Philippines - Second Manila Water Supply Project

Document of lb The World Bank y FOR OFFICIAL USE ONLY Report No. 1978-PH STAFF APPRAISAL REPORT PHILIPPINES MANILA WATER SUPPLY PROJECT II July 7, 1978 This document has a restricted distribution and may be used by recipients only in the performancc of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (As of July 1, 1978) 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. MWSS' FISCAL YEAR Prior to 1976 July 1 to June 30 From 1976 January 1 to December 31  FOR OFFICIAL USE ONLY PHILIPPINES MANILA WATER SUPPLY PROJECT II STAFF APPRAISAL REPORT TABLE OF CONTENTS Page No. I. THE SECTOR . . . . . . .. . . . . . . . . . . 1 Background . . . . . . . . . . . . . . . . . . 1 Population Served and Service Levels. . . . . . . . . . . . 1 Development of the Water Supply Sector. . . . . . . . . . . I Investment Program. . . . . . . . . . . . . . . . . . . . . 3 The Bank's Strategy . . . . . . . . . . . . . . . . . . . 3 II. THE BORROWER AND THE BENEFICIARIES. . . . . . . . . . . . 4 The Borrower . . . . . . . . . . . . . . . . . . . . . 4 Metropolitan,Waterworks and Sewerage System . . . . . . . 4 Organization . . . . . . . . . . . . . . . . . . . . . 4 Management .... . . . . . 5 Billing, Collections and Receivables . . . . . . . 6 Accounts,and Audit .... . . . . .. 7 III. WATER DEMAND. . . . . . . . . . . . . . . . . . . . . . . . . 8 Project Area . . . . . . . . . . . . . . . . 8 Population . . . . . . . . . . . 9 Water Supply Zones . .... .....9 Domestic Service Categories . . . . . . . . . . . 10 Population Served. . . . . . . . . . . . . 12 Water Consumption and Sales. . . . . . . . . . . . . . . . 12 Unaccounted for Water. . . . . . . . . . . . . . . . . . . 14 IV. THE PROJECT .... . . . . . . . . . .... . . . . . . . 15 Objectives .... . . . . . . .... ..... . . . . . . 15 Existing System . . . . . . . . . . . . . . . . . . . . . 17 First Stage Project . . . . . . . . . . . . . . . . . . 17 Supply System Optimization . . . . . . . . . . . . . . . . 17 Distribution System Alternatives . . . . . . . . . . . . . 18 Meters, Service Connections and Public Standpipes. . . . . 20 Well Systems .20 Institutional Development and Training . . . . . . . . . . 20 Parts C and D of the Project . . . . . . . . . . . . . . . 21 This project was preappraised and appraised in August and November 1977 by a mission composed of P.C. Kapur and A. Saravanapavan. 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 - Page No. Cost Estimates ..................... 21 Contingencies. . . . . . . . . . . . . . . . . . . . . . 23 Financing Arrangements ... . . . . . . . . . . . . . . . 24 Procurement. . . . . . . . . . . . . . . . . . . . . . . . 24 Disbursements. . . . . . . . . . . . . . . . . . . . . . 25 Design, Construction and Supervision of Construction . . . 25 Implementation Schedule. . . . . . . . . . . . . . . . . 25 Environmental Impact . . . . . . . . . . . . . . . . 25 V. FINANCIAL ANALYSIS ...... . . . . . .. , . . .. . 26 Past Results and Financial Position. . . . . . . . . . . . 26 Future Position ............... * . . . 26 Financing Plan .... . . . . . . . . . . ... . ... . 27 Water Tariffs and Rate of Return . . . . . . 29 Ability to Pay . . . . . . . . . . . . . . . . . 31 Projected Ratios .... . . . . . . . . . . . . . .. . 32 Duties and Taxes . . . . . . . . . . . . . . . . . . . . . 32 Revaluation of Assets. . . . . . . . . . . . . . . . . . 32 Debt Control . . . . . . . . . . . . . . . . . . . . . . . 33 VI. JUSTIFICATION.. . . . . 33 General .... . 33 Least Cost Solution. . . . . 33 Service to the Urban Poor . ...... . . . . . . . . . 34 Employment . . . . . . . . . . . . . . . . . . . . . . . 35 Economic Evaluation . . . . . . . . . . . . . . . . . . . 35 Project Risks. . . . . . . . . . , . . . . . . . . . . . 36 VII. AGREEMENTS REACHED AND RECOMMENDATIONS . . . . . . . . . . . 36 ANNEXES 1. Tables and Charts Table No. T-1. Projected Population T-2. Extents of Inlying and Outlying Zones T-3. Populations within Inlying and Outlying Zones T-4. Domestic Connections T-5. Standpipes T-6. Total Number of Service Connections T-7. Inlying Zone Population Served  - iii - Table No. (continued) T-8. Outlying Zone Population Served T-9. Population Served T-10. Annual Domestic Water Consumption T-11. List of Completed Work T-12. Existing Supply Facilities in Operation T-13. Existing Distribution Pipelines in Operation T-14. Comparison of Angat with other Sources T-15. Comparison of Ipo-Bicti Alternatives T-16. Project Cost Estimates - Part A T-17. Project Cost Estimates - Part B T-18. Summary Cost Estimates - Parts A and B T-19. Disbursement Schedule T-20. Financial Results of MWSS' Operations T-21. Existing and Proposed Water Tariffs T-22. Incremental Economic Rate of Return Calculations 2. Financial Statements - income statement; statement of sources and application of funds; and balance sheet 3. Assumptions in Financial Forecasts 4. Selected Documents and Data Available in the Project File Charts IBRD 18559 Organization Chart IBRD 18659 Annual Water Production and Use IBRD 18658 Implementation Schedule Maps IBRD 13465 Project Components IBRD 13466 Distribution System IBRD 13467 Blighted Areas   MANILA WATER SUPPLY PROJECT II I. THE SECTOR Background 1.01 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 1.02 It is estimated that only about 17.0 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 MMA, 53% of its 5.8 milion 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. 1.03 Sewerage and drainage facilities are also in great need of improve- ment. 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. Most cities rely principally on individual septic tanks, pits and the direct discharge of untreated wastes into nearby water courses. Development of the Water Supply Sector 1.04 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  -2- 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. 1.05 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 FY76. 1.06 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. 1.07 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 Department of Health and the Department 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. The Government has approved the transfer of these systems to local authorities. The local authorities will be encouraged to form Water Districts and become eligible for assistance from LWUA (para. 1.06).  -3- Investment Program 1.08 To remedy the past neglect of this sector, the Government has embarked upon an ambitious water supply program in the country. In Manila, the proposed project to be financed partly by the Bank and partly by the Asian Development Bank (ADB) (para 4.03), 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 improve- ment project is also included in MWSS' construction program for 1980-1983. But for these investments the water supply and sanitation services in MMA will deteriorate further, and the danger to public health will 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 capabilities will be over-stretched end will need to be supplemented. Management and engineering consultants and advisors financed under the project (paras. 2.08 and 4.20) will help MWSS to implement the project and upgrade its operational, financial and maintenance capabil- ities. LWUA's program for assisting WDs in the 5 years 1977-81 would amount to about $140 million, an average of $28 million per annum as against $12 million in 1976. For the rural areas, the Five Year Plan envisages an investment of $155 million, an average of $31 per annum compared with about $2 million per annum in 1973-76. Despite the efforts of the Government and assistance from the Bank and other agencies, this target will only be partially achieved because of the delays in deciding upon a suitable organization to coordinate the rural water supply sector. The Bank's Strategy 1.09 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) made to the Government in 1977 is currently financing (a) improvement of existing and construction of additional facilities in 6 WDs; (b) feasibility studies for 10 more WDs; (c) feasibility studies and design for sewerage and sanitation project in Manila; and (d) staff training. A loan of $85 million is now proposed for Manila Water Supply Project II and $3.0 million for feasibility and design studies for water supplies in addi- tional provincial cities and rural areas. The Bank's lending program for FY80 includes a loan of $85 million for sewerage and sanitation for MWSS; a loan of $35 million for water supply in 10 additional provincial cities and in rural areas. Water distribution and sanitation systems for low income groups provided through integrated packages of housing, roads, and other infrastructure improvements, are also included in the Bank's FY79 and FY81 programs for urban and rural development. Other multilateral and bilateral agencies such as ADB, United States Agency for International Development (USAID), Danish International Development Agency are also assisting the Government in this sector.  -4- II. THE BORROWER AND THE BENEFICIARIES The Borrower 2.01 The Borrower will be the Republic of the Philippines and the beneficiaries will be MWSS and LWUA. The Government will relend, on the same terms and conditions as the Bank loan, the bulk of the proceeds of the loan ($85.0 million) to MWSS to finance a part of the Manila Water Supply Project and $2.5 million to LWUA for feasibility studies and detailed design for water supply projects in provincial cities; it will utilize the balance of $0.5 million to prepare a rural water supply project. Metropolitan Waterworks and Sewerage System 2.02 MWSS is a wholly government-owned public utility corporation. Prior to its creation in 1971, responsibility for all water supply and sewerage systems then existing in the country devolved on the National Waterworks and Sewerage Authority (NWSA), which had been established in June 1955 under the Republic Act 1383. NWSA was a failure and was abolished in September 1971 (paras. 1.04 and 1.05). MWSS was created in its place under a new charter (Republic Act No. 6234), primarily to serve the needs of MMA. Immediately on its creation, MWSS Board reorganized the system, evaluated each member of the staff, dispensed with the services of some 800 (of the defunct NWSA's 2,700 employees) and assigned others to positions for which they were qualified. This helped instill discipline and boost staff morale as well as improve their efficiency and productivity. Other major steps taken in 1974 to strengthen MWSS' financial position were the restructuring of its capital and raising of water and sewerage tariffs. Since then MWSS has been developing steadily and shows signs of becoming a reasonably good utility. Organization 2.03 MWSS is organized and functions as a modern public utility with a fair degree of autonomy. Overall control and responsibility for policy decisions and supervision is vested in a Board of Trustees consisting of 5 members: a Chairman, 3 Trustees and a General Manager (who is also the ex-officio Vice-President of the Board), all appointed by the President of the Republic of the Philippines. The Board formulates policies, approves budgets, recommends tariff adjustments, determines the System's staff pattern and the number of personnel, fixes their salaries and other emoluments (subject to government's general directions in these matters) and defines their powers and duties. It issues necessary regulations for conduct of business. 2.04 The day-to-day management is vested in the General Manager who is assisted by four Assistant General Managers (appointed by the Board subject to the approval of the President of the Philippines) one each for engineering; operations; finance and administration; and commercial and customers services; and 13 Heads of Department who work under the Assistant General Managers. In addition, there are the Legal Assistance, Management Services, Public Relations and the Provincial Services Offices.  - 5 - 2.05 The engineering de-irtment is responsible for the conception, design and construction of new works. It also has the Office for Special Projects (OSP)/1 which is responsible for the Manila Water Supply Project II. The operations department consists of divisions of sources, treatment, distribution and sewerage. The commercial department has divisions for customer services, meter reading, billing and collection. The finance and administration department is responsible for administration, accounting and financial planning. This organizational structure is basically good and MWSS has agreed that before any major changes are made in this structure in future, it will give the Bank an opportunity to comment on the proposed changes. Management 2.06 The present Acting General Manager is experienced and qualified and has the capability to satisfactorily manage MWSS. He has the stature to work with the Government and MWSS Board in the making and implementation of major policy. The Assistant General Managers are also well qualified and experienced for their respective positions. 2.07 The OSP is headed by a competent manager/engineer who works har- moniously with the expatriate consultants assisting with the design and supervision of construction of the project. He is also the Assistant General Manager (Engineering). The OSP is also responsible for planning the sewerage project (para 1.09) and the next stage water supply project. It has been recently strengthened by the addition of two Project Managers, one for water supply and another for sewerage. The present management team is competent and MWSS has agreed that before filling any future vacancies in the key positions of the General manager, the Assistant General Managers and the Project Manager (water supply), it will give the Bank an opportunity to comment on the qualifications and experience of the proposed candidates. 2.08 Though MWSS has made steady progress since its creation in 1971, it is still weak in its operations, maintenance and financial performance. Un- accounted for water is high, metering is inadequate and inefficient, mainten- ance of facilities is poor, and financial results are unsatisfactory. No attempt has been made to decentralize the operations and maintenance of this large system and though an increase of 1200 staff is projected over the next 7 years there is no staff development plan or a staff training school. The heavy investment program on which MWSS will now embark is beyond any compar- ison with its past achievements and therefore it will need expert advice and technical and managerial assistance for implementing the program and deriving its full benefits. For this purpose, the proposed project includes (besides the engineering consultants for design and construction supervision) the following management consulting services. Part A of the project will finance internationally recruited: (a) a manager-adviser for 18 months to assist the General Manager in coordinating and managing the project; (b) management consultants for 18 man-months to review and recommend changes in the organi- zation, and improvements in metering, meter-reading, billing, collections and /1 Recently established by strengthening what was formerly called the Project Management Office.  -6- financial planning; (c) an adviser for 9 months to prepare and implement a planned preventive maintenance program; (d) an adviser for 6 months for leak detection and repair; and (e) an expert for 12 months to plan and coordinate the work of the task force (which will be created out of the personnel of engineering, operations and commercial departments) for installing 400,000 new metered service connections by 1985. The Bank financed Part B project will help decentralize operations and maintenance functions to 21 offices (13 in existing premises and 8 in new premises) and organize and equip the urgently needed water supply staff training school. A water supply training consultant for 24 months and a ground water consultant (who will also assist in the construction of the 50 wells in the project) for 12 months will help set up the training school and formulate and implement the training program. With the assistance of the management consultants MWSS will also prepare, by September 1, 1979, a staffing plan to adequately cope with its expanded activities. This plan will be reviewed annually and implemented in consultation with the Bank. 2.09 MWSS' organization chart shows the recent changes (para. 2.05) in broken lines (Chart No. 18559). Billing, Collections and Receivables 2.10 Billing is computerized and bills are issued to consumers on monthly cycles. There are very little arrears in billing. Collections are decentralized and are the responsibility of 15 Branch Offices. Collections from domestic consumers are mainly through contract-collectors (numbering about 120) who are remunerated on a graduated scale based on the number of bills collected. Salaried collectors are employed for collections from Government, industrial, commercial and other large consumers. As an incen- tive for higher collection a scheme of monthly "performance bonus" payments to the staff of top five Branch offices whose collections exceed the pre- determined targets, was introduced in February 1976. The results of this scheme have been encouraging. Collection efficiency (amount of collections multiplied by 100 and divided by the amount of billings) was 98% in 1976 and about 100% in 1977. Current collections (i.e. collections within 3 months of billings) were about 85% both in 1976 and 1977. 2.11 Customers accounts receivable at the end of June 77 amounted to P 80.8 million (about 7 months billings) against which MWSS had a bad debt provision of about P 73 million (as of December 31, 1976). The agewise breakdown of the gross receivables was as follows: due for not more than 4 months P 8.4 million; 4 to 6 months P 3.0 million; 6 to 12 months P 9.1 million; 1 to 5 years P 41.8 million; 5 to 10 years P 16.7 million and over 10 years P 1.8 million. Write off of the old irrecoverable bills is being processed by MWSS and as a first step an amount of P 13.5 million representing accounts that had remained uncollected for over 10 years (for the period 1947-66) has been written off. During negotiations agreement was reached that MWSS will take actions (a) to write off and remove from its books the receivables which it considers uncollectible and (b) beginning 1980, receivables at the end of each year will not exceed 4 months billings.  -7- Accounts and Audit 2.12 MWSS has adopted a commercial accounting system developed by the consultants. Accounting is good and the staff which includes a number of CPAs, are competent. The audit of the accounts is carried out by a resident 'Auditor of the Commission on Audit (COA) who certifies the annual financial statements and reports to the Board. The audit is independent and is generally satisfactory. It has been agreed that MWSS' accounts will be audited by COA or other independent auditors acceptable to the Bank and the annual audited financial statements and the auditor's report thereon will be furnished to the Bank within 4 months of the close of each year. 2.13 Prior to 1976, the COA's staff also carried out internal audit functions. In April 1976, the scope of COA's internal audit was reduced to cover only certain specified types of transactions and the responsibility for pre-auditing other transactions was assumed by MWSS. This is carried out partly by the cashiers and the accounting divisions and partly by the manage- ment services office. To discharge the internal audit functions efficienty, MWSS has undertaken to establish and staff an internal audit division directly responsible to the General Manager and lay down detailed procedures for internal audit by June 1, 1979.  - 8 - III. WATER DEMAND Project Area 3.01 Manila is the capital of the Philippines, the main port of entry and the industrial, commercial and cultural center for the nation. It is also a tourist city and in recent times is growing into an international convention center. MMA has most of the problems of a large metropolis (estimated 1977 population within MWSS service area: 5.8 million) and the need for most public utility services has outstripped the efforts of the Government to provide them. Nevertheless, the Government is deeply concerned about basic needs such as water supply, sanitation and housing on which large investments are planned for the next six years. 3.02 The project area encompasses (i) the current MWSS service area; (ii) shore areas reclaimed from Manila bay; and (iii) Muntinlupa, a munici- pality which was recently approved for inclusion within MWSS' service area. MWSS' 1977 service area includes 5 major cities and 21 of the 22 munici- palities that form MMA and 11 contiguous municipalities that are currently not in MMA. Reclamation of the shore areas is expected to add 664 and 748 ha in 1982 and 1987 respectively and Muntinlupa, another 4,670 ha. This would increase MWSS' service area from the present 144,021 ha to 149,355 and 150,103 ha in 1982 and 1987 respectively (Map IBRD 13465). MMA's Human Settlements Commission (HSC) has recently prepared a land use plan for 1982 to form the basis of zoning regulations to control development. This plan differs only slightly from the consultants' land use projection which was developed from a plan prepared by the government in 1975 for the Manila Rapid Transit Railway Project. 3.03 HSC has designated areas in the north of MMA such as Valenzuela, Novaliches, Caloocan City B, including parts of Quezon City and in the south, Paranaque, Las Pinas and Muntinlupa, as areas of "controlled growth". A relatively fast pace of residential development would be encouraged in these areas. Some shift of government institutions to the north is taking place and nonpollutive industries mostly arising from expansion of inner city industry, would be permitted. In the existing industrial areas of Pasig, Pateros, Taguig and parts of Paranaque only nonpollutive industries would be permitted. Commercial activity is expected to expand generally in the same areas of the city as at present. MMA's fringe areas to the east such as parts of Marikina, Pateros and Taguig have been designated as "restricted growth" areas to protect MWSS' future Marikina reservoir catchment and reduce pollution of Laguna De Bay. 3.04 The concept and layout of the primary water supply distribution system ring main in the project, (see para. 4.13) relative to MMA's land use proposals for 1982 are satisfactory. This system has flexibility to adjust to changes, especially in residential land use, since 75% of the increase in residential land use in MMA during 1975-82, representing some 1.28 million additional people mostly in the lower income groups, is expected to take place within the ring main in MMA's inner core areas of Manila,  -9- Pasay, Quezon City, Caloocan, Navotas, Malabon, San Juan, Mandaluyong and Makati (total 36,650 ha) with an increase of average population density from 109 to 144 persons per ha. Outside MMA's inner core area, should the pattern of land use, both residential and industrial, develop differently from HSC's plans, the ring main will permit shifts towards the direction of greatest water demand. There is no reliable land use plan for the period after 1982. However the next stage project is not expected to be completed until 1987 and HSC is expected to develop land use plans for the 1982-1990 period in the next 2 years. 3.05 The sparsely populated semi-rural and rural municipalities outside MMA such as Montalban, San Mateo and Antipolo (1982 population densities of 1.2 to 3.1 per ha) lie outside MWSS' proposed 1982 central distribution net- work and well systems have been provided in the project for these areas. Two residential developments are however planned in Antipolo, namely the new town of Lungsod Silangan and strip development on the highway to the new port of Infanta on the east coast. Groundwater is available for these developments. Population 3.06 The population projection for MWSS' service area was developed by the consultants on the basis of the 1970 and 1975 census results. The consultants' projection for natural increase closely follows the medium assumption made by the Government's National Census and Statistics Office (NCSO). HSC has accepted the NCSO medium assumption. Because the consultants' assumption regarding net-immigration is nearer historic levels, their 1985 projected population is about 3% greater than the NCSO medium assumption. There are also a number of insignificant differences between the consultants, NCSO and HSC population assumptions for some of the municipalities. As these differences are too small to affect the design of the facilities to meet the project needs, the consultants' projection is satisfactory. The population of MWSS' service area as a whole is increasing at an average compounded growth rate of 4.5% annually. Annual growth rates are projected to vary from 1.5% in densely populated Manila City to 6.1% in fast growing Valenzuela. MWSS' service area population in 1975 was 5.3 million and is projected to increase to 9.2 million in 1987. Population in the intermediate years is shown in Table T-1 (Annex 1). Water Supply Zones 3.07 The consultants' demand projections were based upon assumptions of water demands to meet the needs of each municipality in MWSS' service area. As this method did not readily provide information on the different levels of service, a more detailed analysis was made during appraisal to calculate the population served by the project. Because of the lack of records several assumptions, sometimes based upon limited data, were made in making the calculations, the first of which was to establish the part of MWSS' service area which has piped water service at present and the additional areas that will be served under the proposed project.  - 10 - 3.08 The MWSS service area has been considered as two zones - the T'outlying zone" and "inlying zone". The outlying zone is defined as an area within MWSS' service area boundary that is served by mains of less than 300 mm diameter, or not served at all by MWSS' piped water supply system; the inlying zone is the balance. The inlying zone at present covers only 34% of MWSS' service area. It will expand by 28% under the project and will cover 40% of MWSS' expanded 1987 service area. The two zones are illustrated in Map IBRD 13465 and the areas are given in Table T-2. Details of the popula- tion in each zone are given in Table T-3. Domestic Service Categories 3.09 The resident population in both zones obtain water supply for domestic use either entirely from MWSS, or both from MWSS (for drinking and cooking) and private nonpotable sources (for washing and bathing), or entirely through privately developed sources. Based upon three water use studies made by the consultants and other data, five categories of water users have been identified: (a) persons with direct connections installed in their houses; (b) persons who obtain their water regularly from neighboring households with direct connections who share the water; (c) persons who draw water from public standpipes; (d) persons who obtain water entirely from private sources; and (e) persons who obtain water from other sources such as vendors or industrial supplies. This last category may be taken as not having access to safe water. 3.10 It is estimated that 8.2 persons are directly served per domestic connection and this is not expected to change up to 1987. In addition an average of 3.0 persons per domestic connection obtain water from their neighbors; such persons may or may not pay for their water and often supple- ment their "borrowed" supply from nonpotable private sources. As additional domestic connections are provided under the project, borrowers are expected to decline to 2.0 persons per connection in 1982-84, but increase slightly thereafter as the supply constraint is felt, up to the anticipated year of completion of the next stage project, as shown below: Year 1975-78 1979 1980 1981 1982-84 1985 1986 1987 Borrowers per 3.0 2.9 2.7 2.2 2.0 2.1 2.1 2.2 connection 3.11 For the category on public standpipes it is estimated that, on an average, one public standpipe would serve an area of about one hectare. The number of families served by each standpipe would vary considerably, between 100 and 200. All of the standpipes are located in the densely populated areas of the inlying zone and it is assumed that the number served by one standpipe will be about 600 persons and will be the same up to 1987.  - 11 - 3.12 Persons who obtain their water from private sources have been calculated separately for the two zones. For the outlying zone this is the difference between the total population in the zone less the number served by MWSS. The served population is calculated from the number of domestic service connections for both well and surface water sources. In the inlying zone it is estimated that between 1975-1981 10% of the total inlying population, living in subdivisions or living in homes with deep wells, will be on private supplies. This percentage would reduce to 9% and 8% in 1982 and 1983 as owners having wells in a declining water table would connect with MWSS. After 1982 because of the supply constraint a slight increase to 8.3% in 1984 and 1985 has been assumed. 3.13 At present (1978) 91% of the total of 245,000 domestic connections are in the inlying zone. This will increase to 94% on project completion in 1982. Of the total number of 515,000 services at that time about 8% would be served from wells. The allocation of domestic service connections between outlying and inlying zones and between MWSS' ground water serviced system and MWSS' surface water serviced system is based on (1) historical growth trend between 1978-1979 of well serviced connections (2) the projected increase in connections between 1979-1982 from new wells in the project and (3) the shift in number of wells (and related connections) from outlying to inlying zones as the inlying zone served by the surface water system expands. The projected number of domestic connections in each zone is listed in Table T-4. 3.14 MWSS records indicate that there were about 630 standpipes in 1977. Standpipes are intended to be a temporary measure providing service primarily in the most blighted areas of Metro Manila. Under the Zonal Improvement Program (ZIP),/l 415 blighted areas have been identified, of which 380 are to be upgraded and the remainder relocated. Assuming a minimum of one standpipe per hectare, about 850 standpipes will be needed in the ZIP areas. As ZIP is implemented and service connections provided, the number of necessary stand- pipes will decline between 1981-1983 but will then increase beginning in 1984 as new blighted areas may develop and as the supply constraint limits the number of new connections that can be made. Details are shown in Table T-5. 3.15 Because of the inadequate supply, the present low rate of new industrial service connections will continue. Only about 2,200 new connec- tions will be given between 1978-1980. From then on 1,000 new connec- tions will be given annually until 1987. Commercial and institutional connections will also show a sharp increase of 6,800 new connections in 1979-1980 followed by an annual rate of about 3,000 new connections up to 1987. It is assumed that all of the industrial, commercial and institutional connections will be made in the inlying zone. /1 This is an on-going program of the National Housing Administration.  - 12 - 3.16 The projected number of service connections within MWSS' service area is shown in Table T-6. At the time of project completion in 1982 the total number of connections would have increased from about 263,800 in 1977 to 556,000 - an increase of 292,200 connections representing an average annual connection rate of 58,440. Allowing one month for loss of time and bad weather, MWSS will have to install about 250 connections per day. Thirty-two service connection inspection crews will work out of the 21 branch offices to supervise the work of contractors making these connections. This will therefore be an achievable target for MWSS' proposed decentralized operations. Population Served 3.17 The population served is calculated by multiplying the number of domestic connections by the number of users in each category of service. Table T-7 gives details of population served in MWSS' Inlying Zone from wells and surface sources in the different categories. About 3.3 million (74%) of the 1977 population in the inlying zone are served either by direct connec- tions, standpipes or private supplies. The remaining population which now gets water from no easily indentifiable source, will have access (either from standpipes or as borrowers) to safe water on completion of the project in 1982. Table T-8 gives details of population served in MWSS' Outlying Zone. 3.18 When MWSS' service area is taken as a whole, the population with direct house connections will increase from 33% to 59% of the total popula- tion between 1978 to 1983, representing an increase of 2,649,000 persons. People who borrow water from neighbors, would increase from 735,000 to 1,144,000 in the same period, all of the unserved population of 1,273,000 in 1978, would by 1982, have access to safe water. Statistics of population served under the project are in Table T-9. Water Consumption and Sales 3.19 An analysis of the 1967-1975 service records of 400 metered domestic connections in areas with continuous service and adequate pressure is the basis of the following assumptions on domestic water consumption: Consumers/ Annual Income Level Consumption Connection Upper Income P 60,000 and above 525 lcd 6.6 Middle Income P 6,000 to 60,000 235 lcd 7.4 Lower Income P 6,000 and below 130 lcd 9.0 Weighted average 195 lcd 8.2  - 13 - 3.20 Such ideal conditions of pressure and service periods do not presently exist in most parts of MMA and average consumption, by those who are directly served, is lower than 195 lcd at about 180 lcd. With slight changes to allow for the improved pressures and stepped increase in supply with completion of the Balara plant improvements and two phased commissioning of La Mesa plant, consumption is expected to peak at about 200 lcd in 1982 before declining to 194 lcd in 1987. 3.21 Consumption per "borrower" is estimated at a range of 30-50 lcd (average of 40 lcd). In the absence of reliable data, the same assumption is made for persons who are indirectly served. This consumption rate is consistent with MWSS' records of water consumption in 1975 and 1976. Persons using standpipes use 35 liters per capita per day; this includes an allowance for wastage at the standpipe. 3.22 Total annual domestic consumption is calculated by multiplying the served population in each category by the estimated per capita consump- tion as shown in Table T-10. Industrial consumption within the service area was estimated from land use maps and a sample of selected industry. However because of groundwater availability only a proportion of this (25% in 1982) is assumed to be served by MWSS. In the absence of reliable information on the types of industry likely to connect in each year, annual industrial consumption is based upon actual total sales of 18 million cu m made to industry in 1977, giving an average sale of 9,800 cu m per connection. From 1983-1986 some unutilized water (17, 28, 23 and 19 million cu m in each year) is allocated to industrial sales to allow for decline in groundwater levels, which will probably lead to the abandonement of some private wells. Construc- tion of the next stage project is expected to commence in 1983 for completion in 1987. Should commencement of the next stage project be postponed beyond 1987, the capacity constraint would require industrial sales to be held level, as all available increments of water would be needed for domestic use. 3.23 Commercial and institutional sales are calculated and projected in a similar way as the industrial sales. Actual sales of 87 million cu m in 1977 gave a consumption rate of 4,240 cu m per connection per year. A rate of 4,200 cu m per connection has been assumed up to 1987. 3.24 Field surveys indicate that actual domestic consumption exceeds billings by about 15% (sales/consumption ratio of 0.87) because of under- registration of meters and use of average consumption billings on accounts with faulty meters. The calculation of water sales to industrial, commercial/ institutional connections has been proportionately increased to estimate industrial and commercial/institutional consumption. The improvements to be made in MWSS' metering and meter reading efficiency and the installation of new meters are estimated to reduce the excess of consumption over sales causing a gradual increase in the sales/consumption ratio to 1.0 in 1985. Annual water sales and consumption are shown below:  - 14 - Annual Sales (million cu m) Sales/ Annual Consumption (million cu m) Commercial Consump- Commercial and tion Indus- and Industrial Institutional Domestic Ratio trial Institutional Domestic 1976 18 82 137 0.87 21 94 158 1977 18 87 137 0.87 21 100 158 1978 20 88 140 0.87 23 101 162 1979 25 95 157 0.88 28 108 178 1980 41 117 199 0.90 46 130 221 1981 51 129 245 0.94 54 137 261 1982 61 142 316 0.98 62 145 322 1983 88 155 350 0.99 89 157 354 1984 108 166 361 0.99 109 168 364 1985 113 180 373 1.00 113 180 373 1986 119 192 385 1.00 119 192 385 1987 119 192 390 1.00 119 192 390 Unaccounted for Water 3.25 In 1976 and 1977 unaccounted for water, (production less sales) calculated as a percentage of production, was 50.0% and 48.0% respectively. During 1977 about 8% of production i.e. 38 million cu m went unrecorded because of under registration of meters and the use of average consumption billing. Another 10% of production was taken by MMA in municipal use such as fire fighting, watering of parks and roads and by MWSS in testing pipelines and flushing mains. The bulk of the unaccounted for water, 30.0% of produc- tion, was lost in leaks, illegal connections and theft. MWSS has set for itself targets to reduce leakage and theft to 25% and 20% in 1982 and 1985 respectively and plans to charge, wherever possible, for water used in watering of parks and roads to reduce unrecorded municipal use by half. MWSS would also control its own use and by 1984 reduce municipal and MWSS use to 5% of production. The supply capacity, production and water use in the various categories is illustrated in Chart 18659. 3.26 With improved metering, leak detection and repair and more efficient operations MWSS should be able to reduce gradually the unaccounted for water to about 25% by 1986. MWSS has agreed to prepare, by January 1, 1979, an implementation program, acceptable to the Bank, for reducing unaccounted for water caused by leakage, theft, firefighting, watering of parks and roads, testing of pipes and flushing of pipelines. The projected annual water production sales and unaccounted for water from 1976 to 1987 are shown below:  - 15 - Unaccounted for Water (% of Production) Under Municipal & Annual (million cu m) registration MWSS use Leakage Total Sales Unaccounted Production 1976 8.0 10.0 32.0 50.0 237 241 478 1977 8.0 10.0 30.6 48.6 242 228 471 1978 8.0 10.0 30.0 48.0 248 229 477 1979 7.0 9.0 31.0 47.0 277 245 522 1980 6.0 7.0 33.0 46.0 357 304 661 1981 5.0 7.0 33.0 45.0 425 348 773 1982 1.0 7.0 34.0 42.0 519 376 895 1983 1.0 6.0 29.0 36.0 593 333 926 1984 1.0 6.0 25.0 31.0 635 285 920 1985 - 5.0 23.0 28.0 666 259 925 1986 - 5.0 20.0 25.0 696 232 928 1987 - 5.0 20.0 25.0 701 233 934 IV. THE PROJECT Objectives 4.01 The proposed project was prepared by MWSS, with the assistance of Camp Dresser and McKee International Inc. (CDM) of USA; project preparation was financed by a loan from the Asian Development Bank. The project is in conformity with Government's development strategy to improve access to safe water supplies to the urban population, with particular emphasis on providing this basic need to the lower income groups. 4.02 The primary objective of the project is to improve access to safe water supplies to the population of metropolitan Manila by (a) developing fully the present major source of supply at Angat river; (b) carrying out rehabilitation and extension to the water distribution system; and (c) assisting MWSS into becoming an efficient public utility. The proposed project is a continuation of the work started by the Bank in the first stage project. The project also includes feasibility studies and detailed designs for provincial cities and the preparation of a rural water supply project. 4.03 The principal features of the project are summarized below: Part A (a) source development to increase water production capacity from about 1,300 Mld to 2,500 Mld including modification to the existing Angat powerhouse, the construction of a dam, aqueduct, treatment plant and miscellaneous rehabilitation works;  - 16 - (b) construction of about 65 km of primary and secondary pipelines to serve North Manila including bulk supply to Tondo and Dagat-Dagatan; (c) construction of new reservoirs and pumping stations at Bagbag, Bonafacio and Kawit including rehabilitation of existing pumping stations; construction of meter maintenance facilities and installation of service connections and meters; (d) technical assistance for institutional development (63 man months); and (e) consultant services for project implementation. Part B: (a) construction of about 150 km of primary networks and about 520 km of secondary networks, including river crossings, pipe rehabili- tation, tertiary network and service connections; (b) construction of about 50 deep wells including pumps and storage reservoirs; (c) acquisition and installation of 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; (e) construction and equipping of a water supply training school; and (f) technical assistance for Project implementation (180 man months) and staff development (36 man months). Part C: (a) detailed designs for water supply projects in provincial cities for which feasibility studies are being carried out under Loan 1415-PH of May 13, 1977; and (b) feasibility studies for water supply projects in provincial cities. Part D: Preparation of a rural water supply project.  - 17 - Existing System 4.04 The existing major surface source development consists of a large multipurpose dam on the Angat river and a small downstream dam at Ipo, diverting Angat hydropower tailrace releases from an auxiliary powerhouse through two tunnels and three parallel aqueducts, conveying about 1,100 Mld by gravity to Novaliches reservoir, situated 21.5 km south of Ipo. Novaliches reservoir formed by La Mesa dam on the Novaliches river also receives water from a diversion dam on nearby Alat river. The Novaliches-Alat system additionally supplies an average of 160 Mld. Finally, a pump station on the Marikina river contributes about 90 Mld, and the total supply of 1,350 Mld is treated in two independently operated treatment plants at Balara, in Quezon City, northeast of MMA. In addition, about 3 Mld is obtained from groundwater. First Stage Project 4.05 The First Stage project financed by the Bank in 1964 included works in source development, treatment and improvements to the primary distribution system. A second new 6.4 km long 1,135 Mld capacity tunnel from Ipo dam to Bicti, followed by the third 14.9 km Bicti-Novaliches and 3.1 km Novaliches- Balara aqueducts, each with a capacity of 757 and 852 Mld respectively, were provided. At Balara two sets of sedimentation basins, six basins to a set and each set with a capacity of 379 Mld, and a bank of 8 rapid gravity filters with a total capacity of 303 Mld were built. Chemical dosing and chlorination facilities were also provided. The First Stage project did not include secondary or tertiary distribution mains and in 1977 only 34% of the population living in MWSS' service area had house connections. Because of the age of the system and faulty service connections, leakage losses are about 30% of production. The standard of maintenance of the pumping stations and the distribution system has room for considerable improvement. Details are at Tables T-11, T-12 and T-13 and the facilities are illustrated in IBRD Maps 13465 and 13466. Supply System Optimisation 4.06 A recent updating of the hydrological studies made when Angat dam was built in 1962, not only confirms the earlier finding that an annual average of 1,892 Mld (21.8 cums) could be released for water supply, but also that adequate regulating capacity is available in Angat storage reservoir to balance seasonal variations in MWSS' demand for raw water from a maximum of 2,470 Mld (28.6 cums) during the dry January-June months, gradually coming down to a low 1,608 Mld (85% of 1,892 Mld) in the wet months. The other components of the supply system - Ipo, Novaliches and Alat catchments with the Marikina river pump station - would take up the difference to provide a maximum day demand of 3,100 Mld, i.e., 1.25 times average day demand of 2,500 Mld. 4.07 The costs in present value terms of developing alternative water sources to meet the needs of MMA are shown in Table T-14. The very large Marikina-Kaliwa development (4,200 Mld incremental yield) would probably be marginally the most economical, if MWSS were able to expand its services  - 18 - rapidly enough to make full use of this source. However, MWSS' limited financial resources and implementation capacity and the desirability of restricting MWSS' initial capital investment (which would be P 1.5 billion for developing Angat compared to P 5.0 billion for Marikina-Kaliwa) makes it appropriate to develop the existing Angat source to its full capacity before turning to another and much larger development. However, the development of the Marikina source is now being studied in detail as the basis of the next water supply project in MMA. 4.08 The change in reservoir operating patterns which will enable the Angat yield to be utilized would have entailed a small loss of generating capacity in the existing hydroelectric installations. To compensate for this, a new 10 MW turbine will be installed in the auxilliary power house and will utilize the releases made for water supply (para 4.06). The 10 MW turbine is included in Part A of the project. The three major components of the complex transmission system which conveys water from Angat to MMA, also need extension and rehabilitation, to increase conveyance capacity to 2,470 Mld. Operational advantages, disruption of service and redundancy, were important considerations in the final judgements between equal or close alternatives, which were studied by mathematical modelling techniques. A new 30 m high mass concrete dam at Ipo, with a crest of El. 100 and lining the crown of existing Tunnel No. 1, to improve its hydraulic efficiency is the least cost alternative for transmitting water from Ipo to Bicti (see Table T-15). A new fourth parallel 3.4 m diameter 14.9 km long aqueduct will convey water from Bicti to the Novaliches treatment plant. Treating the water near Bicti and building a treated water aqueduct to Novaliches, is not only more costly, but also has some operational shortcomings. All the works in source develop- ment and transmission are included in Part A of the project. 4.09 At Novaliches, the raw water will be treated in the existing Balara treatment plant, which will be upgraded to produce 1,600 Mld, and in a new treatment plant at La Mesa, with a capacity of 1,500 Mld making a total of 3,100 Mld, equivalent to maximum day demand. The new La Mesa treatment plant is of conventional desigh with horizontal flow sedimentation basins. Twenty four dual media anthracite filters rated at 14.5 meters per hour have been proposed, as being the most cost effective. This design is based upon long experience in treating Angat water and on pilot studies made at the existing plant and is acceptable. The new plant and cost of upgrading the existing Balara plant is included in Part A of the project. Distribution System Alternatives 4.10 Based upon the land use studies, the areal distribution of demand by administrative areas was aggregated into 10 new service zones according to the location and type of supply provided, to distribute an average treated water demand of 2,500 Mld to meet 1982 needs. In each zone, principal areas  - 19 - of demand, identified on site, formed the basis of pipe layouts for prelim- inary hydraulic analysis of the secondary distribution system. After refine- ment, and finalization of the network layout, "nodes" of inputs and outputs were identified for the computer analysis of the primary distribution system, and the previously defined service zonal boundaries adjusted as needed during design. 4.11 For the design of the distribution system MWSS has selected criteria based upon service standards which are reasonable and acceptable to most of the consumers. The selected maximum normal head of 70 m in the primary and secondary distribution systems is suited to ground elevations in the service area. The design minimum head of 6.0 m in the secondary distribution system, for 1982, may not be high enough to altogether discourage residential storage and booster pumping. However, because the network is designed for an average per capita consumption of 215 lcd which is 10% higher than the 195 lcd esti- mate made during appraisal, the average minimum head will be higher, at a little over 7.0 m. This would help towards increasing peak hour flows, since the selected peak hour factor of 1.8 for the secondary system would also increase to about 2.25. The lower income groups served by the small diameter tertiary network would therefore have a consumption at about the design level of 130 lcd. An important design criterion which will affect this consumption is the proposed laying of the secondary distribution system pipes in alternate streets or at a maximum spacing of 150 m. This has the advantage of allowing for infilling in the future, with pipes sized to meet the actual demand, based upon a better knowledge of the rate of growth of population and the per capita consumption than at present. 4.12 As far as possible maximum use is made of existing elements, booster pumping kept to a minimum and the various storage options (stand pipes, overhead storage, ground storage) weighed against pumping and gravity supply to achieve the least cost distribution system. 4.13 Based upon the positions, elevations and capacities of La Mesa, Balara and the future Nangka treatment plants and the need to transfer large quantities of water to the south, three transmission alternatives were compared for the 1982 and 1990 situations: (a) split flows at La Mesa; (b) extend San Juan service area or; (c) provide a transmission ring main connecting Balara and La Mesa. The transmission ring sized for 1982 needs, is the least cost and the best alternative, because of its large capacity and inherent flexibility to meet changes in needs because of land use planning errors. For example any unforeseen shift of demand to the north, up to about 200 Mld, can be accommodated with relative ease. Within the ring, the existing system forms a distribution grid together with the Balara-San Juan artery. Three new reservoirs form part of the transmission ring system: Pasig, 80 Ml; Fort Bonifacio, 30 M1; Bagbag, 200 Ml, and one standpipe at Kawit of 11 Ml. At Pasig and Fort Bonifacio, 175 Mld and 170 Mld booster pump capacities will be provided in two new pumping stations. In the exist- ing pumping stations, the storage pumps at Caloocan, D. Tuazon, Makati, Tondo, Algeciras and Ermita will be modified and additional booster pumping will be provided at Espiritu, Pasay, Makati, Cubao and Balara. All this work  - 20 - is included in Part A of the project together with 20 km of the primary and 45 km of secondary pipelines required urgently to serve the low income areas of north Manila, Tondo and Dagat-dagatan. Part B of the project has the following pipelines: about 700 km of the tertiary system, 50 mm and 75 mm diameter; 520 km of the secondary system, 150 to 250 mm diameter and 150 km of the primary system, 300 to 2,600 mm diameter. Meters, Service Connections and Public Standpipes 4.14 Though 82% of MWSS' service connections are metered most of these meters are either defective or in such an advanced stage of dilapidation as to need replacement within the next few years. The project provides 140,000, 1/2" domestic meters in Part A and 520,000 in Part B. These are adequate to meet MWSS' needs during the project period. Also included are related com- ponents for the installation of these meters, in giving new service connec- tions up to the property line, replacing approximately 130,000 existing leaking service connections and providing public standpipes in selected blighted areas. In addition 18,000 industrial and commercial meters are included in Part B. The pumping stations in the proejct would also be metered. Well Systems 4.15 Based upon a comparison of the cost of extending the central piped system with that of providing water from deep wells, well systems are found to be economical in MWSS' outlying zone as follows: Valenzuela (3), San Mateo (1), Montalban (2), Canta (3), Taytay (2), Antipolo (12), Imus (2), Noveleta (2), Rosario (5), Muntinlupa (6) and Cavite City (12). Each well system consists of the required number of wells, storage reservoir, distri- bution pipes and service connections, all of which are included in Part B of the project. In addition about 50 man months of consultants services are included in the total of 180 man months for construction supervision (see para 4.20) for making a groundwater survey of MWSS Service area and providing conjunctive use of groundwater wherever feasible. Institutional Development and Training 4.16 Part A of the project has a large technical assistance component for developing MWSS into an efficient utility (para 2.08). Part B of the project provides for the establishment of 21 offices (8 in new premises and 13 in existing premises including pumping stations which will be upgraded) for operations and maintenance and a training school, all complete with the necessary operational equipment and vehicles. The training program includes not only classroom and on-the-job training, but also the overseas training of about six trainers and other MWSS technical staff. A substantial part of the training will be in ensuring project objectives for achieving new service connection targets, improved maintenance and leakage reduction and developing groundwater supplies. A special training division, the head of which will report to the General Manager will be created to plan and implement the training program. The objective of the training program is to enable MWSS to  - 21 - become self-sufficient in identifying and meeting its manpower development needs. A water supply training consultant is included in the project for a period of two years to assist MWSS in achieving this objective. MWSS has agreed to create and staff a training division not later than June 1, 1979. Parts C and D of the Project 4.17 The feasibility and detailed design studies in these two parts will be carried out by LWUA and the Government respectively. Part C includes 150 man months and Part D 40 man months of internationally recruited consultant services with related equipment, groundwater investigations, training and inputs by local consultants for (i) making detailed design for 12 cities and feasibility studies for 16 additional cities and (ii) prepar- ation of a rural water supply project. Cost Estimates 4.18 The summary project cost estimates are given below. The detailed cost estimates for Parts A and B are at Tables T-16, 17 and 18 and the facilities are illustrated in IBRD Maps 13465 and 13466.  - 22 - Foreign Exchange Foreign Local Total Foreign Local Total Component P million ----- ---- US$ million ---- (%) Manila Water Supply Project II Part A - ADB Financing: Details at Table T-16 Total - Part A 742.3 689.8 1,432.1 100.3 93.2 193.5 52 Part B - Bank Financing: Distribution Pipelines: Primary network: 150 km 221.8 234.1 455.9 30.0 31.6 61.6 Secondary network: 520 km 36.3 85.7 122.0 4.9 11.6 16.5 Tertiary system 10.3 25.2 35.5 1.4 3.4 4.8 River Crossings 11.1 5.5 16.6 1.5 0.7 2.2 Wells - 50 Nos 7.2 14.1 21.3 1.0 1.9 2.9 Service connections 74.0 175.0 299.0 10.0 23.6 33.6 Meters 89.5 29.4 118.9 12.1 4.0 16.1 Vehicles 3.2 - 3.2 0.4 - 0.4 Branch offices & training school 3.3 3.6 6.9 0.4 0.5 0.9 Operational equipment 3.8 3.4 7.2 0.5 0.5 1.0 460.5 576.0 1,036.5 62.2 77.8 140.0 44 Training 4.1 36.0 40.1 0.6 4.9 5.5 Construction Supervision 13.4 40.0 53.4 1.8 5.4 7.2 Contingencies Physical 79.7 101.7 181.4 10.8 13.7 24.5 Price 71.0 102.0 173.0 9.6 13.8 23.4 Total - Part B 628.7 855.7 1,484.4 85.0 115.6 200.6 42 Project Cost Manila Water Supply: Parts A and B 1,371.0 1,545.5 2,916.5 185.3 208.8 394.1 47 Water Supply Feasibility and Design Studies Part C - Provincial Cities 18.5 - 18.5 2.5 - 2.5 Part D - Rural Areas 3.7 - 3.7 0.5 - 0.5 Total Project Cost Parts A to D 1,393.2 1,545.5 2,938.7 188.3 208.8 397.1 47  - 23 - 4.19 The costs for the works are consultants' estimates developed from a study of recent bids received on some of the ADB and USAID financed water supply projects. The foreign exchange costs include both direct and indirect costs and are also based upon consultants' estimates. The total foreign exchange cost of 47% is only a little lower than that in the smaller Provin- cial Cities Water Supply Project (Loan 1415-PH) in which it was 49%. In Part A, the foreign exchange cost is 52%, because of imported treatment plant equipment, compared with 45% in Part B, in which most of the larger pipes in the transmission ring are expected to be of noncylinder prestressed concrete, which requires more local materials. The cost estimates do not include duties and taxes on imported goods, since MWSS will be reimbursed such charges (para 5.21). All prices are adjusted to a baseline of June 1978 and are reasonable. 4.20 CDM will, under their ongoing ADB financed contract with MWSS, prepare detailed designs and contract documents, invite tenders and evaluate bids for both Parts A and B. Supervision of construction will, however, be financed for the two respective parts, by ADB and the Bank and carried out by the same consultants. The amount of P 53.4 million provided for this in Part B is 5% of the baseline cost and is reasonable. In addition twelve man months of consultant services are provided for supervision of construction of the wells in the project and training MWSS staff in developing groundwater. The cost of land acquisition is included in Part A and no major problems of land acquisition for the wells and pipelines are anticipated. During nego- tiations agreement has been reached with MWSS that land acquisition will be carried out in accordance with a timetable consistent with the construction program, as shown in the implementation schedule (Chart 18658). Part B of the project provides for a total of 180 man months of expatriate construction supervision services at an average man-month cost, excluding transportation housing and local costs, ranging from US$5,600 - $8,800 depending on quali- fications and experience. This is reasonable. MWSS will employ engineering, training and groundwater consultants, whose experience and terms and con- ditions of employment are acceptable to the Bank. LWUA and Government will also employ engineering consultants (para. 4.17) whose experience and terms and conditions of employment are acceptable to the Bank. Contingencies 4.21 The cost estimates for Part B are based on quantities derived from preliminary designs prepared by the consultants. Most of the works in the project are below ground and all of the work in Part B is in the construc- tion of pipelines of varying diameters in or near built up areas. Though inves- tigative trial holes have been made, the possibility remains of unforeseen obstructions, corrosive soils and poor foundation conditions and a physical contingency provision of 15% has been made in the cost estimates. This provision is reasonable for work of this type. The estimates for Part A of the project are largely based upon final designs and a reduced physical con- tingency provision of 11% has been made. This is also a reasonable provision. There are no physical contingency provisions for engineering, consultant services, or land.  - 24 - 4.22 Price increases in water supply construction in the Philippines are lower than estimated in 1977. At that time, 10% in 1978 and 1979 and 8% in 1980-81, was provided in the Provincial Cities Water Supply Project (Loan 1415-PH). On the basis of discussions with the National Economic Development Authority and with the agreement of ADB, the consultants have made provision for price increases as follows: for local expenditures, 8% in 1979-83; for foreign expenditures, 8% in 1979-81, 7.5% in 1982 and 7% in 1983. This provision is reasonable. The total of US$23.4 million (P 173.0 mil- lion) provided for price increases in Part B, is 14% of the baseline cost plus the physical contingencies. Financing Arrangements 4.23 For the Manila Water Supply Project II, 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 $49.0 million, to cover in full the foreign exchange expenditures of Part A of the project. Of the proposed Bank loan of $88.0 million, $85.0 million will finance the estimated foreign exchange expenditures of Part B, or about 22% of the total project cost. The local costs of P 1,545.5 million ($208.8 million) will be met by MWSS from its internal cash generation and from the funds to be provided by the Government. The balance of $3.0 million of the proposed Bank loan will finance the cost of engineering consultants to be employed by LWUA and the Government for detailed design and feasibility studies for water supply projects in pro- vincial cities and for preparation of a rural water supply project. Local counterpart staff for these studies will be provided by LWUA and the Govern- ment from their regular establishments and, therefore, no additional local costs will be involved. The financing plan of MWSS for the project con- struction period is in para. 5.07. Procurement 4.24 Procurement of equipment and civil works contracts for Part B will be awarded on the basis of international competitive bidding in accordance with current Bank Group Guidelines. A preference limited to 15% of the c.i.f. price of imported goods or the prevailing custom duty, whichever is lower, would be extended to local manufacturers in the evaulation of bids. MWSS' local procurement procedures are satisfactory and appropriate for contracts covering installation of meters and construction of public standpipes (P 37.8 million), construction of branch offices, training school and purchase of related equipment (P 6.8 million) and well drilling (P 13.6 million). These works, which represent about 4% of the Part B project cost, will be advertised in accordance with local procedures which are acceptable to the Bank. There is potentially adequate local competition and foreign firms can participate. Off-the-shelf items, each costing less than $20,000 equivalent urgently needed for the rehabilitation works, ensuring that the metering targets are kept and for equipping the branch offices and training school would also be purchased under MWSS' local procurement pro- cedures which are acceptable to the Bank. The total cost of such items would not exceed $500,000 equivalent.  - 25 - Disbursements 4.25 Disbursements for civil works would be made at 100% of foreign expenditures for mobilisation and at 40% of expenditures for other civil works. For equipment and materials, disbursements would be at 100% of the foreign exchange cost of directly imported equipment, 100% of the ex-factory price of locally manufactured equipment and 65% of goods procured locally. For costs of consultants and training, disbursements would be 100% of expenditures. The quarterly disbursement forecast is shown in Table T-19. Design, Construction and Supervision of Construction 4.26 MWSS will be responsible for carrying out the project. CDM will assist in preparation of detailed designs and bid documents, evaluation of bids and supervision of construction. The Office for Special Projects will provide the overall supervision and administration for project implementa- tion. The Project Manager (Water Supply) will be responsible for the day-to- day liaison with CDM and other consultants in the project, including approval of technical proposals and all matters related to procurement. Implementation Schedule 4.27 Implementation of Part B is expected to begin in September 1978, with completion of all works in June 1983. The closing date of the proposed loan is six months later - December 31,1983, to allow for unforeseen delays. Completion of the upgrading of Balara treatment plant, from 1,200 to 1,600 Mld in mid-1979, will bring some relief to consumers presently experiencing low pressure. One half of the La Mesa treatment plant, is expected to be ready in mid-1980 and will give additional supplies to the Tondo and Dagat- Dagatan areas. However, appreciable benefits from the project will not result until end 1982, with the completion of the ring main. The implementa- tion schedule for the project is at Chart 18658. Environmental Impact 4.28 The proposed project would directly improve 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 beginning 1981. This project would ensure that most of the waste waters are disposed of safely. Also, at the La Mesa plant a provision is made in the design for lagooning treatment plant wastes. Because of recent government policy to permit only nonpollutive new industry within MMA no appreciable increase in pollutive industrial wastes is anticipated. No unusual environmental hazards are foreseen because of the project.  - 26 - V. FINANCIAL ANALYSIS Past Results and Financial Position 5.01 NWSA, MWSS' predecessor was a weak organization and incurred losses continuously until it was dissolved in 1971. In the first three years of its operations, FY72 (July 1971-June 1972) through FY74, MWSS also incurred losses of an average of about P 11.0 million each year. However, in May 1974. Government took two major steps: (a) raising water tariffs by about 100%; and (b) converting all previous loans into subscribed capital: which helped MWSS turn the corner and produce net surpluses of P 48.0 million in FY75 and P 46.3 million in FY76. Table T-20 shows, in an abbreviated form, the financial results of MWSS' operations in FY72 through FY76. 5.02 In none of the years since its inception, has MWSS made a cash loss. Its revenues fully covered the cash operating costs as well as depre- ciation but in the first three years (FY72 through FY74) it failed to meet, in full, the interest charges on its borrowings. The rate of return on the book value of its net fixed assets in operation ranged between 1% and 4%. 5.03 Effective 1976, MWSS' financial year has been changed to coincide with the calendar year. For CY76, the operating surplus was P 32.2 million and net surplus (including interest earnings) P 48.0 million. The rate of return on net fixed assets was about 2.8%. Future Position 5.04 MWSS' investment program for water supply and sewerage facilities in MMA during the six years 1978-83 is of the order of P 5 billion which amounts to almost twenty times the investment it made in the preceding six years. Water production will be doubled, water sales will rise by about 140% and the number of water connections will increase from 268,000 to 612,000. Such a huge expansion in its activities will demand a strict financial discipline and monitoring of its performance. The management consultants (para. 2.08) will assist MWSS in financial planning and achieving the objective of trans- forming MWSS into a sound and financially strong utility capable of producing satisfactory rates of return (para. 5.14). 5.05 MWSS' Charter limits its authorized capital to P 1.0 billion; local borrowings to P 1.0 billion and foreign borrowings to $200 million. Presently, about half the capital is paid up, there are no local loans and the amount drawn and outstanding against foreign loans is about $18 million (amount committed is about $70 million). In view of the large investment program ahead, MWSS Board recently recommended that these limits be tripled and raised to P 3 billion, P 3 billion and $600 million, respectively. It also proposed that the Government's capital contribution to MWSS be not less  - 27 - than P 250 million every year until the authorized capital is fully paid up. These changes have been approved by the Government. 5.06 Financial projections: income statement, statement of sources and application of funds, and balance sheets- for MWSS' water supply and sewerage operations through 1985 are in Annex 2. The assumptions for the projections are in Annex 3. Financing Plan 5.07 MWSS' financing plan for the project construction period 1978-83 is summarized below:  - 28 - p US$ million million Percentage Capital Investments Manila Water Supply Project II/a 2,853.0 385.5 56 Manila Sewerage and Sanitation Project/b 1,256.4 169.8 25 Next stage water supply project 300.0 40.6 6 Other capital works 329.2 44.5 6 Interest capitalized during construction 380.6 51.4 7 Total 5,119.2 691.8 100 Sources of Funds Internal cash generation 2,263.3 305.8 44 Less: Debt service excluding -582.7 -78.7 -11 IDC capitalized Less: Increase in working capital -84.4 -11.4 -2 Net cash generation 1,596.2 215.7 31 Foreign Borrowings: IBRD proposed loan 628.7 85.0 12 IBRD previous loans /c 36.6 4.9 1 ADB existing and proposed loans/d 716.6 96.8 14 Loan for sewerage project/b 439.8 59.5 9 Total Foreign Borrowings 1,821.7 246.2 36 Government Funds Equity 900.0 121.6 17 Loan 700.0 94.6 14 Total Government Funds 1,600.0 216.2 31 Customers' contributions 101.3 13.7 2 Total 5,119.2 691.8 100 /a Excludes expenditures of P 63.5 million on the project during 1975-77. /b These are approximate figures. A feasibility study for a sewerage and sanitation project is being carried out by the consultants. The cost estimates of the project and the borrowing requirements will be revised on completion of that study in about March 1979. /c For Manila Sewerage feasibility study and Tondo sewer outfall. /d Excludes disbursements of P 25.7 million of ADB loan during 1975-77.  - 29 - 5.08 The capital expe-diture program of about $692 millior during the six years 1978-83 includes Manila Water Supply project II; Manila sewerage and sanitation project; first year's expenditure on the next stage water supply project (Marikina project expected to begin in 1983); other minor capital works; and interest during construction. Internal cash generation will meet $216 million (31%); foreign borrowings $246 million (36%); Government funds $216 million (31%) and consumers' contributions $14 million (2%) of the estimated capital expenditures. Of the projected foreign borrowings of $246 million, $85 million will be financed by the proposed Bank loan, $5 mil- lion by the existing Bank loans and $97 million by the ADB loans; the source of financing for about $60 million representing MWSS' currently estimated foreign exchange expenditures on the Manila sewerage and sanitation project has not been determined yet (that project is included in the Bank's lending program for FY80). The financing plan assumes that the Government funds will be made available to MWSS partly as equity contribution ($121 million) and partly as loan ($95 million). The above financing plan envisages a reason- able mix of internal cash generation, foreign borrowing and government equity/loan and is satisfactory. 5.09 The financial projections show that for implementing the proposed Manila Water Supply project only, MWSS will need an injection of the Govern- ment funds of about $166 million in 1978-81 ($95 million as loan and $71 mil- lion as equity contribution). The balance of about $50 million of the projected Government equity contribution will benefit the Manila sewerage and sanitation project. 5.10 During negotiations the Government has agreed that for the successful completion of the proposed Manila Water Supply project II, it will make available to MWSS adequate funds, as needed, including any cost overruns and shortfalls in MWSS cash generation, on terms satisfactory to the Bank. A condition of effectiveness of the proposed loan will be the execution of a Loan Agreement between MWSS and ADB for an additional amount of about $49 million. Water Tariffs and Rate of Return 5.11 MWSS' current water rates which have been in existence since May 1974 are too low. Domestic consumers pay P 0.20 per cu m (10 cents per 1,000 US gallons) for the first 30 cu m of monthly water consumption (with a minimum monthly charge of P6.50 including P 1.50 as service maintenance fee), P 0.40 per cu m for the next 20 cu m and P 0.60 per cu m for consumption above 50 cu m. For commercial consumers there is a uniform rate of P 0.60 per cu m and industrial consumers are charged P 0.80 per cu m. The average revenue is P 0.5 per cu m. These rates are totally inadequate because MWSS' operating costs have almost doubled since May 1974. The operating results for 1977 show a surplus of P 25.7 million; a rate of return of about 2% on the book value of net fixed assets in operation which will drop to about 1%  - 30 - if the assets are revalued at current prices. On the existing rates, MWSS would just break even in 1978 or show a small loss. MWSS' Board was seriously -concerned about this situation and made proposals for raising the rates to yield an average revenue of P 0.80 per cu m, while slightly reducing the existing minimum charge for poor families (consuming up to 10 cu m per month). The existing and the new rates are shown in Annex 1 - Table T-21. The proposed rate increase of an average of about 60% is satisfactory. In view of the poor and intermittent service to the consumers, a higher increase is not warranted at this stage. 5.12 Under its charter, MWSS is competent to fix the rates but in actual practice a Presidential approval is required. The new rates have been approved by the President and will be made effective from October 1978. 5.13 The above rate increase will be the first step in the series of management actions (metering, leak detection and repair, reducing unaccounted for water, etc.) and further increases in rates would be needed in subsequent years to ensure MWSS' financial viability. To reduce wastage and discourage wasteful consumption of water, MWSS' future pricing of water would aim at recovering full marginal costs of additional supplies while retaining the current social rate structure. For this purpose, MWSS has agreed to (a) carry out an annual review of its water rates in 1979 through 1982; (b) consult with the Bank on the adequacy of water charges; and (c) implement expeditiously recommendations arising from such reviews, including the revision of the tariffs. 5.14 MWSS will, in the coming years, be called upon to meet its largely increased debt service and also make heavy investments in water supply and sewerage works to cope with the growing needs of MMA. Its objective is to become a financially self-supporting utility, generating adequate cash surpluses (after meeting its operating costs and maintenance expenditures) to cover its debt service obligations, meet expenditures on normal expansion of its activities and provide a reasonable part of funds required for its major capital investments. During negotiations, MWSS has agreed to set and maintain its tariffs at such levels as would be necessary to achieve a rate of return of at least 8% on revalued net fixed assets in operation on completion of the project in 1982. This rate of return will enable MWSS to provide from its own resources about P 400 to P 600 million annually for capital works, thereby reducing its dependence on the government funds for expansion of its facilities. In the intervening years, 1979 through 1981, as the service levels improve (resulting from additional supply of water and more efficient management of the system), MWSS will earn a rate of return of at least 3% on revalued net fixed assets in operation in 1979 (as against the estimated 1% in 1977) and 5% in 1980 and 1981.  - 31 - 5.15 To achieve the above rates of return, tariffs will need to be reviewed and adjusted as explained in para. 5.13. The financial projections assume the following average revenue per cu m in the years 1978 through 1985: January 1978 - P 0.50 October 1978 - P 0.80- January 1980 - P 1.00; January 1981 - P 1.25 January 1982 - P 1.70 and January 1984 - P 1.80. Abit4y to Poy 5.16 Domestic connections account for some 90% of the total service connections in MMA and the remaining 10% are commercial and industrial. About three-fourths of the domestic connections are of half inch size and one-fourth are larger. On an average, the half inch domestic connection is billed about 40 cu m per month and the larger-than-half-inch about 70 cu m. In September 1977, about 19,000 families, or 8% of total domestic connections, were billed 15 cu m or less. 5.17 For a very poor family of 8 members, 15 cu m of water per month (about 60 lcd) is an adequate consumption. The monthly water charge for this level of consumption, at the new rates (para. 5.11) would be P 6.00 ($0.81). Assuming that these families have an income of P 250 ($34) per month (half the poverty level), the water charge will be about 2.5% of income. The monthly bill of a domestic consumer who uses 30 cu m (or about 125 lcd) will be about P 13.50. Assuming that all such consumers are at the poverty level of P 500/1 per month, the water bill will be about 3% of income. These charges are within the consumers' ability to pay. To help poor families to obtain water connections, MWSS has decided that the cost of providing half-inch service connections, including the cost of water meters (which will be financed under the proposed project) will not be recovered from the new domestic consumers and will be absorbed by the general tariffs. Domestic consumers asking for larger-than-half-inch connections and the commercial and industrial consumers will continue to pay such charges. 5.18 The projected average rate of P 1.80 per cu m in 1984, involves about 15% annual increase in nominal terms over the new tariff. Adjusting for inflation of 10% (adopted for projecting operating expenses) and assuming a growth of some 5% to 6% in real incomes, the 1984 projected tariff will not involve a higher burden on domestic consumers than about 3% of income as in para. 5.17. 5.19 Currently, consumers connected to the sewerage system pay an addi- tional 50% of the water rates. The same percentage of the progressively increasing water rates (para. 5.15) has been assumed in forecasting sewerage /1 This is about $100 per capita per annum and is lower than the poverty threshold stated in footnote 1 under para. 6.03.  - 32 - revenues. A tariff study is included in the terms of reference of the con- sultants for Manila sewerage feasibility study (financed from Loan 1415-PH) which would form the basis for MWSS and Government to review and revise the charges for sewerage services. Projected Ratios 5.20 The financial forecasts for the years 1978 through 1985 are based on the water production as in para. 3.26; a gradual decrease in unaccounted for water from the current level of 48% to 28% by 1985; and water and sewerage tariffs as in paras. 5.15 and 5.19. These forecasts show that MWSS' operating ratio (after depreciation) will decrease from 95% in 1978 to about 50% in 1982 and thereafter. The rate of return on revalued net fixed assets will be about 3% in 1979; 7% in 1980; 5% in 1981 and between 8% and 9% in subsequent years. Debt service coverage will not fall below 1.6 times throughout the projected period; current ratio will be 2.1 or higher and the debt will not exceed 33% of capitalization in any year. These rates of return and ratios are satisfactory. The realization of the financial performance as forecast in the projections will depend on MWSS' ability to execute the project on schedule, produce and supply the additional quantities of water, raise tariffs, reduce unaccounted for water, install new service connections, ensure efficient metering, meter reading, billing and collections, and exercise adequate control over its operating costs. To measure MWSS' perfor- mance, project supervision will include the reporting and monitoring, on a regular basis, of performance indicators and their comparison with the appraisal forecasts. Duties and Taxes 5.21 Under its charter, MWSS is exempt from payment of all duties and taxes. However, a recent Presidential Decree (No. 1177 of July 30, 1977) requires that government-owned or controlled corporations shall pay income tax, customs duties and other taxes and fees; provided that organizations otherwise exempted by law from payment of such taxes/duties may ask for a subsidy from the General Fund in the exact amount of taxes/duties due; and provided further that a procedure shall be established by the Secretary of Finance and the Commissioner of the Budget whereby such subsidies shall automatically be considered both as revenue and expenditure of the General Fund. The detailed procedure has not been announced yet but the Budget Commission has clarified that the payments and the refunds under this decree will be a paper transaction and no cash transfers will be involved. In the financial projections estimated duties on materials to be imported for the project have, therefore, been added to the "assets" (thereby raising the assets base for rate of return calculation) by a corresponding credit to Government subsidy under "Equity." Corporate taxes have been ignored since the payment and refund will not affect the financial results. Revaluation of Assets 5.22 MWSS last revalued its assets as of 1971 and incorporated the new values in its books in 1974. It has recently appointed an internal committee  - 33 - to make recommendations for revaluation of its fixed assets and expects to receive the committee's report in July 1978. During negotiations it was agreed that MWSS would revalue its assets annually commencing with the year 1978 and that the revaluation would be in accordance with a basis acceptable to the Bank. Debt Control 5.23 The present and forecast debt equity ratio and debt service coverage are satisfactory throughout the projected period. However, to safeguard against MWSS incurring additional heavy debt which may jeopardize its financial position and involve unduly large debt service burden, agreement was obtained during negotiations that without the Bank's consent MWSS will not incur 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 future year. With a view to ensuring that during the project construction period (1978-83), unduly large funds are not allo- cated by MWSS to capital works other than the Manila Water Supply Project II, MWSS has also agreed that during that period it would not undertake, without the Bank's approval, any major capital works (estimated to cost $3 million or more) and that expenditures for capital works other than the project will not exceed $6 million in any fiscal year. VI. JUSTIFICATION General 6.01 Since about 1966, when implementation problems delayed the First Stage project, water supply service to Manila has been steadily deteriorating. Presently over 2.0 million people in 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 will stop the deterioration and substantially increase access to safe drinking water to most of the inhabitants of Metropolitan Manila. It is estimated that by 1987 the project will provide safe water at adequate pressures for an additional 4.0 million people in MMA as well as improve the service to some 3.0 million who are inadequately served at present. The project will also strengthen MWSS' management, its project implementation capacity and provide training of staff. Least Cost Solution 6.02 For each major project component alternatives were studied with discount rates of 8%, 10% and 12%. The project, taken as a whole, is the least cost solution for achieving its objectives.  - 34 - Service to the Urban Poor 1 6.03 There are no reliable estimates, on the number of urban poor. According to an estimate based on nutrition, they could be as high as 60% (3.2 million) of the 1975 population of 5.3 million. Other estimates put them at about 34% (1.8 million) of the population. Also, peculiarly to Manila, except for the well known concentrations at the Tondo Foreshore /2 and Bagong Barrio, the urban poor are scattered throughout the city either in small groups in blighted areas (see Map IBRD 13467), as squatters on public land or as groups of one or two families living cheek by jowl with middle and upper income neighbors, or beside industrial and commercial areas. Under these circumstances, the only method of ensuring that most of the poor benefit from the project, is to lay the network of pipes in the distribution system in all of the populated areas of Manila and size the pipes, not only to meet the needs of the poor, but also the middle and upper income groups. Special provision is made in the blighted areas and other densely populated low income areas, for public standpipes for the very poor and a tertiary grid of small pipes, to reach as many low income families as possible. It is assumed that roughly half the population (4.6 million) will belong to the urban poverty group in 1987. 6.04 A second peculiar feature in Manila, is the number of people who borrow water from their neighbors, because they cannot get private connec- tions themselves and find it more convenient to obtain water in this way, rather than go to a public standpipe. In 1977 this consumer category was 12% of the total population in MWSS' inlying zone. 6.05 It is estimated that in 1987, of the 4.6 million urban poor (para. 6.03), 3.3 million or 74% will have reasonable access to safe water; 0.7 million through standpipes, 1.3 million as borrowers and another 1.3 mil- lion by direct house corrections. 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 project. 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. Assuming a per capita consumption of 100 lcd for the urban poor with house connections, about 20% of the total domestic consumption in 1987 will be used by the poor. It is estimated that about 12% of the project cost of $394 mil- lion or $47 million is directly attributable to the urban poor. Of the loan amount of $85 million for Manila water supply about $10 million will benefit the urban poverty group. 6.06 Taking only the incremental number of persons served by direct house connections and standpipes in 1987 (3.5 million), the capital cost of providing the incremental service is about US$109 per person. As the /1 The Bank has defined the urban poverty threshold in the Philippines as $180.00/capita/annum in 1975. /2 The Tondo Foreshore has 27,500 families located on 180 ha and Bagong Barrio has 16,800 families on a smaller land area.  - 35 - development of remote sources is involved, this is a reasonable cost. Also the present supply will be improved, pressures will remain positive and the water will not be contaminated. Employment 6.07 It is estimated that an additional 10,000 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 sanita- tion program. Economic Evaluation 6.08 The incremental economic rate of return for the project was calcu- lated using water revenues as a minimal measure of the benefits. Currently, water rates are very low and MWSS has proposed stepping them up while retain- ing the social rate structure whereby the large domestic consumers and the commercial and industrial consumers subsidize the residential consumers whose consumption is low. As the service improves, further increases in water rates will be made effective (paras. 5.11 and 5.15). Assuming that the consumers will be willing to pay these increases, the rate of return, based on 1978 prices, is about 12% (Table T-22). For calculating the IER, the foreign exchange expenditures were shadow priced at 1.1./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 the project benefits by two years would lower it to about 9%. 6.09 By using water revenues as a surrogate for the project benefits, the IER of 12% does, in fact, understate the rate of return. It ignores the consumer surplus or additional value of the total water consumed above the amount paid for the water. Moreover, the health, fire-fighting and environ- mental 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. 6.10 The average incremental cost (AIC) of water to be produced by the project adopting a discount rate of 12%, is P 1.00 per cu m, about twice the present average revenue per cu m realized by MWSS. The AIC is higher than the top rate for domestic water use and the rate for commercial consumers by some 66%; and for industrial use by 25%. However, after the October 1978 tariff increase (paras. 5.11 and 5.12), the average tariff will be about 80% of the AIC tariff and the commercial and industrial users will pay equal to /1 The traditional Bank shadow pricing approach is used instead of the Squire-Vander Tak border pricing method so that the calculation of the average incremental cost can be meaninfgully compared to current water tariff levels (see GAS 14 EWT Department).  - 36 - or higher than AIC. The projected average tariff of P 1.80 per cu m in 1984 will, in real terms, be just about equal to AIC. Thus, over the course of the project, the economically efficient allocation of water resources will be promoted through the tariff level for large users while cross subsidies for small consumers are generated through the tariff structure. Project Risks 6.11 There is adequate provision in the project for engineering con- sultants to advise MWSS in the design and supervision of construction of the project. Though much remains to be done, since the 1971 reorganization, MWSS has come a long way in improving its organization and is reasonably efficient. Also the economic climate, which contributed partly to the delay in the implementation of the First Stage project, has improved considerably in recent times. There is a strong enthusiasm, in the organization's staff responsible for project implementation, to tackle the water supply (and sanitation) problems of the metropolis. With the technical assistance provided under the project (paras. 2.08 and 4.20) the risk of delays or serious difficulties in the construction of the major project components is considered small. However, the project would involve a substantial increase in MWSS' services and there could be some doubt whether MWSS has the institu- tional capability to efficiently expand its services as rapidly as projected. The reorganization of MWSS into branch offices for operations and maintenance will address this problem but that reorganization is yet to take effect. This risk will be minimized by close and frequent project supervision both by the Bank and ADB operating in close cooperation and taking advantage of ADB's proximity to the project. Bank supervision missions will be alert to the problem and recommend steps during project implementation to foresee and correct any situation before it seriously affects the project. In order to maintain its role in the long process of institution building the Bank should continue its financial participation and accept the risk. VII. AGREEMENTS REACHED AND RECOMMENDATIONS 7.01 During negotiations agreement was reached with the Government, MWSS and LWUA on the following main points: (a) preparation of a staffing plan (para. 2.08); (b) decrease in receivables (para. 2.11); (c) program for reducing unaccounted for water (para. 3.26); (d) establishment of a training division (para. 4.16); (e) employment of consultants (para. 4.20);  - 37 - (f) annual review of water rates (para. 5.13); (g) rates of return (para. 5.14). (h) revaluation of assets (para. 5.22); (i) long-term debt and limit on other capital expenditures (para. 5.23). 7.02 A condition of effectiveness of the loan will be the execution of a loan agreement between MWSS and ADB for an additional amount of about $49 million (para. 5.10). 7.03 The proposed project is suitable for a Bank loan of $88.0 million for a term of 20 years including a grace period of 5 years.   ANNEX 1 Page 1 PHILIPPINES MANILA WATER SUPPLY PROJECT II Supporting Tables and Charts T-1: Projected Population 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 ------------------------------------