHZs in selected

provinces made functioning by 2011 as single provider network that complies with guiding policies of DOH

• End-of-project

evaluation

F. Health Sector Governance

Increased public accountability and improved organizational effectiveness of health service providers

Policy Loan (selected indicators) • Framework for annual business plans for

hospitals and comprehensive human resources plans for the sector developed by DOH by the end of 2005

• Objectives and operational guidelines for a continuous quality improvement program involving all public service providers developed by DOH by the end of 2005

• Achievement of full gender disaggregation in collection of health statistics, including identification of women-headed households

• DOH framework

document • DOH operational

guidelines

Investment Loan (selected indicators) • 60% of public hospitals adequately staffed

with health personnel by end 2011 • Annual business plans exist in 80% of

public hospitals by the end of 2011 • 90% of DOH and PhilHealth staff

members are trained to implement the HSRA by the end of 2007

• National resource center fully established in DOH by the end of 2007

• Assessment of training performance

• National resource center annual report

• LGUs annual review and action plan

Continued on next page.

Appendix 1 32

Narrative Summary Performance Targets1 Monitoring Mechanisms

Assumptions and Risks

Activities Included in detailed program framework of Supplementary Appendix C. Inputs Policy Loan: $140 million Total Cost of Investment Project: $50 million

Cost breakdown in $ million

Civil works 17.12 Equipment and vehicles 7.42 Consulting services (100 persons-months international, 500 person-months domestic) Operational research, studies

3.85 0.70

Contract services 2.35 Training and fellowships 6.19 Information campaigns 2.14 Seed capital 0.98 Project management/ Operating costs

2.83

Contingencies 1.78 Interest and commitment charges

4.64

Appendix 2 33

SECTOR ANALYSIS 1. The following sections summarize a more detailed analysis set out in Supplementary Appendix A. A. Health Outcomes 2. General health levels, especially in relation to the Philippines' per capita income, are lower than in other countries of the region, except for Viet Nam, which has one third of the per capita gross national product of the Philippines. The Philippines has a gross national product per capita 50% higher than Indonesia, but has lower nutrition, immunization, and safe water statistics (Table A2.1). Other health variables, such as child mortality, tuberculosis prevalence, and maternal mortality rates also lag if adjusted for the relative income levels. Quality of care especially for the rural poor has been declining in the Philippines, due to overcrowding of higher level public hospitals, reduced recurrent expenditures and a shift of public resources in favor of larger institutions and tertiary care facilities and increasing levels of private practice by public service doctors.

Table A2.1: Comparative Health Statistics Country

GNP per Capita ($)

Under Weight for age

>5

>5 Mortality rate

Maternal mortality

rate

1-year olds immunized vs Measles

Tuberculosis prevalence

Rural Pop with safe

water

Poverty – rural (%)

Income ratio (high 20%/low

20%) Philippines 1,050 31.8 40 200 75 582 79 54 12.5 Indonesia 600 27.3 50 230 76 742 69 26.1 4.0 Malaysia 3,390 20.1 10 41 92 128 94 13.2 12.3 Thailand 2,010 17.6 31 44 94 225 81 17.2 9.3 Viet Nam 370 33.8 39 130 97 264 72 45 5.6 Singapore 24,150 2.9 4 15 89 28 n/a 0 8.5 GNP = gross national product, Pop. = population. Source: World Bank. 2000. World Development Indicators.

3. Health management issues are the major factors impeding the delivery of services for the poor who rely on public facilities for both curative and preventive health services. However, primary health services for the poor are understaffed and underfunded; lack drugs, medical equipment, and supplies; and provide poor quality care. Patients are bypassing these facilities and using the outpatient facilities at provincial and teaching hospitals for minor ailments. This leads to both operational and allocative inefficiency in the use of health care resources. Overcrowding at provincial and teaching hospitals also prevents the provision of quality services for patients who need higher level care. Improved management, reorganization, and additional financial resources are needed to improve quality of care at the primary health care level and to improve access to quality health services by the poor. These issues point to the need for structural change and health sector reforms. B. Health Sector Reforms 4. Faced with budgetary constraints on one hand and the need to improve the quality of health care for the poor, on the other, the Government developed the Health Sector Reform Agenda (HSRA) to implement alternative means of managing service delivery and financing. A number of health sector management strategies have been developed and implemented throughout the world to improve health services. The public sector can be made more efficient through decentralizing, and providing management autonomy for hospitals, and by providing appropriate incentives for staff at different levels. Additional gains in efficiency can be achieved

Appendix 2 34

by contracting out specific tasks to the private sector and nongovernment organizations. However, implementation of any of these options results in additional administrative costs for tracking money and ensuring service quality. 5. The comparative advantage of any specific strategy for a public health system can only be determined by conducting cost-effectiveness analyses based on appropriate incentives for the various providers (see Table A2.2). Some options will require field-testing or operations research to determine their effectiveness and total costs. Only after that can they be expanded or replicated in larger areas. The degree of success in implementing health partnerships will depend on effective decentralization and the active participation of local government and communities.

Table A2.2: Incentives for Health Providers

Provision of Services Financing of Services

Public Private

Public Decentralization Autonomous hospitals Incentives in public facilities User charges

Services contracted to private provider

Private Private practice in public facilities Community financing

Institutional provider funded by: • Private insurance • Pre-paid care

Individual providers Privatization of health facilities and services

Source: ADB Studies. 6. The HSRA aims to provide these incentives and is the collective responsibility of the Health Policy Development and Planning Bureau, Bureau of Local Health and Development, National Center for Disease Prevention and Control, National Center for Health Facility and Development, Bureau of Food and Drug, Bureau of Health Devices and Technology, the Bureau of Health Facilities and Services, and National Center for Health Promotion. The Philippines Health Insurance Corporation (PhilHealth) has been given the responsibility for leadership in health financing reform. The 17 regional health offices are the arms of Department of Health at the local level to propel the adoption and implementation of health sector reform initiatives by local government units. 7. The HSRA is a plan to exercise, in a coherent and well-orchestrated manner, the policy instruments of financing, regulation, information, and direct service delivery as mandated by the health reform enabling laws:

(i) Public hospitals must become effective instruments not only for inpatient care, but also for ensuring that subsidies are equitably dispensed through socialized fees. Moreover, public hospitals must be competitive and therefore influence services and prices in the private sector.

(ii) Technical leadership in public health programs (information, research, and technical guidelines) must become an effective instrument in influencing the

Appendix 2

35

effectiveness of service delivery in the field that was devolved and shared with private providers.

(iii) Multi-year budgets must be provided to ensure that priority public health campaigns are sustained long enough to meet targets and demonstrate impact.

(iv) Local health systems, where local government units jointly govern and share responsibilities for a health catchment area must be recognized as the frontline in service delivery and sustained financing.

(v) The capacity of health regulatory agencies must be upgraded to effectively perform their traditional functions, as well as new roles in public information and competition promotion.

(vi) The National Health Insurance Program (NHIP) must expand enrollment and improve benefits to reduce the financing burden, and leverage effective and affordable services from both public and private providers.

9. The reform areas are highly interdependent and complementary, and therefore should be implemented as a package. Health financing reforms through NHIP expansion will make hospital autonomy viable and will ensure that the poor remain protected. Hospital reforms, in turn, will free up resources for investments in public health programs, health systems development, and health regulations at national and local levels. Effective public health programs and local health systems will relieve the NHIP from paying for hospitalizations that should have otherwise been prevented or better handled at primary care facilities, and effective regulation will ensure that health facilities, equipment, and products meet quality standards and are competitively priced so that national and local health budgets and NHIP benefits get good value for money.

Appendix 3 36

LESSONS LEARNED 1. In general terms, the Philippines provides a clear example of the need to address core primary health care (particularly communicable disease and reproductive health), targeting, competition, coordination, and sustainable financing (Table A3). 2. Primary Health Care Delivery. A key issue is whether performance can be improved for the poor by increasing their voice in decision-making. This can be accomplished in several ways. The first is the direct management of local clinical services, through community health centers or revolving drug funds, as in the Bamako Initiative. A second is mobilizing communities for health-promotion activities, from malaria prevention to improved water supply. A third is participating in monitoring the performance of facilities and providers. Another issue is how to improve accessibility. Physical proximity to poor clients can be improved through investment decisions. But opportunities also exist for consolidation because of improved infrastructure; this should be pursued to improve quality and productivity. Accessibility can be improved at lower cost not by duplicating available services in the private and charitable sector, but by allowing clients more choice of service delivery outlets through contracts with nongovernment organizations and private providers, and by improving technical efficiency and incentives among public service providers. Moreover, nongovernment organizations may have greater experience in dealing with certain at-risk groups, such as people with disabilities or youth at risk of sexually transmitted diseases, than the Government. Health care facilities, which have shown to be both costly and inefficient at treating their intended beneficiaries, such as residential institutions for the mentally ill or physically disabled, should be reconsidered in favor of lower-cost, higher-impact services, such as day-care facilities. 3. More Equitable Government Spending. At the macro level, the key issue for the Philippines is how facilities and insurance funds are accessed by the poor. Many developing and middle-income countries have developed core packages, which define health interventions available at the village (health post), community (health center), and district levels (district hospital). Effective packages respond in a cost-effective way to the needs of the poorest segments of the population, and represent priority activities for public financing. They should include services that respond to the burden of disease afflicting the poor and should be linked to poverty maps to facilitate geographic targeting. Virtually all of the interventions are community and clinic-based, but they also require supporting infrastructure of population-based services, communication and knowledge dissemination, school health, and environmental health. 4. Competition and Input Markets. Governments have a major role to play in the two key markets that support and feed into the health system – the pharmaceutical and labor markets. The availability of drugs affects the clinical quality of health services, costs, and perceptions of clients. Purchasing pharmaceuticals in the private market is also one of the main out-of-pocket expenditure items for the poor. Key aspects to be assessed include selection, procurement, distribution, pricing, and quality. Instruments for improving pharmaceuticals transactions market wide include (i) communications campaigns to improve the understanding of drugs among clients and sellers, (ii) social marketing to improve the quality and availability of drugs and family planning supplies, and (iii) impartial enforcement of regulations to protect consumers. By maintaining and disseminating essential drugs lists and pursuing policies to encourage use of low-cost, high-quality generic drugs, governments can improve the functioning of the pharmaceutical system. Procurement in the public sector can be improved through an essential lists of drugs, supplies, and equipment; use of competitive bidding; and encouragement of competition in logistics and distribution systems. The labor market too is a key issue. The quality, distribution, and responsiveness of health personnel influence the availability, quality,

Appendix 3 37

and access to interventions by the poor. Issues to examine include (i) the total number and distribution of various types of providers, by geographic location and level of care; (ii) retention capacity of the system for trained staff; (iii) quality of education and technical skills, as well as responsiveness to the client; and (iv) underlying incentives for provider performance, particularly in relation to poor clients. 5. Governance Issues in Health Provision. A core responsibility of government in a mixed system is to exercise effective oversight. Governance becomes more important as governments shift from direct service provision to a role dominated by policy; population-based health interventions; financing; regulation of providers and insurers; and guiding the system and behavior through research, provision of information, quality enhancement activities, and careful use of financial subsidies. Four areas are key: regulation, coordination, monitoring and evaluation, and information. 6. Financing Sustainability. The issue here is whether the level of resources available to the sector is sufficient to ensure the provision of essential services to the poor. Have resources been made available to sustain the chosen package of interventions? If not, have priorities been imposed to shrink the package to fit within the constraints? Sustainability does not mean unlimited access to funds, but rather that hard decisions are made so that a functioning system can deliver the highest priority services over time. The Philippines will need to address this issue in the context of its policy to ensure broad insurance coverage. A key issue is whether prepayment and insurance methods, when combined with public subsidies, succeed in creating an insured pool of poor and non-poor individuals, thereby offsetting the higher health risks of the poor by the lower risks of the better off. Typically, incentives, subsidies, and compulsion are required to achieve this goal. 7. Project Experience. The principal lesson learned from recent projects in the Asian Development Bank's (ADB) health portfolio in the Philippines is that that implementation capacity is crucial, especially for the performance of Local Government Units (LGUs). ADB experience, in common with the World Bank,1 is that the following are necessary:

(i) Recognize that, under devolution, the LGU plays the major role in health care delivery and DOH can act only in conjunction with the LGUs; as a corollary, involve LGUs as active partners in project preparation, implementation, and monitoring.

(ii) Establish a professional project management office in the Department of Health while involving technical services in all aspects of project implementation.

(iii) Resolve fundamental cross-cutting management problems upfront (e.g., weak financial management, procurement, and human resource management).

(iv) Have a detailed plan for monitoring and evaluation ready at appraisal and use it in management and supervision.

(v) Introduce the complete package of project inputs for a given project area in a synchronized manner to ensure quality production of the project deliverables. In particular, ensure that soft inputs like training and advocacy/communication do not take a back seat to civil works and equipment.

(vi) Plan and implement financing arrangements at the outset.

1 World Bank. 2004. Second Women’s Health and Safe Motherhood Project. Washington, DC (project information document).

Appendix 3 38

LESSONS LEARNED MATRIX Key Lessons Learned Project Response 1. Focus Government resources on primary health care services provision.

Strengthen referral system and enforce gatekeeper function through the insurance system. Improve quality of care and resources at primary health care level (see item 3, Structural Issues).

2. Focus Government resources on the poor.

Strengthen funding of insurance for poor groups; increase pool of insured (and cross-subsidy); link government subsidies to the poor, the beneficiaries, rather than to hospitals, which more often benefit the better off. Strengthen possibilities for cross-subsidies in hospital and basic care systems. Lower cost structures and achieve efficiencies to lower cost of provision (see 3 below).

3. Structural Issues (i) foster competition among

a) providers; and b) suppliers

(ii) reward quality and performance

Strengthen choice among providers by (i) offering choice to the consumers (through health insurance), (ii) providing better patient information, and (iii) introducing enabling regulations. Improve competition to provide delivery systems for services and aggregated purchasing for drugs and other supplies in interlocal health zones (ILHZs) and other levels. Provide incentives for effective ILHZs (more efficient coordination and use of local resources) and for providers to adopt clinical practice guidelines. Provide payment on results, especially for public health programs (for example, immunizations performed).

4. Move to nongovernment provision where more efficient

Encourage corporatization of hospitals and other facilities Facilitate private/ non profit sector investment in provision of health care services, including health facilities.

5. Governance Issues (i) ensure spending is

equitable and efficient (ii) coordination among

providers and financiers (setting standards)

See items 2 and 3. Create appropriate incentives to (i) address the needs of the poor, (ii) improve cost-efficiency in services delivery (allocation of resources), and (iii) improve cost-effectiveness (performance-based allocation of resources). The Project will provide resources to support this activity

6. Lessons from Philippine project implementation (i) ensure resources for

communication among stakeholders are available

(ii) provide resources for sub-project preparation and tendering

(iii) support implementation, especially in the initial stages

Consultant resources and capacity building are available to support the Government in these tasks.

Appendix 4 39

EXTERNAL ASSISTANCE TO THE SECTOR 1. Many recent projects are relevant to the Health Sector Reform Agenda (HSRA) and an extensive aid coordination mechanism is in place. The following initiatives are of particular relevance for the Health Sector Development Program. 2. Asian Development Bank (ADB). The Integrated Community Health Services Project aimed to improve the efficiency and effectiveness of the health care delivery system through a health system development approach. The project was implemented in six provinces from 1997–2003. The Women’s Health and Safe Motherhood Project cofinanced by several development agencies has four components: service delivery, institutional strengthening, community partnership, and policy and operations research. The Early Childhood Development Project is providing comprehensive assistance through the adoption of an integrated approach to child development up to 6 years of age. It is being implemented in three regions with co-funding from the World Bank.

3. United States Agency for International Development. The Health Sector Reform Technical Assistance Project is directed at introducing health sector reforms in the advanced convergence sites. The Decentralized Drug Management System Project supported the assessment of the drug supply situation in the country, and resulted in the development of a process whereby centralized bidding takes place for an annual national supply. Other recent projects have concerned assistance to local government units (LGUs) for hospital management, and social health insurance with emphasis on outpatient services.

4. German Government Assistance. Both technical and financial support are being provided. The four components are currently being implemented in several parts of the country, and concern pharmaceuticals, local health systems development, social health insurance, and family planning and reproductive health.

5. The World Bank. Assistance to the Department of Health (DOH) includes preparation of project proposals for two large projects. The Health Sector Reform Project is intended to strengthen HSRA implementation in four convergence provinces. The Women’s Health and Safe Motherhood Project-II supports the objectives of Women’s Health and Safe Motherhood Project and links them to the broader health sector reform process in selected sites.

6. The Japan International Cooperation Agency. DOH is receiving assistance in support of HSRA implementation through four projects that concern upgrading of facilities and equipment, tuberculosis control, family planning and maternal and child health, and the prevention and control of sexually transmitted diseases. 7. Supplementary Appendix B sets out more details of external assistance to the sector. Detailed discussions have been held on coordination with all funding agencies, resulting in an agreement to harmonize individual project approaches as much as possible while maintaining the medium-term objective to implement a sector approach under the leadership of DOH. The European Union has expressed its intention to work with the Asian Development Bank on extending activities of the HSDP with grant funds after finalizing its project formulation mission at the end of 2004. A development coordination matrix is set out in Table A4.

Appendix 4 40

Table A4: Development Coordination Matrix

Development Agency

Activities Supported

ADB • Provision of improved primary health care, including maternal and child health

• HSRA implementation, particularly local health systems development WB • HSRA implementation with different geographic focus to ADB

• Early childhood development • Women’s health and safe motherhood • Study of private provision of health services

USAID • Family planning • Tuberculosis control • Expanded role of private sector to support FP and TB control

EU • Reproductive health • Population management

GTZ • Family and reproductive health • Social health insurance • Pharmaceuticals • Local health systems development

KfW • Immunization programs • Social marketing • Family planning and HIV/AIDS prevention • Provision of cold chain equipment, hospital equipment, and essential

drugs JICA • Health and medical care administration

• Rural health promotion • Infectious disease control

AusAID • Capacity building for effective health service delivery at the local level CIDA • Ensuring access of the poor to health and nutrition services like nationwide

TB eradication program, maternal and child health in the Autonomous Region of Muslim Mindanao, and health insurance through cooperatives

• Relief and rehabilitation for evacuees in Mindanao • Improved reproductive health care programs and services

UNDP • Community-based approaches to HIV prevention UNICEF • Health nutrition for women and children UNFPA • Family planning and reproductive health UNAIDS • HIV/AIDS prevention Netherlands • Nutrition planning Spain • Health sector reform

• Upgrading of health facilities • National TB program • Manila Eye Hospital

Source: Asian Development Bank. 2003. Country Strategy and Update, Philippines. 2004-2006. Manila.

Appendix 5 41

PROGRAM POLICY MATRIX1

Actions Completed for First Tranche 2 Action Completed for Second Tranche

A. Health Care Financing Reform

• Philippine Health Insurance Corporation (PhilHealth) submits confirmation of the inclusion of the allocation for the sponsored program in the 2005 budget as submitted to Congress.

• PhilHealth submits a Board resolution to review the policy and structure of premium payment for both the employed sector and the sponsored program.

• PhilHealth develops a plan to establish a routine process of review and adjustment of benefit packages aiming at cost-effectiveness.

MONITORABLE ACTIONS • PhilHealth submits a financing plan showing the

proposed budgetary allocation of national government subsidies for sponsored program in 2005.

• PhilHealth issues a coordination plan for a Department of Social Welfare and Development (DSWD) and Department of Interior and Local Government (DILG)-led regular national enumeration and ranking of all households by an appropriate poverty index developed in conjunction with existing initiatives such as those outlined in DILG Memorandum Circular 92-2003.

• PhilHealth submits a plan, for progressive premium contributions based on capacity to pay.

• PhilHealth prepares an action plan on information campaigns targeting the poor.

• PhilHealth submits an action plan to develop a new insurance scheme for the informal sector through organized group program.

• PhilHealth develops an action plan for a feasibility study on coverage of the five most frequent catastrophic illnesses requiring hospitalization.

• PhilHealth submits an implementation plan for the clinical pathways for 5 high cost volume cases; and their use in accreditation, and post-payment auditing of claims.

• PhilHealth issues an implementation plan for the use of 10 clinical practice guidelines (CPGs) in all accredited hospitals as criteria for accreditation and quality assurance.

• PhilHealth submits confirmation of the inclusion of the allocation for the sponsored program in the 2006 budget as submitted to Congress.

• PhilHealth board approves a new premium policy allowing progressive premium structure.

• Based on a detailed cost database and analysis, PhilHealth board approves a revised payment package.

• PhilHealth publishes a performance report on the status of the utilization of the 10 CPGs for quality assurance and accreditation.

MONITORABLE ACTIONS • PhilHealth submits their financing plan, which allocates

subsidies for the sponsored program in 2006. • PhilHealth submits a Board-approved Medium Term

Plans (MTPs) for 2005–2012 including actuarial forecast on revenues and payments.

• PhilHealth develops local government unit (LGU) database monitoring participation in sponsored program and a mechanism of improved targeting, monitoring and evaluation, and tests it in three project LGUs.

• PhilHealth board approves a progressive premium contribution scheme based on individuals' capacity to pay for poor households under the poverty line but ineligible for sponsored program.

• PhilHealth concludes designed information campaign. • PhilHealth board expands PhilHealth Organized

Groups Interface (POGI) for national implementation. • PhilHealth and organized groups in informal sector

develop a memorandum of agreement (MOA) in all Health Sector Development Program (HSDP) provinces to implement Organized Group Program.

• PhilHealth publishes a report on status of CPG use in accredited hospitals.

B. Hospital Reforms

• Department of Health (DOH) develops an action plan to prepare standard guidelines to institutionalize governing boards, including ways to select and train board members and terms of reference of governing boards. Governing boards must include consumer representatives and develop an annual business plan.

• DOH designs a unified management information system for pilot testing and enters into an MOA with selected hospitals for test.

• DOH issues an AO to adopt a policy on governing boards of all public hospitals.

• DOH issues an AO to adopt performance-based

1 Detailed matrix setting out objectives and actions in more detail is set out in Supplementary Appendix D. 2 Monitorable actions are not tranche release conditions. Second tranche monitorable actions constitute Program

End Conditions.

42 Appendix 5

Actions Completed for First Tranche 2 Action Completed for Second Tranche

• DOH issues an administrative order (AO) setting out a policy for a unified management information system (UMIS), including systematic monitoring and evaluation of finances and management of all public hospitals

• DOH submits a plan and terms of reference to develop a policy framework for performance-based allocation of subsidies to DOH hospitals.

• DOH submits draft guidelines on rationalizing LGU hospitals, based on need, using an objective criteria such as utilization rate and geographic access.

MONITORABLE ACTIONS • DOH develops a set of waste management guidelines. • DOH incorporates in their budget in the 2005 General

Appropriations Act submitted to Congress, giving authority to DOH hospitals to retain and utilize revenues.

• DOH submits guidelines on basic principles to earn, retain and use revenues.

allocation of subsidies for 2006. • DOH issues AO to state a policy on rationalizing local

public hospitals based on need. MONITORABLE ACTIONS

• DOH issues an AO to implement the public and private hospital waste management guidelines. DOH completes a human resource assessment for 30% of DOH hospitals.

• DOH evaluation report on progress and experience of corporatizing the two selected DOH hospitals.

• DOH implements guidelines on revenue retention for DOH hospitals.

• DOH submits three LGU ordinances authorizing provincial hospitals to earn, retain, and use their revenues.

• DOH issues an AO on implementation of continuing quality improvement (CQI) and use of monitoring tools in all DOH hospitals.

• PhilHealth endorses CQI as a criteria for accreditation of all hospitals.

• DOH completes the performance evaluation system. • DOH submits an action plan to assess hospital staff

requirements based on expected case load and service volume, identify training requirements, and design hospital staff performance evaluation system.

C. Public Health Reforms

• DOH issues an AO to adopt the revised expenditures targets for public health spending and hospital-based services.

• DOH develops a framework to establish long term performance-based budgeting for priority public health programs.

• DOH revises Philippines National Drug Formulary to include contraceptives (pills, injectibles, and IUDs).

MONITORABLE ACTIONS • DOH drafts a bill for Congress review to institutionalize

long-term performance-based budgeting for priority public health programs.

• DOH submits an action plan to set a national target for increasing the share of public health expenditures for public health programs.

• DOH issues AO to make a policy statement for contraceptive self-reliance strategy, targeting poor women.

• DOH issues a plan setting out policy for reviewing the current primary health care services and recommend necessary adjustments.

• DOH issues AO on partnerships with the private sector for delivery of public health programs, specifically tuberculosis and family planning.

• DOH and selected private health organizations signs an MOA on public-private partnerships on tuberculosis and women's health and safe motherhood programs.

D. Regulatory Reforms

• DOH develops an action plan to review and revise the existing laws (e.g., Hospital Licensing Act, Food and

• Drug Regulation Act), and proposes amendments.

• DOH drafts a bill for Congress review proposing amendments of the mandates of DOH regulatory

• agencies to increase efficiency in health care provision.

Appendix 5 43

Actions Completed for First Tranche 2 Action Completed for Second Tranche

• DOH submits an action plan to strengthen DOH's certification guidelines for primary health service providers based on service capacity and quality.

• DOH develops an action plan to develop guidelines to improve controls over drug prices.

• DOH issues an AO on certification mechanism for • primary health care services providers based on • service capacity and quality. • DOH issues an AO and new regulations on drug

management in order to reduce drug prices. MONITORABLE ACTIONS

• DOH reviews AO revising licensing and accreditation standards and criteria to support reforms.

• DOH issues guidelines for the selected, most frequently used drug groups

E. Local Health Systems Reform

• DOH issues guidelines on (i) ILHZ governance, (ii) resources sharing arrangements among participating LGUs, (iii) promotion of core referral system, (iv) pooled procurement of drugs, (v) promoting private-public partnership, and (vi) development of strategic business plans for health services delivery.

• DOH, PHIC and LGUs approve an MOA, which commits to (i) establishing ILHZs, (ii) enrolling the poor in PHIC indigents program, (iii) setting up enrollment centers, and (iv) upgrading strategic health facilities to meet PHIC accreditation and licensing requirements and DOH certification standards for RHUs and BHSs.

• DOH submits standard MOA on establishment of ILHZ. • DOH develops guidelines for incentives for sustaining

effective operations of ILHZs.

• LGUs sign an MOA to establish ILHZ in at least three of the 13 areas identified by DOH in five project provinces.

• To issue licensing and accreditation of ILHZ as an integrated network including private health services providers (system accreditation), PHIC approves accreditation criteria for local health systems and DOH approves licensing standards for ILHZ.

MONITORABLE ACTIONS • At least three ILHZ's business plans in project

provinces developed for 2006. • DOH issues an AO to approve incentive schemes

supporting sustainable operations of ILHZs. • To convert EO 205 (1999) that mandates DOH and

DILG to form national health planning committee and ILHZ into a Republic Act, DOH submits a draft plan for a Congress review.

F. Improving Health Sector Governance • DOH develops action plan and TOR to conduct a

comprehensive need assessment and develop a capacity development plan, and distribution of health human resources.

• DOH initiates an EO to establish a process whereby short- and medium term plans of DOH and LGU health agencies are reconciled with updated HSRA.

• DOH develops a framework for consumer participation in planning and evaluating health sector activities and performance; and standard instrument to measure consumer participation.

• DOH develops a comprehensive plan for health human resource assessment and capacity development, and approves it.

• DOH issues the first update of short- and medium-term plans for DOH and project provinces in support of HSRA implementation.

• DOH through a consultation process with relevant stakeholders develops a standard instrument for measuring the effectiveness of consumer participation, and tests and approves it.

MONITORABLE ACTIONS • DOH reviews AO on CQI and in participating

provinces, supports the implementation of CQI programs.

• DOF and DOH shall submit a report on the investment in the health sector, including proceeds of the program loan in support of the HSRA and policy implementation.

Appendix 6 44

Appendix 6 45

Appendix 6 46

Appendix 7 47

SECTOR FINANCING AND TARGETS A. Health Sector Expenditure 1. The recurrent expenditure for health services was 96% (65% personnel salaries and 35% maintenance and other operating expenses), compared with an average of 4% in development expenditure from fiscal year (FY) 1998 to FY2001 (Table A7.1). Overall, the total health sector budget (both revenue and development expenditures) has increased by 8% per year.

Table A7.1: Health Sector Budget by Expenditure Type, FY1998–2001 (P million)

Item FY1998 FY1999 FY2000 FY2001 1. Revenue Expenditure 31,496 34,227 45,391 39,357

a. Personal Salaries 20,704 22,269 26,522 26,340 b. Maintenance, Operating and Other Expenses 10,792 11,958 18,870 13,257

2. Development Expenditure a. Capital Outlay 2,252 1,970 1,302 884

Total Health Sector Expenditure 33,748 36,198 46,693 40,482FY = fiscal year. Source: 1991–2001 Philippine National Health Accounts, National Statistical Coordination Board, December 2001, and April 2003. 2. In 2001, total national health expenditure was 3.5% of gross national product.1 The public sector provides both public health care services and personal care services, with the Department of Health (DOH) and local governments as the main players. DOH allocates the bulk of its expenditures to personal care services, and the local governments’ collective resources are spent on public care services. In terms of level of care, DOH spending goes primarily to tertiary care (personal care), while that of the Local Government Units (LGUs) goes to primary and secondary care (public health). In terms of functions, DOH allocates roughly the same budget shares to personal services and maintenance, operating, and other expenses (MOOE). In contrast, the bulk of LGU spending goes to personal services: resources are insufficient for drugs, medicines, supplies, and facility improvements. B. Adjustment Costs 3. The adjustment costs for the reform program are estimated at $280 million over 3 years (Table A7.2). 4. With the Health Sector Development Program (HSDP), efficiency of health spending will be improved through three main mechanisms. Fewer staff will be necessary to operate the system as a result of revised norms (staff size; doctors and nurses to patient ratios, number of days per stay). Per person expenditure on health operating costs is expected to decrease as a result of increased utilization of lower level facilities, and purchaser systems reform in social insurance. The HSDP will encourage a pro-poor restructuring of health budgets. Health spending will be better targeted as a result of the shift from personal care (tertiary level) to public health support (i.e., vertical programs for tuberculosis, malaria, purchase of drugs, surveillance, expansion of public health facilities).

1 National Statistic Coordination Board. 2003.

Appendix 7 48

Table A7.2: Reform Cost Estimates, 3-Year Period

($ million) Item Cost Promotion Participation, Linkages, and Public Accountability 10.00 Public Expenditure Reform in the Sector A. Rationalize health sector financing 8.00 B. Increase coverage of the poor 35.00 C. Increase share of public health programs and primary health care

47.00

Subtotal (1) 90.00 Sector Rationalization A. Upgrade referral system and facilities rationalization 160.00 B. Hospital management reform 5.00 C. Promote service integration in local health systems 5.00 Subtotal (2) 170.00 Cost-Efficiency in Health Services A. Quality improvement and drug regulation 4.00 B. Improvement in health care financing 6.00 Subtotal (3) 10.00 Total 280.00

Source: Asian Development Bank estimates based on data from the Department of Finance. 5. Health care financing will be rationalized through establishment of management information systems connecting the Philippines Health Insurance Corporation (PhilHealth) with DOH and hospitals, establishment of additional collection centers, technical assistance for developing and pilot testing new insurance schemes and studies, incremental staff, additional offices, community-based re-insurance, and licensing and accreditation support. Subsidies will be provided increase social insurance coverage of the poor (assuming 25% of the population or 21.5 million people). Further structural adjustments will be achieved with a view to encouraging the mobilization of extrabudgetary resources, granting hospital autonomy in managing revenues generated, and supporting the establishment of local health boards. 6. Taking into consideration the high capital and recurrent costs of health facilities, the Government will support the establishment of interlocal health zones (ILHZs) by improving and integrating health referral systems (upgrading core referral hospitals, and satellite barangay health stations and rural health units). Under the proposed reforms, higher-level health facilities are to be rationalized in favor of public health and secondary facilities. HSDP implementation will involve a radical overhaul of management processes at hospital and public health facilities along with considerable strengthening of capacities for designing, managing, and implementing health sector reforms. Through the Health Sector Reform Agenda, the Government is committed to support moves toward self-management and autonomy of health institutions at all levels. Participation, linkages, and public accountability will be institutionalized. Cost containment, output, performance-based funding mechanisms will become the basis of resource allocation. Finally, quality improvement and drug regulation will be reformed through clinical practice guidelines, procurement schemes, competitive pricing, devolution of Bureau of Food and Drugs, and establishment of national drug board. More details of sector financing and financing projection are in Supplementary Appendix B.

Appendix 8 49

LIST OF INELIGIBLE ITEMS

1. The proceeds of the loan will be utilized to finance the foreign exchange expenditures for the reasonable cost of imported goods (excluding any duties or taxes) required during the execution of the Health Sector Development Project. All imported goods financed from the proposed loan must be produced in, and procured from, Asian Development Bank (ADB) member countries. 2. Notwithstanding the provisions of para. 1, no withdrawals will be made from the loan proceeds for

(i) expenditures for goods included in the following chapters and headings of the Customs Coordination Council Nomenclature, Alphabetical Index to the Nomenclature and the Explanatory Notes (English Text), amending Supplement No.15 Customs Coordination Council, Brussels, 2nd Edition, June 1978 as designated by ADB by notice to the Borrower:

Chapter Heading Description of Items 22 22.03–22.10 Alcoholic beverages 24 24.01 Tobacco, unmanufactured tobacco refuse 24 24.02 Tobacco, manufactured (whether or not containing

tobacco substitutes) 28 28.50–28.52 Radioactive and associated materials 71 71.01–71.04 Pearls, precious and semiprecious stones,

unworked or worked 71 71.05–71.06 Jewelry of gold, silver, or platinum group

71.09–71.15 Metals (except watches and watch cases) goldsmiths’ or silversmiths’ wares (including gems)

71 71.07–71.08 Gold, nonmonetary (excluding gold ores and concentrates)

84 84.59 Nuclear reactors, and parts thereof, fuel elements (cartridges), nonirradiated for nuclear reactors

(ii) expenditures for goods intended for a military or paramilitary purpose or for

luxury consumption; (iii) expenditures for pesticides categorized as extremely hazardous or highly

hazardous in Class 1a and 1b, respectively, of the World Health Organization’s Classification of Pesticide by Hazard and Guidelines to Classification 4;

(iv) expenditure for goods supplied or to be supplied under a contract that any national or international financing institution or any other financial agency has financed or agreed to finance including any contract financed or to be financed under any loan from ADB; or

(v) expenditures incurred more than 180 days prior to the date of loan effectiveness.

Appendix 9 50

SUMMARY INITIAL ENVIRONMENTAL EXAMINATION A. Environmental Examination of the Project

1. Introduction

1. The proposed Health Sector Development Project (HSDP) is intended to support the implementation of the Health Sector Reform Agenda (HSRA) of the Department of Health (DOH) and to enhance access of the poor to essential health services. In keeping with the thrusts and objectives of HSRA, the Project will focus on the implementation of reform in five areas, namely (i) hospital reforms, (ii) public health reforms, (iii) health care financing reforms, (iv) local health systems development, and (v) regulatory services reforms.

2. The Project is targeting five preselected provinces: Ifugao, Ilocos Norte, Nueva Vizcaya, Oriental Mindoro, and Romblon. The Project’s three components–health sector governance, hospital reform, and local health systems reform have environmental impacts.

3. The procedure adopted to identify all significant environmental impacts from different stages of subproject development1 is contained in the Asian Development Bank (ADB) Environmental Guidelines for Selected Infrastructure Projects (Checklist of Environmental Parameters for Urban Development Projects), and the results were checked for consistency against the new guidelines, except for the Sapalibutad and Pulongbulo subprojects where ADB’s Environmental Assessment Guidelines were used. A more detailed description of environmental issues relating to the Project and a detailed initial environmental examination for a typical interlocal health zone are set out in Supplementary Appendix E.

2. Description of the Project and Environment

4. Subprojects will involve small-scale construction and civil works such as buildings, local roads and drains. Most are likely to improve the environment. All subprojects generate small, but significant environmental impacts during construction. The proposed works by their very nature mitigate environmental impacts and reduce the inherent health risks attributable to unplanned development of health facilities. The environment of the subproject sites is normally urban, albeit poorly serviced. No significant species of flora or fauna are expected to be found. Topography varies, but is generally flat. Soil conditions vary greatly.

3. Potential Environmental Impacts and Mitigation Measures

5. Impacts associated with small-scale civil works and small medical facilities common to the subprojects, and recommended mitigation measures, are set out in Table A9.1. These recommended measures are simple and easy to integrate in the feasibility and detailed engineering studies.

4. Institutional Requirements and Environmental Monitoring

6. Because subprojects will normally not have significant environmental impacts, participating Local Government Units (LGUs) will be required to obtain either certificates of non coverage or environmental compliance from the regional Environmental Management Bureaus of the Department of Environment and Natural Resources. This will require consultant support 1 Including location, design, construction, and operation stages.

Appendix 9 51

to the unified project management unit (UPMU). The component of the investment loan supporting DOH will provide this, while institutionalizing the capacity within DOH. 7. The UPMU will not approve subprojects without the appropriate environmental clearance and environmental management plan. The steering committee will monitor compliance. Both the environmental management and monitoring plans are set out in Supplementary Appendix E. The investment process is consultative, and project interventions will be discussed with the community concerned.

Table A8:1 Environmental Impacts and Typical Recommended Mitigation Measures for the Health Sector Development Project

Issue Degree of Significance A. Preconstruction Phase 1. Land and

Resource Use No impact is projected as the Project involves only upgrading of existing facilities. No additional facilities will be constructed; therefore, no additional land is required.

2. Water Quality Since the proposed intervention only entails the rehabilitation and upgrading of existing facilities, it is not projected to impact on the water quality in the area.

3. Air Environment Levels of Total Suspended Particulates (TSP), SOx and NOx will increase as a result of the operation of equipment and machinery and the increase in volume of vehicular traffic. However, this impact is temporary and short-term in nature, and is considered insignificant considering the project type and scale.

4. Noise Level The operation of equipment and machinery and the increase in the volume of vehicular traffic in the area will inadvertently result in increased levels of noise. However, this is temporary and short-term and is, therefore, an insignificant impact.

5. Floral and Faunal Communities

Since no additional land is required, clearing of vegetative cover will not be necessary. Habitat for faunal communities in the study area will not be affected.

B. Construction Phase 1. Land and

Resource Use No impact is projected on this parameter as the Project involves only upgrading of existing facilities. No additional facilities will be constructed, therefore no additional land is required.

2. Water Quality Since the proposed intervention only entails rehabilitating and upgrading existing facilities, water quality in the area will not be affected.

3. Air Quality Levels of TSP and other gaseous materials, such as SOx and NOx will increase as a result of the operation of heavy equipment and machinery and the increase in volume of vehicular traffic. Likewise, this impact is temporary and short-term and is considered insignificant.

4. Noise Level

The operation of equipment and machinery and the increase in the volume of vehicular traffic in the area will inadvertently result in increased levels of noise, but this is a temporary impact and short-term. It is a significant impact.

5. Floral and Faunal Communities

Since no additional land is required, no vegetative cover will be cleared. Habitat for faunal communities in the study area will not be affected.

C. Operation and Maintenance Phase 1. Land and

Resource Use No significant impact.

2. Water Quality The Project will not have a significant impact on the water resources in the area during its operation.

3. Air Quality During this phase of the Project, the volume of vehicular traffic is projected to increase. Consequently, emissions from these sources will also increase, primarily SOx and NOx. The level of this impact, however, is projected to be lower than during the previous phases (pre-construction and construction) of the Project. Owing to the project type and scale, this impact is insignificant.

4. Noise Level The operation of the rehabilitated facilities will have no significant impact on the noise levels in the area.

5. Hospital Waste During the operation phase of the proposed intervention, an increase in patients serviced is anticipated. Consequently, an increase in hospital waste generation is projected. This impact is significant.

Floral and Faunal During this phase of the Project, impacts on the terrestrial ecology of the Project 6.

Appendix 9 52

Issue Degree of Significance Assemblages area are minimal to nil. No trees will be cut or vegetative cover cleared during this

phase. Replanting of floral assemblages will be undertaken along the alignment. Socio-economic

effect The upgrading of the health facilities will result in better delivery of services and result in a healthy population, ultimately leading to a better quality of life.

7.

5. Public Consultation and Information Disclosure

8. Because subprojects for the project loan have not been finalized full community consultation was not possible. Pilot site investigations included opportunities for the public to participate in the design process of the subprojects. 9. Participating LGUs will incorporate the process of consultation in their activities. The LGUs concerned will ensure that all those affected, including owners of assets and occupants of private lands affected by right-of-way acquisition and other physical developments in relation to the proposed subproject are properly consulted. Individual visits and consultation meetings were conducted. Minutes of the meetings and agreements reached will be properly documented, including the master list of people to be affected.

6. Findings and Recommendations

10. The assessment and evaluation of the interventions showed that none would require the preparation of an environment impact assessment. No interventions or activities proposed can be considered to be environmentally critical or are projected to create significant adverse or negative impacts on the environment. However, potential adverse impacts of some of the proposed activities/interventions, specifically the upgrading of existing health facilities, may to some extent be significant in degree, albeit temporary in nature, localized in scope, and would not have long-term deleterious impacts on the receiving environment. Moreover, these impacts are avoidable and can be mitigated through proper planning and the employment of efficient construction methodologies. Positive socio-economic impacts are predicted to occur as a result of the implementation of the activities/interventions. This will result in better living conditions for the poor and vulnerable. Nevertheless, it is recommended that an initial environment examination of the specific subprojects be carried out during project implementation once the specific facilities and their sites are identified, for a more detailed assessment of probable impacts of the subprojects.

7. Conclusions 13. The conclusion of the assessment is that the Project is expected to have a positive impact on the environment, in particular because of improvements to neighborhood infrastructure and because of improved awareness of the correct procedures for handling hospital waste. Impacts during construction are expected to be minor, temporary and adequately addressed by DOH, UPMU staff, and consultant resources available for the Project. B. Environmental Assessment of the Policy Matrix

1. Description of Policy Interventions 14. The policy matrix set out in Appendix 5 sets out the reforms required in each of the five areas. The reforms, with one exception, involve reallocating existing health budgets to more

Appendix 9 53

pro-poor use and increasing the efficiency of health care provision. The exception is, within the Hospital Reforms component, the bolstering of regulations on the handling of hospital waste. The policy interventions and their impacts are set out in the matrix in Table A9.2.

Table A9.2: Policy Interventions and Impacts Policy Intervention Economic and Social

Outcomes Environmental Impacts Mitigation

Measures Health Care Financing Reform

Increase coverage and level of services to the poor

None None

Hospital Reforms More efficient local hospitals offering higher quality services especially to the poor

Hospital waste management will be improved Where new investment is catalyzed some minor, particularly construction, impacts may occur

Project loan will institutionalize appropriate procedures

Public health reforms

More funding for public health especially for the poor

None None

Regulatory Reforms Lower cost provision of services

None None

Local Health System Reform

More efficient local health services offering higher quality services especially to the poor

Where new investment is catalyzed, some minor, particularly construction, impacts may occur

Project loan will institutionalize appropriate procedures

Health Sector Governance

Supports the previous and is focused on improving efficiency in the health care system

None None

2. Environmental Management Plan

15. The only potential adverse environmental impacts are associated with subcomponents of two components. These components are under the supervision of DOH and the participating LGUs. The environmental management plan will thus be focused on improving the capacity of DOH and participating LGUs to correctly identify and manage environmental issues. This plan will be formulated in detail by consultants working under the project loan.

3. Conclusion 16. The conclusion of the assessment is that the HSDP is expected to have no impact on the environment. Where it catalyzes new development it will normally have a positive impact on the environment, in particular because of improvements to neighborhood infrastructure and because of improved awareness of the correct procedures for handling hospital waste. Impacts during construction are expected to be minor, temporary, and adequately addressed by the environmental management guidelines prepared by consultants funded under the Project.

Appendix 10 54

COST ESTIMATES AND FINANCING PLAN ($ '000)

Foreign Local Total Foreign Local Total Foreign Local TotalItem Exchange Currency Cost Exchange Currency Cost Exchange Currency CostA. Investment Cost

1. Civil Works 0.00 8.98 8.98 0.00 5.83 5.83 0.00 3.14 3.14 2. Equipment 2.55 1.37 3.92 2.55 0.00 2.55 0.00 1.37 1.37 3. Consultant Services

a. International Consultants 0.73 0.00 0.73 0.73 0.00 0.73 0.00 0.00 0.00 b. Domestic Consultants 0.00 0.33 0.33 0.00 0.00 0.00 0.00 0.33 0.33

4. Training and Workshops a. Overseas Training 0.20 0.00 0.20 0.20 0.00 0.20 0.00 0.00 0.00 b. In-country Training 0.00 1.04 1.04 0.00 0.00 0.00 0.00 1.04 1.04

5. Social Marketing 0.00 0.50 0.50 0.00 0.00 0.00 0.00 0.50 0.50 6. Research and Studies 0.22 0.50 0.72 0.22 0.00 0.22 0.00 0.50 0.50 7. Project Management 0.26 1.05 1.31 0.26 0.00 0.26 0.00 1.05 1.05

8. Taxes and Dutiesa 0.00 1.29 1.29 0.00 0.00 0.00 0.00 1.29 1.29 Subtotal 3.95 15.06 19.01 3.95 5.83 9.79 0.00 9.22 9.22B. Contingenciesb

1. Physical Contingencies 0.13 0.52 0.64 0.13 0.29 0.42 0.00 0.23 0.23 2. Price Contingencies 0.00 1.51 1.51 0.00 0.63 0.63 0.00 0.88 0.88

Subtotal 0.13 2.02 2.15 0.13 0.92 1.05 0.00 1.10 1.10C. Interest and Commitment Chargesc 2.16 0.00 2.16 2.16 0.00 2.16 0.00 0.00 0.00 Total Cost 6.25 17.08 23.33 6.25 6.75 13.00 0.00 10.33 10.33a Taxes and duties are computed at 10% civil works and equipment costs.

c Interest and commitment charges are based on 5-year LIBOR-based swap rate of 4.36% (inclusive of 0.4% spread), and 0.75%, respectively.Source: Asian Development Bank estimates.

b Physical contingency is estimated at 5% of civil works and equipment costs. Price contingency is estimated at 0% of foreign exchange cost and over 5% of local currency cost during the six-year project period.

Total ADB Government

Appendix 11 55

FINANCING ARRANGEMENTS AND FUNDS FLOW

Project Loan

Na

Coun

Loca

Loan

Ag

reem

ent

Subs

idia

ry

Loan

Ag

reem

ents

i =

9%

(1

0/3

yrs)

Department of Health

t

Asian Development Bank

Department of Finance

G

Ben

Participati

Municipal Finance Corporation

Loan Account

Loan Account

tional Government

terpart Contributions

l Hospital and Health Center Upgrading

Nat

iona

l Gov

ernm

ent

eficiaries Qualified Poor

ng Local Government Units

Loan Accoun

interest rate mark-up ≈

cont

ribut

ion

DO

H fa

cilit

ies

Loan Repayments or community input

Guaranty = 1% GRT = 5% Forex cover =

i = OCR rate +

front-end fee + commitment fee

30/6 yrs

National overnment

Appendix 12 56

IMPLEMENTATION SCHEDULE

Year Component/Major Activity 1 2 3 4 5 Component 1: Capacity Building for Health Sector Reform Agenda

Financing and Regulatory Reforms Program design Training implementation Installation and Updating Public Health Program (including community-based referral system)

Program design Pilot-testing Evaluation Expansion Component 2: Hospital and Local Health Systems Interlocal Health Zone Organization Health Sector Reform Comprehensive Plan Development Availment of Matching Grant Program assistance Design of specific reforms Implementation of the Reform Plan Upgrading/construction of facilities Procurement of equipment Training/staff development activities Installation of systems Establishment of public-private partnership Compliance with Social Security certification,

PhilHealth accreditation, and licensure requirements

Social marketing Evaluation of pilot innovations Expansion of innovations in other areas Component 3: Strengthening Department of Health/Centers for Health and Development (CHD) Institutional and Regulatory Capacity

Policy review and revision Protocols and standards development Reengineering/reorganization of CHD Staff development/retooling (national and regional) Automation of regulatory systems Consultative meetings/technical conferences Procurement of testing equipment Upgrading of Regional Hospital (Region 2) Setting Up of Resource/Information Center (national) Research and special studies Project Management

Project Team mobilization Setting up of Project Management Offices Project monitoring and annual planning Baseline, Midproject, and End-of-Project Evaluation

PhilHealth = Philippine Health Insurance Corporation.

Appendix 13 57

CONTRACT PACKAGES

Number of Mode of Activities Contracts Procurement

A. Civil Works 1. Hospitals-Renovation a. Tertiary Hospital-Veteran's Hospital 1 LCB 1,071 b. Core Referral Hospital Multiple LCB 13,187 c. Specialty Center Multiple LCB 514 d. Extension Hospital Multiple LCB 360 e. Rural Health Unit Multiple LCB 3,471 f. Barangay Health Station-New Multiple LCB 1,851 g. Barangay Health Station-Upgrade Multiple LCB 357 2. National HSRA Resource Center 1 LCB 1,250 3. UPMU Office 1 LCB 54 4. Project Management 1 LCB 27 Subtotal 22,142B. Equipment 1. Vehicles Multiple ICB/IS 513 2. Medical Equipment Multiple ICB/IS 5,766 3. Office Equipment Multiple LCB/DP 2,221 Subtotal 8,500C. Materials 1. IEC Materials (print, audio, and others) Multiple LCB 488

Aggregate Amount($'000)

DP= direct purchase, HSRA = Health Sector Reform Agenda, ICB = international competitive bidding, IEC =information, education, and communication, IS = international shopping, LCB=local competitive bidding, UPMU= unified project management unit.

Appendix 14 58

OUTLINE TERMS OF REFERENCE OF CONSULTANTS A. Introduction 1. Under the health sector governance component of the Project, some 86 months of international and 437 months of domestic consulting will be required to support (i) implementation of the Health Sector Reform Agenda, and (ii) detailed design and implementation of the investments under the project loan. The unified project management unit of the Department of Health (DOH) will undertake the required coordination. B. Improving Health Sector Governance 2. Organizational Development Specialists (20 person-months international, 14 person-months domestic). The consultants will (i) coordinate project implementation, monitoring, and evaluation; (ii) review organizational cultures in clinical settings and team work in each major agency in each convergence site; (iii) develop workshops and action plans for individual agencies, and for groups of agencies that need to work closely together to implement program reforms, care pathways, public and private sector collaboration, improve consumer participation, and strengthen team work across health professions and care settings; and (iv) help implement action plans and establish annual surveying of organizational effectiveness including consumer participation. The specialists will also help design and support implementation of a DOH research facility, institutionalize capacity building, and support monitoring and information dissemination tasks. C. Social Health Insurance Reforms 3. Social Health Insurance Specialists (15 person-months international, 46 person-months domestic). The consultants will (i) work with the Philippines Health Insurance Corporation (PhilHealth) and agencies in the convergence sites to review and refine processes meant to increase membership of the national health insurance scheme, and to review and modify services covered by the national health insurance scheme, with the aim of adding and deleting on the basis of value-for-money; and (ii) in particular, review and refine approaches to increase enrolment such as identifying target groups, marketing membership, adjustments to benefits packages and premium rates, access to enrolment and premium payment centers, and facilitation of group enrolment. 4. Health Financing Specialists (4 person-months international, 18 person-months domestic). The consultants will (i) work with central agencies and agencies in the convergence sites to design and implement an enhanced method of subsidization of health insurance from general government revenue; (ii) review and refine methods of establishing and maintaining community-based (local) complementary insurance schemes that cover important costs such as safe water, emergency transportation, and outpatient drugs; (iii) analyze and then recommend adjustments to ensure the financing from all sources is effective in terms of progressivity of financing and equity of service access; (iv) design and implement changes to increase local consumer involvement in the governance of health financing and health insurance in particular; and (v) identify important investments in infrastructure that are required to support increased social health insurance, as inputs to service planning and infrastructure development. 5. Health Financing Specialists (1 person-month international, 18 person-months domestic). The consultants will (i) review activities of other health insurers, and consider how

Appendix 14 59

they might be involved in complementary reforms such as the use of care pathways especially targeted for the poor and indigenous groups; (ii) review previous design work by PhilHealth on a new supplementary benefits package, and propose modifications as appropriate; and (iii) help PhilHealth develop an implementation plan, including costing and marketing. D. Health Care Purchasing 6. Social Health Insurance Specialists (2 person-months international, 6 person-months domestic). The consultants will (i) work with PhilHealth and DOH to develop a general classification of hospital services for payment purposes, together with a process to refine it over time; (ii) help design a plan to move to per case payment for all inpatient services over a transition period; (iii) design and help with the implementation of at least one new service package that involves care in both a hospital and a nonhospital setting, based on a costed care pathway; and (iv) design and help with the implementation of at least one new service package with a method of payment that encourages a shift from inpatient to same-day or outpatient care, based on a costed care pathway. 7. Social Health Insurance Specialists (1 person-month international, 3 person-months domestic). The consultants will work with PhilHealth and relevant care provider agencies to develop a strategy for progressive refinement of contracting methods, with the emphasis on applying competitive bidding by care providers where this would be beneficial. E. Local Health Systems Development 8. Health Economists (4 person-months international, 12 person-months domestic). The consultants will (i) help local agencies design and implement interlocal health zones (ILHZs) that are consistent with care delivery strategies; (ii) undertake analyses to ensure that account is taken of the need to vary the size of the ILHZ to reflect the aspects of particular types of services; (iii) establish the general structure of contracts to be used between LGUs, between LGUs and service providers, and between service providers that provide sufficient control without excessive administrative overheads; (iv) establish the service classifications to be used in the contracts and methods of payment rate setting in the interests of performance-based payment; (v) design and implement a simple process of measurement of actual levels of service provision for the purpose of equitable sharing of costs; and (vi) provide assistance in establishing methods of control of care provider capacity including the acquisition of expensive technologies. 9. Health Economists (1 person-month international, 12 person-months domestic). The consultant will (i) help national and local agencies develop an equitable method of sharing health financing; and (ii) develop and test a method whereby available funding from all sources can be pooled at the local level, and then distributed to care providers according to a single and transparent set of allocation rules. 10. Health Contract Law Specialists (1 person-month international, 6 person-months domestic). The consultants will (i) review proposed contracts between agencies and care providers in ILHZs; (ii) assess consistency with existing laws and regulations, and advise on adjustments to the proposed contracts or laws and regulations; and (iii) support the design, implementation, and evaluation of the ILHZ contracts.

Appendix 14 60

11. ILHZ Implementation Team (48 person-months domestic). The team will consist of a health facilities planner; an engineer, an environmental specialist; specialists capable of addressing social, resettlement, indigenous peoples, and gender issues. This team will help LGUs plan, cost, document, tender, and implement improvements to ILHZ facilities. The environmental specialist will ensure the required environmental assessment is undertaken and the identified remedial measures are implemented, including assistance to LGUs to prepare and implement an environmental management plan and monitoring program for subproject design, construction, and operation, particularly for hospital waste management. The gender specialist will ensure the gender action plan is fully implemented. The social and resettlement specialist(s) will ensure the interests of poverty groups are protected and the resettlement framework is followed. F. Hospital Reforms 12. Health Management Specialists (9 person-months international, 43 person-months domestic). The consultants will (i) work with local care provider purchasing agencies, consumer representatives, nonhospital care providers, and hospital managers to agree on goals for refining methods of care provision; (ii) assist care provider agency managers with internal changes, including the implementation of improved methods of management of clinical work and improved financial management; (iii) undertake informal and formal training of care provider facility staff; and design, implement, and evaluate revised management processes at interested facilities; and (iv) identify needs for technical training and ways to address them on a continuing basis through existing formal and informal training and development programs. 13. Health Planners (3 person-months international, 5 person-months domestic). The consultants will (i) review and refine integration across care settings through appropriate financing and referral systems; (ii) develop and test referral guidelines with emphasis on reducing unnecessary referrals to higher levels in the chain; and (iii) design and implement a program that encourages appropriate use of services through consumer advice, care provider incentives, and in other ways. G. Public Health Program Reforms 14. Public Health Specialists (2 person-months each for 2 international; 12 person-months each for 2 domestic). The consultants will (i) work with local agencies and relevant national agencies to design and implement an improved program for tuberculosis control; (ii) ensure appropriate linkages between tuberculosis control programs and those for other infectious diseases; (iii) assist local agencies with the design and implementation of an improved program for reproductive health and family planning programs, and ensure appropriate linkages between them and other activities directed at improved maternal and child health; and (iv) make recommendations regarding revision of resource allocation methods to ensure public health (including primary care) services are appropriately funded. 15. Community Participation Specialists (2 person-months international, 12 person-months domestic). The consultants will (i) assist local agencies with the design and implementation of programs directed at improving the health of poor and indigenous communities, specifically targeting infectious diseases and reproductive health; (ii) assist local agencies with the design and implementation of measures to increase the level of participation of the poor and indigenous communities in planning and managing programs that are appropriate to their perceived and actual needs; and (iii) monitor and evaluate the effects on

Appendix 14 61

community participation and acceptability of services, and recommend corrective actions where appropriate. 16. Health Facilities Planners (2 person-months international, 12 person-months domestic). The consultants will (i) design and implement programs for upgrading assets (buildings and major items of equipment and plant) that are consistent with the service delivery strategy; and (ii) ensure investments in assets are consistent with the long-term needs, and retain flexibility where possible. H. Health Regulation Reform 17. Quality Assurance Specialists (2 person-months international, 12 person-months domestic). The consultants will (i) review current licensing, accreditation, and related external control mechanisms, (ii) design an integrated system of external control that encompasses desirable features of existing mechanisms, (iii) introduce the monitoring of use of care pathways as a core method of quality improvement, and (iv) prepare and distribute operating rules and guidelines. 18. Health Systems Analyst (2 person-months international, 6 person-months domestic). The consultants will (i) review proposals to establish an agency of external control, and make recommendations on its functions; encourage consideration of its role in monitoring of organizational cultures, clinical teamwork, community participation, and external auditing including licensing and accreditation; (ii) prepare a business case for establishing an agency, taking account of related activities already being undertaken by other agencies; and (iii) facilitate collaborative decision making regarding the establishment of an agency, and seek to obtain agreement to an action plan for its establishment. 19. Health Economists (Pharmacology) (2 person-months international, 12 person-months domestic). The consultants will (i) review drug prescribing patterns in the convergence sites and identify problems including underprescribing and overprescribing; (ii) review current guidelines and requirements, and patterns of compliance; (iii) identify and appraise optional ways of improving prescribing practices, including education, financial incentives, and sanctions; and explore ways of encouraging greater use of generic drugs; (iv) design and implement changes; and (v) monitor and evaluate the effects and produce recommendations for future practice. 20. Health Economists (Pharmaceuticals) (2 person-months international, 12 person-months domestic). The consultants will (i) work with local agencies and relevant national agencies to design and implement improved methods of drug purchasing, storage, and distribution; (ii) explore options involving outsourcing and pooled procurement; (iii) help establish and operationalize approaches, such as drug-revolving funds where appropriate; and (iv) appraise the option of devolution of some drug quality control functions to selected convergence sites.

Appendix 15 62

SUMMARY POVERTY REDUCTION AND SOCIAL STRATEGY (SPRSS)

A. Linkages to the Country Poverty Analysis

Is the sector identified as a national priority in country poverty analysis?

Yes

No

Is the sector identified as a national priority in country poverty partnership agreement?

Yes

No

Contribution of the sector or subsector to poverty reduction in the Philippines: The investment loan Project will contribute to improving the health status of the population, particularly of the poor and other marginalized and vulnerable population groups, by implementing a package of reforms that will improve the quality of health care and ensure access of the poor to quality health services. Improved health status of the population will have a positive impact on human capital (the ability to command labor), which is a key asset of the poor. Improved health leads to higher productive capabilities. For women in particular, improved health status and reduced fertility through enhanced family planning services will enhance their individual productivity. In addition, the Project will facilitate the empowerment of poor, marginalized, and vulnerable groups. Their skills and competencies will be developed by supporting community-based organizations to participate in local health planning and to increase representation on local health boards. These capacities become lifelong skills that they can use in negotiating, claim-making, and searching for alternatives to improve their socioeconomic status. The Project directly targets approximately 175,000 poor households or close to a million people in the five project provinces Ifugao, Ilocos Norte, Nueva Vizcaya, Mindoro Oriental, and Romblon (in 2000, the five project provinces had a total population of approximately 2.1 million people, or 400,000 households). These beneficiaries are composed of poor families whose incomes cannot meet the basic food and nonfood requirements, and subsistence poor families, whose incomes cannot meet even basic food requirements. The beneficiaries also include vulnerable groups such as women of reproductive age (15–49 years of age), households headed by women, children under 5, and indigenous people. Of the total number of project beneficiaries, more than half of the female beneficiaries will be women of childbearing age and 13% will be children under 5. The Project will ensure that (i) at least 95% of children in the project areas are fully immunized; (ii) the contraceptive prevalence is increased by at least 15%; (iii) at least 90% of the poor are enrolled in the National Health Insurance Program either as sponsored, or individually paying members; (iv) at least 80% of births are delivered in a certified or accredited health facility and attended by a trained health care professional; (v) at least 70% of the poor and indigenous population are located within 5 kilometers or 1 hour from a primary health care service provider; and (vi) at least 50% of the poor are consulting the barangay health stations (BHS), rural health units (RHUs), or hospital outpatient department for treatment or preventive services. B. Poverty Analysis Targeting Classification The primary source of income in the five provinces is farming, followed by wage employment in both the formal and informal sectors. Other sources of income are largely rental incomes and remittances and subsidies from family members who are working either domestically or abroad. Household expenditure analysis reveals that poor households spend almost 50% of their income on food items. Second to food comes expenditure on production/income-generating related activities. Education expenses come in third. Because of their meager incomes, investing in health is simply not a priority among poor households. Lack of access to quality health services is the common complaint among the provinces. Long distances, bad roads, and inadequate transportation hamper access to health facilities, services and providers. Poverty incidence varies across the five project provinces. Compared with national poverty incidence of 28.4% of families in 2000, three of the project provinces have significantly higher poverty incidences. In 2000, Nueva Vizcaya had the lowest poverty incidence (15.9%), followed by Ilocos Norte (18.2%), while about half of the households in Mindoro Oriental (43.7%), Romblon (55.2%), and Ifugao (55.6%), were considered poor. The percentage of households who will directly benefit from the Project is

Poverty intervention Targeted intervention (M 1–7)

Appendix 15 63

significantly higher in the poorest provinces. The distribution of households directly benefiting from the Project is as follows: 67.8% in Ifugao, 27.5% in Ilocos Norte, 28.3% in Nueva Vizcaya, 46.4% in Oriental Mindoro, and 73.4% in Romblon. The following specific mechanisms are included in the project design to maximize the benefit of the Project for the poor: (i) construction of a total of approximately 160 BHSs, and upgrading and expansion of existing RHUs and BHSs; (ii) establishment of an effective mechanism for identifying and prioritizing the poor and determining their unmet needs for essential health services; (iii) strengthening of organizations/ associations of the poor so that they can be appropriately represented in at least 70% of local health boards in project sites; (iv) training and organization of Barangay Health Workers to promote healthy lifestyles and to disseminate information on essential health services that are made available at BHSs and RHUs in barangays with a majority of poor and/or indigenous people; (v) provision of health insurance coverage for at least 90% of the poor and indigenous people households in the areas covered by the Project; (vi) provision of technical and financial support for community-based health programs and projects targeting poor and other marginalized groups in particular; and (vii) improvement of the capacity of frontline health workers so that the poor can be provided with quality health care. C. Participation Process Is there a stakeholder analysis? Yes No A stakeholder analysis has been prepared. Is there a participation strategy? Yes No A participation strategy has been prepared. Specific design measures have been included in the Project to enhance participation of the beneficiaries, these include (i) establishing a community-based information system to identify and prioritize unmet needs for essential health services, including social health insurance; (ii) strengthening and assisting organizations of the poor to become members of the local health boards. D. Gender Development Strategy to maximize impacts on women: A gender strategy has been prepared. The gender strategy includes the following measures: (i) design and installation of gender-disaggregated community-based information systems in all barangays; (ii) upgrading and expansion of RHSs and BHSs into birthing and lying-in clinics; (iii) conversion of selected health facilities into centers for obstetrics and gynecology, maternal care, women’s diseases, and victims of violence; (iv) expansion of interventions in health care financing to include prenatal care, childbirth, postnatal care, and family planning as part of the insurance package; (v) targeting of poor women and households headed by women as enrollees of PhilHealth’s sponsored program; (vi) capacity building for barangay health workers and family health volunteers in improved primary health care techniques, particularly women's health and reproductive health; (vii) capacity building for women leaders and entrepreneurs in community drug programs and reproductive health; (viii) provision of technical assistance and seed funds for women-initiated and women-managed community-based projects; (ix) equal opportunities for women and men health providers for training, capacity building, and fellowship; promotion of gender awareness and sensitivity among health providers as part of quality assurance; (x) gender awareness and sensitivity among community members in the project sites through inclusion of gender messages in information, education, and communication materials and training; (xi) and enhancement and implementation of Department of Health (DOH) policy on gender, and promotion of gender sensitivity among national, regional, and provincial DOH staff. Has an output been prepared? Yes No See Supplementary Appendix F.

Appendix 15 64

E. Social Safeguards and other Social Risks

Item

Significant/

Not Significant/ None

Strategy to Address Issues

Plan Required

Resettlement

Significant

Not significant

None

Unknown, but unlikely; most civil works will be rehabilitation. The civil works required will involve insignificant resettlement effects as described in the Asian Development Bank (ADB) Handbook on Resettlement, A Guide to Good Practice. Land acquisition will likely affect a very minimal number of households since the land required for new construction is insignificant, and will likely be within existing boundaries. A compensation policy framework and procedural guidelines has been developed (Supplementary Appendix F for Resettlement Framework).

Full

Short

None

Affordability

Significant

Not significant

None

Yes

No

Labor

Significant

Not significant

None

Yes

No

Indigenous Peoples

Significant

Not significant

None

Some project sites include indigenous people. These people are likely disadvantaged because they belong to ethnic minorities or indigenous groups. In fact, the Project will promote participation of these groups through various means: (i) indigenous people will be included in the gathering of data and in participatory focus group discussions and workshops in the preparation the community-based information system to identify their number (population) and determine their unmet needs concerning basic health services and social insurance; (ii) representation of indigenous people will be facilitated at the local health boards; (iii) capacity building of indigenous health workers; and (iv) information, education, and communication specifically targeting indigenous people. An IDPF for the Project has been developed (Supplementary Appendix F).

Yes

No

Other Risks and/or Vulnerabilities

Significant

Not significant

None

Yes

No

Appendix 16 65

RESETTLEMENT FRAMEWORK A. Background 1. The Government of the Philippines has requested a $32.5 loan from the Asian Development Bank (ADB) to undertake the Health Sector Development Program (HSDP). The HSDP includes a civil work component (the Project) aiming at expanding hospitals and expanding or constructing rural health units (RHU) and barangay health stations (BHS) in five candidate provinces: Ifugao, Ilocos Norte, Nueva Vizcaya, Oriental Mindoro, and Romblon. Land acquisition and resettlement (LAR) for the Project is expected to be minimal and, at times, unnecessary. RHUs and BHSs are small facilities requiring no more than 160 m2 and 60 m2 respectively. Hospital expansion may need wider plots, but also in this case is expected to cause impacts below the “severe impact” threshold1 defined by the ADB resettlement policy. Where RHU, BHS and hospitals will be renovated or expanded within the properties of these facilities, LAR will not be needed. B. Compensation Policy Framework and Procedural Guidelines 2. To plan the compensation of project impacts the Department of Health (DOH), the implementing agency, has prepared Compensation Policy Framework and Procedural Guidelines (CPFPG) fitting relevant laws and ADB’s policy on involuntary resettlement as detailed in the Handbook on Resettlement: A Guide to Good Practice. The CPFPG establishes a compensation policy for the Project inclusive of eligibility/entitlement provisions and assurances guaranteeing that eventual donations of land are fully voluntary. The CPFPG also details LAR preparation and implementation procedures and activities. Supplementary Appendix F provides detailed frameworks.

1. Compensation Policy 3. The CPFPG establishes the following policy principles: (i) negative impacts will be minimized as much as possible and, unless absolutely necessary impacts affecting informal settlers will be avoided; (ii) when impacts cannot be avoided compensation will be sufficient to improve or at least restore the pre-project income and living standards of those affected; (iii) lack of formal title to land should not be a bar to compensation or rehabilitation; (iv) compensation activities will be carried out with equal consideration of women and men; the compensation beneficiaries will be the documented owners independent of their gender; (v) the affected persons will be fully informed and consulted on compensation options and resettlement planning; (vi) asset compensation will be provided at market rates (for land and crops) and at replacement rates (for houses and other assets); (vii) compensation, replacement land and rehabilitation provisions/allowances will be provided in full prior to ground leveling and demolition; and (viii) resettlement and compensation costs will be included in subproject budgets. 4. The CPFPG sets eligibility/entitlement provisions for various losses and subsidies. Land losses will be compensated in cash at market rates or through “land for land” arrangements. Full/partial buildings losses will be compensated in cash at replacement rates free of depreciation, demolition expenses, and salvaged materials; crop losses will be paid at market 1 Severe impacts occur when more than 200 national majority individuals or 100 Indigenous Peoples individuals are

affected by losses exceeding 10% of their productive land or income and/or are relocated.

Appendix 16 66

rates, and tree losses will be compensated based on the productive value of each tree. Finally, affected sharecroppers, house renters, relocates, and businesses owners will respectively receive a production allowance covering the value of 1 year produce in affected plots, a rental allowance covering a standard 3 months rent in project areas, a transfer allowance covering transport costs, and a Business losses allowance based on tax declarations or local minimum salaries for each month of interruption of business activities up to 1 year. 5. As it is common in local government unit (LGU) projects in the Philippines, land may be procured through donations. This is acceptable under ADB policy, but only if the donations are demonstrably voluntary. To satisfy this requirement, the CPFPG establishes the following conditions: (i) a donation is to be a donor’s informed decision based on knowledge of his/her entitlement to compensation at market rates and asset compensation amounts; (ii) the donation does not affect the donor’s livelihood; (iii) the plots to be donated are titled, are not rented out, occupied by squatters, or encumbered; (iv) the voluntary nature of the donation is documented by: (a) a signed Deed of Donation; and (b) by a signed statement that the donor is aware of the above conditions. The inclusion of both documents in the LAR plan will be the basis for ADB approval for the plan.

2. LAR Preparation and Implementation: Activities and Procedures 6. CPFPG approval by ADB and LGUs will respectively be a condition for project appraisal and province inclusion in the Project. ADB approval of the LAR plans will be a condition for contract awards; LAR plan implementation will be a condition for civil works initiation. LARP preparation will entail: (i) identification of the plots needed by each subproject; (ii) preparation of an impact assessment/AP inventory; (iii) valuation of affected assets at market value/replacement cost; and (iv) public consultation/information activities. These activities will be carried out by the Municipal Planning and Development Office (MPDO) with Barangay Captains’ assistance. Based on the above activities, the MPDO will prepare a budgeted and scheduled LARP fitting ADB requirements. As it is expected that each subproject will affect less than 200 individuals (and less than 100 in the case of BHS and BHU construction)2 the LARPs will follow in principle a Short LARP format. 7. The overall responsibility for LAR rests on the LGUs. The Municipal Planning and Development Officer, in coordination with barangay leaders, is responsible for LARAP preparation with funds provided by the LGU. LARP preparation/implementation will be based on intense public consultation carried through surveys and meetings and involving EA, LGUs and APs. A summary of the CPFPG will be distributed to all APs. CPFPG and LARPs in Tagalog will be made available to the public in each LGU. The same documents in English will be disclosed on the ADB website. Grievance will be first lodged at the barangay. If no settlement is reached, the grievance may be lodged to the MPDO. If still unresolved, a case can then be lodged at the Provincial Health Office and, if needed, further appealed at the central Project PMO. The last available appeal option will be at the appropriate court of law. The MPDO will monitor LAR implementation quarterly. External monitoring will be assigned to an external monitoring agency (EMA). The MPDOs will report quarterly to central PMO and ADB. EMA reports will be submitted to ADB semi-annually and will be supplemented by a final evaluation report at the end of the Project.

2 ADB policy requires a full LARP when project impacts are severe (see footnote 1).

Appendix 17 67

INDIGENOUS PEOPLES FRAMEWORK1 A. Background 1. In the pre-selected provinces the subprojects may affect Indigenous Peoples (IP). Considering project interventions, negative impacts on IPs will be limited to LAR, which, as already noted, will be minimal, if not unnecessary. In view of this fact, the provisions set out in the CPFPG are deemed sufficient to safeguard not only mainstream Filipinos but also IPs. 2. If the Project’s negative impacts on IPs are extremely small, the positive impacts on them are substantial. On the one hand the construction of new BHUs and BHSs will be carried out in remote areas where IPs have poor access to basic health facilities. On the other, the health services reform pursued by the Project stands to directly benefit IP stakeholders by increasing the availability of doctors in isolated barangays, establishing less discriminatory medical practices and attitudes, and providing health programs and delivery mechanisms better patterned on the needs of specific beneficiaries. In order to ensure that these benefits are systematically extended to IP communities the DOH has prepared an Indigenous Peoples Policy Framework (IPPF) based on a social assessment (SA), relevant local laws, and the ADB Policy on Indigenous Peoples. B. The Indigenous Peoples Policy Framework 3. The IPPF provides a definition of IP, identifies the groups that may be affected by the Project and summarizes SA results and IPPF legal background. The IPPF also details IP policy principles, IP strategy and relative task organization and preparation. 4. IP Policy Principles. The IP policy principles for the Project are: (i) all efforts will be made to distribute project benefits to IP communities;(ii) project interventions will be carried out in full respect of the needs and traditions of the IPs and will not lead to their further marginalization; (iii) IPs will not suffer unmitigated adverse impacts during or after Project implementation; (iv) when medically beneficial, the IPs traditional health practices will be included in Project programs; (v) health information materials provided by the Project will be handed to IP beneficiaries in a language they can understand well and read. (vi) IP representatives will be included in the Project decision-making process; (vii) IPs will be given broad opportunities to participate in Project outputs design and in Project decisions; (viii) the Project will pave the way for the formation/institutionalization of productive partnerships between local governments and IP communities based on principles of equity. 5. IP strategy for the Project. The Project will not have a separate component for IPs. Key to the inclusion of the IPS into the design/implementation of the reformed health services and other Project deliverables will be an intensive participatory process involving both mainstream and ethnic minority people. This participatory program will be carried for the entire duration of the Project through focus groups, community meetings, and questionnaires and will involve IPs both as Project planners and as project beneficiaries. The objective of public participation activities is the incorporation of the needs of each significant social group in project areas, including IPs, into the design/delivery of new health services and into the planning/construction of new health facilities.

1 See Supplementary Appendix F for details.

Appendix 17 68

6. Organization and Responsibilities. Overall responsibility for the preparation and the implementation of Project programs and for ensuring that Project benefits will be extended to eventual IP communities, rests on the Provincial PMU. Data collection, participatory planning activities, and the preparation of annual action plans will be carried out by an NGO, which, in the relevant provinces, will include substantial IP staff. The annual action plans will have to be approved by the Provincial Health Board (PHB) and by ADB. 7. IPPF Preparation Activities. After the establishment of the PMU the first activities will be hiring the NGO that will carry out participatory planning activities, and the preparation of a work plan. In provinces inhabited by IPs, the NGO will include staff from local IP groups and the work plan will have to reflect the assurances established by the IPPF. Following this initial phase project preparation implementation will proceed by including the following tasks:

(i) Data-gathering for the Community Based Information System (CBIS). In relevant

provinces, this task will involve, through workshops, interviews and focus groups, IPs across gender and age boundaries and traditional leaders. CBIS information will include: (a) IP demography and settlement patterns, (b) preferred location of new health facilities, (c) agreed LAR compensation modalities; (d) IP perceptions on the way health services are delivered; and (e) all data needed to develop tuberculosis eradication, health insurance, and reproductive health programs.

(ii) Annual Action Plan preparation. Based on CBIS data, the NGO under the supervision of

the PMO will prepare a scheduled and budgeted Annual Action Plan (AAP) detailing all activities to be carried out in the year to follow, including, when relevant, specific arrangements for IPs.

(iii) In IP provinces, the draft AAP will be disclosed for comments to the IP communities

before submission to the Provincial Health Board for approval. 8. Disclosure. The IPPF in local language will be distributed to all concerned IP communities. The IPPF in English will be disclosed on the ADB website. 9. Monitoring/Evaluation. The PMU will monitor Project implementation quarterly and will include a section detailing Project activities targeting IPs and IP degree of satisfaction. The findings of the internal monitoring reports will be reviewed annually by an external monitoring agency (EMA). EMA reports will be compiled and submitted to the PMU and ADB annually. At the end of the Project the EMA will prepare a final evaluation report on IP satisfaction.

Appendix 18 69

ECONOMIC ANALYSIS A. Economic Rationale 1. The Philippine health sector is characterized by fragmentation; underproduction, and underconsumption of public health and health promotion interventions; information asymmetries and underproduction of information; and limited effective access to basic care, particularly for the poorest segments of the population. Inefficiency in the public delivery system is indicated by the insufficient availability of affordable drugs and health personnel in the public sector provision system, and insufficient funding of public health as compared with personal care. The system's overall effectiveness–in terms of health status achieved for the level of financial, physical, and human resource inputs committed–is hampered by poor quality, limited effective access, and micro inefficiency. The impact of the financing system on distributional equity is regressive. The Health Sector Development Program (HSDP) aims to improve health care delivery to the poor, vulnerable, and other marginalized population groups. This section sets out the economic and financial analysis of the HSDP. Supplementary Appendix G provides a more detailed discussion. 2. The HSDP is expected to yield an economic rate of return of about 28%. Although this assessment is based on a number of assumptions, sensitivity analysis indicates relatively robust results. Considerable social return on investment is anticipated through (i) resource cost savings, and (ii) productivity benefits from a population in better health. Cost savings considered in the analysis arise from three sources: (i) efficiency gains in the hospital sector through economies of scales achieved in the overall health service supply and optimum utilization rate, (ii) reduced transportation costs made possible by the availability of services closer to the beneficiary population, and (iii) reduction of the drug bill through improved efficiency in the procurement and distribution system. Productivity gains, on the other hand, result from fewer lives lost and less time lost due to illness. B. Analysis of the Municipal Finance Corporation 3. The Municipal Finance Corporation (MFC), a government financing institution, was incorporated and registered in June 2004 as an affiliate of the Land Bank of the Philippines and is the successor to the Municipal Development Fund Office. Its role is to facilitate the access of local government units (LGUs) to finance for development investment. MFC’s initial paid-in-capital is P2 billion. Using modest growth assumptions, MFC will continue to operate viably and profitably in the next 6 years (2005, base year) by (i) generating income from low-cost sources of funds for lending and investments; (ii) maintaining sufficient liquid assets to meet loan drawdowns; (iii) preserving the balance between operating expenses, gross income, and total assets; and (iv) ensuring that its capital adequacy indicator meets the central bank requirement. MFC estimates its total assets will grow from P3.3 billion in 2005 to P4.4 billion in 2010 (Table A17.1), an increase of more than 6% annually. Income after tax is expected to average about from P143 million annually during the 6-year period (Table A17.2). A summary of the financial performance indicators of MFC for the next 5 years confirms its solid commitment to preserve a capital adequacy ratio that is higher than the central bank’s mandated 10% (Table A17.3). Profitability is projected as better than the estimated average for the banking sector, as indicated by a projected return on assets of about 2.4% at the end of 2010. The proposed Asian Development Bank loan will account for about 57% of MFC’s projected total assets by the end of 2010 and will, thus, have a positive impact on its overall financial condition.

Appendix 18

70

Table A17.1: Projected Balance Sheets of Municipal Finance Corporation, 2005–2010 (P' 000)

Account

2005 2005 2007 2008 2009 2010

Assets Cash in Banks 61.6 106.1 149.8 200.5 251.8 301.9 Accrued Interest Receivables 126.1 124.8 151.4 165.0 176.6 182.2 Investments in TB 1,990.9 1,990.9 1,990.9 1,990.9 1,990.9 1,990.9 Loans Receivables 1,085.7 1,528.7 1,755.3 1,949.2 2,043.3 1,953.8 Other Assets 9.1 9.1 9.1 9.1 9.1 9.1

Total Assets 3,273.3 3,759.6 4,056.4 4,314.6 4,471.7 4,438.0 Liabilities and Equity Accrued Interest Expense 44.3 43.4 61.1 70.2 78.0 81.7 Income Tax Payable 14.3 13.6 13.9 14.4 14.8 14.6 Payable to National Government 64.5 61.1 62.8 65.0 66.5 65.9 Dividend Payable 12.9 12.2 12.5 13.0 13.3 13.2 Loans Payable 1,085.7 1,528.7 1,755.3 1,949.2 2,043.3 1,953.8 Stockholders Equity and Retained Earnings 2,051.6 2,100.5 2,150.7 2,202.7 2,255.9 2,308.7

Total Liabilities and Equity 3,273.3 3,759.6 4,056.4 4,314.6 4,471.7 4,438.0 MFC = Municipal Finance Corporation, TB = treasury bills. Note: Figures may not add up to total because of rounding. Source: Municipal Finance Corporation and Asian Development Bank estimates. Table A17.2: Projected Income Statements of Municipal Finance Corporation, 2005–2010

(P '000) Account

2005 2006 2007 2008 2009 2010

Interest Income - TB 119.3 119.3 119.3 119.3 119.3 119.3 Interest Income - Loans to LGUs 132.9 130.3 183.4 210.6 233.9 245.2 Total Income 252.2 249.5 302.7 329.9 353.2 364.5 Cost of Funds 88.6 86.9 122.3 140.4 155.9 163.5 Gross Margin 163.6 162.7 180.4 189.5 197.2 201.0 Total Administrative Expenses 20.2 26.8 40.9 45.0 49.6 54.4 Net Income before Taxes 143.4 135.9 139.5 144.5 147.7 146.5 Provision for Income Tax (10%) 14.3 13.6 13.9 14.4 14.8 14.6 Net Income after Tax 129.0 122.2 125.5 130.0 132.9 131.9 Remittance to National Government (50% of Net Income)

64.5 61.1 62.8 65.0 66.5 65.9

Dividend Payment - LBP 12.9 12.2 12.5 13.0 13.3 13.2 Net Income after Remittance and Dividend Payments

51.6 48.9 50.9 52.0 53.2 52.8

LGUs = local government units, MFC = Municipal Finance Corporation, TB = treasury bills. Note: Figures may not add up to total because of rounding. Source: Municipal Finance Corporation and Asian Development Bank estimates.

Table A17.3: Projected Financial Performance Indicators of Municipal Finance Corporation, 2005–2010 (%)

Indicators 2005 2006 2007 2008 2009 2010 Average Capital Adequacy Equity/Assets 62.7 55.9 53.0 51.1 50.4 52.0 54.2 Total Debt/Total Equity 52.9 72.8 81.6 88.5 90.6 84.6 78.5 Managerial Efficiency Operating Expenses/Gross Income 43.2 45.6 53.9 56.2 58.2 59.8 52.8 Gross Profit Margin 64.8 65.1 59.6 57.4 55.8 55.1 59.6 Earning Performance Return on Assets 4.4 3.6 3.4 3.3 3.3 3.3 3.6 Return on Equity 6.3 5.8 5.8 5.9 5.9 5.7 5.9 MFC = Municipal Finance Corporation. Source: Municipal Finance Corporation and Asian Development Bank estimates.