Philippines - Angat Water Supply Optimization Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 15764 IMPLEMENTATION COMPLETION REPORT PHILIPPINES ANGAT WATER SUPPLY OPTIMIZATION PROJECT (LOAN 3124-PH) JUNE 30, 1996 Infrastructure Operations Division Country Department I East Asia and Pacific Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit - Peso (P) Average used in appraisal estimates (1989): US$ P21.00 Actual yearly average market values: US$ = P24.31 1990 USS = P27.48 1991 US$ P25.51 1992 USS P27.12 1993 US$ P26.44 1994 USS P25.70 1995 FISCAL YEAR OF BORROWER January I to December 31 WEIGHTS AND MEASURES I meter (m) = 39.37 inches 1 kilometer (kni) = 1.000 meters or 0.62 mile I square meter (m2) = 10.8 square feet I square kilometer (krm2) = 0.38 square mile I hectare (ha) = 10,000 square meters or 2.47 acres I cubic meter (m3) = 1.000 liters or 264 US gallons I cubic meter per second (cums) = 22.82 million US gallons per day I liter (1) = 0.26 US gallon I liter per capita per day (lcd) = 0.26 US gallons per capita per day I million liters per day (Mld) = 1.000 cubic meters per day 1 metric ton (t) = 1.000 kilograms or 2,205 pounds ABBREVIATIONS AND ACRONYMS ADB - Asian Development Bank AWSOP - Angat Water Supply Optimization Project CORPLAN - Corporate Planning Group ERR - Economic Rate of Return ICR - Implementation Completion Report MWSS - Metropolitan Waterworks and Sewerage System MSA - MWSS Service Area NRW - Non-Revenue Water OECF - Overseas Economic Cooperation Fund of Japan PMO - Project Management Office UATP - Umiray-Angat Transbasin Project  FOR OFFICIAL USE ONLY PHILIPPINES IMPLEMENTATION COMPLETION REPORT ANGAT WATER SUPPLY OPTIMIZATION PROJECT (LOAN 3124-PH) Table of Contents Page No. Preface ......................... Evaluation Summary ..................................... ii PART I: IMPPLEMENTATION ASSESSMENT ......................................1 A. Project Objectives .. B. Achievement of Project Objectivs ..2 C. Major Factors Affecting the Project ..7 D Project Sustainability ..7 E. Bank Performance ..8 F Borrower Performance ..8 G Assessment of Outcome ..9 H. Future Operatio ..9 I Kev Lessons Leamed ..9 PART II: STATISTICAL ANNEXES .............................11 T'able L. Sumunary of Assessments .l Table 2. Related Bank Loans .12 Table 3. Project Timetable .13 Table 4. Loan Disbursements .14 Table 5. Key Indicators for Project Implementation .15 Table 6. Key Indicators for Project Operation .16 Table 7. Studies Included in Project .18 Table 8a. Project Costs .19 Table 8b. Project Financing 19 Table 9. Economic Costs and Benefits 20 T'able 10. Status of Legal Covenants .21 T5able 1 1. Bank resources: Staff Inputs .22 Table 12. Bank resources: Missions .23 APPENDICES A. Borrower's Contribution ....................... ,... 24 B. Project Description .................. ,,,,,, 47 C. Non-revenue Water .................. 49 MAPS IBRD #21605 Thlis documcent has a restricted distribution and rnay bc used by rccipients only in Lhc perfornmnce of their offici3l duties. Its contents may not otherwise be disclosed without World Banlc authorization.   i PHILIPPINES Implementation Completion report Angat Water Supply Optimization Project (Loan 31 24-PH) Preface This is the Implementation Completion Report (ICR) for the Angat Water Supply Optimization Project in the Philippines, for which loan No.3124-PH in the amount of US$ 40 million equivalent was approved on November 9, 1989 and made effective on January 23, 1990. The loan was closed on December 31, 1995. Final transaction took place on May 8, 1996 at which time a balance of US$2.42 million equivalent was canceled. The ICR was prepared by the Infrastructure Operations Division, Country Department I, East Asia and Pacific Region and reviewed by Mr. Shivakumar, Chief of the Division. The borrower provided comments that are included as Appendix A to the ICR. Preparation of this ICR began during the Bank's completion mission, in March 1996. It is based on material in the project file and obtained during the field visit. The borrower contributed to preparation of the ICR by preparing its own evaluation of the project's execution and initial preparation, commenting on the draft ICR.   ii PHILIPPINES IMPLEMENTATION COMPLETION REPORT ANGAT WATER SUPPLY OPTIMIZATION PROJECT (Loan 3124-PH) Evaluation Summary Introduction i. The Angat Water Supply Optimization Project (AWSOP) was designed to support the Government's sectoral program through the provision of financial resources and by gradually solving sector issues including the accelerated development of institutions responsible for providing water supply and sewerage services to the community. Through the project preparation the Bank drew on its familiarity with the Philippines water supply and sewerage sector, its experience in supporting sector developments worldwide, and its interest in addressing environmental issues. Proiect objectives ii. The main objective of the project was to provide water supply in the National Capital Region to fulfil the expected demand until the year 2000. The project was designed to: (a) increase the Metropolitan Waterworks and Sewerage System's (MWSS) water production capacity; (b) provide fifteen cubic meters per second of potable water to serve an additional population of about three million persons; (c) increase service coverage of the population in the MWSS service area (MSA) to 75% by 1994, particularly in poor neighborhoods; (d) improve the efficiency of MWSS's operations; and (e) strengthen MWSS's finances as well as its planning and management information systems. iii. The project was designed to maximize the benefits from existing investments, and to provide urgently needed water to the MSA, which is half the country's industrial base. It would eliminate water rationing and low pressure, reduce the dependence of commercial and industrial consumers on groundwater use, and restore normal pressure decreasing the potential health risk posed by sewage infiltration into un-pressurized mains. iv. The AWSOP project was financed by IBRD, the Asian Development Bank (ADB),the Overseas Economic and Development Fund of Japan (OECF), and MWSS, with specific components financed by each agency. The IBRD-financed works included a 6 km tunnel, two thirds of a 19 km aqueduct, the second La Mesa by-pass, and the Bulacan province water system. The other components, not financed by IBRD, included a power station, and treatment and distribution facilities. The IBRD- financed works were completed in 1993, but other components financed by ADB and OECF are delayed and are projected to be complete by December 1998. This Implementation Completion Report (ICR) only relates to the completed IBRD components. v. The financial viability of MWSS, the implementing agency, depended upon the ability to generate adequate income to meet all financial obligations on a timely basis, sustain a satisfactory level of working capital to continue operations, and contribute a reasonable proportion to its investment program. To this end MWSS agreed to set tariffs yielding adequate revenues to meet operation and maintenance costs including depreciation, and to provide a rate of return of at least 8 % on its net revalued fixed assets.  Hi vi. The planning was sound and the physical results show that the project was well founded and the agreements reached to promote the achievement of the objectives were well conceived, although optimistic. Implementation experience and results vii. The project achieved its physical objectives with only a minor delay in completion of construction. The identification phase was carried out in a very satisfactory manner. The feasibility studies and detailed design benefitted not only from the extensive involvement of MWSS, but also from the evaluation of issues by the infrastructure division within the Bank. The project also achieved its primary objective of augmenting water supply capacity. The Government has since initiated the next phase of adding supply capacity by signing a loan agreement with the ADB in 1996 for the Umiray-Angat Transbasin Project, expected to be completed by 1999. viii. The appraisal estimated cost of the IBRD-financed works including interest during construction at US$61.3 million, of which US$40.0 million equivalent was to be financed by the Bank. The balance was financed from local borrowing, and internal cash generation. The original loan closing date of December 31, 1995 was adhered to. The actual cost is US$46.4 million which is US$14.9 lower than the appraisal estimate, mainly due to the cancellation of the Bulacan component. ix. Despite the additional supply, service coverage could only increase from 56% in 1989 to 67% in 1995 falling short of the 75% target. This was primarily attributable to the failure to improve operational efficiency. Based on two rehabilitation projects which were under implementation during appraisal of the project, plus the MWSS ongoing leak repair program, it was expected that NRW would be reduced from the 1989 figure of 55.8% to 33.5% by the end of 1995. This did not happen and the NRW at the end of 1995 was unchanged. As a result, water rationing remained a problem, and new connections could not be installed at the pace planned. x. The failure to reduce NRW led to an impasse with the Government refusing to allow tariff increases including adjustments for inflation after 1992. As a result, the financial performance of MWSS began to deteriorate threatening project objectives. This impasse in 1992 indicated that more far reaching institutional change was required to increase operational efficiency and sustain project benefits. Consequently, the Bank initiated a high level sector dialogue with the Government resulting in the Water Sector Reform Study in 1993, the Water Summit called by the President in 1994 and the Water Crisis Act passed by the Congress in 1995 explicitly authorizing a restructuring of MWSS. During this period, the Bank organized through the EDI two workshops in the Philippines on private sector participation in the water sector. In addition, top Government policy makers, congressmen, MWSS management and Board members and labor representatives participated in Bank organized conferences and study tours in Barcelona and Buenos Aires in 1995 and 1996, respectively. The intense sector work culminated in the Government's decision in 1995 to formally ask the World Bank Group to assist in the privatization of MWSS. A 25 year concession is scheduled to become operative in February 1997. xi. All project objectives are expected to be achieved with the institutional restructuring of MWSS based on Bank analysis of the experience of water utilities privatized elsewhere. Project benefits are therefore expected to be high and sustainable. During project implementation, a number of secondary institutional strengthening measures were initiated under the MWSS Development Program dated August 1989, including upgrading customer services and the corporate planning group (CORPLAN), improving billing and collections, and training. The implementation of the computerized accounts system including  iv upgrading billing and collections commenced in March 1996 and is due to be completed by September 1996. xii. Overall Bank supervision was highly satisfactory, being handled by an experienced sanitary engineer, supported by environmental and financial specialists. The implementing agency's project supervision was satisfactory and relations with the consultants and contractors were cordial and productive. On balance the outcome of the IBRD-financed works can be considered satisfactory and the results of the sector work accompanying the project very encouraging. Surnnary of findings, future operations, and key lessons learned xiii. Benefits of the IBRD-financed works completed under this loan should be sustained given the Government's commitment to improve water supply in MSA. MWSS restructuring will ensure that the constructed facilities are monitored and the system is operated and maintained to yield maximum operational and economic benefits. xiv. The main lessons to be drawn from the experience in implementing the project are as follows: (a) the Bank should carefully evaluate the institution's capabilities to undertake programs that have a direct bearing on the achievement of project objectives. The failure to reduce leakages in the distribution system means that the majority of the additional water supplied under the project is lost before it can reach consumers and generate revenues. Without the planned privatization, this would have threatened project sustainability. (b) while the borrower may agree during negotiations to increase tariffs, the decision can be affected by public resistance due to poor levels of service, as well as political issues outside the agency's control. Assurances should be received that if a shortfall in revenues results in the agency being unable to cover its operational costs and finance capital projects, then the requirement for permanent money in the forn of Government capital contributions, subsidies or foreign grants would be introduced. (c) administrative problems including the failure to reduce distribution losses, caused MWSS's debt burden to substantially increase during the past five years. Investments in infrastructure should have resulted in increased revenues to fund appropriate maintenance of the new assets and cover debt servicing requirements. (d) as an alternative to using the rate of return covenant to measure satisfactory financial performance of a water supply and sewerage utility where assets are mainly underground, out of sight and difficult to value, an acceptable measure is the agency's contribution to investment from internal resources; this covenant was adopted for the sewerage project in Manila (Manila Second Sewerage Project) which was appraised in 1995. (e) Close monitoring yielded early warning of potential problems and appropriate sector work supported by the highest level of Bank management enabled significant and timely institutional reform to ensure sustainability of project benefits. The close relationship between the Bank and the borrower provided the basis for wide-ranging discussions to create an appropriately designed project.   THE PHILIPPINES IMPLEMENTATION COMPLETION REPORT ANGAT WATER SUPPLY OPTIMIZATION PROJECT (Loan 3124-KO) PART 1: PROJECT IMPLEMENTATION ASSESSMENT A. PROJECT OBJECTIVES 1. The Metropolitan Waterworks and Sewerage System (MWSS), established in 1972, is responsible for the development, operation and maintenance of water supply and sewerage systems in and around Metropolitan Manila. The MWSS service area (MSA) includes Manila city, nine neighboring cities and twenty-seven municipalities. MWSS is a semi-autonomous corporation under the Department of Public Works and Highways. 2. The Bank financed First Manila Water Supply Project (Loan 386-PH 1964-70) improved water systems in four cities and 16 municipalities in Metro Manila. In 1978 the Bank provided Loan 1615-PH for the Second Manila Water Supply Project (MWSP II) included extension of bulk water mains and the distribution system, and assisted MWSS into becoming an efficient public utility. 3. An important part of MWSS's plan to upgrade and expand water services in MSA was to increase its production capacity. All but 3 % of the total water supply produced by MWSS comes from the Angat river. MWSS initially intended to undertake the Third Manila Water Supply Project (MWSP III) at a cost estimated around US$1.000 million to include the construction of a dam on the Kaliwa river, transmission mains and treatment facilities. Factors affecting the decision not to proceed with this project related to national political changes, the lengthy construction period of about nine years before any water supply would be available, and budgetary constraints. 4. It was necessary therefore, for MWSS to look for a solution whereby additional water capacity would be available earlier, in phased increases at a lower cost. The alternative adopted would optimize water resources available from the existing source of the Angat river. The scheme would be in two stages; first the more effective reallocation of water from the Angat reservoir among the beneficiaries (water supply, power generation, irrigation) resulting in a 15 cums increase in MWSS's share for water supply; and second, an additional 9 cums through an inter-basin transfer from the Umiray river by 2000. 5. In February 1989 the Government requested the Bank to co-finance the Angat Water Supply Optimization Project (AWSOP) with the Asian Development Bank (ADB) and the Overseas Economic Cooperation Fund of Japan (OECF). The project was designed to address a basic need for increased water supply, and to strengthen the institutional capacity of MWSS, a major public utility. The objectives were to: (a) increase MWSS's water production capacity; (b) provide 15 cums of water to serve an additional population of about 3.0 million persons; (c) increase service to 75% of the population in MSA by 1994, particularly in poor neighborhoods; (d) improve efficiency of MWSS's operations: and (e) strengthen MWSS's finances as well as its planning and management information systems. Construction of the second stage project, the ADB financed Umiray-Angat Transbasin Project (UATP), at an estimated cost of US$220 million, commenced in 1996 and is expected to be completed by 1999. 6. A summary of the AWSOP project description (Parts A, B and C) appears in Appendix B of this report. The Bank was requested to help finance the main portion of Part A of the project comprising: a 6 km tunnel, two sections of a 16 km aqueduct, the 2.5 km La Mesa by-pass, and 35 km of water mains in Bulacan province, with the remainder financed by ADB, OECF, local bonds and MWSS internal cash generation.  2 7. In a modification to the project, the long-term program for provision of water supply to the Bulacan province was reviewed in the Memorandum of Understanding between MWSS, the Local Water Utilities Administration and the Bulacan province dated January 9, 1990. Following additional studies it was decided to eliminate the component proposed for Bank financing, and MWSS would use its own resources to supply water to two towns in the province located on the boundary of the MSA. 8. In July 1994, MWSS requested that a portion of the savings of the IBRD loan be used to finance consultants' services relating to the distribution network which was recognized as being within the original project objectives, and the Loan agreement was duly amended in January 1995 to include up to US$350,000 for such services. 9. The project objectives were well defined, realistic and important for the sector development, and had the full commitment of MWSS. The complexity of the project was considered to be within the capabilities of the management of MWSS. There were no unusual risks although delayed implementation of the various components would postpone overall project completion, and failure to reduce NRW would increase the cost of water and reduce the population benefitted. B. ACHIEVEMENT OF PROJECT OBJECTIVES 10. The project was timely and well prepared, the scope and scale well thought out, and accurately represented in the SAR. The project concept was clear and shared by all relevant parties, the design being carried out by consultants in close collaboration with all involved agencies. Physical objectives lI. Taking into account the reduced scope of the Bank components, it is considered to have satisfied the physical objectives of the project. It is disappointing that the other project components are delayed by about four years and therefore this report can only review the completed components which received IBRD financing. 12. The design of all project components represented the least-cost solution to expand water supply to MSA. The analysis of the least-cost solution is in the Feasibility Study available in the Project File. Hydrologic studies demonstrated that by modifying the operating rules and allowing use of the Angat dam's full design capacity, MWSS could optimize the use of 15 cums of water, and construct treatment and distribution facilities at an amount equivalent to one third of the cost of Manila Water Supply III Project. 13. Construction of the Bank financed components was completed by October 1993, about nine months behind schedule. Some of the ADB and OECF financed components originally scheduled to be completed by 1994 are currently projected to be completed by December 1998. Construction of distribution network is delayed by about four years because of technical and legal issues regarding procurement of pipes. The Novaliches to Balara aqueduct is delayed due to right of way negotiations, and the telemetry system is behind schedule because of delays in bid evaluation. 14. The actual cost of the Bank financed components including interest during construction was US$46.4 million which is US$14.9 million lower than the appraisal estimate mainly due to the cancellation of the Bulacan component. Full details comparing estimated and actual costs appear in Table 8 of Part II of this report. The project was financed by local bonds, MWSS internal cash generation, and a US$38.1 million Bank loan. The loan closed on December 31, 1995.  3 15. In September 1991, to assist the Philippines Government during the Middle East crisis, the Bank increased the percentage of expenditures from 70% to 90% on civil works that could be financed from the loan. This in part enabled MWSS to utilize 95% of the original loan amount even though about 17% of the IBRD financed works was canceled. Water demand 16. The projections made during appraisal were based on the assumptions that the MSA population would increase by 16% between 1989 and 1995, with a similar increase in the percentage of the population with direct water connections. It was also assumed that per capita water consumption would increase by about 8% and NRW would reduce from 55.8% of production to 35.5%. 17. The estimates made during appraisal (1989) compared to the actual results appear in Table B.1. Table B.1: Water Demand Year MSA Percent No. of Production Billed population population conns. Million Million NRW (million) served (1000) m3/year m3/year Required Estimate at Appraisal 1989 9.0 68.1% 608.6 856.5 378.6 55.8% 1995 10.4 84.0% 901.3 952.2 614.2 35.5% Actual Actual 1995 10.7 67.2% 844.3 975.9 426.5 56.3% 18. The population growth projection was 3% higher than forecast, but the number of connections was 6% below appraisal estimations, mainly due to the lack of supply. MWSS did not succeed with its stated objective of reducing NRW, which increased by 0.5% since 1989, and this major failure to reach the target objective had a considerable adverse impact on the company's revenues. 19. The critical problem of NRW has persisted for over 30 years. However, between 1984 and 1994, MWSS has actively pursued a series of remedial measures including two rehabilitation projects employing 1,800 persons and costing US$120 million. Other action includes a comprehensive leak detection program including contracting out leak repairs. There is major concentration on a series of programs to reduce NRW to acceptable levels and the ongoing and proposed programs directly involved in reducing NRW appear in Appendix C. 20. The MWSS Development Program dated August 4, 1989 planned to steadily improve revenue water, and at that time the first results of the rehabilitation projects were very promising indicating sharp reductions of NRW in completed zones. Based on these first results, assurances were obtained that MWSS would take all measures to reduce NRW to 35.5% by 1995. This expectation was not met due to continued administrative weaknesses which were not remedied by frequent changes of leadership.  4 Financial obiectives 21. The financial objectives were established so that MWSS would improve its financial situation, have adequate funds to properly operate and maintain the facilities, and contribute to funding investments. To support these objectives, MWSS agreed that revenues would be set to cover operating and maintenance costs including depreciation, and produce annual rates of return of not less than 8 %. 22. The financial accomplishment during the project period was very disappointing, mainly due to failure in achieving operating targets. The main reason for this poor result was that NRW was not significantly reduced. While MWSS could potentially have made up for this revenue loss by increasing tariffs beyond those planned, they were unable to do so as the Board could not justify passing on the cost of poor performance to the consumer. To partly offset the lower than expected revenue income, some operational expenditure was less than projected, which could indicate inadequate maintenance of its facilities. 23. Since 1989, the rate of return targets have been maintained at over 8.0%, thus meeting a covenant of the Loan Agreement, except for 1995 when the figure dropped to 6.9%. The commitment not to incur any long-term debt unless a debt servicing ratio of at least 1.2 was maintained was also achieved each year except for 1995. Provisional projections show these figures at 6.02% and 1.19 for FY1996. The reason MWSS did not achieve the rate of return target in 1995 was due to reduced income and the increased value of fixed assets in operation. Tariffs 24. The tariff is a vital component of the MWSS operation as, together with the volume billed, it determines the company's income. Each year the corporate planning group (CORPLAN) prepares a review for the Board of the adequacy of its water and sewerage charges and makes recommendations for increases in tariff levels to ensure the financial viability of the company. The report includes a summary of revenue requirements to satisfy the company's charter rate of return target, debt servicing requirements, and affordability, especially for the low-income section of the population. The tariff is structured to promote conservation and provide a lifeline supply at an affordable price. 25. Over the 1989 to 1992 period, tariffs for water and sewerage were increased in line with annual inflation, but since May 1992 tariffs remained unchanged during years of relatively high inflation. This course of action by the Board reflected central Government and customer resistance because of water shortages directly resulting from MWSS's failure to sufficiently reduce NRW. While this decision by the Board could well have acted as a stimulus to management to bolster their efforts to improve revenue water, it also deprived the company of the necessary revenues to rectify the leakage and administrative losses. 26. While the failure to increase tariffs had an impact on revenues, the shortfall in the amount of water billed because of over optimistic NRW reduction targets was the principal reason for the failure to meet the required revenue levels, as can be seen in Table B.2.  5 Table B.2: Effect of Tariff Million m3 Billed Inflation Avg Tariff Peso/m3* Revenue Mil Peso Year Estimate Actual Estimate Actual Estimate Actual Estimate Actual 1989 378.6 375.8 9.0% 9.6% 4.63 4.23 2087.1 2121.8 1990 407.9 384.7 9.0% 14.9% 4.99 4.73 2496.9 2352.0 1991 444.1 386.5 9.0% 19.8% 5.42 5.48 2862.8 2873.6 1992 484.6 383.0 8.0% 12.2% 5.81 6.24 3343.3 3150.4 1993 528.6 397.3 8.0% 10.4% 6.26 6.43 3929.2 3481.0 1994 575.0 418.9 8.0% 10.2% 6.87 6.43 4678.8 3696.5 1995 614.2 425.2 8.0% 8.,1% 7.32 6.43 5325.7 3768.9 *Note: Excludes CERA. A currency exchange rate (CERA) was introduced in 1984 to compensate for revaluation of the Peso against a basket of international currencies, and tracks MWSS's foreign debt service per cubic neter of water sold . At the end of 1995 the CERA surcharge was equivalent to 15% of the average tariff. Accounts Receivable 27. Although some progress has been made since appraisal, MWSS has not resolved the problem of high accounts receivable which at the end of 1995 represented 139 days' sales. Since appraisal, MWSS has collected only about 95 % of its billings, but the annual provision for uncollectible debts is only 2.0% and therefore the balance of accounts receivable increases every year. In the ledger are many extremely old and uncollectible debts, the high figure being partly due to its inability to write off these balances. An examination of Table B.3 would indicate that the provision for doubtful debts is significantly understated. 28. In 1989 about 30% of accounts receivable was due from government agencies, and assurances were received that the Government would take the necessary measures to reduce these debts so that in aggregate they would not exceed four months of billing. At the end of 1995 government debts were less than 10% of total accounts receivable and represented 3.9 months of billing. 29. The ageing of accounts receivable including government accounts as estimated by the accounting department at the end of 1995, is shown in Table B.3. Table B.3: Aged Accounts Receivable as at December 31. 1995 Age of accounts Total Amount Govermnent AC Provision for Doubtful (Mill.Peso) (Mill.Peso) Debts (Mill.Peso) under 1 year 456.3 56.6 2-5 years 709.3 48.7 6-10 years 101.9 22.9 over 10 years 178.8 6.7 1446.3 34.9 623.0 30. A summary of pertinent operational and financial data from MWSS's financial statements is in Table 6(a) and 6(b) of Part II of this report.  6 Institutional development 31. While secondary institutional improvements took place during project implementation, they were unable to compensate for the inability of management to control NRW which threatened the full realization of project benefits. The failure to reduce NRW led to an impasse with the Government refusing to allow tariff increases including adjustments for inflation after 1992. As a result, the financial performance of MWSS began to deteriorate. This impasse in 1992 indicated that more far reaching institutional change was required to increase operational efficiency and sustain project benefits. 32. Taking this impasse as an early warning signal, the Bank initiated a high level sector dialogue with the Government with the active involvement of top Bank management. This resulted in the Water Sector Reform Study in 1993, the Water Summit called by the President in 1994 and the Water Crisis Act passed by the Congress in 1995 explicitly authorizing a restructuring of MWSS. During this period, the Bank organized through the EDI two workshops in the Philippines on private sector participation in the water sector. In addition, top Government policy makers, congressmen, MWSS management and Board members and labor representatives participated in Bank organized conferences and study tours in Barcelona and Buenos Aires in 1995 and 1996, respectively. The intense sector work culminated in the Government's decision in 1995 to formally ask the World Bank Group to assist in the privatization of MWSS. A 25 year concession is scheduled to become operative in February 1997. 33. All project objectives are expected to be achieved with the institutional restructuring of MWSS based on Bank analysis of the experience of water utilities privatized elsewhere. Project benefits are therefore expected to be high and sustainable. 34. During project implementation, the performance of customer services has developed satisfactorily with more timely response times for new house connections, meter repairs and replacement. The monthly management report format has been improved to include details of leak repairs, illegal connections, new customer services, and volume billed per sector. Large commercial and industrial consumers are monitored by each sector and action is taken where consumption varies from the three month average. Connections closed for non-payment are checked each month, to ensure they have not been illegally re-connected. 35. The 'Rover' meter reading equipment has been upgraded to improve security of data, and new machines are on order with greater capacity than the existing equipment, which will interface with the new computerized billing and collection system later in 1996. 36. The central control room to operate the telemetry component was held up due to delays in the bid evaluation. The telemetry system is expected to be fully operational by June 1997 with the latest technology to keep management constantly informed on water levels in the dams and reservoirs, the level of water flowing in the distribution system measured through 56 flow meters, and the pressure levels in each sector, which is very important in monitoring and improving the level of NRW. 37. The computerized billing and collection system has not operated satisfactorily for well over 15 years, even though a new computer for this purpose was installed in 1989. The main system problem was the delay of around six months in posting cash receipts to individual customer accounts, which meant that monthly bills did not show unpaid arrears from previous months, thus impeding debt collection performance. In 1990 the MIS group commenced plans to fully computerize the whole of the accounting function and at the same time introduce a more efficient system of recording collections. The first trials of the new computerized billing and collections system started in March 1996, and implementation of the total system is expected to be completed by the third quarter of 1996.  7 38. CORPLAN has upgraded its computerized models for its management information system, investment planning, financial projections, and water demand. The projections including operating and financial parameters are periodically produced and provided to the lending agencies. However, although these comprehensive reports are regularly updated and contain important information on developments within MWSS, the senior officers seldom use them and therefore the benefits to aid management are mainly wasted. Environmental objectives 39. An expected environmental benefit from the additional water supply would be the reduction in the high level of groundwater used in MSA, preventing excessive depletion and salinity intrusions. Later studies demonstrated that the current rate of ground water extraction did not cause any serious damage to the aquifer, and salinity intrusion was not a significant problem. Another projected benefit would be that the increased supply would give continuous pressure through the entire network. However, due to the delay in completion of the project components, as well as the ongoing serious leakage problem, the supply is still not sufficient to satisfy demand in all areas of MSA, and the pressure in the network is not constant. 40. The impact of additional wastewater, which will be experienced in MSA once the additional supply is available, will be alleviated mainly by septic tanks which are required by law for all houses. In 1990, MWSS planned two sewerage projects to be implemented in sequence, but they were not followed through because of high per capita costs. The Bank-financed Manila Second Sewerage Project due to commence later in 1996 is a low cost sanitation project developed as a result of the earlier rejected projects. The new water and sewerage master plan due to be completed by mid-1996 reviews in detail the proposals for collection and disposal of wastewater for the next 20 years. Economic rate of return 41. The projected economic rate of return (ERR) of 15 % made during appraisal was prepared for the total project including those components financed by ADB and OECF. Given the costs associated with the project and the returns that have been accruing to MWSS to date, it is anticipated the actual ERR will be close to the original forecast detailed in the staff appraisal report. However, as other components of the project are currently ongoing, a more accurate ERR is expected to be completed by December 31, 1998. C. MAJOR FACTORS AFFECTING THE PROJECT 42. At appraisal, the project was already in an advanced stage of implementation with the contracts for the tunnel and the aqueduct having already been awarded, and completion of all components planned by December 1994. MWSS's engineering area was responsible for project planning and design, and the construction was the responsibility of the Project Management Office (PMO) established under the MWSS deputy administrator for construction. The performance of the consultants who assisted in the engineering and construction areas was satisfactory. 43. The standard of performance of the contractors constructing the tunnel, aqueducts and related tasks was generally satisfactory, although some of the equipment provided to satisfy the minimum requirement condition of the contract was in a poor state of repair. The construction equipment was upgraded after an initial slow start.  8 44. Delays in completion of the IBRD financed works were not excessive, amounting to about nine months in total. The delays were due to shortages of construction materials (mainly cement), unworkable site conditions due to unusually heavy rainfall, lack of ventilation equipment and minor collapses in the tunnels, unexpected rock conditions in tunnels causing the issue of numerous variation orders, seepage in the La Mesa by-pass, and redesign of the buried conduit to avoid felling some trees. 45. The commitment of MWSS management and staff was generally satisfactory and their internal administrative procedures worked satisfactorily. The submission of project progress reports and managerial and financial monitoring indicators was regular and good. D. PROJECT SUSTAINABILITY 46. The operational requirements of the tunnel, aqueduct and by-pass are minimal as it is a gravity system for the total length of the construction. However, maintenance of the sluice gates at Ipo dam will be required, regular inspection to check for leakage in the aqueducts and by-pass, and regular monitoring of the flow meter at Bicti junction. 47. The principal risk to the achievement and enhancement of the project's potential benefits would be failure to properly maintain the system. The financial resources needed for adequate operation and maintenance will be insufficient if there is not significant progress on the serious NRW problem, and if tariffs are not set at levels allowing MWSS to operate as a self-financing public utility. These risks would now be mitigated by the privatization of MWSS. 48. The institutional and operational improvements introduced or under implementation since appraisal including computerization of accounts, improved billing and collection, new sectors to control hydraulic flows, improved customer services and planning, increased training, telemetry, and several NRW reduction programs, are collectively expected to lead to progressive and permanent improvements in efficiency and performance. These would be reinforced by the expertise brought in by a specialized international water operator. E. BANK PERFORMANCE 49. The Bank worked closely with MWSS during the preparation, appraisal, negotiation and loan approval stages of the project. The technical alternatives selected were appropriate and represented the least-cost solution to improve water systems in MSA. There were no unusual risks, although at appraisal it was recognized that a failure to reduce NRW would have an adverse affect on internal cash generation. 50. Continuity of Bank staff during implementation was highly satisfactory with very few changes between the appraisal and the supervision teams. Ten supervision missions were carried out at regular intervals over the implementation period, and there was good cooperation between the Bank and MWSS management and staff. 51. Financial and operational projections were prepared at appraisal along with key monitoring indicators, and the main performance targets were covenanted. During supervision missions these parameters were regularly checked and any deviations were recorded in the mission's Aide Memoire which were reported to the implementing agency by Bank headquarters. Close monitoring yielded early warning signals which led to successful sector work resulting in institutional changes designed to sustain  9 project benefits. F. BORROWER PERFORMANCE 52. MWSS's performnance through to completion of the IBRD financed components was satisfactory. The detailed engineering preparation was good, although a more comprehensive test of rock conditions where tunneling was to take place would have prepared the contractors in advance for correct construction methods. Supervision of construction got off to a slow start mainly due to under-manning of the supervision teams, but this was later rectified and the overall performance was good. 53. The status of performance on the major covenants in the loan and project agreements is shown in Table 10 of part II of this report. Compliance with these covenants is mixed with disappointing results on the decrease of NRW, reduction of accounts receivable and, in the last year of project implementation, the failure to achieve rate of return and debt service targets. 54. The failure to meet these perfonnance targets (NRW, accounts receivable, rate of return, debt service) means that MWSS's income is too low. When this happens, the tendency is to reduce expenditure on operations and maintenance, resulting in performance inefficiencies and the deterioration of assets, which appears to be the case in MWSS. This lack of finances to efficiently operate the system exacerbates the difficulties within MWSS, and the cycle of new investments to rehabilitate existing assets is a permanent negative feature. Hence the Balara Treatment Plant Rehabilitation Project currently being implemented, the planned rehabilitation of the La Mesa I Treatment Plant which was constructed 12 years ago, and the total network (including the areas rehabilitated between 1984 and 1994) are currently being studied for major renovation projects (Appendix C). G. ASSESSMENT OF OUTCOME 55. The project results on the IBRD financed works are rated satisfactory, tempered by the disappointing operational and financial performance. Physical project objectives were achieved with very little delay and there is evident sustainability of the completed facilities. While the Bulacan component representing about 17% of the IBRD financed works was dropped, MWSS was able to take advantage of the amendment in the Loan Agreement which increases the percentages of expenditures to be financed for civil works from 70% to 90% (para 15). However, the full survey of achievements will not take place until the total project is complete and the ADB completion report is prepared, presently expected to be ready by mid- 1999. 56. The institutional developments that took place during the implementation of the project should have a lasting impact on efficient operation and maintenance of new assets. The restructuring of MWSS assisted by the Bank's sector work would be instrumental in sustaining project benefits. H. FUTURE OPERATION 57. The completed project works are expected to be operated and maintained by the private concessionaire. With the induction of an experienced international water operator it is expected that all facilities would be utilized efficiently. MWSS is also experienced in operating systems constructed under the project, and the consultants provided additional training to operators on the new technologies introduced during the project.  10 58. Performance monitoring is already well established within MWSS partly as a result of the improvements introduced in the 1989 MWSS Development Plan. The existing allocation of duties and responsibilities is currently being reviewed under the MWSS Operational Strengthening Study (MOSS) the final report of which will be ready by mid-1996. 1. KEY LESSONS LEARNED 59. The current state of the distribution system fundamentally calls into question the benefit which will accrue to customers as additional water resources from AWSOP become available. At that stage average pressures in the system will rise, but the current condition of the distribution system will certainly lead to increased losses, and very little increase in revenue (para 20). A prior focus on improving the distribution network is essential. 60. The calculation of the rate of return for MWSS relies on a realistic valuation of the fixed assets. Due to the inherent difficulty in valuing assets (mainly underground and out of sight), compounded by the uncertainty of asset replacement values, it is considered advisable in future to focus on the main concern which is the overall target for internally generated funds. The covenant's objectives promote financial viability, satisfactory financial performance, prudent financial management of the project entity, and support socio-economic goals. The cash generation covenant was used in several follow-up projects - e.g. Manila Second Sewerage Project 1996 (para 23)_ 61. The agreed project Financing Plan required reductions in NRW combined with increases in water and sewerage tariffs, so that revenues would be at an adequate level to produce a minimum rate of return. While it may be appropriate to base the project implementation on assurances received during negotiations, in retrospect consideration should have been given to the possibility that service levels might not significantly improve, and also that political realism could change priorities or deflect attention from the program - e.g. national pressures restricting the Board's ability to make tariff increases (para 25). 62. During the drilling of tunnel No.3 and the tunnel sections of the aqueducts, different structures of rock were found than had been expected, which resulted in a large number of variation orders being issued. During project design test drilling should have been carried out to thoroughly investigate rock conditions (para 44). 63. A major factor in the relative success of this project was the active participation by senior management in its preparation and implementation, and the close relationship with the Bank which helped to create an appropriately designed project. With proper preparation, and regular meetings with top management and contractors, it has been shown that a project can be constructed in a relatively short period of time (para 49). 64. MWSS has accumulated a substantial amount of debt which would not be a burden if funds invested had a positive impact on the company's revenues. In retrospect, measures should have been taken to ensure that the current situation in which new resources increase debt but do not produce new revenue does not arise. Recent investments have produced only marginal growth resulting in debt service difficulties (para 54). 65. A project of the magnitude of AWSOP benefits from inter-active dialogue and cooperation with the Bank, as it provides a mechanism to follow the difficult path towards institutional reform, and strengthen the organization to carry forward the development programs efficiently (para 32).  PART II: STATISTICAL TABLES   11 Philippines Implementation Completion Report Angat Water Supply Optimization Project (Loan 3124-PH) Table 1: Summary of Assessments Achievement of Objectives Substantial Partial Negligible Not Applicable Macroeconomic policies X Sector policies X Financial objectives X Institutional development X Physical objectives X Poverty reduction X Gender concerns X Environmental objectives X Public sector development X Private sector development X Project Sustainability Likely Unlikely Uncertain x Bank Performance Highly Satisfactory Satisfactory Deficient Identification X Preparation assistance X Appraisal X Supervision X Borrower Performance Preparation X Implementation X Covenant compliance X (part) X (part) Assessment of Outcome Highly Un- Highly Un- Satisfactory Satisfactory satisfactory satisfactory K  12 Philippines Implementation Completion Report Angat Water Supply Optimization Project (Loan 3124-PH) Table 2: Related Bank Loans Loan Title Purpose Approved Status Preceding operations Manila Water Supply Expand and improve 1964 Complete. I Project the water supply system loan closed 06/30/70 (Ln 386-PH) in Metro Manila Implementation not satisfactory-operations and financial covenants not satisfied. Manila Water Supply Water supply for Metro 1978 Complete. Some works not II Project Manila completed thro'cost over- (Ln 1615-PH) runs-included in MMWPD PCR No. 7153 Manila Sewerage & Improvement of environ- 1980 Complete Sanitation Project mental sanitation in loan closed 12/31/89 (Ln 1814-PH) Metro Manila including Included design of future development of institutional water supply projects capacity for managing PCR No. 8779 sewerage and sanitation Metro Manila Water Expanded and improved 1986 Complete Distribution Project distribution system to loan closed 12/31/93 (Ln 2676-PH) reduce UFW, maximizing Project underwent several the utilization of the revisions mainly due to existing production and increased self funding of transmission capacity. distribution PCR No. 14293 Following operations Manila Second Improve septage 1996 Loan negotiations Sewerage Project collection and April 1996 disposal  13 Philippines Implementation Completion Report Angat Water Supply Optimization Project (Loan 3124-PH) Table 3: Project Timetable Steps in project cycle Date planned Date actual Identification - 1988 Preparation 05/88 05/06/88 Appraisal 04/89 04/21/89 Negotiations - 08/04/89 Board presentation - 10/03/89 Signing - 11/09/89 Effectiveness - 01/23/90 Project completion 12/31/94 06/15/94 Loan closing 12/31/95 12/31/95  14 Philippines Implementation Completion Report Angat Water Supply Optimization Project (Loan 3124-PH) Table 4: Loan Disbursements: Cumulative Estimated and Actual (US$ Millions) FY90 FY91 FY92 FY93 FY94 FY95 FY96 Appraisal estimate 5.2 12.0 20.4 30.4 38.4 40.0 40.0 Actual 8.1 17.2 28.2 34.3 37.7 37.9 38.0 Actual as % of est. 156% 143% 138% 113% 98% 95% 95% Date of final disbursement April 1996  Philippines 15 IiplerLentation Conpletion Report Acgat Water Supply Optiaization Project (Loan 3124-PH) Table 5: Key Indicators for Project Ilpleuientation Iipleiientation Schedule ----- Estiaate at Appraisal----------> <------------------- Actual -----------------><-----Forecast------ 1989 1990 1991 j1992 1993 1994 1989 1990' 1991 1992 1 1993 1994 1995 19966 1997 f 1998 M J S J S Di J S DM J SDM J S DM J S J S D MJSDJSDMJSOJSDJ JS D X S J SD J S Dt __ _ __ _ _ ___ i__ ., I __ _ _ _ ,__ __ ISD J L TUNNEL & AQUEDUC' BA i Tunnel #3 - - -- - - --- - - - -- -- - - - - Aqueduct 5B ! Aqueduct 5C - - - - - --- - - -- - I - - - AQUADUCT 5A BBAA1-= --_ LA Y.ESA BY-PASS DDDDDDDBA=== - - - - - - - - - BULACAS SYSTEM IDDDDDDD;A i i . I Civil works TE- D D, -IA Will continue under UATP in 1999 RIGHT OF WAY(Raw Water) ::===m= , POWER STATION DDDDDO BAA : Civil works I , Equipaent '- -- ------ LA M.ESA 2 T'MENT DDDDDD BAA Civil works --------- Equipaent --------- RESERVOIR & AQUEDUCT DBA Civil works ---'