Philippines - Second Manila Water Supply Project

Document of FILE COPY The World Bank FOR OFFICIAL USE ONLY Report No. P-236 55pPi REPORT AND RECOMKSNDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF THE PHILIPPINES FOR A SECOND MANILA WATER SUPPLY PROJECT July 12 , 1978 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit Peso (P) P 1.00 - US$ 0.135 US$1.00 = P 7.40 MEASURES AND EQUIVALENTS mm millimeter = 0.04 inches cm = centimeter = 0.39 inches m - meter = 3.28 feet km - kilometer = 0.62 miles sq km = square kilometer = 0.39 square miles ha hectare = 10,000 square meters or 2.47 acres cu m cubic meter = 264 US gallons cums cubic meters per second = 22.8 million US gallons per day 1 = liter = 0.26 gallons lcd liters per capita per day = 0.26 US gallons per capita per day Mld = megaliters per day = 0.26 million US gallons per day PRINCIPAL ABBREVIATIONS AND ACRONYMS ADB = Asian Development Bank CDM = Camp Dresser and McKee Internatonal Inc. LWUA = Local Water Utilities Administration MMA = Metropolitan Manila Area MWSS - Metropolitan Waterworks and Sewerage System. NWSA = National Waterworks and Sewerage Authority W.D = Water District GOVERNMENT OF PHILIPPINES FISCAL YEAR January 1 to December 31  FOR OFFICIAL USE ONLY PHILIPPINES SECOND MANILA WATER SUPPLY PROJECT Loan and Prolect Summary Borrower: Republic of the Philippines Beneficiaries: Metropolitan Waterworks and Sewerage System (MWSS) and Local Water Utilities Administration (LWUA) Amount: $88 million equivalent Terms: The loan would be for a term of 20 years, including 5 years of grace, with interest at 7.9% p.a. Relending Terms: The Borrower would relend $85 million of the loan to MWSS and about $2.5 million to LWUA on the same terms as those of the Bank loan. The Government would use the balance of $0.5 million to finance the preparation of a rural water supply project. MWSS and LWUA would each bear the foreign exchange risk on the amounts of the loan relent to them. Project Description: The proposed project will provide safe water for an additional 4 million people in Metropolitan Manila, as well as improve the service to some 3 million who are inadequately served at present. It is estimated that, by 1987, some 3.3 million of the 4.6 million urban poor would have reasonable access to safe water as a result of the project. An additional 10,000 jobs for 30 months would be provided during project construction. The major risk associated with this project relates to the ability of MWSS to improve its capacity to construct and operate a much larger water supply system. This risk would be minimized by the substantial provision in the project for technical assistance and training and by the proposed reorganization of MWSS with branch offices for operation and maintenance. Close supervision of the project will be required. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Estimated Cost: Foreign Local Total ------ $ million ------ Part A: Source Development: 100.3 93.2 193.5 Part B: Distribution Pipelines: 62.2 77.8 140.0 Training 0.6 4.9 5.5 Construction 1.8 5.4 7.2 Contingencies 20.4 37.5 47.9 Subtotal-Part B 85.0 115.6 200.6 Part C: Feasibility & Design Studies for Water Supply Projects in Provincial Cities 2.5 - 2.5 Part D: Preparation of a Rural Water Supply Project 0.5 - 0.5 Total 188.3 208.8 397.1 Financing Plan: MWSS and Bank ADB Government Total Part A - 100.3 93.2 193.5 B 85.0 - 115.6 200.6 C 2.5 - - 2.5 D 0.5 - - 0.5 Total 88.0 100.3 208.8 397.1 Estimated Disbursements: ----------- ($ million) ---------- Bank FY 1979 1980 1981 1982 1983 1984 Annual 14.6 38.7 24.9 7.3 1.9 0.6 Cumulative 14.6 53.3 78.2 85.5 87.4 88.0 Rate of Return: 12%. Staff Appraisal Report: No. 1978-PH dated July 7, 1978.  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF THE PHILIPPINES FOR A SECOND MANILA WATER SUPPLY PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of the Philippines for an equivalent of $88 million for a second Manila water supply project. The loan would have a term of 20 years, including 5 years of grace, with interest at 7.9% per annum. The Government would relend, on the same terms, $85 million of the proceeds of the loan to the Metropolitan Waterworks and Sewerage System (MWSS) to finance the expansion of the water supply distribution system in Manila and $2.5 million to the Local Water Utilities Administration (LWUA) to finance feasibility studies and detailed design of water supply systems in provincial cities. The Government would use the balance of the proceeds of $500,000 to finance the preparation of a rural water supply project. MWSS and LWUA would each bear the foreign exchange risk on the amounts of the loan relent to them. PART I - THE ECONOMY /1 2. An economic mission visited the Philippines in July/August 1977 and its report, "The Philippines: Country Economic Memorandum" (No. 1765-PH of October 26, 1977), was distributed to the Executive Directors under Secretary's Memorandum PHL77-2 on October 27, 1977. A basic economic report, entitled The Philippines: Priorities and Prospects for Development (SecM-76/366), was previously distributed to the Executive Directors on May 18, 1976. Macroeconomic Performance 3. During the 1960s, the Philippine economy grew in real terms at an annual rate of about 5-1/2%. However, the rate of growth was less than what might have been achieved if the country's considerable natural and human resources had been utilized more effectively. The benefits of growth were also distributed relatively unevenly, both with respect to regions and income classes. While overall agricultural growth was reasonably satisfactory, repeated food deficits were experienced. The growth of productive employment opportunities failed to keep pace with the expansion of the population and labor force. Low levels of taxation resulted in inadequate public expenditure for necessary infrastructure and social services. Poor export performance combined with the heavy import dependence of domestic industry led to chronic weakness in the balance of payments. 4. The growth of the Philippine economy accelerated slightly to an annual rate of 6% in the 1970s. Fluctuations, however, have been significant. In the period 1970-72, when the effects of a balance of payments stabilization program initiated in 1970, were being felt, the economy grew less rapidly; exports and imports of goods and services were roughly equal; and the shares of public and private fixed investment in GNP were stable at still relatively low levels. Economic growth was unusually good in 1973 as sharply higher prices for traditional export commodities stimulated demand; agricultural /1 This section of the report is the same as that of the Third Industrial Investment Credit Project distributed under cover of SecM/78-103, which was approved by the Executive Directors on May 18, 1978.  -2- production rebounded strongly from the natural disasters of the previous year, and the balance of payments registered a substantial current account surplus. The export-led income boom of 1973 was followed by an investment boom. The resulting high investment rate, together with favorable sugar prices, temporarily sheltered the economy from the impact of the oil price increase in late 1973 and the following world recession, and real GNP growth was maintained at 6% in 1974-75. The first half of the 1970s also saw significant structural changes in the economy, the most important of which were an increase in the level of public investment, financed in large part by a greater tax effort, a recovery in export growth, a shift of the domestic terms of trade in favor of agriculture, and the slowing of the population growth rate. 5. The collapse of sugar prices in late 1975, following earlier declines in the prices of other major export commodities, altered the external situation dramatically. The terms of trade dropped by 23% in 1975, and as a result, the current account deficit rose to 6% of GNP, and the overall balance of payments deficit to $500 million. Thus, the necessity of restoring balance to the external accounts was superimposed on the Government's longer term objectives of faster economic growth and a better distribution of its benefits. To maintain the momentum of growth and investment, the Government adopted a policy of increasing capital inflows in the near term to finance the resulting expanded current account deficits while accelerating export growth in the longer term. In 1976-77, the economy - led by exports, public investment, agriculture and construction - has continued to grow at 6% per year. Unfor- tunatelv, much of the stimulus from an expansion in export volume was offset by further deterioration in the terms of trade. However, inflation, which reached a peak of 31% in 1974 as a result of externally generated pressure on domestic prices, has slowed to a rate of about 7% because of the deceleration in international inflation and a conservative monetary-fiscal policy. Development Strategy 6. The Government's development objectives and policies, which were recently set out in a Five-Year Development Plan for the period 1978-82, call for further acceleration of economic growth, first to 7% and then to 8%. The development stiategy focuses on an expansion of more productive employment opportunities at a rate of 3.6% per annum, reduction of income disparities, greater self-sufficiency in food and energy, strengthening the balance of payments, and increased development in rural areas. In addition, the Plan includes strategies for development in each of the country's thirteen regions. In general, the Plan is an elaboration of the policy directions pursued by the Government in recent years. It is also broadly consistent with the Bank's basic economic report, although investment, manufacturing output, and exports are projected to grow more rapidly than visualized therein. It should be feasible to accelerate the overall growth rate to 7% as the terms of trade stabilize, but more rapid expansion of manufacturing is necessary to do so, and efforts need to focus on improving the efficiency of investment. Ag r i en 1 tu r a 7. For a country with fairly good soils and a reasonably literate rural population, agricultural yields in the Philippines are relatively low. Possible reasons for this situation are the low quantity and quality of  - 3 - irrigation facilities and high vulnerability to weather risks; land tenure patterns; and weak agricultural credit, extension, and other supporting services. Agricultural production has, nevertheless, grown at an average rate of 4-1/2% per year in the 1970s. The performance of the sector was exceptionally strong in 1976 and 1977, as production increased by 7%, and the Philippines has been virtually self-sufficient in rice, its main staple, for the past three years. 8. The Government gives high priority to agriculture and rural development. It has undertaken a number of steps to increase the availability of irrigation and supporting services, and has also expanded programs to improve living conditions in rural areas, including rural electrification, health and family planning, and rural roads. However, while irrigation investment has been raised substantially, improvements in the quality of supporting services - particularly credit and extension - are necessary. 9. For historical reasons, land ownership in the Philippines is inequitably distributed. The land transfer program, which has been in operation for five years and covers rice and corn growing areas, proceeded quite rapidly when larger landholdings were the focus of concentration, but progress has been slower recently as the focus has been on a larger number of medium-sized holdings, which often belong to middle-class landowners. As of June 1977, an estimated 120,000 tenants, or 30% of the total tenants under the program, had received Certificates of Land Transfer, which established their claim to the land. Despite the difficulties in the process of implemen- tation, the transfer program remains an important part of the Government's rural development strategy. Industry 10. During the 1960s, Philippine industrialization was promoted by high tariff protection and subsidized finance, and consequently industrial growth was primarily in the area of import-substitution with a high capital intensity. Performance was disappointing with respect to employment, exports, and the overall rate of growth of output. In the early 1970s the Government floated the exchange rate, which then depreciated significantly, and introduced policy changes to reduce tariffs and realign industrial incentives. Further efforts to reduce remaining biases in favor of import-substitution and * capital intensity will still be needed, however, to accelerate the rate of industrial growth as projected in the Five-Year Development Plan. 11. Manufacturing industry has grown at a relatively slow average rate of about 6% in the 1970s. Moreover, due to the slow increase in national income and demand because of the decline in the terms of trade in the last two years, manufacturing growth has also slowed, and investment has stagnated. On the other hand, industries producing nontraditional exports have expanded rapidly from a very low base, as their exports increased almost fivefold in the four-year period 1973-76, in response to exchange rate adjustment and special measures designed to alleviate existing restrictions on imports and thus reduce the bias towards production for the domestic market. As noted above, further efforts in this direction will be needed if industrial exports are to continue to grow at a rapid rate. The construction industry has also grown  - 4 - rapidly as the expansion of relatively construction-intensive public investment and large tourism investments in the Manila area raised construction expendi- ture from 6% of GNP in the early 1970s to 12% in 1976. Employment, Incomes and Population 12. Employment increased by about 4.6% annually during 1973-76, a considerable improvement over the historical growth rate of 2.4%, and was able to keep pace with the rapid growth of the labor force. Particularly noteworthy was the growth of employment in manufacturing, which essentially stagnated during 1970-74, but grew by 8% annually during 1975/76, resulting in part from the growth of labor-intensive production for export. However, because manufacturing's share of total employment is small, agriculture and services continue to function as residual sources of employment and account for most of the growth in total employment. 13. Preliminary survey data show that the share of income received by the poorest 40% of families, which remained constant during the 1961-71 period, increased from 12% in 1971 to 15% in 1975. The income share of the top 20% of families remained about the same as in 1971, while that of middle- income families declined correspondingly. Due to the improvement in agri- culture's terms of trade, the growth of agricultural production, the decline in urban real wages following the devaluation in 1970, and the stagnation of industrial employment until 1975, the ratio of the average rural income to the average urban income rose from 48% in 1971 to 57% in 1975. Real per capita consumption increased by about 2% annually in 1971-75. Hence, after allowance for price increases, real incomes in rural areas, where most of the poor live, have probably increased somewhat, while real urban incomes have remained about the same. 14. The population is estimated at 43.3 million in 1976 and is currently growing at 2.8% as compared to a 3.0% growth rate during the 1960s. The Philippines has an active family planning program registering approximately 650,000 new acceptors per year. Although the number of new acceptors has reached a plateau as the program faces the increasingly difficult problem of reaching rural areas, the estimated proportion of married women of reproductive age practicing family planning increased from 20% in 1974 to 25% in 1977. Investment and Savings 15. Due largely to the buoyant export performance in 1973 and the subsequent increase in incomes, investment boomed in 1974-75. Private investment rose from 14% of GNP in the early 1970s to 20% in 1975. Public investment was raised from 2% to 4% of GNP with the growth in revenue from international trade taxes, improvements in tax administration, and improved project implementation capacity. Subsequently, public investment has been raised further to an estimated level of 6-1/2% of GNP in 1977. The private investment rate, on the other hand, has fallen somewhat to an estimated 18% of GNP. Although the private investment rate is well over the 14% average of the early 1970s, the revival of private investment is an important short-term problem. Furthermore, the high incremental capital-output ratio, the relatively modest growth of manufacturing output and employment, and the structural underutilization of capacity in some industries suggest that the efficiency of investment also needs to be improved.  - 5 - 16. Aggregate savings performance has improved during the last decade and is comparable to that of other countries at a similar stage of economic development. In 1976-77, gross domestic savings maintained the level of 25% of GNP achip-ed in 1975 and financed about 80% of total investment, with the balance coming from foreign savings. In order to increase the efficiency of financial markets in intermediating between savers and investors, the Govern- ment has made significant improvements in financial policy. Organized banking institutions have been strengthened. Interest rates were realigned in 1976 and, again, in 1977 to encourage a greater flow of financial savings into time and savings deposits relative to short-term deposit substitutes, and to reduce the spread between borrowing and lending rates. Further reforms are required to increase the availability of long-term domestic currency resources. Special credit programs have been adopted to expand lending to the credit-short agricultural sector and rural areas and to serve the needs of medium- and small-scale industries. However, a deterioration of loan recovery rates has been experienced by all government financial institutions and credit programs, creating a difficult policy dilemma. On the one hand, the programs have become costly means of achieving their objectives, and the growth of arrears reduces the overall efficiency of resource mobilization and allocation. On the other hand, the programs do redress imbalances in the availability of credit so that arrears have to be reduced without closing necessary credit channels. Government Expenditures and Revenues 17. Public expenditures and revenues have historically claimed a much smaller share of national resources in the Philippines than in many other developing countries. In the early 1970s, general government expenditure averaged only 12% of GNP, public investment was strikingly low at about 2% of GNP, and tax revenues stood at 11% of GNP. Government expenditures were dominated by general administration and social services, particularly education. This situation had resulted from a variety of factors including difficulties in raising tax revenue and weak implementation capacity in the public sector. Since the early 1970s, the Government has taken steps to correct the situation and has raised both the overall level of expenditures and the share going to economic services and public investment. By 1977 government expenditures had reached an estimated 18% of GNP, and public investment, which has risen very rapidly in the last two years, equaled about 6-1/2% of GNP. 18. Recognizing that a large increase in tax revenues would be required to finance expansion of the public investment program, the Government has undertaken a comprehensive program of tax reform to raise the needed revenues equitably and efficiently. In the short term, needed revenues have been raised through revisions in indirect taxes. In the long term, structural changes are to be made to raise the built-in elasticity of the tax system, to reduce distor- tions in economic incentives and dependence on cyclically volatile taxes on international trade, and to improve equity by increasing the proportion of revenues coming from direct taxes. The Government has increased the ratio of domestic taxes to GNP by an impressive 1.5 percentge points between 1975 and 1977 through new tax measures and vigorous efforts to improve taxpayer compli- ance and collection performance. However, much of the success in mobilizing  - 6 - revenue from domestic sources has been offset by a sharp decline in the yield of export taxes and import duties due to cyclical fluctuations. Total tax revenues, which had been raised from 11% of GNP to 13.6% by 1975, rose to only an estimated 14.1% in 1977. Greater resource mobilization by government financial institutions and government corporations, whose investment programs have grown rapidly, is also needed. External Trade and Capital Flows 19. Largely as the result of a 23% decline in the terms of trade in 1975, the current account recorded a deficit of $900 million, or 6% of GNP. To meet the immediate payments problem, the Government drew down its international reserves, obtained loans under various IMF facilities, and expanded its borrowing program to finance necessary imports. For the longer term, the Government adopted a strategy of accelerating export growth both to hold the current account deficit about constant, while it declined relative to GNP, and to meet the debt service payments on the higher level of external borrowing. 20. Some progress in these directions was made in the last two years. In 1976, in spite of a further 11% deterioration in the terms of trade, a substantial increase in export volume and slow growth of import payments narrowed the trade deficit and partly offset the higher net interest payments. Although somewhat larger than in 1975, the current account deficit was stabil- ized at 6% of GNP. Net capital inflows were nearly doubled to $1.1 billion. Most of the inflow was from medium- and long-term loans, two-thirds of which were public loans reflecting in part increased disbursements from official sources. Estimates for 1977 show a further substantial expansion in export volume which, with little expected change in the terms of trade, import volume, services or transfers, would reduce the current account deficit to 4% of GNP and eliminate the overall payments deficit. Hence, on the whole, the balance of payments position has strengthened significantly. 21. To achieve a 7% growth rate in real GNP, as projected for the period 1978-82, imports will have to grow faster than they have recently and a net capital inflow of at least $1 billion per year will be required. Assum- ing continued sound debt management and the maintenance of a balanced maturity structure of foreign borrowings, the overall level of external debt of the Philippines is expected to remain within reasonable limits. The ratio of debt service payments to exports and nonfactor services would average about 19%, of which 7% would be public debt service, during the Plan period (1978-82). 22. In order to ensure that the long-term capital transfer is commensu- rate with the level of development expenditures which will be required during 1978-82 and that debt service obligations remain within reasonable limits, the Government sought commitments of official assistance of $750-800 million in 1978 at the meeting of the Consultative Group for the Philippines, held in Tokyo, on December 1 and 2, 1977. This amount is likely to be available. However, since many of the planned projects which are to be financed from external sources have a low foreign exchange component, some local cost finan- cing is necessary, in appropriate cases, to meet the Philippines' external financing requirements.  PART II - WORLD BANK OPERATIONS /1 23. As of May 31, 1978, the Philippines had received 54 Bank loans (of which two were on Third Window terms) amounting to $1,717 4 million and four IDA credits amounting to $60.2 million. At that date, IFC investments totalled $86.3 million. The share of the Bank Group in total debt disbursed and outstanding is about 11% and its share in total debt service is about 5%. These ratios are expected to increase to about 12% and 5%, respectively by the end of the present decade. Annex II contains a summary of IDA credits, Bank loans and IFC investments, as of May 31,1978, as well as notes on the execution of ongoing projects. 24. The Bank Group has financed projects in virtually all sectors of the economy with particular emphasis on agriculture and basic infrastructure which have each accounted for about one-third of total Bank Group lending. In agriculture, emphasis has been given to expanding the irrigation system to increase food production and to credit programs to support food grain produc- tion and processing and livestock, fisheries and tree farming production. Support has also been provided for integrated rural development projects in low income areas. The Bank Group has also provided large amounts of assistance in developing power and transportation because substantial improvement in basic infrastructure has been needed to compensate for many years of past neglect due to low levels of public expenditure and to provide the basis for future growth of the productive sectors. In the industrial sector, the Bank's main thrust has been on strengthening the capacity of public and private development finance institutions with increasing attention given to meeting the needs of small and medium industries. In the social sectors, the Bank Group has provided support for education programs designed to improve the quality of primary and secondary education and to meet trained manpower requirements in agriculture and industry. In urban areas, assistance has been provided for water supply projects and for programs to upgrade slum living conditions and to develop low cost sites and services. Support has also been provided to the Philippines population program through assistance for the construction of multipurpose rural health units and for training of family planning staff. 25. There has been a marked improvement in the execution of Bank- financed projects in the last five years compared with the experience in the late 1960s, when there were serious problems caused by a shortage of peso counterpart funds and weak administration. Almost all ongoing projects are now being implemented reasonably well and the supervision and project comple- tion reports indicate that the economic benefits for most projects are likely to be in line with appraisal estimates. However, the overall rate of disburse- ment is marginally below what would be expected given the generally good project implementation, and the Government is currently reviewing disbursement performance on an agency-by-agency basis to identify possible reasons for disbursement lags and to find appropriate solutions. /1 This part is substantially the same as that of the Third Industrial Investment Credit Project distributed under cover of Sec. M/78-103, which was approved by the Executive Directors on May 18, 1978.  - 8 - 26. As noted in Part I of this report, the Government's Five-Year Development Plan highlights a strategy which focuses on the expansion of production and employment in agriculture and industry, reduction in income disparities, greater self-sufficiency in food and energy, and increased development in rural areas. The Bank's future lending program has been designed to assist the Government in achieving these objectives. Agricul- tural and rural development will account for the largest part of future lending with continued emphasis on food production and increasing the produc- tivity and incomes of small farmers. However, the future program provides for several needed new initiatives, including a first loan to support the streng- thening of the national agricultural extension service and a first loan for developing multiple cropping systems in rainfed areas, where there is substan- tial rural poverty. Increased support will also be provided for integrated rural development projects which will support the Government's objectives of redressing regional imbalances in income. Substantial assistance will also continue to be given to industry with considerable attention given to expanding the development of labor-intensive, small and medium industries outside of the Metropolitan Manila area. The share of lending for social sector projects is expected to continue to increase as a result of greater emphasis on construc- tion of urban water supply and sewerage systems and further assistance for slum upgrading and low cost sites and services projects. The Bank Group will also continue to provide support for improving the quality of education and for expanding the Government's population program in rural areas. While the Bank Group will continue to provide support for transportation and power infrastructure needed to support the Philippine development effort, the share of Bank lending for this will decline somewhat in the years ahead primarily because alternative sources of financing are available to finance a large part of the power generation program. 27. As noted in Part I, the Philippines has experienced a serious deterioration in its international terms of trade in the last several years which has necessitated substantial foreign borrowing. While the overall level of debt remains manageable, the Philippines will need to obtain substantial amounts of foreign assistance on concessional terms to support its expanding development program. In view of this consideration, the per capita income of the country and the generally good management of the economy, a limited amount of IDA financing has been included in the Bank Group's overall lending to the Philippines. The first IDA credit since 1974 has recently been presented to the Executive Directors and a second one is scheduled for FY79. 28. This is the first loan to be presented to the Executive Directors this fiscal year. Loans for urban development, agricultural extension, small- holder credit, irrigation and highway projects are expected to be ready for presentation in the next several months.  - 9 - PART III - THE WATER SUPPLY SECTOR Background 29. The Philippines is endowed with abundant water resources. Not only does the country have an average annual rainfall of about 300 cm, but it also has nine major river basins, many lakes and streams, and extensive groundwater resources sufficient to cover foreseeable needs in most areas of the country. However, public investment in the water supply sector has traditionally been very low, with the result that the infrastructure for water supply, sewerage, and drainage is currently inadequate throughout the country. Population Served and Service Levels 30. It is estimated that only about 17 million people (38% of the estimated 1977 population of about 44.5 million) are served by public water supply systems. Of these, 3.2 million are in the Metropolitan Manila Area (MMA), 3.7 million in other urban areas, and 10.1 million in rural areas. In the MMA, 53% of the 5.8 million population has access to public water supply and in other urban areas and in the rural communities about 53% and 32%, respectively, obtain a relatively safe supply through piped systems, artesian wells and springs. In Manila and also in other communities with piped water systems, insufficient investments, growth in demand, advanced age of the facilities and high leakage rates arising from inadequate maintenance have reduced water main pressures. Many systems are operated to supply water for only a few hours a day to avoid loss of water during the off-peak hours. The remaining 27.5 million (or 62% of the population) manage with water which is often of doubtful quality from sources such as open wells, handpumps, rain water cisterns, lakes, rivers, and streams. 31. Sewerage and drainage facilities are also in great need of improve- ment. Most cities rely principally on individual septic tanks, pits and the direct discharge of untreated wastes into nearby water courses. The most recent National Health Plan (1975-85) cited poor environmental sanitation as a major factor in the high incidence of communicable diseases in the country. In Manila, typhoid, cholera and gastroenteritis are endemic; in 1972 morbidity and mortality from these diseases were about 1,800 and 80, respectively, per 100,000 population. Development of the Water Supply Sector 32. The National Waterworks and Sewerage Authority (NWSA) was created in 1955 to own and operate all of the water and sewer systems then existing in the Philippines. Almost from its inception, however, NWSA was plagued by severe managerial and financial problems. The organization suffered from weak top management, a lack of staff discipline, financial weakness exacerbated by low tariffs and inadequate financial planning, and recurring disputes with contractors and suppliers which often resulted in time-consuming court proceedings. In 1964, the Bank made a loan of $20.2 million (Loan 386-PH) to NWSA to expand and improve the water supply system serving the Metropolitan Manila Area. The problems noted above, however, seriously affected project implementation. After the closing date for the loan was postponed twice, the  - 10 - undisbursed balance of $0.6 million was cancelled in 1970. Most of the project components were completed in 1972, although some works continued until 1975. 33. During the 1970s, the Government has taken a number of important steps to improve the organization of the water supply sector. NWSA was dissolved in 1971 and the Metropolitan Waterworks and Sewerage System (MWSS) was created under a new charter to be primarily responsible for water supply and sewerage in the MMA./1 Since that time the management of water supply operations in Metropolitan Manila has improved significantly. The financial position of MWSS has also been improving steadily. In May 1974, water tariffs were increased, MWSS' capital was restructured and its past loans were converted into equity, all of which helped MWSS earn surpluses in FY75 and thereafter. 34. The creation of MWSS had no effect on the water supply problems of provincial cities, whose needs had traditionally been neglected by NWSA. Consequently, the Local Water Utilities Administration (LWUA), a semi autono- mous government corporation, was established in September 1973 to (a) assist in the formation and development of technically sound and financially viable locally-controlled water districts (WDs); (b) provide loans to the WDs for the improvement and expansion of water supply and waste water disposal systems; (c) provide technical assistance and personnel training for the WDs; and (d) establish and enforce standards of water quality and service. Currently, LWUA helps cities with population of 30,000 and more. There are about 300 such communities in the Philippines of which 60 had formed WDs as of December 31, 1977. To extend further the water supply benefits, the Government is considering the formation of WDs in communities with populations exceeding 20,000. Since the establishment of LWUA, significantly greater attention has been directed to the needs of the provincial cities and with the assistance of international and bilateral aid agencies, water supply projects are under execution in a number of WDs and feasibility studies are being made for projects in other WDs. 35. Responsibility for water supply in the urban centers, which are not covered by MWSS and LWUA, as well as in the rural areas, rests with the local authorities. Several government departments: the Bureau of Public Works, the Environmental Sanitation Division of the Ministry of Health and the Ministry of Local Government and Community Development assist the local governments, but coordination is lacking. A water supply and sewerage study carried out in late 1976 at the Government's request by staff of the IBRD/WHO Cooperative Program identified serious deficiencies in the provision of basic water supply services to these communities mainly because of poor institutional arrangements, lack of trained staff and inadequate operational and maintenance practices. These deficiencies are being addressed by the Government with the assistance of the Bank and other bilateral agencies. /1 MWSS still provides support to 82 provincial water supply systems. However, the Government has approved the transfer of these systems to local authori- ties. The local authorities will be encouraged to form Water Districts to become eligible for assistance from LWUA.  - 11 - Investment Program 36. To remedy the past neglect of this sector, the Government has embarked upon an ambitious water supply program in the countLy. In Manila, the proposed project to be financed partly by the Bank and ADB will about double the water supply to 2,500 Mld and by 1987 provide safe drinking water, at adequate pressures, to about 4 million additional residents, as well as improve the present unsatisfactory service to about 3 million. A sewerage and sanitation improvement project is also included in MWSS' construction program for 1980-1983. Without these investments the water supply and sanitation services in MMA would deteriorate further, and the danger to public health would increase. MWSS' proposed investment in the 6 years 1978-83 would, in nominal terms, be about 20 times its capital expenditures in the immediately preceding 6 years. Consequently, MWSS' managerial and staff capabilities would need to be greatly strengthened during the coming years to implement this program and to improve its operational, financial and maintenance capa- bilities. The proposed project is designed to address these needs. LWUA's program for assisting WDs in provincial cities in the five years 1977-81 would amount to about $140 million, an average of $28 million per annum compared to $12 million in 1976. For the rural areas, the Five-Year Plan envisages an investment of $155 million, an average of $31 million per annum compared with about $2 million per annum in 1973-76. While this target is probably ambitious, the Government is now considering steps to establish the organiz- ational arrangements necessary to implement a much larger future rural water supply program. To complement the water supply and sewerage program, the Government has recently adopted large urban programs to expand basic services in low-income urban areas in integrated packages of water supply, sewerage, roads and other infrastructure. These programs will be carried out by the National Housing Authority and municipal governments, and Bank assistance for them is planned. Bank Lending for Water Supply and Sewerage 37. The Bank's strategy in the water supply and sewerage sector is to support the Government's investment program for improving water supply, sewerage and sanitation facilities and to provide technical assistance and training for institution building and staff development. A loan of $23 mil- lion (Loan 1415-PH) was made to the Government in 1977 for water supply projects in six provincial cities. As indicated in Annex II, progress in implementing this project is satisfactory. The proposed loan of $88 million would help improve and expand the Manila water supply system, finance detailed design and feasibility studies for water supply in provincial cities and preparation of a rural water supply program. The Bank's future lending program includes a loan for sewerage and sanitation in Manila and a loan for construction of additional water supply systems in provincial cities and rural areas. Bank-financed urban and rural development projects are also providing water supply and sanitation systems for low-income groups. Other multilateral and bilateral agencies such as ADB, USAID, and the Danish International Development Agency are also assisting the Government in developing such systems.  - 12 - PART IV - THE PROJECT Objectives 38. The primary objective of the project is to improve the population of Metropolitan Manila's access to safe water supplies by (a) developing fully the present major source of supply at Angat river; (b) rehabilitating and extending the water distribution system; and (c) assisting MWSS to become a more efficient public utility. The proposed project was prepared by MWSS with the assistance of engineering consultants, Camp, Dresser and McKee International Inc. of USA (CDM), financed by a loan from ADB. It was appraised in November-December 1977. Negotiations were held in Washington in May 1978 with a Philippine delegation led by His Excellency Eduardo Z. Romualdez, Philippine Ambassador to the United States. A Staff Appraisal Report entitled "Philippines - Manila Water Supply Project II (No. 1978-PH dated July 7, 1978) is being distributed separately. Supplementary project data are provided in Annex III. 39. The principal features of the project are summarized below: Part A (a) Source development to almost double the water production capacity, including modification to the existing Angat power house, the con- struction of a dam, aqueduct, treatment plant and miscellaneous rehabilitation works; (b) construction of about 65 km of primary and secondary pipelines to serve north Manila, including bulk water supply to Tondo and Dagat- Dagatan; (c) construction of new reservoirs and pumping stations at Bagbag, Bonifacio and Kawit, including rehabilitation of existing pumping stations and construction of meter maintenance facilities and installation of meters; and (d) technical assistance for institutional development and project implementation. Part B (a) Construction of about 150 km of primary and 520 km of secondary networks, including river crossings, pipe rehabilitation, tertiary network and service connections; (b) construction of about 50 deep wells, including pumps and storage reservoirs; (c) acquisition and installation of about 520,000 domestic and 18,000 industrial/commercial water meters; (d) construction and provision of equipment, vehicles and tools for 8 operations and maintenance branch offices and upgrading of 13 existing branch offices;  - 13 - (e) construction and equipping of a water supply training school; and (f) technical assistance for project implementation and staff 'evelopment. Part C (a) preparation of detailed designs for water supply projects in provin- cial cities for which feasibility studies are being carried out under Loan 1415-PH; and (b) feasibility studies for water supply projects in provincial cities. Part D Preparation of a rural water supply project. Project Area and Served Population 40. The capital, Manila, is the main port of entry and the industrial, commercial and cultural center of the nation. It accounts for one-third of the total urban population of the Philippines and one-third of the urban poor. Manila's population has grown at 5% p.a. since 1960 and, as past investment in public services has been low, many of the basic needs of the population are not being met. The need for improved water supply and sewerage is particularly acute. 41. The population of MWSS' service area is about 5.8 million, of which presently only about 2.0 million have access to piped water supply through house connections. Another 1.1 million obtain water from public standpipes or from neighbors, and 1.5 million from private sources. The remaining 1.2 mil- lion have no identifiable source of water supply. 42. On project completion in 1982, about 78% of MWSS' service area population of 7.6 million will have access to public water supplies; 4.2 mil- lion people will have direct house connections and 1.7 million will be served by public standpipes or obtain water from neighbors; the remaining 1.7 million (about 22%) will be dependent on private supplies. By 1987, when the project facilities will be fully utilized, about 80% of the 9.2 million projected population will be served by MWSS and the remainder living in the fringe areas will be on private supplies. 43. Standpipes are intended to be a temporary measure providing service primarily to the unserved population and those living in the poorest areas (blighted areas) of Metro Manila. Under the Zonal Improvement Program (ZIP),/1 415 such blighted areas have been identified, of which 380 are to be upgraded and the remainder relocated. On the basis of one standpipe per hectare, about 850 additional standpipes will be constructed in the ZIP areas to serve the residents of these areas until the ZIP program has been implemented. /I This is an ongoing program of the National Housing Administration.  - 14 - 44. Average domestic consumption of the directly served population of Manila who have adequate pressures and a 24 hour supply is about 195 lcd. However, because the service is intermittent and pressures are low in most parts of Manila, domestic consumption is presently about 180 lcd. The consump- tion rate of 195 lcd with slight variations is therefore used in calculating the demand for 1982 through 1987 when the criteria of adequate pressure and 24 hours service would be achieved under the project. It is expected that increases above this level will be discouraged by tariff increases proposed in 1978-82. 45. In 1977, unaccounted for water represented 48% of total production. About 8% of production went unrecorded because of non-metering of consumption or under registration by meters. Another 10% of production was used for munici- pal purposes and for testing pipelines and flushing mains. The bulk of the unaccounted for water, 30% of production, was lost in leaks and unauthorized connections. MWSS has set for itself targets to reduce water losses due to these causes to 25% and 20% in 1982 and 1985, respectively, and plans to charge, wherever possible, for water used in watering of parks and roads. MWSS would also control its own use and by 1984 reduce municipal and MWSS use to 5% of production. It has been agreed that MWSS would prepare, by January 1, 1979, an implementation program, acceptable to the Bank, for reducing the unaccounted for water, and implement the program thereafter (Section 3.03 of the draft Project Agreement). Equipment and technical assistance for mainten- ance and leak detection provided under Part A of the project would help support this program. Project Cost and Financing 46. The project is estimated to cost $397.1 million equivalent with a foreign exchange component of $188.3 million (47%). ADB made a loan of $51.3 million to MWSS in August 1974 and is currently considering a proposal to make a further loan of about $49 million to finance the full foreign exchange requirements of Part A of the project. The proposed Bank loan of $88 million would be made to the Government; $85 million of the proceeds would be relent on the same terms as the Bank loan to MWSS to finance the estimated foreign exchange costs of Part B of the project, and $2.5 million to LWUA for Part C of the project. MWSS and LWUA would each bear the foreign exchange risk on the amounts of the loan relent to them. The Government would implement Part D of the project with the balance of $0.5 million. The local costs of P 1,545.5 million ($208.8 million) would be met by MWSS from its internal cash generation and from funds to be provided by the Government. An additional condition of effectiveness of the loan would be the execution of the Loan Agreement between MWSS and ADB for Part A of the project (Section 6.01 (d) of the draft Loan Agreement). 47. Most of the work in the project is below ground and all of the work in Part B is in the.construction of pipelines of varying diameters in or near built up areas. Though investigative trial holes have been made, the possibility remains of unforeseen obstructions, corrosive soils and poor founda- tion conditions; a physical contingency provision of 15% has, therefore, been  - 15 - made in the cost estimates for civil works and equipment. This provision is reasonable for work of this type. Provisions for price contingencies have been made as follows: 8% for local expenditures in 1979-83; for foreign expendi- tures, 8% in 1979-81, 7.5% in 1982 and 7.0% in 1983. The to-al provision of $23.4 million for price contingencies in Part B amounts to 15% of the baseline costs. Project Implementation 48. The implementing agency for the water supply project for Metro Manila would be MWSS, a wholly Government-owned public utility corporation created under the Republic Act 6234. Since its creation in 1971, MWSS has been developing steadily and shows signs of becoming a reasonably good organi- zation. A Chairman, three trustees and the General Manager, all appointed by the President of the Republic of the Philippines, constitute the MWSS' Board. The present General Manager is capable and experienced. However, to manage a rapidly growing program he would need assistance and expert advice in organi- zing and coordinating MWSS' four departments of engineering; finance and administration; customer services; and operations. Internationally recruited advisers and management consultants (financed under Part A of the project for a total of 63 man-months) would assist the management in project implementation. These consultants would also assist in reviewing and recommending changes in the organization, improving metering, billing and financial planning; preparing and implementing a planned preventive maintenance program; and establishing a more effective program of leak detection and repair. An assurance was obtained that the Bank would be given an opportunity to comment on any major proposed changes in MWSS's organizational structure (Section 3.02(i) of the draft Project Agreement). 49. MWSS' Office for Special Projects (OSP), which is in the engineering department, would be responsible for carrying out the project construction. CDM would assist in the preparation of detailed designs and bid documents, evaluation of bids and supervision of construction. The Assistant General Manager for engineering has the responsibility for the day-to-day liaison with CDM and approval of technical proposals and all matters related to procurement. His department has recently been strengthened by the creation and filling of two posts of Project Managers, one for water supply and another for sewerage. It has been agreed with MWSS that the filling of any future vacancy in the key positions of the General Manager, the Assistant General Managers and the Project Manager (water supply) would be made after the Bank has been given an opportunity to comment on the qualifications and experience of the proposed appointee (Section 3.02 (iii) of the draft Project Agreement). Part B of the project provides for a total of 216 man-months of construction supervision and training services at an average man-month cost, excluding transporation housing and local costs, ranging from $5,600-$8,800. 50. During the next five years, MWSS will need to increase its staff from its present level of 2,800 to 4,000 to carry out the rapidly expanding water supply and sewerage program. Assurances were obtained during negotiations that MWSS would prepare, by September 1, 1979, a staffing plan which would be reviewed annually and implemented in consultation with the Bank (Section 3.02 (ii) of the draft Project Agreement) and a special training division would  - 16 - be created by not later than June 1, 1979 (Section 3.02 (v) of the draft Project Agreement). Part B of the project also provides for the establishment of a residential training school. MWSS' accounts are audited by the staff of the Government's Commission on Audit. An adequately staffed internal audit division would be established by MWSS and by June 1, 1979 it would lay down detailed procedures for internal audit (Section 3.02 (iv) of the draft Project Agreement). 51. No major problems of land acquisition for the wells and pipelines are anticipated and agreement has been reached with MWSS that land acquisition would be carried out in accordance with an agreed implementation schedule (Section 2.07 of the draft Project Agreement). Financial Analysis 52. NWSA, MWSS' predecessor suffered losses continuously until it was dissolved in 1971. In the first three years, 1972-1974, MWSS also incurred losses of an average of about P 11.0 million each year. However, the actions taken by the Government in May 1974 (para 33) helped MWSS, turn the corner and produce net surpluses of about P 48.0 million in both 1975 and 1976. 53. MWSS' investment program for water supply and sewerage facilities during the six years 1978-83 is of the order of $692 million equivalent and, includes the proposed Manila Water Supply Project; Manila Sewerage Project; first year's expenditure on the next stage water supply project; other minor works; and interest during construction. Internal cash generation would meet $216 million (31%); foreign borrowings $246 million (36%); Government equity contribution $122 million (17%); Government loan $94 million (14%) and consumers' contributions $14 million (2%) of the estimated capital expenditures. 54. MWSS' current water rates, which have been in existence since May 1974, are totally inadequate because its operating costs have almost doubled since then. Domestic consumers pay between P 0.20 and P 0.60 per cu m (10-30 US cents per 1,000 gallons) depending on the volume of water consumption. Commercial and industrial consumption is charged at P 0.60 and P 0.80 per cu m respectively. The average revenue is P 0.50 per cu m. Under the existing rates, MWSS would just break even in 1978 or show a small loss. MWSS has therefore decided that with effect from October 1, 1978 the water tariffs will be raised to achieve an average of P 0.80 per cu m while slightly reducing the existing low rate for poor families consuming 10 cu m per month. In view of the poor and intermittent service to the consumers, a higher increase is not warranted at this stage.  - 17 - 55. MWSS' objective is to become a financially self-supporting utility, generating adequate cash surpluses (after meeting operating costs and main- tenance expenditures) to cover its debt service obligations, meet expenditures on normal -xpansion of its activities and provide a substantial part of the funds for its major capital investments. It has been agreed that, on comple- tion of the project in 1982, MWSS would achieve a rate of return of at least 8% on revalued net fixed assets in operation (Section 4.05 of the draft Project Agreement). This rate of return would enable MWSS to provide, from its own resources, about P 400 to E 600 million annually for capital works, thereby reducing its dependence on government funds for expansion of its facilities. In the intervening years, 1979 through 1981, as the service levels improve, MWSS would earn a rate of return of at least 3% in 1979 and 5% in 1980 and 1981 on revalued net fixed assets. The basis for an annual revaluation of fixed assets commencing in 1978 would also be agreed with MIWSS (Section 4.06 of the draft Project Agreement). 56. To achieve the above rates of return, tariffs would need to be reviewed every year. MWSS has agreed to carry out an annual review of water rates in 1979 through 1982; consult with the Bank on the adequacy of water charges based on these reviews and implement expeditiously the recommendations thereof, including, if necessary, the revision of tariffs (Section 4.04 of the draft Project Agreement). 57. Domestic connections account for some 90% of the total service connections of which about three-fourths are half inch, and on an average use about 40 cu m per month. Assuming that consumers at the poverty level of about P 500 per month use 30 cu m monthly (125 lcd for 8 family members on an average), they would be required to pay about P 13.5 per month for water under the new rates (para. 54). This would amount to about 3% of income. For the very poor, a monthly consumption of 15 cu m, adequate for basic needs, would involve a payment of about 2.5% of income. These charges are within the consumers' ability to pay. Additionally, to help poor families, MWSS has decided that the cost of providing half-inch service connections would not be charged to the new domestic consumers, and would be absorbed by the general tariffs. 58. The projected average rate of P 1.80 per cu m in 1984 involves an annual increase of about 15% in nominal terms over the new tariff. Adjusting for inflation of 10% (adopted for projecting operating expenses) and assuming a growth of some 5 - 6% in real incomes, the 1984 projected tariff would not involve a higher burden on domestic consumers than about 3% of income. The large domestic users and the commercial and industrial users would subsidize the poor consumers and the economically efficient allocation of water resources would be promoted through the tariff levels.  - 18 - 59. The financial projections show that MWSS' debt will not exceed 33% of capitalization and its debt service coverage will not fall below 1.6 times throughout the project period. These debt/equity ratio and debt service coverages are satisfactory. However, to safeguard against MWSS incurring additional heavy debt, which may jeopardize its financial position and involve an unduly large debt service burden, assurances have been obtained that MWSS would not incur, without the Bank's consent, any long term debt unless its net income for the 12 months immediately preceding the incurrence of such debt is at least 1.5 times the maximum debt service in any succeeding year (Section 4.07 of the draft Project Agreement). It has also been agreed that during the project construction period, MWSS would not, without the Bank's approval, undertake major capital works estimated to cost the equivalent of $3 million or more and expenditures for any capital works shall not exceed the equivalent of $6 million in any one year (Section 4.08 of the draft Project Agreement). 60. Billing of water and sewerage revenues is computerized and is on regular monthly cycles. Collection efficiency has improved considerably in the last two years but accounts receivable are still very high, equal to about 7 months billings, and include bills due for over 10 years. MWSS has undertaken to review and write off old uncollectible accounts and, by 1980, to bring down the receivables to not more than four months billings (Section 4.03 of the draft Project Agreement). Procurement 61. Equipment and supplies for Part B of the project (costing about $106 million) would be procured on the basis of international competitive bidding in accordance with Bank Group Guidelines. A preference limited to 15% of the c.i.f. price of imported goods, or the custom duty, whichever is lower, would be extended to qualified local manufacturers in the evaluation of bids. Major civil works contracts costing about $73 million would be awarded on the basis of international competitive bidding in accordance with Bank Group Guidelines. Contracts for the installation of meters and construction of public standpipes costing about $5 million; for the construction of branch offices, training school and purchase of related equipment costing about $1 million and for well drilling costing about $2 million would be awarded on the basis of bids advertised locally in accordance with local procedures acceptable to the Bank. These contracts represent about 4% of the Part B total project cost. There is potentially adequate local competition and foreign firms would be eligible to participate. Items costing less than $20,000 each would be procured through normal Government procedures acceptable to the Bank. Compe- titive bidding would not be appropriate for these small and diverse items which would be needed often on short notice for rehabilitation works, for ensuring that the metering targets are kept and for equipping the branch offices and training school. The total costs of such items would not exceed $500,000. Disbursement 62. The Bank loan would be disbursed for 100% of the foreign exchange cost of directly imported equipment and materials, including mobilization and construction equipment under civil works contracts, 100% of the ex-factory price of 1ocally manufactured goods and 65% for goods procured locally.  - 19 - Disbursements for civil works would be 40% of expenditures. For costs of consultants and trsining, disbuirsement would be at the rate of 100%. Project Benefits and Risks 63. Presently, over 2 million people in Manila, one of the world's largest cities, do not have safe or adequate quantities of water to maintain a reasonable standard of personal hygiene and health and to enjoy a decent quality of life. The justification for the proposed project is that it would substantially increase access to safe drinking water for most of the inhabi- tants of Metropolitan Manila. About 80% of the projected MMA service area population of 9.2 million in 1987 will be served by MWSS. The project would also strengthen MWSS' management, its financial performance and project imple- mentation capability and will provide staff training. 64. The urban poor of Manila, estimated at 2.0 million in 1977 (34% of MWSS service area population) are scattered throughout the city in small groups in depressed areas; as squatters on public land; as groups of one or two families living with the middle and upper income neighbors or in the industrial and commercial areas. Under these circumstances, the only method of ensuring that a large number of the poor benefit from the project is to lay the network of pipes in the distribution system to cover most of the populated areas of Manila. Special provision has been made in the project to construct public standpipes for the very poor and to lay a tertiary grid of small pipes to the blighted areas of the city to reach as many low income families as possible. 65. It is estimated that in 1987, of the projected 4.6 million urban poor, 3.3 million or 74% will have reasonable access to safe water. The remaining 1.3 million living in the fringe semi-rural areas of the city will be mostly dependent on unsafe private water supplies until piped water is provided to them in the next stage of Manila's water supply program. About 2.2 million people, or 55% of the additional population of 4.0 million served by the proposed project, would be the urban poor. About 20% of the total domestic consumption in 1987 would be used by the poor, and the increased commercial and industrial water use (about 150% over the 1977 use) would also benefit them. 66. Approximately 10,000 additional jobs for 30 months will be provided during project construction and MWSS operational staff will be increased from about 2,800 to 4,000 because of the water supply and sanitation program. 67. Taking the revenue derived from water charges as the measure of project benefits and assuming the proposed tariff increases and a 40-year project life, the incremental economic rate of return (IER), based on 1978 prices, is about 12%. For calculating the IER, foreign exchange expenditures were shadow priced at 1.1. Sensitivity analysis indicates that the return could drop to about 10% if the project costs exceed the current estimates by 20% and could increase to 15% if such costs were 20% lower than estimated. The IER is not sensitive to increases in operating expenses but a decrease of 20% in revenues or postponement of project benefits by two years would lower it to about 9%. By using water revenues as a surrogate for the project benefits, the IER of 12% does, in fact, understate the rate of return. It  - 20 - ignores the consumer surplus, or the additional value of the total water consumed above the amount paid for the water. Moreover, the health, fire- fighting and environmental benefits that accrue to the community by improved water supply are not captured by the water revenues. While it is impossible to quantify these benefits, their exclusion biases the IER downwards. 68. The project will directly benefit the environment of MWSS' service area. It will, however, increase the quantities of waste water requiring disposal. A sewerage and sanitation project is therefore under preparation and is planned for implementation in 1980-83. This project will help ensure that most of the waste waters are disposed of safely. Because of recent government policy to permit only nonpollutive new industry within MMA, no unusual environmental hazards are foreseen because of the project. 69. Though MWSS still needs to improve its operational, maintenance and financial performance, it has come a long way since its creation in 1971 and has made steady progress. However, the magnitude of the proposed investment is very much larger than MWSS's past program and it will, therefore, need expert advice and technical assistance and training to implement the project effectively. The proposed project includes adequate provision for such assistance. With this technical assistance, the risk of delays or serious difficulties in the construction of the major project components would be reduced. However, the project would involve a substantial increase in MWSS' services, including making house connections and collecting water charges. The decentralization of MWSS' operations will address this problem, but strong and continuing efforts will be essential to ensure adequate service and collection. This risk will be minimized by close and frequent project supervision both by the Bank and ADB. PART V - LEGAL INSTRUMENT AND AUTHORITY 70. The draft Loan Agreement between the Republic of the Philippines and the Bank, the draft Project Agreement between the Bank and Metropolitan Waterworks and Sewerage System and the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement of the Bank are being distributed separately to the Executive Directors. Special conditions of the project are listed in Section III of Annex III. The execution of the loan agreement between the ADB and MWSS for Part A of the project has been made an additional condition of effectiveness of the proposed loan (Section 6.01 (d), of the draft Loan Agreement). 71. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 72. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments July 12, 1978  Annex I Page 1 of 4 pages TABLE 3A PHILIPPENES - SOCIAL INDICATORS DATA SHEET LAND AREA (THOU KM2) -------------------------______________________ _______________ . PHILIPPINES REFERENCE COUNTRIES (1970) TOTAL 300.0 MOST RECENT AGRIC. 109.6 1960 1970 ESTIMATE THAILAND lURKEY KOREA SOUTH ** GNP PER CAPITA (USS) 140.0* 230.0* 45Q*3j 210.0 * 500.0* 280.0* POPULATION AND VITAL STATISTICS _______________________________ POPULATION (MID-YR, MILLION) 27.4 36.9 43.3/a 36.3 35.6 32.2 POPULATION DENSITY 144 0 PER SQUARE KM. 91.0 123.0 . 71.0 46.0 327.o PER SQ. KM. AGRICULTURAL LAND 328.0 375.0 395.0/a 263.0 65.0 1371.0 VITAL STATISTICS CRUDE BIRTH RATE (/THOU, AV) 45.1 44.2 43.8 44.3 40.6 35.o CRUDE DEATH RATE (/THoU,AV) t7.9 13.2 10.5 13.7 14.4 11.4 INFANT MORTALITY RATE (/THOU) 84.681. Qf 720 80.0 153.0/a LIFE EXPECTANCY AT BIRTH (YRS) 3.5 . 3K.2 54.6/4. 65.0 GROSS REPRODUCTION RATE 3.5/a 3.3 3.3 3.2 2.b,c 2.S POPULATION GROWTH RATE (%) TOTAL 3.0 3.0 2.8 3.1 2.5 2.3 URBAN 4.0 4.0 3.9 4.9 4.9/d 6.4 URBAN POPULATION (% OF TOTAL) 25.3 27.6 29.8 15.0 38.7 41.2 AGE STRUCTURE (PERCENT) 0 TO 14 YEARS 45.7 45.6 43.2 45.1 41.7 42.t 15 TO 64 YEARS 51.6 51.6 54.0 51.8 54.0 54.5 65 YEARS AND OVER 2.7 2.8 2.8 3.1 4.3 3.4 AGE DEPENDENCY RATIO 0.9 9 0 0. 0.9 0.9 0.8 ECONOMIC DEPENDENCY RATIO 1.3/b 1.5 1. 3b 1.1 .1:/e 1.4 FAMILY PLANNING ACCEPTORS (CUMULATIVE, THOU) .. 320.0 4065.0/a 470.0 , 4424.7 USERS (% OF MARRIED WOMEN) .. 2.0 25.0/a 10.0 8.2 42.0 EMPLOYMENT TOTAL LABOR FORCE (THOUSAND) 10100.0 12400.0 15400.0/a 16700.0 14500.0/f 10200.0 LABOR FORCE IN AGRICULTURE (%) 61.0/C 55.0/a 52.67a 79.0 67.0 50.4/a IINFMP! CYfl (% O' LABOR FOCE) 1. e 7.5 4.C 4 4.0/ 4A . INCOMC D:STRIBUTION X OF PRIVATE INCOME REC'D BY- HIGHEST 5% OF HOUSEHOLDS 28.8 .- * 22.0 32.Wjh 17.1 HIGHEST 20% OF HOUSEHOLDS 56 2 5 51. 60.6 44.5 LOWEST 20% OF HOUSEHOLDS 4.2 .'D A 5..6 2.9 7 7 LOwEST 40% OF HOUSEHOLDS 11.9 11.7 14.7 14.3 9.4Th 17.7 DISTRIBUTION OF LAND GWN -.,1I-, % OWNED BY TOP 10% OF OWNERS .. ., 43.0/C .. 53.0 28.0 % OWNED BY SMALLEST 10% OWNERS .. .. 2.0/c .. 0.9 2.0 HEALTH AND NUTRITION POPULATION PER PHYSICIAN .. 1190. 7970.0 2250.0 2110.0 POPULATION PER NURSING PERSON .. 4 0. GM 6650.0 1770.0 /i 2170.F b POPULATION PER HOSPITAL BED 1180.0 850.0 880.0 890.0 500.0 1900.0 PER CAPITA SUPPLY OF - CALORIES (% OF REQUIREMENTS) 83.0 93.0 105.7 103.0 110.0 103.0 PROTEIN (GRAMS PER DAY) 44.0 45.0 55.6 52.0 78.0 65.0 -OF WHICH ANIMAL AND PULSE 19.0 /d 22.0 ., 17.0 /a 22.0 L 19.0 DgATH RATE (/THOU) AGES 1-4 9,0/e 6.G 7.5 14.7 /k EDUCATION ADJUSTED ENROLLMENT RATID PRIMARY SCHOOL 95.0 113.0 117.0 81.0 109.0 104.0 SECONDARY SCHOOL 26.0 49.0 49.0 16.0 28.0 41.0 YEARS OF SCHOOLING PROVIDED (FIPST AND SECOND LEVEL) 10.0 10.0 10.0 12.0 11.0 12.0 VOCATIONAL ENROLLMENT