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Philippines Compact

The Millennium Challenge Corporation’s $434 million compact in the Philippines supported reforms and infrastructure in the country through three projects.  First, the compact modernized the Bureau of Internal Revenue by redesigning and computerizing business processes that increased the efficiency and sustainability of revenue collection. Second, the compact expanded and improved far-reaching community-driven development projects that strengthened community participation in development and governance activities at the village and municipal levels.  Third, it rehabilitated a critical secondary national road on Samar Island that is reducing transportation costs for the island’s people.

As a result of the compact, through reforms at the Philippine Bureau of Internal Revenue, MCC helped the Government of the Philippines strengthen tax administration and case management systems, which helped raise tax revenues, reduce tax evasion, and address agent-related corruption.  The project helped generate more than $300 million in additional domestic tax revenue since 2013.  In 2017, the project contributed to the collection of $600 million from a single taxpayer.[[>Business World: PHL seeks US assistance for tax academy program]] In addition, 222 km of a national road serving as a lifeline for numerous towns and municipalities in one of the poorest and most typhoon-prone areas of the country was rehabilitated to new climate-resilient standards.  And close to 4,000 small-scale community-driven development projects in basic infrastructure and social services were completed in rural, high-poverty areas based on needs identified and prioritized by residents across Filipino communities.

This report provides a summary of the outputs of the compact program, documentation of changes in compact activities and the reasons behind them, information on performance against targets in the monitoring plan, and the results of independent evaluations that have been completed.  Further details of compact results will be shared in forthcoming impact and performance evaluations expected by early 2018 (Kalahi-CIDSS Project) and in 2019-2020 (Secondary National Roads Development Project).


The Philippines is a sovereign island country in Southeast Asia situated in the western Pacific Ocean.  It is one of Asia’s two archipelagic states (along with Indonesia), comprised of more than 7,000 islands dividing the Pacific Ocean from the South China Sea. The country’s development performance during the past several decades had been less impressive than that of many of its East and Southeast Asian neighbors. In the 1950s and 1960s, the country had one of the highest per capita gross domestic products (GDPs) of about $612 in the region[[Data from World Economic Outlook (IMF, various years); World Development Indicators (World Bank, various years); and Statistical Data Book (CEPD, various years).   Figure is expressed in 2000 United States dollars.]]; however, the Philippines fell behind following the 1997 Asian financial crisis.  Household incomes were stagnant and inequality remained high when the country was selected as eligible to develop an MCC compact in 2008.  The Philippines successfully completed a three-year Threshold Program to improve revenue administration and anti-corruption efforts in 2009.

As part of its compact development process, MCC utilized an economic report published by the Asian Development Bank in 2007 to identify the binding constraints to economic growth in the country. The report identified a lack of fiscal space for growth-enhancing public investments, poor infrastructure – namely transport and energy, weak investor confidence due to poor governance and corruption concerns, and an inability of government to address market failures that led to a very narrow industrial base.

MCC and the Government of the Philippines signed a five-year, $434 million compact in September 2010 to address the constraints outlined above.  The program aimed to lay the groundwork for sustained economic growth by improving critical road infrastructure in one of the country’s poorest regions; empowering citizen participation in local economic development activities, including managing community assets in a sustainable manner; and improving the effectiveness and integrity of revenue collection and administration to increase public investment and reduce tax evasion. The compact was implemented by MCA-Philippines, an institution established by the Government soon after compact signing as a condition of the MCC grant.[[Under its country ownership model, MCC’s counterparts are responsible for implementing MCC-funded programs.  Partner governments establish entities known as accountable entities referred to as MCAs to manage implementation for compact projects.]]

  • Original Amount at Compact Signing:
  • Amount spent:
  • Signed:
    September 23, 2010
  • Entry Into Force:
    May 25, 2011
  • Closed:
    May 25, 2016

Project Results

Kalahi-CIDSS Community-Driven Development Project

  • $120,000,000
    Original Compact Project Amount
  • $124,999,276.36
    Total Disbursed

Estimated Benefits

Estimated Benefits for the Kalahi-CIDSS Community-Driven Development Project
Time Estimated Economic Rate of Return (ERR) over 20 years Estimated beneficiaries over 20 years Estimated net benefits over 20 years
At the time of signing 5,200,000 $16,600,000
At compact closure 0 $0

Project Description

During the previous five decades, the Philippines had consistently lagged behind other countries in the region with respect to government development expenditures as a percentage of GDP and infrastructure investment and quality. Inadequacies in infrastructure were a critical constraint to economic growth in the country, and the availability of basic infrastructure (water, sanitation, roads, and electricity) had deteriorated. In addition, the provision and use of education and health services varied across regions, particularly as a function of income.

The Kalahi-CIDSS Project – Kapit-Bisig Laban sa Kahirapan (Linking Arms Against Poverty) Comprehensive and Integrated Delivery of Social Services – aimed to improve welfare in rural areas by targeting communities where poverty incidence was greater than the national average with small-scale, community driven development projects that targeted basic infrastructure needs.  The project built upon and supported the application of the participatory planning, implementation, and evaluation methodology developed by the Government of the Philippines Department of Social Welfare and Development, in collaboration with the World Bank.  The first phase of the World Bank-funded project (called KC1) was successfully implemented from 2003 to 2009 in 4,229 villages, or barangays, across 42 provinces, providing a wealth of information for MCC’s project appraisal.

Communities were selected to participate in the Kalahi-CIDSS Project based on specific criteria, including geographic location, poverty incidence, and the ability of communities to participate in the entire program. After a community was enrolled in Kalahi-CIDSS, the Community Empowerment Activity Cycle began. Each cycle followed a progression of strategies and activities to promote transparency and accountability. Projects were designed through a consultative process that incorporated input and priorities of the entire community, including women.  From procurement to implementation to maintenance, all processes were discussed and agreed upon by the community. Over the course of three cycles, MCA-Philippines’ National Project Management Office gradually handed off responsibilities for the implementation of Kalahi-CIDSS activities to local governments to sustain.

The project empowered communities to participate fully in development activities that addressed the needs they identified and provided guidance on managing assets in a sustainable way.  It improved the link between community priorities and the development programs of local government, and used investments in a transparent manner to promote greater accountability and reduce poverty.  Grants were provided directly to local communities, who were then responsible for project selection, the procurement of goods and services, and in many cases, the operations and maintenance of physical assets.

Complementing projects like farm-to-market roads, school buildings, health stations, drainage systems and footpaths, the program also included a $1 million Gender Incentive Grant to promote gender equality and women's empowerment at the village and municipal levels.  The Gender Incentive Grant funded activities that addressed barriers to either men or women participating in community activities, decision-making processes, and economic activities such as non-traditional skills training for women, women support shelters, and maternity services. The effort particularly emphasized and encouraged women’s leadership and opportunities for paid employment through Kalahi-CIDSS. Women community volunteers made up 10 percent of paid skilled and unskilled labor in community project construction in 2015, a significant increase from a baseline of 3 percent in 2010. And more than 1,399 women benefited from certificate training on non-traditional skills such as plumbing, welding, electrical installation, carpentry, painting, tile-setting, hollow blocks-making and masonry.

With 3,760 small-scale, community-driven development projects in six regions of the Philippines, Kalahi-CIDSS benefited nearly 1 million households.  In 2014, citing the success of the Kalahi-CIDSS Project and other community-driven development programs around the world, the Government made Kalahi-CIDSS a national model for development project planning and implementation with a focus on inclusive development and poverty alleviation.  The nationwide roll-out incorporated compact-introduced enhancements, such as environmental safeguards, enhanced methods of design and construction, and support for gender integration into project design and implementation.

Revenue Administration Reform Project

  • $54,300,000
    Original Compact Project Amount
  • $30,280,930
    Total Disbursed

Estimated Benefits

Estimated Benefits for the Revenue Administration Reform Project
Time Estimated Economic Rate of Return (ERR) over 20 years Estimated beneficiaries over 20 years Estimated net benefits over 20 years
At the time of signing 125,000,000 $224,500,000
At compact closure 125,000,000 $166,100,000

Project Description

One consequence of the Philippines’ tight fiscal situation was a limited ability of the Government to fund its growing needs for basic infrastructure and social programs.  Tax-related patterns of non-compliance and tax administration inefficiencies contributed to a poor business climate, and ultimately impacted the rate of both domestic and foreign-direct investment.[[The Philippines had ranked the lowest among its regional neighbors in foreign direct investment since the Asian financial crisis of 1997.]] One of the most pervasive embodiments of corruption in the Philippines was the low rate of taxpayer compliance and alleged active collusion of revenue agents in the negotiation of tax assessments.[[In a 2007 survey by Social Weather Stations, 33% of enterprises reported that they were asked for a bribe connected to the payment of taxes.  The 2007 SWS Survey of Enterprises on Corruption is included in the BIR’s Trainer’s Manual on Corruption Prevention.]]

Through its earlier threshold program, MCC provided extensive training; support for inter-agency collaboration; and IT equipment to investigators, lawyers and prosecutors in charge of pursuing corruption, tax evasion, and smuggling cases.  The Revenue Administration Reform Project built on these efforts by increasing and improving the Philippines’ ability to sustain higher collection of tax revenues and helping to reduce tax-related graft and malfeasance.

Project activities and sub-activities included:

  • The Bureau of Internal Revenue (BIR) Reform Activity included three sub-activities:
    • The Electronic Tax Administration Sub-Activity (eTIS) computerized the business processes of the BIR, modernizing the Bureau and providing an enhanced tax administration system expected to cover 95 percent of taxpayers in the country. It increased the operational efficiency in registering taxpayers and processing tax returns and accounting payments.  These enhanced business processes also worked to improve compliance, audit, and enforcement and increased tax revenue collection.  Additionally, MCC co-financed technical assistance to the Bureau of Internal Revenue with the International Monetary Fund’s Fiscal Affairs Department to implement reforms in basic tax administration at the procedural and technical levels, with the objective of improving core business processes for different taxpayer segments.  The technical assistance redesigned procedures and identified key risks and compliance objectives in each core functional area and measures needed to address them. Through cross-project coordination, these procedural improvements were integrated with eTIS.
    • The Automated Audit Tools Sub-Activity (AATS) supplied the Large Taxpayer Unit of BIR with software tools for use in auditing taxpayers who have automated records. These tax auditing tools significantly reduced the amount of time needed to complete an audit and addressed taxpayer concerns about fairness of tax audits based on sampling rather than a review of all transactions. The reduction in person days per tax audit helped BIR reduce its backlog of unfinished audits, promoted taxpayer satisfaction, and led to increased revenue collection of 30 percent per audit.
    • The Public Awareness Campaign Sub-Activity educated the public on BIR services and programs. It disseminated information on the reforms, modernization and enforcement initiatives of BIR to support increasing tax revenues over time. The Public Awareness Campaign promoted greater understanding of tax obligations and increased the ability of taxpayers to access tax information, which is expected to lead to better tax compliance.  Greater utilization of online services also led to improved compliance by reducing taxpayer errors, such as those that might result from the introduction of a new form or new regulations.
  • The Revenue Integrity Protection Service Activity strengthened revenue agency surveillance and discipline of Department of Finance staff. Through the acquisition and customization of case management software, a data repository system, training, reinforcing its surveillance capacity, and instilling discipline in Department of Finance agencies, the activity advanced the detection and punishment of forms of malfeasance that allowed revenue agents to reap financial rewards from taxpayers.  By increasing the likelihood of detection and punishment, the frequency of such incidents was expected to decline, thereby improving the image of revenue generating agencies, increasing tax collection in the country.
The Revenue Administration Reform Project also facilitated an improved understanding of key gender and taxation issues through learning sessions on gender, taxation and corruption for government counterpart agencies; a study on gender and tax administration; and collection and analysis of sex-disaggregated data on taxation and corruption issues.

The goal of the Project (as reflected in the ERR) was to increase the share of government revenues as a share of GDP by 0.3 percent, which is too small an effect to measure statistically. MCC and MCA-Philippines instead tracked whether government revenue collections continued their robust growth trend, which they did — by the end of the compact, revenue from new and existing business registrants had increased from 822,624 million PhP to 1,441,571 million PhP.  The project contributed to this effort by narrowing the gap between potential and actual collections and reducing the discretion of individual revenue collection officers. It also helped improve the predictability and impartiality of revenue laws and regulations enforcement.  Other outcomes related to BIR efficiency generally improved, such as shorter processing times and more automated audits[[The Bureau of Internal Revenue has a citizens’ charter which is posted on its website. The charter covers the frontline services available to taxpayers, the applicable fees and forms, and expected processing times. Actual processing times achieved are published.]]. The Public Awareness Campaign received Araw Values Advertising awards from the Advertising Foundation of the Philippines for its effort to increase awareness of taxpayer obligations and provide information regarding how to file returns.  The Automated Auditing Tools Sub-Activity reported substantial gains in tax audit and arrears management programs.  Additionally, as part of the Revenue Integrity Activity, 220 people were charged with graft, corruption, lifestyle and/or criminal offenses.[[IMF Fiscal Affairs Department Final Project Assessment Report (August 2016).]]

While the Revenue Administration Reform Project achieved impressive results, MCC and the Government of the Philippines did encounter significant challenges implementing the two systems development and systems infrastructure components of the project:  (i) the new Revenue Integrity Protection Service automated system to help detect possible illicit financial gains by employees of the government’s revenue agencies; and (ii) eTIS, the tax administration system intended to eventually replace the BIR’s legacy tax administration system, ITS.  While the Revenue Integrity Protection Service activity consisted of the design and implementation of a new software application to sit on a new, stand-alone hardware infrastructure within a refurbished and secure office space, eTIS was the continuation of a project started by the BIR several years before the compact.  The primary hurdles that had to be overcome had to do with, respectively, the newness of the Revenue Integrity Protection Service activity’s automated system and linking eTIS to past systems.  Both represented the first significant systems development efforts funded by an MCC compact.

As initially envisioned, eTIS would complement broader reform efforts with technical assistance from the IMF that would help incorporate improved policies and procedures regarding tax administration at BIR.   This involved expanding the level of effort and cost to customize the auditing and compliance modules of the system, cleaning up the existing registration data base and making the data more accessible, secure, and trustworthy. It also required the BIR to shift its organizational resources to focus on large taxpayers and VAT collection efforts.  These ambitious objectives required intense collaboration with BIR to ensure ownership of the direction and implementation of the activity.  MCC and MCA-Philippines had to refine procurement preferences and expectations to accomplish the activity’s objectives, which significantly differed from the methodology that was intended in the original design.   As a result of implementation challenges, including difficulties in procurement, project management and delays in decision-making, the original target for the number of Revenue District Offices (RDOs) to be covered by eTIS was revised from 128 down to 13 BIR offices, covering 73 percent of taxpayer revenue.  Following compact closure, the BIR committed to rolling out eTIS to cover 95 percent of taxpayer revenue and to developing and implementing five additional modules of eTIS.

Secondary National Roads Development Project

  • $214,440,000
    Original Compact Project Amount
  • $199,849,932.15
    Total Disbursed

Estimated Benefits

Estimated Benefits for the Secondary National Roads Development Project
Time Estimated Economic Rate of Return (ERR) over 20 years Estimated beneficiaries over 20 years Estimated net benefits over 20 years
At the time of signing 282,000 $25,000,000
At compact closure 282,000 $-12,400,000

Project Description

Inter- and intra-island transport systems play a crucial role in supporting the economic development of the widely dispersed regions of the Philippine archipelago. However, the poor condition of infrastructure facilities and lack of reliable, safe, and efficient transport services have significantly hampered the movement of passengers and cargo throughout the country, limiting direct internal and external trade links and tourism, and constituting a major constraint to regional economic growth. This is particularly true in many poor areas of the Philippines, where improved accessibility has the potential to lower marketing costs for local agricultural products, improve access to social services and economic opportunities, and catalyze investments to develop local resources. Secondary national roads are important contributors to economic growth, especially in rural areas.  Roads are the dominant mode of transport in the Philippines, accounting for 53 percent of freight and 89 percent of passenger traffic in the country. The Philippines has a total road network of approximately 200,000 km, including some 29,000 km of national roads.  Approximately 79 percent of the national arterial roads are paved, and 48 percent of these require rehabilitation.[[“Philippines: Critical Development Constraints,” Asian Development Bank, December 2007.]]

The Secondary National Roads Development Project was designed to reduce transportation costs and provide additional economic opportunities to rural residents in one of the poorest and most typhoon-prone regions of the country.  The project was originally designed to reconstruct and rehabilitate 222 km of the Samar road crossing the provinces of Samar and Eastern Samar.  The project also provided an opportunity for MCC to partner with other principal donors active in road maintenance so a singular policy framework could be pursued.

The Philippines is susceptible to natural disasters; in particular, typhoons, flooding and landslides present an ever-present threat to road construction.  In recent years, the cost of road construction in the Philippines has escalated because of the impact of increasingly frequent severe weather events.  Due to the significantly high cost, infrastructure investments are often insufficiently designed and evaluated, resulting in long-term failure.  The Secondary National Roads Development Project considered the adverse effects of heavy rainfall, flooding, and typhoons in its design using climate models to examine how changes in storm intensity, numbers and frequency could impact the road, particularly drainage.  Drains were changed from a previous standard of withstanding 1 in 20 year events to 1 in 50 year events. Bridges were raised to allow for more clearance during flood events.

The project also faced particularly challenging conditions for implementation due to weather on the island.  Recognizing the need to begin construction on the road project as soon as possible, the Government and MCC jointly developed a mechanism for MCC to procure and contract the road design while instituting a management system of the design that was Philippines-led with the Department of Public Works and Highways at the forefront of decision-making and design reviews.  This allowed for efficient and effective development of the road design and the procurement of civil works contracts in impressively quick fashion. This creative approach to road design also allowed for an early and proper evaluation of the budget requirement for the project.

As a result, the climate-resilient road ultimately withstood Super Typhoon Yolanda (internationally termed Haiyan) in 2013 and Typhoon Ruby in 2014, providing invaluable connectivity to the 14 municipalities along the road and immediate employment opportunities to more than 2,000 local residents in the aftermath of the storms. Shortly after Typhoon Yolanda struck, the Samar Road was a major conduit for relief supplies on the island of Samar.  Compact contractors were able to mobilize equipment quickly to help clear the road and debris in coordination with local governments, and joined the larger relief effort in many communities along the road as well as in the city of Tacloban, Leyte.  Protective measures taken by MCA-Philippines, contractors and consultants leading up to the storm, as well as the incorporation of more climate-resilient standards in the road’s design, limited damage to newly constructed road segments.  The teams identified practical and helpful solutions to address many cross-cutting issues in the aftermath of the storm, such as ensuring continued resettlement assistance to project affected entities, countering trafficking in persons, and coordinating an expansive tree re-planting program.

MCC and MCA-Philippines collaborated to accelerate the project schedule to ensure the road’s timely completion as a way to directly support and facilitate other ongoing aid and reconstruction efforts in Eastern Samar. Compact-funded contractors voluntarily made their equipment and materials available to clear the roads in Samar so that food, water and medicine were brought to people in need quickly to prevent further devastation and loss of lives. Compact partners also collaborated with local organizations and international donors to reinforce vigilance against human trafficking; historically, a large percentage of victims of human trafficking in the Philippines have come from Samar, and with the typhoon remnants, that population was even more vulnerable as many social safety nets were washed away by the storm.

In addition, the project included efforts to empower communities to address the threat of trafficking in persons (TIP) through education and awareness of this threat. The project utilized innovative tools to address common pitfalls of infrastructure projects which included:

  • piloting a ground-breaking community-managed road maintenance program, a joint initiative of the Department of Social Welfare and Development and Department of Public Works and Highways, to ensure effective, sustainable routine maintenance of the newly rehabilitated road;
  • implementing a gender toolkit in the design and construction phases to help ensure the project included all beneficiaries, regardless of gender; support for women’s economic opportunities arising from road construction activities;
  • utilizing an International Road Assessment Programme (iRAP[[The International Road Assessment Programme (iRAP) assesses roads all over the world and aims to significantly reduce road casualties by improving the safety of road infrastructure.]]) to improve safety characteristics for road users along the road; and
  • employing advanced technology to incorporate in-situ materials in the newly constructed road (i.e. recycling existing pavement and using existing pavement as a base layer), thereby minimizing the need to quarry and transport new materials.

With northern sections of the road passing through Samar Natural Island Park, home to several protected species, including the critically endangered Philippines Eagle, MCC and the Government took particular care to build safeguards into the road design. The environmental and social impact assessments were highly detailed, and observations on protection of flora and fauna were built into contractors’ environmental and social management plans. Also noteworthy was the continuing collaboration, guided and encouraged by MCC, between the Department of Natural Resources and Environment and the Department of Public Works and Highways on reforestation of 100 trees for each one removed.  The Tree Reforestation Program employed local residents along the road who were trained in establishing nurseries and tree replanting.  The replanting program, which included mangrove reforestation – especially relevant for the eastern seaboard as both a natural barrier to storm surges and a source of fisheries-based community livelihoods – will provide a source of future income for residents while ensuring environmental sustainability.

By the end of the compact, the Secondary National Roads Development Project completed rehabilitation of 175 km of road, including 59 bridges, to new climate-resilient standards on a key national road on Samar Island, connecting some 14 municipalities, a city, and 134 barangays. Additionally, the project led the Department of Public Works and Highways to adopt gender-inclusive initiatives in their standard operating procedures. 

While nearly all of the originally planned sections of road were completed at the end of compact, conditions exacerbated by climate events on parts of the road, including new landslide remediation and enhanced bridge repair, required a time extension beyond the compact to complete the work.  The Government committed its own resources to successfully finish the remaining work, mainly focusing on rehabilitation works on two bridges and land remediation, as well as assurance to commit necessary funds and resources for the operations and maintenance of all project roads.  All 222 km are now open to traffic, and the roadway is functioning safely for its intended purpose.

As of Tue Apr 03 2018 00:00:00 GMT-0400 (Eastern Daylight Time)