Philippines - Second Provincial Cities Water Supply Project

Document of The World Bank FOR OFFICIAL USE ONLY FILE COPY Report No. P-2551-PH REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND DEVELOPMENT CREDIT TO THE REPUBLIC OF THE PHILIPPINES FOR A SECOND PROVINCIAL CITIES WATER SUPPLY PROJECT May 16, 1979 l This document has i restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclos witbout World Bsnk authorization.  CURRENCY EQUIVALENTS (As of May 1, 1979) Currency Unit - Pesos (P) P 1.00 = US$0.135 P 1 million = US$135,000 US$1.00 P 7.40 US$1 million = P 7,400,000 MEASURES AND EQUIVALENTS mm = millimeter = 0.04 inches cm = centimeter 0.39 inches m = meter 3.28 feet km = kilometer 0.62 miles ha = hectare 10,000 square meters or 2.47 acres cum = cubic meter 264 US gallons cumd = cubic meters per day = 264 US gallons per day 1 = liter 0.26 US gallons lped = liters per capita per day 0.26 US gallons per capita per day PRINCIPAL ABBREVIATIONS AND ACRONYMS MMA = Metropolitan Manila Area MWSS = Metropolitan Waterworks and Sewerage System IMPWTC = Ministry of Public Works, Transportation and Communications LWUA = Local Water Utilities Administration MLGCD = Ministry of Local Government and Community Development NWRC = National Water Resources Council WD = Water District WHO = World Health Organization FISCAL YEAR January 1 to December 31  PHILIPPINES FOR OFFICIAL USE ONLY SECOND PROVINCIAL CITIES WATER SUPPLY PROJECT Loan/Credit and Project Summary Borrower: Republic of the Philippines Beneficiaries: The Local Water Utilities Administration (LWUA), about 50 Water Districts in provincial cities and about 1,000 Rural Water Associati6ns in the rural areas. Amount: $16.0 million IBRD $22.0 million IDA Terms: The Bank loan would have a repayment term of 20 years, including 5 years of grace, with interest at 7.9% per annum. The credit would be made on standard IDA terms. Relending Terms: The Government would relend $30 million of the proceeds to LWUA at 7.9%, repayable over 20 years with 5 years of grace. The foreign exchange risk would be borne by the Government. Project Description: The project is designed to provide improved water supplies in about 50 Water Districts in the provincial cities, and about 1,000 rural communities, by rehabili- tation and construction works. The project provides for (a) water supply construction in provincial cities; technical assistance for project preparation, detailed designs, supervision of construction and preparation of next stage project; training of LWUA and Water District staff, together with related equipment; and vehicles and equipment for Water Districts; (b) water supply construction in rural communities, and a pilot sanitation study for about eight rural communities. Project benefits include a reduction in the incidence of waterborne diseases and the possibility of epidemics. Between 40% and 60% of the population served would be the urban poor. The main risk in the proposed project concerns the implementation performance of LWUA in the timely formation of the Water Districts, preparation of detailed designs and completion of subprojects. The project makes provision for organizational and financial changes, technical assistance and training, which would help to minimize these risks. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - 2 - Estimated Cost:Il Local Foreign Total -----------$ million------------ Part A: Water supply construction in provincial cities 18.6 19.2 37.8 Contingencies 5.9 5.9 11.8 Engineering 3.8 3.4 7.2 Total Part A 28.3 28.5 56.8 Part B: Technical assistance, vehicles and equipment and training 1.6 1.6 3.2 Part C: Rural communities water 1.8 1.8 3.6 supply Part D: Rural sanitation 0.2 0.2 0.4 Total financing required 31.9 32.1 64.0 Financing Plan: IBRD/IDA WDs Government Total *--------------- $ million ------------- 38.0 5.7 20.3 64.0 Estimated Disbursements IBRD/IDA FY 1980 1981 1982 1983 1984 1985 -------------------$ million----------------- Annual 1.21 6.98 7.65 11.12 7.50 3.54 Cumulative 1.21 8.19 15.84 26.96 34.46 38.00 Rate of Return: For the three sample cities of Guagua, Orani and San Jose, the internal rates of return are 7.4%, 6.6% and 9.8% respectively. Staff Appraisal Report: No. 2398-PH dated May 11, 1979. /1 Excludes duties and taxes as these are reimbursable.  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANIK FOR RECONSTRUCTION AND DEVELOPMENT AND THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND DEVELOPMENT CREDIT TO THE REPUBLIC OF THE PHILIPPINES FOR A SECOND PROVINCIAL CITIES WATER SUPPLY PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of the Philippines for the equivalent of $16 million and a proposed development credit for an equivalent of $22 million to help finance a second provincial cities water supply project. The loan would be for a per- iod of 20 years, including 5 years of grace, with interest at 7.9% per annum. The development credit would be on standard IDA terms. The Government would relend $30 million of the proceeds of the loan/credit to the Local Water Utilities Administration (LWUA) at 7.9%, repayable to the Government over 20 years with 5 years of grace. The Government would provide $6.0 million to the Water Districts as a contribution to their equity. The balance of $2.0 million would be used by the Ministry of Public Works, Transportation and Communications (MbPWTC) for rural water supply construction, and to develop rural sanitation. The Government would bear the foreign exchange risk on the Bank loan and the IDA credit. PART I - THE ECONOMY 2. An economic mission visited the Philippines in July/August 1977 and its report, "The Philippines: Country Economic Memorandum" (No. 1765-PH of October 26, 1977), was distributed to the Executive Directors under PHL-77-2, dated October 27, 1977. An updating economic mission is currently in the field. A basic economic report, entitled The Philippines: Priorities and Prospects for Development (SecM-76/366), was previously distributed to the Executive Directors on May 18, 1976. Macroeconomic Performance 3. During the 1960s, the Philippine economy grew in real terms at an annual rate of about 5-1/2%, but with more effective economic management the rate of growth could have been higher. The pattern of growth was also structurally unsatisfactory in a number of respects. The benefits of develop- ment were distributed relatively unevenly, with respect to both regions and income classes. While overall agricultural growth was reasonably satisfactory, repeated foodgrain deficits were experienced. The growth of productive employment opportunities failed to keep pace with the expansion of the labor force. Low levels of taxation resulted in inadequate public expenditure for necessary infrastructure and social services. Finally, poor export performance combined with heavy import dependence of domestic industry led to chronic weakness in the balance of payments. 4. During the 1970s there have been significant improvements in economic management. Public revenues have been increased substantially, public sector implementation capacity has been strengthened, and the ratio of public investment to GNP raised from 2% in the early 1970s to 5% in 1976-78. Private investment also increased, and the ratio of total fixed investment to GNP rose from 16% in the early 1970s to 25% in 1976-78. As a consequence of  higher levels of investment the construction industry boomed. Agriculture has performed well in response to the spread of irrigation and higher yielding rice varieties, more favorable price policies, and some improvements in supporting services. Selective steps were taken to promote nontraditional manufactured exports, which have grown rapidly. On the other hand, the performance of that part of the manufacturing sector oriented to the domestic market has remained only "fair" in a comparative sense and has been inadequate in relation to the Philippines' need to generate productive employment opportunities. The net effect of the above developments has been acceleration in the trend GNP growth rate by one percentage point to 6-1/2%. 5. An important constraint has been placed on Philippine development options by the sharp deterioration of its terms of trade since 1975, stemming from the increase in oil prices and depressed prices for major Philippine commodity exports such as sugar and copper. As a result, real national income has been growing more slowly than real national product, and with the higher level of investment the dependence of the economy on foreign savings has increased. Although the terms of trade have recently stabilized, the current account deficit is still about 4% of GNP. Development Strategy 6. The Government's development objectives and policies, which were set out in a Five-Year Development Plan for the period 1978-82, call for further acceleration of economic growth, first to 7% and then to 8%. The development strategy focuses on an expansion of productive employment oppor- tunities at a rate of 3.6% per annum, reduction of income disparities, greater self-sufficiency in food and energy, a strengthening of the balance of payments, and increased development of rural areas. In addition, the Plan includes growth strategies for each of the country's thirteen regions. In general, the Plan is an elaboration of the policy directions pursued by the Government in recent years. It is also broadly consistent with the Bank's assessment of priorities, although Plan projections for investment, manufacturing output and exports are somewhat higher than Bank staff estimates. It should, however, be feasible to accelerate the overall growth rate to 7%, but more rapid expansion of manufacturing is necessary to do so, and the efficiency of investment also needs to be improved. Agriculture and Rural Development 7. In recent years the trend growth rate of the agricultural sector has been slightly over 4%, which by international standards is quite good. However, variations among subsectors have been considerable. Due to the spread of irrigation and high yielding varieties, irrigated rice production has increased rapidly. The Philippines, once a chronic importer of rice, actually exported 100,000 tons of rice in 1977/78. With completion of large irrigation projects now under implementation, continued rice self-sufficiency appears assured for the 1980s. On the other hand, locally adapted technologies for improving yields of rainfed grains, particularly corn, are still under development, and rainfed agricultural areas have a high incidence of poverty. Productivity in the coconut sector is relatively low because of a large number of overaged trees, but a major replanting program is scheduled for the early 1980s when a sufficient number of HYV seedlings becomes available. Increasing  -3- pressure of population on the land and inadequately controlled commercial logging have led to soil erosion and deterioration of some forest areas. The Plan calls for a major reforestation effort, but this will require substantial upgrading of Government administrative capabilities in this area, develop- ment of new hill cropping technologies, and resolution of difficult land tenure problems. 8. As well as providing greater support for agricultural production, the Government has substantially expanded programs such as water supply, electrification, rural roads, and health to improve living conditions in rural areas. An agrarian reform was also instituted in 1972 which provides for transfer of tenanted holdings of rice and corn land in excess of seven hectares and enforcement of leasehold instead of sharecropping on remaining tenanted holdings. As of March 1978, only about 10% of the estimated number of land transfer beneficiaries had completed all formalities, but about 60% had received Certificates of Land Transfer (the initial step in the process establishing their claim to the land). Industry 9. Manufacturing has grown at an average rate of about 6-1/2% during the 1970s. The greater part of the sector, oriented to the domestic market, has been promoted by high tariff protection and an incentive system which has favored the use of relatively capital-intensive production techniques. Relatively little employment has been generated in relation to Philippine factor endowments. Macro statistics such as the incremental capital-output ratio suggest that the efficiency of investment has been low, and most manufacturing plants have located in the greater Manila area. Reform of tariffs and other industrial incentives to bring these into line with develop- ment objectives are presently being considered by the Government. 10. Beginning in 1970, selective measures have been introduced to promote nontraditional manufactured exports, including permitting firms in selected export industries to import needed goods free of duty and establishing export processing zones. Entrepreneurs have responded to these opportunities, and receipts from nontraditional manufactured exports increased from $116 million in 1972 to more than $1.0 billion in 1978. Population Growth, Employment and Income Distribution 11. The 1978 population is estimated at 45.5 million. The popula- tion growth rate fell from 3.0% in the intercensal period 1960-70 to 2.8% in the intercensal period 1970-75. The Philippines has an active family planning program registering approximately 650,000 new acceptors per year. Although the number of new acceptors has reached a plateau as the program faces the increasingly difficult problem of reaching rural areas, the estimated propor- tion of married women of reproductive age practicing family planning increased from 15% in 1973 to 27% in 1978. However, by East Asian standards, this index is still relatively low. 12. Employment increased by about 4.6% annually during 1973-77, a considerable improvement over the historical growth rate of 2.4%, and was able to keep pace with the rapid growth of the labor force. With the exhaustion  -4- of most new land resources suitable for cultivation and the exploitation of the most easily irrigable areas, industry will have to provide employment for about one half of the new entrants to the labor force in the next decade. Employment in manufacturing essentially stagnated during 1970-74, but grew by 7% annually during 1975/77, resulting in part from the growth of labor-intensive production for export. However, because manufacturing's share of total employment is small, agriculture and services still continue to function as residual sources of employment and accounted for most of the increase in total employment. 13. For historical reasons, income distribution has been highly skewed in the Philippines, and there is a small elite which is conspicuously wealthy. Recent trends in income distribution are mixed but, on balance, positive. Because of the improvement in agriculture's terms of trade, the growth of agricultural production, the decline in urban real wages following the devaluation in 1970, and the stagnation of industrial employment until 1975, the ratio of the average rural income to the average urban income rose from 0.48 in 1971 to 0.57 in 1975. Real per capita consumption has increased by about 2% annually. Hence, real incomes in rural areas, where most of the poor live, have probably increased somewhat, while real urban incomes have not improved substantially. As a result, although accurate statistics are not available, the share of family income received by the poorest 40% of families appears to have increased somewhat, the income share of the top 20% has remained about the same, and that of the middle-income families has declined correspondingly. Nevertheless, the incidence of poverty remains high, at 40-45%, in both rural and urban areas, and malnutrition is wide- spread. Public Finance 14. The public sector has historically claimed a much smaller share of national resources in the Philippines than in many other developing countries. In the early 1970s, general government expenditure averaged only 12% of GNP, public investment was strikingly low at about 2% of GNP, and tax revenues stood at 11% of GNP. Government expenditures were dominated by general administration and social services, particularly education. This situation had resulted from a variety of factors including difficulties in raising tax revenue and weak implementation capacity in the public sector. Since the early 1970s, the Government has taken steps to correct the situation and has raised both the overall level of expenditures and the shares going to economic services and public investment. By 1978 government expenditures reached an estimated 16% of GNP, and public investment, which has risen rapidly in the last three years, equaled about 5% of GNP. This expansion in the public investment program has brought about badly needed improvement in basic infra- structure particularly in transportation, power and irrigation, as well as the development of more effective programs in the fields of urban development, health and family planning. 15. Recognizing that a large increase in tax revenues would be required to finance expansion of the public investment program, the Government has undertaken a comprehensive program of tax reform to raise the needed revenues equitably and efficiently. Despite a sharp cyclical decline in the yield of export taxes and import duties, the overall tax ratio was raised by more than two percentage points through a series of new, mainly indirect, tax measures and vigorous efforts to improve taxpayer compliance and collection performance.  Moreover, import tariff exemptions were reduced and the financial position of certain public enterprises was improved through selective price increases. However, further reform measures will be needed to improve the equity of the tax system and to strengthen its responsiveness to the growth in GNP, mainly by increasing the proportion of revenues coming from direct taxes. In addition, fiscal and tariff incentives will need to be rationalized further to eliminate remaining biases favoring import substitution and capital intensity. Continued effort will be needed to ensure that Government corporations finance an appropriate share of their investments from their own savings. Private Savings and the Financial Sector 16. Aggregate savings performance has improved during the last decade and is comparable to that of other countries at a similar stage of economic development. Gross domestic savings now finance about 85% of total investment, with the balance coming from foreign savings. In order to increase the efficiency of financial markets in intermediating between savers and investors, the Government has made significant improvements in financial policy. Organized banking institutions have been strengthened. Interest rates were realigned in 1976 and, again, in 1977 to encourage a greater flow of financial savings into time and savings deposits relative to short-term deposit substitutes and to reduce the spread between borrowing and lending rates. Further reforms are required to increase the availability of long-term domestic currency resources. Special credit programs have been adopted to expand lending to the credit-short agricultural sector and rural areas and to serve the needs of medium- and small-scale industries. A deterioration of loan recovery rates was experienced by all government financial institutions and credit programs. The Government has already taken a number of steps to improve collections; further efforts in this direction are necessary to improve financial discipline and ensure an adequate flow of credit to the productive sectors without burdening the public finances. External Trade and Capital Flows 17. To meet the acute balance of payments problem in 1975, which largely resulted from the decline in terms of trade, the Government drew down its international reserves, drew upon various IMF facilities, and expanded its borrowing program to finance necessary imports. For the longer term, the Government adopted a strategy of accelerating export growth both to hold the current account deficit about constant in absolute terms, while letting it decline gradually relative to GNP, and to meet the debt service payments on the higher level of external borrowing. 18. In spite of a further deterioration in the terms of trade since 1975, the current account deficit has behaved as anticipated over the last three years - averaging $1.0 billion per year but declining from 6% of GNP in 1976 to an estimated 4% in 1978. Export volume, although constrained in 1978 by the depressed sugar market, increased substantially over the three-year period as a whole. Import payments, after growing slowly in 1976 and 1977, accelerated with the recovery of private investments in 1978. To finance the current account deficits, net capital inflows were nearly doubled from the 1975 level of $580 million to an average of $1.1 billion per year in 1976-78. Most of the inflow came from medium- and long-term loans. About two thirds  -6- of this was from public loans, a reflection in part of increased disbursements from official sources. As a result of increased borrowing, the debt service ratio has risen from 16% in 1975 to 20% in 1978. 19. To achieve a 7% growth rate in real GNP, as projected for the initial years of the Plan period (1978-82), import volume will have to grow at a similar rate, and a net capital inflow of at least $1 billion per year will be required. However, the commencement of oil production, which now accounts for 15% of domestic consumption, early this year promises some longer term relief on the import side. Assuming a continued effort to promote exports and sound debt management, the overall external debt of the Philippines is expected to remain within reasonable limits. The ratio of debt service payments to exports of goods and nonfactor services is expected to average around 21%, of which half would be public debt service, during the Plan period and to decline thereafter. 20. In order to ensure that the long-term capital transfer is commensu- rate with the level of development expenditures required during 1978-82 and that debt service obligations remain within reasonable limits, the Government sought commitments of official assistance of $850-900 million in 1979 at the last meeting of the Consultative Group for the Philippines, held in Paris in November/December of 1978. This amount is likely to be made available. However, since many of the projects planned for financing from external sources have a low foreign exchange component, some local cost financing is necessary, in appropriate cases, to meet the Philippines' external financing requirements. PART II - WORLD BANK OPERATIONS /1 21. As of-March 31, 1979, the Philippines had received 61 Bank loans /2 (of which two were on Third Window terms) amounting to $1,929.9 million and four IDA credits amounting to $60.2 million. At that date, IFC investments totalled $88.4 million. The share of the Bank Group in total debt disbursed and outstanding is about 11% and its share in total debt service is about 5%. These ratios are expected to be about 12% and 5%, respectively, by the end of the present decade. Annex II contains a summary of IDA credits, Bank loans and IFC investments as of Mlarch 31, 1979, as well as notes on the execution of ongoing projects. 22. The Bank Group has financed projects in virtually all sectors of the economy with particular emphasis on agriculture and basic infrastructure, which have each accounted for about one third of total Bank Group lending. In agriculture, emphasis has been given to expanding the irrigation system to /1 This section is substantially the same as that contained in the President's Report for the Fourth Highway Project (R79-30) which was approved by the Executive Directors on March 6, 1979. /2 Includes Loan 1661-PH, Fourth Highway Project, $100 million, which was signed on March 9, 1979, and is not yet effective.  - 7 - increase food production and to credit programs to support foodgrain produc- tion and processing and livestock, fisheries and tree farming production. Support has also been provided for integrated rural development projects in low income areas. The Bank Group has also provided large amounts of assistance in developing power and transportation to provide the basis for future growth of the productive sectors. Substantial improvement in basic infrastructure has been needed to compensate for many years of past neglect due to low levels of public expenditure. In the industrial sector, the Bank's main thrust has been on strengthening the capacity of public and private development finance institutions with increasing attention given to meeting the needs of small and medium industries. In the social sectors, the Bank Group has provided support for education programs designed to improve the quality of primary and secondary education and to meet trained manpower requirements in agriculture and industry. In urban areas, assistance has been provided for water supply projects and for programs to upgrade slum living conditions and to develop low-cost sites and services. Support has also been provided to the Philippines population program through assistance for the construction of multipurpose rural health units and for training of family planning staff. 23. There has been a marked improvement in the execution of Bank- financed projects in the last five years compared with the experience in the late 1960s, when there were serious problems caused by a shortage of peso counterpart funds and weak administration. Almost all ongoing projects are now being implemented reasonably well and the supervision and project comple- tion reports indicate that the economic benefits for most projects are likely to be in line with appraisal estimates. However, the overall rate of disburse- ment is marginally below what would be expected given the generally good project implementation, and the Government is currently reviewing disburse- ment performance on an agency-by-agency basis to identify possible reasons for disbursement lags and to find appropriate solutions. 24. As noted in Part I of this report, the Government's Five-Year Development Plan highlights a strategy which focuses on the expansion of production and employment in agriculture and industry, reduction in income disparities, greater self-sufficiency in food and energy, and increased development in rural areas. The Bank's future lending program has been designed to assist the Government in achieving these objectives. Agricul- tural and rural development will account for the largest part of future lending with continued emphasis on food production and programs to increase the productivity and incomes of small farmers. However, the program pro- vides for several needed new initiatives, including support for strength- ening the national agricultural extension service through the recently approved loan and a first loan for developing multiple cropping systems in rainfed areas, where there is substantial rural poverty. Increased assistance will also be provided for integrated rural development projects which will support the Government's objectives of redressing regional imbalances in income. Substantial assistance will also continue to be given to industry with considerable attention given to expanding the development of labor-inten- sive, small and medium industries outside of the Metropolitan Manila area. The share of lending for social sector projects is expected to continue to  - 8 - increase primarily as a result of greater emphasis on construction of urban water supply and sewerage systems and further assistance for slum upgrading and low-cost sites and services projects. The Bank Group will continue to provide support for improving the quality of education and for expanding the Government's population program in rural areas. While the Bank Group will continue to provide support for transportation and power infrastructure needed to support the Philippine development effort, the share of Bank lending for these sectors will decline somewhat in the years ahead primarily because alternative sources of financing are available to finance a large part of the power generation program. 25. As noted in Part I, the Philippines has experienced a serious deterioration in its international terms of trade in the last several years which has necessitated substantial foreign borrowing. While the overall level of debt remains manageable, the Philippines will need to obtain some foreign assistance on concessional terms in the near term to support its expanding development program. In view of this consideration, the per capita income of the country and the generally good management of the economy, a limited amount of IDA financing has been included in the Bank Group's overall lending to the Philippines. 26. This is the seventh loan to be presented to the Executive Directors this fiscal year. Loans for small and medium industries development and population projects are expected to be ready for presentation soon. Loans for rural development and education projects are in advanced stages of preparation, and may be ready for presentation in the first half of the next fiscal year. PART III - THE WATER SUPPLY SECTOR Background 27. 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 and sanitation sector has traditionally been very low, with the result that the infrastructure for water supply, sewerage, and drainage is currently inadequate throughout the country. Only about 39% of the population have access to safe water. About 5% of the population are served by public sewerage systems; some 37% depend on individual septic tanks or pit latrines and the rest are without any facilities. The Government's objective is that by the end of the current five-year plan in 1982, safe water supply should be available to about 62% of the population and sewerage facilities to about 46% of the population. 28. The sector can be divided into three parts: Metropolitan Manila; other urban centers; and rural areas. In Metropolitan Manila about 82% of the population have access to piped water, but in other urban areas and in the rural communities only about 51% and 33%, respectively, obtain a safe supply through piped systems, artesian wells, and springs. In communities  - 9 - with piped water systems, the growth in demand, the advanced age of the systems and the high leakage rates arising from inadequate maintenance have all gradually reduced water main pressures. Many water systems are operated to supply water for only a few hours a day to avoid loss of water during the off-peak hours. About 61% 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. Metropolitan Manila 29. Water supply and sewerage are the responsibility of Metropolitan Waterworks and Sewerage System (MWSS) in MMA. Of MMA's 1977 population of for 1977, about 3.1 million of the 5.8 million residents of Metropolitan Manila obtained water from MWSS. The ongoing Second Manila Water Supply Project is expected to almost double the water supply, provide safe drinking water to about 4 million additional residents as well as improve the present unsatisfactory service to about 3 million residents. However, by the end of 1982 only about 78% of MWSS' service area population of 7.6 million will have access to safe public water supplies. The Government is therefore preparing a Third Water Supply Project for Manila. 30. A sewerage and sanitation project for Metropolitan Manila has been prepared and is expected to be appraised shortly. The Government is also preparing a Solid Wastes Management Project. This project would, through improved collection, recycling and disposal of the solid wastes generated in Manila, further help improve the sanitation of the city. The Provincial Cities Subsector 31. The Local Water Utilities Administration (LWUA) is responsible for developing water utilities in some 628 provincial cities with urban populations exceeding 20,000. LWUA assists with the formation of Water Districts (WDs) in these cities and provides them with technical, managerial and financial assistance. Water Districts are locally controlled public utility organizations created under Presidential Decree No. 198. As of the end of March 1979, 82 cities had formed Water Districts and some 60 others had expressed interest in doing so. Water supply in the cities which have not yet formed WDs continues to remain the responsibility of the local authorities until such time as LWUA and the local authorities reach agreement on forming WDs. 32. Out of the total urban population of 8.4 million living outside Metropolitan Manila only about 50% have access to safe water. Several external agencies (United States Agency for International Development, Danish Interna- tional Development Agency, Asian Development Bank and the Bank) have made loans through LWUA to WDs, for the construction, expansion and rehabilitation of these water supply facilities. However, important issues have arisen in the last year or two concerning the design of subprojects in small communities, financing of such small projects, affordable tariff levels and LWUAs' own institutional capability for handling a large program spread throughout the country. In keeping with the Government's ambitious objectives in the sector, the Government and LWUA have taken important actions to deal with these issues.  - 10 - 33. Low Cost Design. The Government has become increasingly aware that the cost of water supply systems has to be kept low to ensure that the charges do not exceed the willingness and ability of consumers to pay for better services. In the design of subprojects greater care is now being taken to ensure that all feasible low cost technical alternatives are studied for the major components such as sources of supply, optimization of storage and selection of pipe materials. Standard and modular design drawings are being developed by LWUA to reduce design costs and United Nations Development Program is providing technical assistance in the design of low cost distribution systems. Most of the systems would be based on groundwater and capital costs kept low at about $60 per person. The existing dilapidated systems would be rehabilitated through the repair of leaking pipelines and reservoirs, replace- ment of inefficient pumps and the redevelopment of wells. A public education program followed by public hearings would give each community opportunities to participate in deciding the scope of the project, service levels such as the provision of public faucets in the poverty pockets and the extension of the piped supply to areas of greatest need. By providing relatively low cost services, the Government expects to demonstrate to these largely poor commu- nities the advantages of a safe and affordable water supply. In this way the project will serve as a catalyst for future improvements and extensions by these communities. 34. Lower Debt Service. In order to help further reduce the debt service of the Water Districts, the Government will provide a 20% equity con- tribution to be matched by a 10% contribution to construction costs by the community from internally generated funds. The Government contribution would be an incentive for the communities to raise water tariffs to the levels necessary to generate the 10% construction cost. Also, because of the reduced debt service requirement, tariffs would be lower and more affordable. 35. Lower Tariffs. The small and carefully designed low cost water supply systems would result in affordable water tariffs and would be consist- ent with the Government's recent directive that tariff increases should not exceed 60% at a time and that public hearings should be held before any tariff increase is put into effect. The tariff structure is so designed that the lower income residents who consume less than 10 cu m per month would spend no more than 4% of family income for water. They would be subsidized through higher charges to larger domestic consumers and commercial and industrial users. 36. Institutional Capacity. Since LWUA became active in the subsector in early 1975, it has started 24 water supply projects in large provincial cities and is undertaking immediate improvement works in 39 smaller cities. Despite this big work program LWUA's management systems are generally working well and its organizational structure continues to be satisfactory. Staff has been more than doubled in the last three years and a group of qualified and enthusiastic professionals is quickly developing the expertise to make an effective contribution to the sector. Turnover is fairly high because of better compensation offered by a growing local consulting engineering indus- try which is also helping LWUA with project implementation. LWUA has a good training program and is planning to further increase and train staff to  - 11 - implement the larger program. The proposed project provides for about 150 man- months of overseas training of LWUA and Water District staff. However, until then LWUA will need to continue to employ consultants to assist with the implementation of the proposed project. The Rural Water Supply Subsector 37. An IBRD/WHO Sector Study, made in 1976, recommended the creation of a specialized institution for rural water supply. Presidential Letter of Instruction 683, of March 30, 1978, established policies for providing water supplies in communities with less than 20,000 inhabitants and created a Task Force on Rural Water Supply in the National Water Resources Council (NWRC/TF) under the Ministry of Public Works Transportation and Communications (MPWTC). The National Water Resources Council is a government organization charged with the responsibility of formulating policies on development and use of water resources. It is chaired by the Minister of Public Works, Transpor- tation and Communications. 38. Rural water supply subprojects will be of least-cost design to provide three levels of service: (i) a point source, which could be a well or a spring to serve about 50 households; (ii) a communal faucet system, serving about 100 households, with one faucet for a group of about four to six households, and delivery of between 40 and 80 litres per capita per day; and (iii) a mixed system of communal faucets and house connections, but with less than 10% of households with house connections. By this means the project would ensure that safe water is supplied to a cross-section of the rural poor. Investment Program 39. LWUA's program for assisting WDs in provincial cities in the five years 1980-84 would amount to about $218 million, an average of about $44 mil- lion per annum, compared to $16 million in 1977. For the rural areas, the Five-Year Plan envisages an investment of $210 million, an average of about $42 million per annum, compared with about $2 million per annum in 1973-76. While these targets are ambitious, the Government has taken important steps to establish the organizational arrangements necessary to implement the program. A Bank loan of $23 million (Loan 1415-PH) was made to the Government in 1977 for the first Provincial Cities Water Supply Project. There has been some delay in the preparation of detailed designs and bid documents, but the project is likely to be completed on schedule. A Bank loan of $88 million (Loan 1615-PH) was made last year to help improve and expand the Metropolitan Manila water supply system, finance detailed design and feasi- bility studies for water supply in provincial cities and prepare a rural water supply program. Initial progress is satisfactory. To complement the water supply and sewerage program, the Government has recently adopted large urban programs to expand basic services in low-income urban areas in integrated packages of water supply, sewerage, roads and other infrastructure. These programs are being carried out by the National Housing Authority and municipal governments, with Bank assistance. Implementation of the first urban project (Loan 1272T/1282-PH) is somewhat behind schedule due to difficulties in reblocking of densely populated communities but performance is improving.  - 12 - PART IV - THE PROJECT Objectives 40. The primary objective of the project is to provide improved water supplies by carrying out rehabilitation and construction works in about 50 WDs in the provincial cities and about 1,000 rural communities. The project would support LWUA's long-range program to provide water supplies to the provincial cities and would initiate much needed programs in rural water supply and sanitation. The project would assist in the further institutional development of LWUA; and the communities benefitting from subprojects would have greater involvement in the development of their respective WDs by participating in the decision-making process starting from the feasibility studies through tariff setting and construction completion. This component of the project has been prepared by LWUA with the assistance of consultants. The rural water supply and sanitation component was prepared by the Rural Development Division of the Bureau of Community Development. The project was appraised in October 1978. Negotiations were held in April 1979. The Government negotiating team, chaired by His Excellency Eduardo Z. Romualdez, Philippine Ambassador to the United States, was led by the Honorable Alfredo L. Juinio, Minister of Public Works, Transportation and Communications. A Staff Appraisal Report entitled "Philippines-Provincial Cities Water Supply Project II" (No. 2398-PH dated May 11, 1979) is being distributed separately. Supplementary project data are provided in Annex III. Description 41. The principal features of the project are summarized below: (a) Water Supplies in Provincial Cities (i) water supply construction in about 50 provincial cities; (ii) technical assistance for project preparation, detailed designs and supervision of construction; (iii) technical assistance for preparation of next stage project; (iv) training of LWUA and WD staff including needed equipment; and (v) vehicles and equipment for WDs. (b) Rural Water Supply and Sanitation (i) water supply construction in some 1,000 rural communities; and (ii) pilot sanitation study and subprojects for about eight rural communities.  - 13 - Concept and Composition 42. Water Districts in Provincial Cities. To meet the Government's objectives of speedily providing safe water supplies to WDs in a larger number of the provincial cities, four modifications have been made to the approach adopted under the ongoing first project (Loan 1415-PH): (a) Unlike the first project, in which the feasibility studies on the six WDs were completed at the time the loan was made, in the proposed second project there are about 50 WDs and for these only about 12 feasibility studies would be completed at the time of loan effectiveness; 16 more feasibility studies would be completed in each year thereafter for three years. As this project would aim at reaching about 10 times as many communities in comparison with the first project, LWUA would undertake an annual review of project implementation. (b) Secondly, in the first project the designs were made to meet demand for five to eight years after project completion. This has caused hardship to some communities because of the larger debt service needed to complete projects with these specifications. Therefore, this project is designed to meet water supply needs for about six years after project completion. If the WD so desires construction would be in two phases. Each one of these phases would be technically sound and compatible with the total design and would meet needs for about three years after construction comple- tion. LWUA has agreed that the criteria to be used for subproject design and implementation will be such as are acceptable to the Bank (Section 2.01(c) of the draft Project Agreement). The cri- teria have been discussed in detail and provide requirements for a water district's eligibility under the project and standards for preparation, review, appraisal and design of subprojects in the water districts. These include low cost designs of subprojects, progressive water tariffs, Government equity contribution to needy water districts, procurement procedures, supervision of construc- tion and training of LWUA and WD staff. The details have been recorded in the Agreed Minutes of Understanding. (c) Each WD in the first project is providing 10% equity contribution from internal cash generation. Even so, debt service is a burden for these large and comparatively wealthy communities. To help reduce this burden for the smaller and poorer communities in this project the Government will match a 10% construction contribution by WDs with a 20% equity contribution for each subproject (Section 3.04 of the draft Development Credit Agreement). Rural Water Supply and Sanitation 43. Rural Water Supplies. The National Water Resources Council Task Force under the Ministry of Public Works, Transportation and Communications (MPWTC) would be the executing agency for the rural water supply component of the project, until a permanent institution is set up by the Government for the rural water supply subsector. It has been agreed that, as a condition of  - 14 - disbursements for the rural component of the credit/loan, MPWTC would establish an organization within its structure to be responsible for the rural water supply component (Schedule 1, Section 4(a)(ii) of the draft Development Credit Agreement). 44. Rural Sanitation Studies. These studies, designed to develop low cost appropriate technologies for excreta disposal, would include pilot projects to be carried out by LWUA and the Task Force. LWUA would con- centrate on the rural areas bordering three typical WDs but, before actual construction, would make economic, technical and cultural studies in order to develop acceptable and feasible solutions. The Task Force would attempt, through an educational program and with minimum investment, to improve environmental sanitation in five communities with completed rural water supply subprojects. Project Area and Served Population 45. The subprojects are scattered throughout the Philippines and are shown in the attached map. The urban population served in the project WDs will be approximately one million. The largest city included in urban component is Iloilo with a total population of about 200,000. The total rural population served under the project would be about 580,000. This served population would generally not include the wealthier rural households, most of which already have simple piped supplies. Local Water Utilities Administration 46. LWUA was established in September 1973, primarily to function as a specialized institution for the promotion, development and financing of local water districts. Its main objectives are: (a) to assist in the formation and development of technically sound and financially viable locally controlled WDs; (b) to provide loans to WDs for the improvement and expansion of water supply and waste water disposal systems; (c) to provide technical assistance and personnel training for WDs; and (d) to establish and enforce standards of water quality and service. LWUA's Board appoints a General Manager, who is also an ex-officio member of the Board and is responsible for all aspects of LWUA's management subject to the policies established by the Board. Because of the importance of the General Manager's position, agreement has been reached that LWUA will afford the Bank an opportunity to comment on the qualifications of any new appointee to this position (Section 3.02 of the draft Project Agreement). LWUA's organizational structure is satisfactory and assurances have been obtained that without prior consultation with the Bank, no major changes would be made in LWUA's organization and charter (Section 3.02 of Project Agreement). 47. LWUA's operations are audited by the Commission on Audit. Audited reports have been presented for 1976 and 1977 and are satisfactory. LWUA's lending program is growing very fast. To make sure that the institution will be able to handle the resulting large volume of operations, it has to define responsibilities, policies, procedures and control sytems for billing and collection of principal and interest of loans to WDs. It has been agreed that LWUA will present for the Bank's comments, not later than January 31,  - 15 - 1980, proposed policies and procedures for the collection of principal and interest on loans to WDs (Section 3.03 of the draft Project Agreement). Project Implementation 48. LWUA needs to improve overall coordination of the implementa- tion of subprojects. Therefore, following consultation with the Bank, LWUA has recently appointed a senior person as Project Manager at a high level with full-time responsibility for implementing the project. 49. The first package of 12 WDs for this project was put together in December 1977 and the consultants appointed for preparing feasibility studies, C. Lotti Associati, expect to complete work by June 1979. Consultants for the second package of 16 subprojects, Motor Columbus (Switzerland), have started work in collaboration with LWUA staff and should complete the feas- ibility studies by end 1980. Feasibility studies and detailed designs for the third and fourth packages (bringing the total to about 60 subprojects), should be ready by end 1981 and 1982. LWUA would, in consultation with the Bank, appoint consultants to assist in carrying out feasibility studies, detailed designs, supervision of construction and review of subprojects (Section 2.02 of the draft Project Agreement). 50. LWUA's Project Manager would appoint an expert team, with one member external to LWUA, to review the draft final feasibility study reports and check that each subproject would meet the agreed criteria (see para. 42 (b)). LWUA would then hold a public hearing and obtain the WD's agreement to the subproject and timing of tariff increases when necessary. If a subproject did not meet the agreed criteria, it would not be financed under the proposed project, but would be replaced by another subproject so that about 50 subprojects would be completed with the available financing. 51. The Ministry of Public Works Transportation and Communications would be the implementing agency for the rural water supply and sanitation components of the project. The proceeds of the credit would be channeled through the Ministry to the Task Force for the rural water supply project and to both the Task Force and LWUA for the pilot sanitation studies. Although the Bank would have the right to comment on all rural water supply subprojects, in practice, this would be limited to the first ten subprojects in order to establish acceptable standards. The Task Force would prepare rural water supply and rural sanitation subprojects to criteria acceptable to the Bank (Section 3.03(b) of the draft Development Credit Agreement). The criteria were discussed and agreed to during negotiations. Rural water supply sub- projects would be prepared and implemented by Government agencies to least cost designs and serve communities ranging from 50 to 600 households. The communities would make a small contribution to construction and will also operate and maintain the systems. Project Cost and Financing 52. The total cost of the project is estimated at $64 million, with a foreign exchange component of $32.1 million. Physical contingencies of 10% of the baseline cost of the water supply component have been provided. Price  - 16 - contingencies assume foreign and domestic price increases of 7.5% per annum on both equipment and civil works. The proposed IDA credit of $22 million and Bank loan of $16 million would finance the foreign exchange cost of the project and $6.0 million of local currency costs. The justification for local cost financing is set out in para. 20 of this report. 53. Construction supervision of the subprojects would be mostly by LWUA with minimal assistance from local consultants. The project provides for a total of 126 man-months of internationally recruited consultants at an estimated average man-month cost of $6,500, excluding transportation, housing and local costs which are variable and depend on home station and family circumstances of individual consultants. As these consultants would be all experienced senior staff, this is a reasonable cost. 54. The Government would relend $30.0 million of the proceeds of the credit/loan to LWUA with a term of 20 years, including a 5 year grace period, and with the same interest as the Bank loan. The terms and condi- tions of the Government loan to LWUA would be set out in a subsidiary loan agreement, which would be signed before the credit/loan is declared effective (Section 5.01(a) of the draft Development Credit Agreement). LWUA would retain $1.5 million of the proceeds of the subsidiary loan to finance prepar- ation of future projects. LWUA would relend the balance of $28.5 million together with $13.1 million of its own resources to the WDs for development of their water supply systems. The loans to the WDs would have a term of 30 years including a grace period equal to the construction period at an interest rate of 9% per annum. These lending rates are below the general level of interest rates in the Philippines, although they are likely to be marginally positive given the average inflation of 7-8% over the past three years, and projections for the next three years. Such concessionality is justified in view of the social character of this project and the limited capacity of the provincial cities to service loans on harder terms. WDs would finance $5.7 million (10% of project costs) from internal cash generation. The Government would provide, out of the remainder of the proceeds of the credit/loan, a sum of $6.0 million plus $3.5 million from its own resources, as its equity contribution to the small WDs, representing 20% of project costs of the water supply program. The terms and conditions of the subsidiary loan agreement between LWUA and the WDs will be presented to the Bank for its approval. 55. The Government would use the remainder of the proceeds of the credit/loan of $2.0 million to finance the foreign exchange costs of the rural water supply component ($1.8 million) and rural sanitation studies ($0.2 million). Ministry of Public Works, Transportation and Communications would be responsible for implementing these components and would finance the local costs of $2.0 million through Government budgetary allocations. Procurement and Disbursement 56. Except for the largest subproject in the city of Iloilo, procurement of all equipment and civil works required for each water supply subproject, which on an average are estimated to cost below $1.0 million equivalent for each WD, would be packaged by LWUA into single contracts, satisfactory to the ink, and would be awarded after competitive bidding advertised locally in  - 17 - accordance with Government procedures which are acceptable to the Bank. These works would account for 75% of the total project cost. LWUA's local competitive bidding procurement procedures are satisfactory and appropriate for these works. The Philippines has a growing construction industry and almost all contracts are expected to be won by local contractors. The subprojects (except for Iloilo) are not only small in value but are also scattered throughout the country and are therefore likely to evoke little interest from international contractors. Foreign firms would, however, be eligible to participate. Equipment and civil works for the Iloilo subproject, estimated to cost $9.0 million (14% of the total project cost), would also be packaged into a single contract, but would be awarded on the basis of inter- national competitive bidding in accordance with Bank Group guidelines. For the rural water supply subprojects (6% of the total project cost) all equipment would be obtained by the Ministry of Public Works, Transportation and Commu- nication (MPWTC) through bulk procurement on the basis of international competitive bidding. Procurement of vehicles, tools and equipment (less than 1% of the total project cost) would also be through international competitive bidding. A preference limited to 15% of the c.i.f. price of imported goods or the prevailing customs duty, whichever is lower, would be extended to local manufacturers for procurement through international competitive bidding. Except in cases where voluntary labor is offered, MPWTC would follow local procurement procedures, which are satisfactory and appropriate, for minor civil works in laying pipes, constructing intakes and small reservoirs, installing public faucets and related items for rural water supply projects. Both LWUA and MPWTC (Ministry of Public Works, Transportation and Communi- cations) would also follow local procurement procedures for the pilot rural sanitation projects. Goods costing less than $15,000 equivalent needed for the public education program, for carrying out public hearings, for training, and for urgently required off-the-shelf items for project completion would be procured through local shopping procedures satisfactory to the Bank, provided the total cost of such items does not exceed $100,000 equivalent for the LWUA component of the project, and $20,000 for the rural water supply and sanitation components, respectively. 57. Disbursements for civil works would be: (a) 100% of foreign expendi- tures for mobilization, and (b) 65% of other civil works expenditures. 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 overseas training, disbursements would be 100% of expenditures. Financial Aspects 58. LWUA's history is too short to discern any well-defined trends. Nevertheless, it is clear that it is growing fast and is so far doing well. Gross spread is large because a high percentage of the borrowings committed so far comes from soft loans. The ratio of long-term debt to equity at the end of 1978 was 0.65:1, well below the limit of 3.0:1 established in Loan 1415-PH. In June 1978, LWUA's authorized capital was increased from f 0.5 to P 2.5 billion ($338 million). This is a good indication of the intention of the Government to continue supporting LWUA. Paid-in capital as of September 30, 1978, was eP 239.2 million ($32.3 million).  - 18 - 59. LWUA's total lending program for 1980-84 is $218 million. LWUA would receive $30.0 million from the IDA/IBRD funds to be lent to the Govern- ment. In addition, LWUA's program includes borrowed funds totalling $68.3 mil- lion, of which $33.1 million would come from loans already contracted with USAID, ADB, IBRD and DANIDA, and the balance of $35.2 million from sources not yet fully identified. The Government is expected to contribute to LWUA the equivalent of $100.3 million, of which $9.5 million would go to the WDs as an equity contribution equivalent to about 20% of their investment program. The balance of $90.8 million would be the Government's capital subscription to LWUA. Since this represents an increase of about 80% over the average capital payments received by LWUA from the Government over the past three years, assurances were obtained during negotiations that the Government would increase LWUA's paid-in capital to meet LWUA's requirements, estimated to average $18.0 million equivalent per year (Section 3.05 of the draft Develop- ment Credit Agreement). The financing plan is reasonable and reflects the level of operations that LWUA has to undertake to help in the reduction of deficiencies in the sector. 60. Based on the underlying assumptions, LWUA's outlook is satisfactory. After corporate taxes of 35%, net income as a percentage of average equity is expected to increase from 1.1% in 1978 to 4.5% in 1986. Nevertheless, as loans with higher interest rates become a larger percentage of the total borrowings, the gross spread is cut in half from 4.6% in 1978 to 2.3% in 1986. During the period under consideration, 1978-86, LWUA's capital structure is expected to remain sound, with a long-term debt-to-equity ratio under 0.8:1, well below the maximum of 3.0:1 covenanted in Loan 1415-PH. Debt service coverage, although decreasing through the years, remains satisfactory, above 1.8. It has been agreed that LWUA's long-term debt, as in the ongoing loan, would not at any time exceed its equity by more than three times (Section 4.05(b) of the draft Project Agreement). 61. Tariffs. The Presidential Decree establishing LWUA stipulated that the WDs shall fix rates and charges for water adequate to cover operating expenses and debt service, as well as to provide a reasonable surplus for investment in the improvement and expansion of the system. Presidential Letters of Instruction 700 and 744, issued in June and September 1978, further directed that any single tariff increase should not exceed 60%, and that public hearings should be held before any proposed tariff increase is put into effect. LWUA's guidelines on tariffs now include the following criteria: (a) tariffs shall be progressively stepped upwards with any one increase not to exceed 60% at a time for domestic service; (b) the tariff structure will achieve both financial and equity goals; and (c) those families who consume less than 10 cu m per month will spend no more than 4% of family income for water. These guidelines are reasonable and consistent with the objectives of providing an affordable level of service. It has been agreed that the WDs would review the water charges annually to determine, in con- sultation with LWUA, what changes are needed, and would submit for the Bank's comments a statement of the results of the review proposed for implementation at the beginning of the following year (Section 4.04 of the draft Project Agreement).  - 19 - 62. During the project construction period, water tariffs of the WDs would be set to generate internal cash of at least 10% of the project expendi- tures. By a gradual increase in water rates, WDs would earn rates of return on average net revalued fixed assets of 3% in the third year following the start of project construction, increasing to 4%, 5%, 6% and 7% respectively in each succeeding year, and 8% thereafter. LWUA has agreed on the rate of return as above (Section 4.03 of the Draft Project Agreement). 63. Under the first loan (1415-PH) tariff increases were scheduled to be implemented in the cities of Baguio, Tarlac, La Union, Lipa, Lupata and Cabanatuan by January 1, 1979. However, due to delays caused by a Presiden- tial review of the tariff provisions, only one increase was put into effect by that date, in La Union. It was determined that Baguio's cash flow is comfortable, and an increase is therefore not necessary at this stage. The increase in Tarlac is due to be implemented in June, and those in Lipa and Cabanatuan in July. A review is still under way for Lupata; a decision to increase the tariff, and implementation of the increase, are expected in the summer. Implementation of increases in all six cities is a condition of effectiveness of the proposed loan/credit (Section 5.01(b) of the Develop- ment Credit Agreement). Service to the Poor /1 64. There are no reliable estimates on the number of poor in these provincial cities and rural areas. According to Bank Group estimates, 39% of the estimated urban population of 13 million, and 44% of the rural population of 32 million of the Philippines were below the Bank-defined absolute poverty line in 1977. In the three sample WDs the percentage of people below the absolute poverty line with house connections and public faucets, after project completion would be about 42% in Guagua, 70% in Orani and 64% in San Jose. Assuming that the subproject WDs are similar to the sample WDs, it is reasonable to conclude that between 40% and 60% of the population served would be considered among the absolute poor. In the same three cities about 16%, 33% and 26% of the consumption would be by the absolute poor. On the basis of consumption, about 25% of the total cost of the three subprojects of $2 million for these cities would be for the absolute poor. The tariffs for these lower income families, who consume about 10 cu m per family per month, would be subsidized through higher charges to larger domestic consumers and commercial and industrial users. The low-income families would pay about 4% of family income for water. Taking only the incremental number of persons served in the three sample cities, the capital cost of providing the incre- mental service is about P 441 ($60) per person. This is a low cost because the first stage project aims at making immediate improvements and some extensions to demonstrate to the communities the advantage of a safe and affordable public water supply. /1 For 1977, the Bank Group has defined the absolute urban and rural poverty lines in the Philipines as $250 and $190 per capita per annum respectively (P 1,877 and P 1,410).  - 20 - Economic Benefits 65. Because the subprojects for this loan are in various stages of preparation and identification, it is impossible to calculate an overall internal rate of return for the project. However, for the three sample cities of Guagua, Orani and San Jose, using 1982 tariffs (in constant prices) as a minimal measure of economic benefits, and assuming a foreign exchange conversion factor of 0.9, the internal rates of return are 7.4%, 6.6% and 9.8%, respectively. A more direct measure of the internal economic rate of return is not possible due to the difficulty of quantifying health benefits. Project Risks 66. This is a large project in the context of LWUA's management capa- bility, staff availability and the capacity of the limited local consulting services. On the other hand, there is great pressure from the Government and the people for an affordable water supply program on a scale much larger than has ever been attempted before. Therefore, in order to ensure that the pro- ject generates the expected benefits, it is important that (a) the 60 Water Districts are formed to schedule; (b) feasibility studies and detailed designs are completed on time; and (c) subprojects are implemented efficiently within the time and cost allowed in the implementation schedule. The Bank is pro- viding technical assistance for training LWUA staff to prepare financial projections for the large number of subprojects. The recent appointment of a Project Manager would improve project coordination and help ensure the timely execution of the feasibility studies, detailed design and supervision of construction. The Government contribution of 20% of subproject costs should greatly assist in the formation of water districts and it has been agreed that LWUA would complete the formation of 50 subproject WDs by June 30, 1980 (Section 3.07 of the draft Project Agreement). There is also a provision for consultant services in the project which would reduce the risk of delays in project implementation. Environmental Impact 67. As this is a project essentially for providing domestic water supply, some pollution of surface waters can be expected from the used water. Most of these cities and villages cannot afford conventional sewerage or sanitation systems. However, research and development of low-cost alterna- tives by the Bank, UNDP, LWUA and MWSS is expected to provide affordable and practical systems soon which could be included in the next stage project. Meanwhile, because of the high rainfall and the general nature of the terrain in the several islands which constitute the project area, the natural drainage and dilution are adequate to ensure that there is no significant increase in the pollution to the environment because of the project.  - 21 - PART V - LEGAL INSTRUMENTS AND AUTHORITY 68. The draft Development Credit and Loan Agreements between Republic of the Philippines, and the Association and the Bank, respectively, the draft Project Agreement between the Association, the Bank and LWUA, the Recommen- dation of the Committee provided for in Article V, Section 1(d) of the Articles of Agreement of the Association and the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank are being distributed to the Executive Directors separately. 69. Special conditions of the project are listed in Section III of Annex III. The execution of a Subsidiary Loan Agreement between Republic of the Philippines and LWUA, and action to increase water tariffs in six water districts have been made additional conditions of effectiveness of the Credit and the Loan (Section 5.01(a) and (b) of the draft Development Credit Agree- ment). 70. I am satisfied that the proposed loan and credit would comply with the Articles of Agreement of the Bank and the Association. PART VI - RECOMMENDATION 71. I recommend that the Executive Directors approve the proposed loan/credit. Robert S. McNamara President Attachments by I. P. M. Cargill Washington, D.C. May 16, 1979  - 22 - ANNtX I TABLE 3A PHILIPPTNES - SOCIAL INDICATORS DATA SHECT REFERENCE CROUPs (ADJUSTED AVERAGES PHLIPPINES /8 LAND AREA (THOUSAND SQ. KM.) - MOST RECENT ZSTIMATE) TOTAL 300.0 SAME SANE NEXT HIGHER AGRICULTURAL 85.6 MOST RECENT CEOGRAPHIC INCOME INCOME 1960 / 1970 a ESTIMATE /b REGION c GROUP Ld GROUP l CNP PER CAPITA (USS) 140.0 230.0 450.0 616.0 432.3 867.2 ENERGY CONSUMPTION PER CAPITA (KILOGRAS OF COAL EQUIVALENT) 147.0 301.0 326.0 522.0 251.7 578.3 POPULATION AND VITAL STATISTICS TOTAL POPULATION. KID-YEAR (MILLIONS) 27.4 36.9 44.5 URBAN POPULATION (PERCENT OF TOTAL) 25.3 27.6 29.8 30.1 24.2 46.2 POPULATION DENSITT PER SQ. EM. 91.0 123.0 148.0 156.8 42.7 50.8 PER SQ. EK. AGRICULTUBAL LAND 360.0 472.0 520.0 794.8 95.0 93.3 POPULATION AGE SrIUCTUR (PrCENT) 0-14 nRS. 45.7 45.6 42.9 40.8 44.9 42.9 15-64 YRS. 51.6 51.6 54.2 55.4 52.8 53.5 65 YnS. AND ABOVE 2.7 2.8 2.9 3.2 3.0 3.5 POPULATION GROVTE RATE (PERCENT) MTAL 3.0 3.0 2.8 2.3 2.7 2.5 URBAN 4.0 4.0 3.9 5.1 8.8 4.7 CRUDE BIRTH RATE (PER THOUSAND) 45.0 43.0 35.0 34.6 42.2 37.8 CRUDE DEATH RATE (PER THOUSAND) 15.0 11.0 9.0 8.7 12.4 10.8 GROSS REPRODUCTION RATE 3.5 f 3.3 2.4 2.6 3.2 2.5 FAMILY PLANNlNG ACCEPTORS, ANNUAL (TBHUSANDS) .. 191.7 750.8 USERS (PERCENT OP MARRIED WOEN) .. 2.0 25.0 22.1 14.2 20.0 FOOD AND NUTRITION INDEX OF POOD PRODUCTION PER CAPITA (1970-100) 99.1 100.0 110.8 106.8 104.3 107.3 PER CAPITA SUPPLY OP CALORIES (PERCENT OF RUQUIRIXENTS) 83.0 86.0 87.0 108.7 99.5 105.3 PROTEINS (GRAMS PER DAY) 44.0 45.0 50.0 57.7 56.8 63.0 OF 8ICH ANIMAL AND PULSE 19.0 22.0 19.2 17.0 17.5 21.7 CHILD (AGES 1-4) MORTALITY RATE 9.0 6.6 7.5 4.0 7.5 8.0 HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) 49.4 57.0 60.0 59.0 53.3 57.2 INFANT MORTALITY RATE (PER THOUSAND) 84.6 81.0 80.0 44.0 82.5 53.9 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL .. .. 39.0 21.9 31.1 56.8 URBAN .. .. Sl.0 58.3 68.5 79.0 RURAL .. .. 3).0 9.8 18.2 31.8 ACCESS TO EXCRETA DISPOSAL (PERCENT OP POPULATION) TOTAL .. .. 56.0 28.6 37.5 30.9 URBAN *- *- 76.0 66.6 69.5 45.4 RURAL .. 40.0 44.0 14.8 25.4 16.1 POPUIATION PER PHYSICIAN .. 3150.0 4103.1 9359.2 2706.8 POPULATION PER NURSING PERSON .. 3840.0 4990.0 1520.2 2762.5 1462.0 POPULATION PER HOSPITAL BED TOTAL 1180.0 850.0 880.0 657.1 786.5 493.9 URBAN .. .. . 145.5 278.4 229.6 RURAL .. .. .. 1011.8 1358.4 2947.9 ADMISSIONS PER HOSPITAL BED .. .. .. 19.0 19.2 22.1 HOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL 5.8 5.9 .. 5.2 .. 5.2 URBAN .. 6.2 .. 5.2 .. 5.0 RURAL .. 5.8 .. 5.4 .. 5.4 AVERArE NUMBER OF PERSONS PER Ot TOTAL .. 2.3 .. .. .. 2.0 URBAN .. 2.1 .. .. 2.3 1.5 iURAL .. 2.4 .. .. .. 2.7 ACCESS TO fLECTEICIrY (PERCENT OF DWELLINGS) TOTAL 17.0 23.0 31.0 39.1 28.3 64.1 URBAN .. 60.4 .. .. .. 67.8 RURAL *- 7.0 10.0 .. 10.3 34.1  -23- e,NEX I PAr. l Or 5 P-. 60 TABLE 3A PntLIPPINfS - SOCIAL INDICATnRS DATA SHFET REFERENCE GROUPS (ADJUSTED AVERACES PUILIPPINES -MOST RECENT ESTIMATE) In SAME SAYF NEXT HICHER MOST RECENT CEOGRAPHIC INCOME INCOYE 1960 lb 1970 Lb ESTIMATE /b REGION 1c GROUP /d GROUP /e EDUCATION ADJUSTED ENfOLLMENT RATIOS PRIMARY: TOTAL 95.0 114.0 105.0 95.6 75.8 99.8 FEMALE 93.0 113.0 103.0 93.7 67.9 93.3 SECONDARY: TOTAL 26.0 50.0 56.0 43.3 17.7 33.8 FEMALE 25.0 50.0 57.0 38.6 12.9 29.8 WCATIONAL (PERCENT OF SECONDARY) 14.0 .. .. 11.3 7.4 12.8 PUPIL-TEACQER RATIO PRIMARY 36.0 29.0 29.0 30.0 34.3 34.9 SECONDARY 27.0 33.0 31.0 25.4 23.5 22.2 ADULT LITERACY RATE (PERCENT) 7L.9 82.6 87.0 84.0 63.7 71.8 CONSUKPTION PASSENGER CARS PER TDUSAND POPULATION 3.0 8.0 8.0 9.3 7.2 12.4 RADIO RECEIVERS PER THOUSAND POPULATION 22.0 72.0 .. 97.6 71.1 104.5 TV RECEIVERS PER THOUSAN0 POPULATION 1.4 10.0 17.0 21.8 14.1 28.1 NEWSPAPER ('DAILY GENERAL niTEREST") CIRCULATION PER THOUSAND POPULATION 17.0 14.0 18.0 25.9 16.3 45.2 CINEMA ANNUAL ATTENDANCE PER CAPITA 0.6 .. 7.6 4.6 1.6 4.6 EMPLOYMENT TOTAL LABOR FORCE (THOUSANDS) 10100.0 12400.0 16230.0 FEMALE (PERCENT) 34.4 33.1 95.3 33.2 28.0 25.7 AGRICULTURE (PERCENT) 61.0 55.0 50.0 48.4 54.1 46.2 INDUSTRY (PERCENT) 15.2 15.8 14.0 PARTICIPATION RATE (PERCENT) TOTAL 39.8 36.6 35.3 38.9 37.8 33.8 MALE 52.1 48.6 47.1 48.6 50.3 48.1 FEMAJLE 27.4 24.4 23.3 28.4 20.9 17.3 ECONOKIC DEPENDENCY RATIO 1.3 1.5 1.3 1.2 1.3 1.4 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS 28.8 .. .. 17.3 19.5 23.6 HIGHEST 20 PERCENT OF HOUSEHOLDS 56.2 54.0 53.3 45.6 48.9 52.3 LOWEST 20 PERCENT OF HOUSEHOLDS 4.2 3.6 5.5 6.5 5.9 4.3 LOWEST 40 PERCENT OF HOUSEHOLDS 11.9 11.7 14.7 17.3 15.7 13.1 POVERTY TARGET GROUPS ESTLIATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 250.0 140.8 155.9 191.9 RURAL *- - 190.0 112.8 97.9 193.1 ESTIMATED REILATIVE POVERTY INCOME LEVEL (USS PER CAPITA) URBAN .. .. 132.0 .. 143.7 319.8 RURAL .. .. .. 76.8 87.3 197.7 ESTDIATED POPULATION BELOW POVERTY INCOME LEVEL (PERCENT) UKBAN .. .. 39.0 27.7 22.9 19.8 BIRAL 44 *-