Document of The World Bank Report No: 18367-PH PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US$23.3 MILLION TO THE DEVELOPMENT BANK OF THE PHILIPPINES (DBP) FOR A LGU URBAN WATER AND SANITATION PROJECT NOVEMBER 1, 1998 Urban Development Sector Unit East Asia and Pacific Region CURRENCY EQUIVALENTS (Exchange Rate Effective) Currency Unit = Peso P.025= US$ I US$ 1.00 = P 40.00 FISCAL YEAR January 1 to December 31 ABBREVIATIONS AND ACRONYMS ADB - Asian Development Bank APL - Adaptable Program Lending BAP - Barangay Action Plan CAS - Country Assistance Strategy COA - Commission on Audit DBP - Development Bank of the Philippines DENR - Department of Environment and Natural Resources DILG - Department of Interior and Local Government DOF - Department of Finance DPWH - Department of Public Works and Highways EA - Environmental Assessment EMP - Environmental Management Plan EU - European Union GFI - Government Financing Institution GOP - Government of the Philippines IDA - International Development Agency IFC - International Finance Corporation IRA - Internal Revenue Allocation LGU - Local Government Unit LWUA - Local Water Utilities Administration MOA - Memorandum of Agreement MWSS - Metropolitan Waterworks and Sewerage System NEDA - National Economic Development Agency NDF - Nordic Development Fund OECF - Overseas Economic Cooperation Fund PMO - Project Management Office (national level) PMU - Project Management Unit (in each LGU) SB - Sangguniang Bayan (Municipal Council) SOE - Statement of Expenditures USAID - United States Agency for Development WUPSPF- Water Utilities Private Sector Participation Facility Vice President: Jean-Michel Severino, EAP Country Manager/Director: Vinay K. Bhargava, EACPF Sector Manager/Director: Keshav Varma, EASUR Task Team Leader/Task Manager: N. Vijay Jagannathan, EASUR PHILIPPINES LGU URBAN WATER AND SANITATION PROJECT CONTENTS Page A. Project Development Objective 1. Program purpose and program phasing: 3 2. Project development objective 3 3. Key performance indicators 4 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 4 2. Main sector issues and Government strategy 5 3. Sector issues to be addressed by the project and strategic choices 6 4. Program description and performance triggers for subsequent loans 7 C. Project Description Summary 1. Project components 8 2. Key policy and institutional reforms supported by the project 9 3. Benefits and target population 9 4. Institutional and implementation arrangements 9 D. Project Rationale 1. Project alternatives considered and reasons for rejection 9 2. Major related projects financed by the Bank and other development agencies 10 3. Lessons learned and reflected in proposed project design 10 4. Indicatioi.- of borrower commitment and ownership 11 5. Value added of Bank support in this project 11 E. Summary Project Analyses I. Economic 11 2. Financial 12 3. Technical 13 4. Institutional 13 5. Social 14 6. Environmental assessment 14 7. Participatory approach 15 F. Sustainability and Risks 1. Sustainability 16 - III - 2. Critical risks 16 3. Possible controversial aspects 17 G. Main Loan conditions 1. Effectiveness conditions 17 2. Other 18 H. Readiness for Implementation 18 I. Compliance with Bank Policies 18 Annexes Annex 1: Project Design Summary 19 Annex 2: Detailed Project Description 23 Annex 3: Estimated Project Costs 33 Annex 4: Cost Benefit Analysis Summary 34 Annex 5: Financial Summary 40 Annex 6: Procurement and Disbursement Arrangements 46 Annex 7: Project Processing Schedule 54 Annex 8: Documents in Project File 55 Annex 9: Statement of Loans and Credits 56 Annex 10: Country at a Glance 58 MAP(S) IBRD 29796 -IV - PHILIPPINES LGU Urban Water and Sanitation Project Project Appraisal Document East Asia and Pacific Region East Asia Urban Sector Development Unit Date: November 1, 1998 Team Leader: Vijay Jagannathan Country Manager/Director: Vinay K. Bhargava Sector Manager/Director: Keshav Varma Project ID: 39022 Sector(s): WW - Water Supply & Sanitation Adjustment Lending Instrument: Adaptable Program Loan (APL) Theme(s): Poverty Targeted Intervention: No Program Financing Data Estimated APL Indicative Financing Plan Implementation Period Borrower (Bank FY) IBRD Others Total Commitment Closing US$ m % US$ m US$ m Date Date APL 1 23.3 73.0 8.6 31.9 05/01/99 05/01/2 Development Bank of the Loan/ 002 Philippines, with the Republic Credit of the Philippines as guarantor APL 2 60.0 75.0 20.0 80.0 05/01/200 05/01/2 Development Bank of the Loan/ 1 004 Philippines and Land Bank of Credit 1 Philippines, with the Republic of the Philippines as guarantor APL 3 100.0 75.2 33.0 133.0 05/01/200 05/01/2 Development Bank of the Loan! 3 007 Philippines and Land Bank of Credit Philippines, with the Republic of the Philippines as guarantor Total 183.3 61.6 244.9 Project Financing Data N Loan EJ Credit E0 Grant El Guarantee El Other (Specify) For Loans/Credits/Others: Amount (US$m) 23.3 Proposed Terms: 0 To be defined C Multicurrency Z Single currency I Standard Variable El Fixed LIBOR-based Grace period (years): 5 Years to maturity: 20 Commitment fee: 0.75% Front end fee on Bank loan 1.00% Financing Plan: El To be defined Source Local Foreign Total Government 2.6 0.0 2.6 IBRD 13.2 10.1 23.3 IDA 0.0 0.0 0.0 Total: 15.8 10.1 25.9 Borrower: Development Bank of the Philippines Guarantor: Republic of the Philippines Responsible agency: Department of Interior and Local Government and Participating Local Government Units (LGUs) Implementing agency(ies): Estimated disbursements ( Bank FYIUS$M): FY 2000 2001 2002 Annual 5.8 7.8 9.7 Cumulative 5.8 13.6 23.3 Project implementation period: 3 Expected effectiveness date: 05/01/99 Expected closing date: 05/01/2002 OCS APL PAD Form: October 9, 1998 -2- A: Program Purpose and Project Development Objective 1. Program purpose and program phasing: The Bank's assistance strategy for the Philippines is to strengthen infrastructure, facilitate private sector participation, and upgrade basic urban services in its towns, so that the Government's objective of ensuring that at least 90 per cent of the urban populations have access to safe and reliable water supply can be achieved within a reasonable period of time. This program aims to implement the strategy by assisting LGU-managed water utilities to operate on commercial principles, and thereby provide consumers with safe, reliable, sustainable water and sanitation services in about 250 secondary towns and cities in the Philippines. If the Program achieves its impact (stated as the Development Objectives indicators), this will contribute, along with other related programs, to improving the living standards of the urban population. The development objective of the LGU Urban Water and Sanitation Program is to ensure that by year 2007, approximately a quarter of LGU-managed water utilities is able to provide residents with water and sanitation services on the basis of consumer demand, as enunciated in NEDA Board Resolutions Nos. 4 and 5 of 1994, and NEDA Board Resolution No. 6 of 1996. In order to achieve this objective the program will generate incentives for the private sector to participate in utility management, lower production costs and increase responsiveness to consumers. 2. Project development objective: (see Annex 1) The development objective of this project will be achieved through a series of three Bank-supported investments, which will assist the Government of the Philippines implement its forward-looking water and sanitation sector policies. The current challenge is one of actually implementing those policies; particularly with regard to: a) Clarifying the role of local government units (LGUs) in the provision of water supply services and determine the types of assistance made available to them by national government agencies concerned; b) Providing guidance to the LGUs in the development and implementation of viable and sustainable water supply projects, supporting the principles of managing water as an economic good, promoting a demand-oriented approach in the provision of services and management to be made at the lowest appropriate level, greater private sector participation in service delivery, and c) Identifying institutional strengthening needs of LGUs that would develop their capacity to adequately perform their financing, planning and service provisioning functions. The project objective is to test and fine-tune the set of institutional, technical, financial and economic rules through which the national policies can be translated to concrete measures that ensure better quality water supply and sanitation services in hundreds of small towns in the Philippines. The project development objective is, therefore, to provide practical demonstration, through a reasonably large sample of Local Government Units (LGUs), that with appropriate technical and financial designs, pricing rules and institutional incentives, water supply systems, irrespective of size, can be made both viable and sustainable. A litmus test on whether this demonstration exercise has succeeded is the extent to which the private sector is willing to invest its time, effort and finances in supporting the water utilities in these towns. -3- The experiences gathered with regard to the implementation of project rules, and whether or not the private sector shows interest in the proposed lease (affermage) contracts will be evaluated and utilized to calibrate the Operational Manual developed for the project. These lessons will serve to scale up the investment program to about 80 towns in the second project (APL2), due to start in late 1999. Annex I describes the project development objectives and key indicators. 3. Program Objectives APL I and APL2 aim at attracting the private sector in order to help LGUs operate water supply systems better than what is the current practice, and also at developing a sufficiently large LGU-based water utilities market, which can (under APL3 and beyond) attract much needed private sector financing into the sector. The program objectives, therefore, have both a short-term and a long-term aspect. In the short-term (APLI and APL2), the objective is to finance investments in water supply infrastructure, and attract sufficient numbers of private sector operators to operate and maintain LGU-managed water supply systems efficiently, while being responsive to its customers. In the long term (APL3 and beyond), the objective is to create a sufficiently large market for LGU-based water utilities, so that private financing institutions supplement the meager public financing available at present. The program objective will be accomplished if safe, reliable and sustainable water supply and sanitation services to at least 90 per cent of all urban residents in the Philippines is accomplished in participating towns by 2007, compared to the current estimate of 55 to 60 per cent. It may be noted that the three APLs proposed are the first significant intervention in a long-term program of sector assistance aimed at changing the structure and incentives of water utilities in the Philippines, and are entirely consistent with the Bank's sector assistance strategy. The three elements in the Bank's program of sector assistance are to: a) Assist water utilities improve operational efficiency and accountability to consumers : This will be in the form of developing rules and procedures that enable water utilities to provide services according to what consumers want and are willing to pay for. b) Facilitate private sector participation in the sector: In order to facilitate private sector participation provide technical assistance to the national government to develop a well-articulated framework of national policies that improves the overall business environment in water utilities. c) Leverage private financial flows into the water and sanitation sector: The biggest challenge in the urban are-as is to attract adequate financing for basic urban services in LGUs, as public financing is limited because of competing claims on limited resources. Private financing will be attracted only when an adequate track record is established in the cities and municipalities, with tariffs raised to financially viable levels, and local administrations have built a record of honoring their commitments. 3. Key performance indicators: (see Annex 1) B: Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: Report No. I 5362-PH Date of latest CAS discussion: 02/15/96 A significant element of the Country Assistance Strategy is the offer of World Bank assistance to the Government to strengthen infrastructure/facilitate private sector participation. In the water sector Bank lending will support the rationalization of management of urban water utilities, promote private sector -4- participation, and help increase coverage of urban populations to safe and reliable water supply. The proposed project will advance these objectives in about thirty five of the approximately one thousand LGUs in which municipal offices manage town water supply systems under APL 1. 2. Main sector issues and Government strategy: i. General issues affecting the sector: (a) Lack of adequate coverage: A substantial population in Metro Manila as well as in other urban areas of the town is without access to safe water and sanitation. In the 1000 small towns where municipal agencies are responsible for water supply and sanitation, approximately 37 per cent of the population do not have access to safe water and sanitation. These residents end up paying unit rates for water supply at ten to fifteen times higher than what residents with access to public sector services pay. The estimated financing requirements to meet existing deficits in services run into billions of dollars. (b) Unreliable services: Even among those with piped water, services are often restricted to less than one hour a day. Residents often have to privately invest in wells, arrange for contracts with water vendors etc. to mitigate the risk of unreliable supply. (c) Inefficient management of water utilities : The general standards of efficiency have been low throughout the country in LGU-managed water utilities. Tariffs have been often set based on political considerations, rather than on the basis of operational efficiency. Further, only a few have any metering in place, and the constructed water supply systems are managed by poorly trained staff. ii. Specific issues to be addressed by the proiect: (d) Unsustainable service provisioning, especially in small towns: Water supply services have been unable to meet demand because the past sectoral practice was one of undertaking investments based on programs and generic designs, rather than responding to what consumers wanted and were willing to pay for. There could be major welfare gains to communities if reliable and adequate water supply facilities are available on the basis of what consumers want and are willing to pay for. Such changes would also reduce the dependence of these water utilities on financial subventions from the LGUs concerned. (e) Low institutional and technical capacity in LGU-managed water utilities: LGUs lack trained technical and financial management staff to run the water utilities as commercial enterprises. Additionally the small size of the respective customer bases make these utilities generally unattractive to qualified professionals and to infrastructure financing institutions. iii. Government Strategy Since 1994 the Government of Philippines, with donor support, has instituted a series of measures to develop a policy and financing framework aimed at (a) rationalizing the Philippine water sector, (b) promoting private sector participation, and (c) improving water and sanitation service delivery to low income communities in urban areas. NEDA Board Resolution Nos. 4 and 5, series of 1994, have laid out the national policies for extending sustainable service provisions in the country. A Water Management Cluster or Cabinet Cluster G was established with the mandate of implementing the policy recommendations. In June 1995 the National Water Crisis Act (RA 8041) was enacted, vesting the Executive with special powers in order to improve management of water resources in general, and addressing the specific water crisis faced by the Metro Manila area. In April 1996, the Joint Executive-Legislative Water Crisis Commission, set up under the National Water Crisis Act completed its recommendations to the President on strategies and approaches that could be adopted to rationalize and streamline the water sector in the Philippines. Further, NEDA Board Resolution No 6 in May 1996 devolved planning and implementation of water and sanitation services to LGUs, with the Department of Interior and Local Government (DILG) being made the national agency responsible for building capacity in LGUs. A Presidential Task Force for Water Resources Management presented to the Philippine Congress a -5- Bill to reorganize regulatory arrangements for the water sector. Finally, in August 1997, the Government successfully privatized MWSS by the award of two concession contracts. 3. Sector issues to be addressed by the project and strategic choices: The challenge is to build into the design and operation of LGU systems practices which reflect the forward-looking principles already incorporated in the above resolutions. Chief among these are that water will be managed as an economic good, that the projects must be demand-oriented, and the systems managed at the lowest appropriate level. In the context of the small LGU-managed water utilities, which have been traditionally considered as being "non-viable" water supply systems, this requires a period of "doing and learning" before the changed approach can be operationalized across the entire sector. So far about 200 LGUs have signaled their interest in participating in the project, despite its conditionalities with regard to pricing of services, cost recovery and institutional re-organization. As the size of each individual subproject is likely to be quite small, the project team and national government have agreed to test out the methodoiogy for an initial batch of about thirty five towns, before the project is launched on a large-scale through the subsequent loans using the Adaptable Program Loan instrument. In this project the following strategy is being followed in order to validate the policy concepts before the successor project experiences enable the launch of a nation-wide program of improving basic water supply and sanitation services: a. From Principles to Practice: Technically Feasible Options and User Choice: The management of water as an economic good and demand-orientation require that municipal systems are constructed which provide local consumers the opportunity to make an informed choice among technically feasible options for the delivery of services. As technically feasible options for the delivery of service have significantly different capital and operating costs and provide somewhat different levels of service, choice has to be exercised by users. The key element in the procedure to select supply options, is the value which users attach to the improvement in service offered by the technical option. This information regarding user valuation is most accurately provided by the willingness of users to pay for the service. Consequently, project procedures have included not only the preparation of technically feasible options but user indications of the value (willingness to pay) which they attach to the different options. Selection of the preferred option was negotiated between LGU administrations and the users, with mutually shared information about the expected costs and the expected user payment for the improvement. The project promoted full cost recovery, with users from the household level to the barangay and town council levels exercising choice, and paying for the services. A Consultant team, funded under a Japan Government PHRD grant worked closely with LGU administrations to operationalize the above process. b. From Principles to Practice: Lowest Appropriate Management Level: In determining the lowest appropriate level for the management of water supply systems, the project design takes into account that the cost of a technical option is strongly influenced by the management mode and the scope of the service area. Economies of scale often result in lower costs for services to larger service areas. In practice, therefore, it is useful to investigate in which cases the establishment of a regional service delivery organization would result in lower costs and lower requirements for user payments for the same service level, compared to single LGU management. Such regional organizations are likely to have cost-saving advantages in several areas. It is intended to evaluate such options in this project, if mayors in the affected regions desire that it should be considered. A sub-regional system in Isabela province has been recommended in the first batch of projects of APLI. In the second batch of projects of APLI, the prospects of subregional systems appear to be promising. -6- c. From Principles to Practice: Identifying Feasible Financing Levels and Repayment Options: In the case of participating LGUs, the costs of agreed improvements are large relative to the initial revenue base of the LGU. Moreover, the expected benefits from the improvement for current and future users will be long lasting, if managed effectively. Financing the improvements from up-front revenues will not generally be possible for LGUs. LGUs, however, have little experience in financial management much beyond the range of current budgets. Practice in LGU assessment of the safe scope for borrowing is limited. Assistance to overcome this deficiency in the processing of the project has been provided by the development of a long-range financial management model to estimate LGU borrowing capacity to finance improvements safely. This estimate was discussed with each LGU during field visits, and has formed the basis of estimating the size of the IBRD loan. 4. Program description and performance triggers for subsequent loan: The program development objectives will be achieved with steady progress over an agreed seven year program including the following projects: Prqject I (APLI): Testing and operationalizing the demand-based framework, as supported by GOP stated policy, in approximately 35 LGUs. In the first APL satisfactory water supply services will be extended to about 34,000 service connections in 12 municipalities at an investment cost of $28 million. Many towns have opted to outsource operations and maintenance of the constructed facilities through affermage (i.e. lease) contracts between the municipal governments and private sector operators. Sanitation investments by households will be through specific arrangement between the LGU, the operator and the households. Project II (APL2): Scaling up, on the basis of APLI, to a significant number of additional cities and municipalities (estimated at 80) that demonstrate sufficient demand to warrant inclusion and completion of contractual arrangements for private sector participation as developed in APLI supported subprojects. Project III (APL3): Changing the role of GFIs from retailers to wholesalers of loans, inducing private sector banks to invest in LGU-based water supply and sewerage systems. Improved financial management in LGUs and improved management of water systems through private sector participation are also expected. Triggers for subsequent loans: The Second LGU Urban Water and Sanitation Project (APL2; indicative amount of $60 million) would be considered when there is: a) Devolution of operation, management, and revenue collection responsibilities under long-term commercial arrangements in 12 LGUs, and b) Fully operational project-funded water supply system improvements in 10 LGUs. The Third LGU Urban Water and Sanitation Project (APL3; indicative amount of $100 million) would be considered when there is: a) Devolution of operation, management and revenue collection responsibilities under long-term management contracts and leasing arrangements in 40 additional LGUs b) Achievement of a working ratio less than 0.50 in at least 80 LGU water utilities receiving financing from APLs I and 2 -7- c) Achievement of at least 16 hours of water per day to connected households in participating urban areas with completed systems through APLs I and 2 investments d) An average of 80% of consumers satisfied with service performance in LGUs participating e) At least 60% of households in any barangay of the LGUs participating in APLI and APL2 connected to the water supply system C. Program and Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): The major component of the project is to finance civil works and equipment in water supply infrastructure in participating municipalities. Preliminary feasibility studies and financial affordability analysis were conducted for a total of 21 municipalities. The findings were discussed with mayors, members of town councils and communities in order to select a technical option that matched the LGU and community willingness to pay. Of the 21 municipalities, twelve approved the project designs through the development and consolidation of project implementation plan (Barangay Action Plans or BAPs, inclusive of new tariff levels and how the constructed systems would be managed). For these municipalities, representing the Phase I of the project, feasibility studies have been completed by appraisal, and detailed engineering designs by negotiations. The sanitation and drainage components (derived from the BAPs and environmental assessments) will finance investments in communal toilets, on-site sanitation systems, and micro-drainage infrastructure respectively. Based on the lessons learned from this phase, the project will finance approximately an additional 23 municipalities for Phase II of the project in the year2000. The Water Utilities Private Sector Participation Facility will function as a pre-investment fund, designed to assist LGUs and water districts evaluate the available private sector participation (PSP) options, and select the ones best suited for the municipalities, cities or region. The inst4litional components (for which cofinancing arrangements are being finalized with the NDF) will support tecnnical assistance to facilitate the formation of regional and subregional water utilities, training utility staff to plan and manage the water utilities and local environmental concerns in a sustainable manner, and undertake feasibility studies to prepare the next batches of water supply and sewerage projects. This component will also assist DBP monitor and evaluate project performance, in order to develop the succeeding phases of the Adaptable Program Loan (i.e. APLs 2 and 3 respectively). Indicative Bank- % of Component Sector Costs % of financing Bank- (US$M) Total (US$M) financing Water Supply 23.3 73.5 21.0 90.1 Sanitation 1.6 5.0 1.4 87.5 Drainage 0.8 2.5 0.7 87.5 Water Utilities PSP Facility 1.5 4.7 0.0 0.0 Project Development for Water Supply 2.5 7.9 0.0 0.0 and Sanitation Institutional Capacity Building 2.0 6.3 0.0 0.0 Total Project Costs 31.7 99.4 23.1 72.9 Front-end fee 0.2 0.6 0.2 100.0 Total Financing Required 31.9 100.0 23.3 73.0 -8- 2. Key policy and institutional reforms supported by the project: The project supports the key policy recommendations of the national government over the past five years. It also blueprints possible approaches by which private sector interest in the sector could be enhanced. At the consumer level, the project tests out methods by which consumers can actively participate in deciding levels of service, based on what they and the LGUs are willing to pay for. All of the above are related to implementation of key policy and institutional reforms that have already been established at the national government level. 3. Benefits and target population: An estimated 155,000 residents, many of low income levels, and in the relatively small class V and VI municipalities) are expected to benefit from improved access to safe water and sanitation facilities from this project. The total beneficiaries from the program is estimated to be about 6 million persons. 4. Institutional and implementation arrangements: The loan will channeled through the Development Bank of the Philippines (DBP). a Government Financing Institution. Operational management of the project will be undertaken by a Project Management Office in DBP (DBP-PMO). Actual investments (first three components of the project) will be implemented by Project Management Units (PMUs) established by the participating LGUs. The national government has received an offer of cofinancing of SDRs 5 million from the Nordic Development Fund for the institutional capacity bdiilding component (of APLI and APL2), which will be coursed through the Development Bank of the Philippines. The oversight role will be exercised by the Department of Interior and Local Government and Department of Finance through a Technical Working Committee comprising these two Departments and the DBP. This Committee will be responsible for overall coordination among the various components, with its working arrangements defined in a Memorandum of Agreement. D: Project Rationale 1. Project alternatives considered and reasons for rejection: The Philippine water sector has traditionally classified water utilities as being viable and non-viable. Financing and technical assistance has generally focused on viable water systems serving large cities and towns, where the full economies of scale could be realized. Non-viable systems, as in many of the smaller municipalities, have relied on sporadic grant financing (from bilateral donors or Congressional Development Fund grants from locally elected Congressmen and Congresswomen). A project alternative could have been to follow a traditional route of financing investments in larger, proven viable water districts in the country. This alternative was rejected because the project team questioned the distinction between viable and non-viable water utilities. At the heart of the distinction lies the political economy of tariff setting. If communities and LGU administrations could accept the idea that water supply and sanitation services should respond to what consumers want and are willing to pay for, most systems can, not only be made viable, but in fact even be attractive in terms of private sector participation. The inclusion of three elements of the project discussed above--preparation of feasible technical options and their costs: agreement between service organizations and users regarding user valuation and user payment; plus assessment of feasible borrowing capacity of LGUs--have all been on the premise that any town can invest in viable systems, provided tariffs are set at a rate that reflects economic costs. -9- The project design, therefore, is focused on presenting options to users, and assisting them in deciding levels of service they want and are willing to pay for. In these small towns, consumers were willing to pay substantially higher prices for water than what was being traditionally charged by water utilities, provided services met their specific requirements in terms of service reliability, quality and access. These insights provide new institutional design options for the whole class of approximately 1000 LGU-managed water utilities that are traditionally described as "non-viabld' water supply systems. The project design has built flexibility during planning and implementation, so that lessons learned are fed back in succeeding phases of the project to alter or modify project rules that are not working. Providing, the widest range of alternatives, on the technical, financial and institutional side thus forms the core of project design. 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned). Latest Supervision Sector Issue Project (PSR) Ratings (Bank-financed projects only) Implementation Development Bank-financed Progress (IP) Objective (DO) Rural Water Supply and Sector Policy First Water Supply, Sewerage S S Framework and Sanitation Sector Project Sewerage and sanitation development in Water Districts Development secondary cities and introduction of public Project (approved September 9, performance audit in Metro Manila 1997) Manila sewerage and sanitation development Manila Second Sewerage S S project (Effective in March 1998) Other development agencies Asian Development Bank: Financing of water Small Towns Water Supply districts, MWSS investments Project (1997-2002) OECF. Government of Japan: Financing of Provincial Cities Water Supply water districts investments Project (I through V) Ausaid: Financing of water districts and LGU Baguio Water Supply Project. water supply systems Northern Mindanao Water and Sanitation project KfW. Government of Germany Provincial Towns Water Supply and Sanitation Programs I and 11 French Protocol, Financing of MWSS Rizal Water Supply Project Investments IPBDO Ratings: HS (Highly Satisfactory), S (Satisfactory). U (Unsatisfactory), HU (Highly Unsatisfactory) 3. Lessons learned and reflected in the project design: The inclusion of the three elements of the project mentioned above--preparation of feasible technical options and their costs; agreement between service organizations and users regarding user valuation and - 10- user payment; plus assessment of feasible borrowing capacity of LGUs--is expected to lead to the creation of viable systems. It is also expected to lead, in some cases, to the adoption of regional systems under the control of LGUs and the encouragement of private sector involvement in the sector, in both the management and operation of viable systems and in their financing. These features are based on the lessons learned from projects in the Philippines, and elsewhere in the world, with regard to service provisioning in low income communities, or where the community resource base is small. The project design recommended follows substantial analytical work done by the Bank in the last decade. Willingness to pay studies showed, that consumers were willing to pay substantially higher prices for water than what was being traditionally charged by water utilities provided services met their specific requirements in terms of service reliability, quality and access. These insights have provided new institutional design options for what were earlier termed as"non-viable" water supply systems. The project design has built flexibility during planning and implementation, so that lessons learned are fed back in succeeding phases of the project to alter or modify project rules that are not working. Key economic, financial, organizational and technological rules will be defined during the appraisal process through the lessons learned from 12 subproject preparation activities. Project implementation will continue monitoring which of the rules worked and which did not work, and thus continually fine-tune the project design during the implementation of these subpk'ojects. 4. Indications of borrower commitment and ownership: Two of the primary platforms of government policy is to provide basic urban services to all city and town residents in the Philippines, and to build capacity in LGU administrations, so that decisions concerning services in a town are taken locally by the Mayor and Town Councils. The project development objectives, therefore, is fully consistent with the national government's interest in planning and management of local civic services through local institutions. The speed with which the national government departments, particularly DILG, has mobilized its staff and expedited project preparation attests the national government commitment to the project. The borrower, Development Bank of the Philippines, is also, as a part of its corporate mandate, interested in developing the LGU market for environmental-related investments. 5. Value added of Bank support in this project: The World Bank is assisting the Government implement two such innovative demand-driven project in the Philippines through this project and the Water Districts Development Project. The value added by the Bank involvement is the global experience and multi-disciplinary support it brings at both the project design and implementation phases. There is also value added to the Bank's own learning experience of implementing a flexible project design. E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (supported by Annex 4): * Cost-Benefit Analysis: NPV=US$ million: ERR = 21.26 % C Cost Effectiveness Analysis Other The major benefits of this project are improved water services to beneficiaries of LGU systems. These benefits are direct user benefits from water consumed and consumer surplus for users who now use less effective and more costly alternatives (such as buying water from vendors, relying on dugwells, rivers etc.). - 11 - The project offers improvements to LGUs who have expressed a willingness to participate and the improvements scaled to a level of service and a tariff which have been agreed with the beneficiaries. Thus, it is highly probable that user benefits calculated on the basis of expected revenues will be realized. In the initial batch of 12 towns in this phased project, the average economic internal rate of return based on conservative assumptions is 21.3 percent. The potential cost savings are also substantial and would raise the expected economic rate of return even higher. The results are robust since they link agreed user willingness to pay and cost of chosen technical solutions and as shown by sensitivity tests of possible reductions in revenue and increases in cost. Further information is provided in Annex 4. 2. Financial (see Annex 5): NPV=US$ million; FRR = % In the area of finance the project will aim to: (i) ensure financially viable systems through full recovery of both capital, and operating and maintenance costs; and (ii) strengthen prospects for commercial operations by broadening private sector participation in the financing and management of the water utilities. A methodology, utilizing a fully integrated long-term financial planning model, was developed for evaluating the borrowing capacities of the first 12 and subsequent generations of sub-projects. This involved three steps. First, a preliminary financial assessment was taken of each participating LGU to determine a total 5-year investment envelope for which a portion of which would be earmarked for water projects. Second, a total project budget ceiling was derived that would fit well within an affordability criteria of the finances of that LGU. Finally, tariff levels were derived based on a uniform formula which ensured full recovery of all capital and operating cost plus allow for a nominal return on the capital invested. The tariff levels proposed are adequate to assure an adequate rate of return for a private operator interested in bidding for a long term affermage or lease contract. By the end of APLI, the project experience is expected to provide a more complete "road map" for private sector participants in water supply production and distribution. This should enable, by the end of APL2 for the program to more actively pursue the idea of attracting private financing into the sector. At present many obstacles still exist for private banks to actively engage in extending credit to LGUs. On the one hand, domestic financing in long-term maturities are extremely scarce. Long term maturities in the private sector range between four to five years with a maximum of only seven years. However, recent developments for bridging the gap that currently exists in this market between the LGUs and private banks are extremely promising, as the banking community has begun to recognize the potential market in LGU lending. Whereas, just less than a year ago private banks often shunned the idea of lending to LGUs, now the focus is more on working out the mechanics by which this could be done. A private LGU credit guarantee facility has already been established to enable private banks to begin tapping this market. In order to complement this facility, an LGU credit rating system is being developed in the Philippines. Efforts are also under way to reform the accounting standards and reporting systems, so that the entire financial community can understand LGU financial management systems better. The project will support these initiatives in the third APL project, when the DBPs financing facility wi. converted to a wholesale operation involving private banks in lending to LGUs for the water infrastructure projects. Such an operation is essential for achieving the high volume target of facilitating the participation of 250 LGUs from the program by 2007. - 12 - Fiscal Impact: The counterpart funding will be provided by LGUs from their internally generated revenues and Internal Revenue Allocations (IRAs). Hence there will be no fiscal impact at the national level. All participating LGUs have signaled their interest in encouraging the constructed facilities to be leased out to the private sector. In subprojects where the facilities are successfully bidded out, the affermage fees are expected to fully amortize the loans. Annex 4 provides a summary of the fiscal impacts in the LGUs appraised for the project. 3. Technical: The project will finance civil works and equipment for improved water supplies for about thirty five small towns in the Philippines. It will also finance the construction of on-site sanitation and micro-drainage system in participating towns to mitigate some minimum negative environment impacts that might result from the increase of wastewater. Detailed engineerin designs have been completed for twelve towns selected for Phase 1. These studies have been prepared with assistance of a reputed local consultant in collaboration with DILG, and have been reviewed by the Bank team. Based on this experience, a technical memorandum has been prepared, which includes technical design standards based on proven local and international experience. Innovative approaches that have been introduced for technical and practical reasons have been flagged for monitoring during implementation. In order to enhance the prospects of efficiency and sustainability of investments, selection of participating towns has been demand-driven, entailing intensive and iterative consultations with households, communities and dialogue with legislative and administrative branches of the LGUs. For those towns where demand has been expressed at all the three levels, detailed engineering design was completed for the 12 towns by September 1, 1998. The drop-out rate during the consultation and dialogue process has been almost 30% of the towns. However, lessons learned in Phase 1, particularly with regard to the high drop-out rate, are being used in planning feasibility studies in the remaining towns in Phase II of the project. During implementation, engineering consultants will assist the local government in the supervision of construction. For the towns that have made the option for possible private operation, the prospective private operator will be in charge of the quality control during the construction phase. 4. Institutional: a. Executing agencies: The borrower for the investment components of the project will be the Development Bank of the Philippines, which will on-lend the loan proceeds to participating LGUs. For the technical assistance components of the project, cofinanced by the Nordic Development Facility (NDF) the borrower will be the Development Bank of the Philippines, which will blend IBRD funds and other concessional loans/grants from bilateral assistance. The Development Bank of the Philippines will on-lend the technical assistance funds as either soft loans or a fee to participating LGUs and Water Districts under the overall supervision of the Technical Working Committee A credit agreement has been signed between the DBP and NDF in this regard. b. Project management: Project management will be the responsibility of the Development Bank of the Philippines, which has established a Project Management Office (DBP-PMO) to administer the project. As the project is the first APL of three IBRD-financed loans, the Water Supply and Sanitation Project Management Office of DILG (WSS-PMO) will continue functioning in its role of "advocacy, brokering and capacity building", by facilitating and managing the process of preparing new batches of subprojects according the project rules. Consultants will provide technical assistance, as and when required. For overall coordination among the components, a Technical Working Committee comprising of the -13- DBP-PMO, DILG-WSSPMO and DOF has been established. A Memorandum of Agreement defining respective agency responsibilities has been entered into by these three agencies. 5. Social: For the twelve LGUs under the first batch, no resettlement is expected. No major social issue has either been identified in the surveys conducted or raised during the consultation meetings with the LGU administrations and the barangays (communities). However, Guidelines on Resettlement and Compensation of Land and Other Assets consistent with Bank policies have been prepared to deal with land acquisition and other matters which may have a negative social impact in future batches of projects. The guidelines provide principles and instructions on: (i) minimizing land acquisition and subsequent displacement; (ii) compensation to all project affected persons including non-title holders; (iii) replacement of productive assets and amenities, and (iv) provision of rehabilitation measures and transitional allowances. More importantly, based on the lessons learned preparing the first phase projects. the guidelines simplify the process of consultation and the roles and responsibilities of the LGUs, so that while the project design principles are adhered to, all owners of assets and occupants of land likely to be affected by the proposed investments are properly consulted before final decisions are taken. 6. Environmental assessment : Environment Category D A IE B Ol C The project is expected to have mainly positive environmental and public health impacts through the provision of affordable clean and more reliable individual water supply connections to residents of small towns in the project LGUs. There is potential for some negative impacts, mainly resulting from the wastewater which needs to be disposed off in these small urban areas without a piped sewerage system. However. these potential negative impacts can be mitigated and managed through actions by the public authorities and the individual households concerned. Environmental assessments (EA) have been prepared by consultants for each of the first batch of LGUs, together with environmental management plans (EMP) which focus on individual sustainable on-site sanitation solutions plus mitigative actions by LGUs (available in project files for the EA and EMP for the first batch). In order to guide the preparation of EAs and EMPs for subsequent batches of LGUs, an operational manual for EA has also been developed. The emphasis of the EA process for this project is less on the assessment of the obvious, generic impacts but more on their ongoing management, including the protection of the raw water sources (mainly groundwater). These EA procedures are in compliance with Philippines regulations for sanitation and environmental protection which are consistent with the Banks OD 4.01 (Environmental Assessment). Mitigzative actions will be supported through capacity building, in particular training of local health officers and sanitation inspectors. The National Government will provide adequate finds for local capacity building. the project envisages that LGUs may on-lend a portion of their subloans to individual households for on-site sanitation improvements, based on full cost recovery. The NDF cofinancing is expected to build municipal capacity for sound environmental management. A part of the cofinancing will also prepare future batches of sewerage projects in LGUs facing the most severe problems of municipal pollution. - 14 - 7. Participatory Approach (key stakeholders, how involved, and what they have influenced or may influence: if participatory approach not used, describe why not applicable): a. Primary beneficiaries and other affected groups: The participatory approach adopted by this project is expected to expose the potential negative environmental impacts and to raise awareness of the LGUs and the communities for the need for good environmental management. During the project preparation stage, five significant activities demonstrated the characteristics of a demand-oriented participatory project. These were: 1. A letter of intent signed by the Municipal Mayor and in some municipalities, a Sangguniang Bayan (Municipal Council) Resolution were submitted to the Department of Interior and Local Government (DILG) signifying the interest of the municipal LGU in participating in the proposed project; 2. Results of the feasibility study and socio-economic surveys i.e. technical options, management options, financial assessment and cost recovery options were presented to the Municipal Mayors and Sangguniang Bayan for assessment of LGU's capacity and decision-making in assuming the responsibilities required by the Project. The agreements and decisions made among the members of the Municipal Council was embodied in a SB Resolution. 3. The content of the SB Resolution are: (i) the willingness of the municipal LGU to delegate the day-to-day management of the water utilities through supervision contracts to professional water management organizations; (ii) to adopt water tariff rates to levels that will ensure system sustainability; (iii) to undertake specific investments to ensure that there are no adverse environmental impacts from augmented water supply; (iv) to borrow from a recommended government financing institution (GFI) on terms and conditions specified by the national government; and (v) that 25% of the total project cost will be provided by the local government unit as their counterpart contribution. 4. The provisions of the SB Resolution were presented and discussed in a series of meetings with the barangays (village) that will be served by the project. The result of the barangay meetings is the signing of the Willingness-to-Connect (WTC) form by individual households. The WTC is a clear measure of demand at the household/community level. At least 60% of the target households to be served by the water supply project should sign and submit this document so that the project will proceed to implementation. If a number below 60% is reached, the project will not be implemented even if there is a demand at the LGU level. The Project believes that demand should be demonstrated at both LGUs and communities levels since the responsibilities of making the Project work also belong to both LGU3 and communities. With the 12 nmnicipalities for the first batch, a demand between 65-70% WTC has been generated. 5. The results of the barangay meetings, WTC and the detailed engineering design were presented to the Mayor and the Sangguniang Bayan. This led to the adoption of the final SB resolution designating authority to the Municipal Mayor to sign a subsidiary loan agreement in behalf of the municipality with the DBP after the loan is approved by the World Bank. All of the 5 activities mentioned above underwent an iterative process of (i) information dissemination; (ii) discussions: (iii) decision-making; and (iv) commitment and responsibility, summarizes the participatory process adopted by the project team. - 15 - b. Other key stakeholders: During the process of community participation, key stakeholders at the community level, including NGOs, religious organizations and cultural organizations are consulted. It is also expected that this involvement will be continued after project implementation, in order to ensure that: (i) the water supply services are sustained by the community maintaining oversight over the system operator, and (ii) adequate information dissemination takes place so that communities access the sanitation facility for household sanitation improvements. F: Sustainability and Risks 1. Sustainability: The sustainability of project benefits depend on four key factors, as specified in the Operational Manual: (i) the full participation and ownership of stakeholders in the design, implementation and operation of the project: (ii) clarity in fund channeling rules, particularly with regard to LGU commitments, contributions, and responsibilities of LGUs, communities and households; (iii) flexibility in engineering design in order to meet specific service requirements of communities in a sustainable manner, and (iv) outsourcing of operations and maintenance responsibilities to the private sector, as much as possible 2. Critical Risks (reflecting assumptions in the fourth column of Annex 1): Risk Risk Rating Risk Minimization Measure From Outputs to Objective Newly electei LGU administrations will S 1. Sign-off from at least 60 per cent of remain committed to agreements between community was required as evidence of the proJect and communities stakeholder commitment to the project 2. Repeated consultations with stakeholders will be ensured through the project cycle 3. The Subloan Agreements and lease contracts will address mitigation of political risks Successor LGU administrations will remain H 1. Contracts with operators will include committed to maintaining agreements with substantial penalties to be recovered from an regard to tariffs and honoring long-term escrow account maintained by the DBP contracts with the private sector for operations and maintenance. Participating LGUs will agree to the H 2. Contracts will have duration of at least fifteen provisions of the lease contract particularly years in order to insure the operator from the setting up of an escrow account at the political cycles. DBP and will agree to allocate the needed resources. This was not earlier considered in the 12 pilot towns. Lessons learned from APL process generate M Regular consultative meetings will be held to support in national government and among share experiences and work out consensus other donors among sector agencies, government departments and donors -16- From Components to Outputs DBP-PMO is established N A condition for Board Presentation DBP-PMO and DILG work effectively in M Technical Working Committee to oversee the preparing second batch for implementation project work already established by the GOP in 1999 Cofinancing of technical assistance is M Cofinancing arrangements with the NDF is a available on time condition for Board Presentation Overall Risk Rating S The Adaptable Program instrument allows the Bank and the national government test out methodologies and proto-type design before scaling up. The returns from successful implementation are very high Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk) 3. Possible Controversial Aspects A potential area of controversy is that the Mayors and LGU residents might object to project beneficiaries paying much higher water tariffs compared to the more well-off residents of neighboring water districts, who benefit from existing policies of cross-subsidization by industrial/commercial consumers and local system economies of scale. The controversy will subside if the private sector is able to deliver services efficiently, so that consumers get value for the money they pay. Another potential area of controversy is that affermage contracts may eventually lead to operators negotiating exclusive rights to develop other raw water sources in the LGU. Greater coordination and consistency between the water resource management aspect and water supply management aspect is urgently necessary, so that pricing of raw water reflects its opportunity costs. This is an issue for the national government agencies and the Bank project teams to monitor closely, as a part of the on-going policy dialogue. G: Main Loan Conditions 1. Effectiveness Conditions Conditions for Negotiations were: 1. A draft policy framework for land acquisition and resettlement has been prepared, and will be confirmed during negotiatiot between the Bank and the Development Bank of the Philippines 2. LGUs will have to pass a Municipal Council Resolution signaling their desire to participate in the project before negotiations 3. The Resolution will confirm the LGU's acceptance of the condition that (a) the water utility will be separated from other municipal departments, and that it will begin functioning as an organization independent of municipal budgetary and accounting system, (b) tariffs will be charged on the basis of at the minimum covering operations and maintenance costs, and (c) outsourcing of operational functions would be undertaken as much as practicable. 4. The GOP will establish a Technical Working Committee at the national level to oversee project implementation before negotiations. 5. The Technical Working Committee will adopt the Project Operational Manual. 6. Finalization of a Letter of Sector Development Policy by the Government of the Philippines before negotiations. -17- Conditions for Board Presentation are: 1. The Government of the Philippines will approve the Credit Agreement with the Nordic Development Fund for cofinancing the technical assistance aspects. 2. The Government of the Philippines approves the offer of European Union Grant assistance for the proposed Water Utilities Private Sector Participation Facility. 3. The Development Bank of the Philippines will establish a fully functioning Project Management Office (DBP-PMO) Condition for Effectiveness: 1. Subloan Agreements have been executed on behalf of the Development Bank of the Philippines and at least ten participating LGUs. 2. The Grant Agreement has been executed between the Republic of the Philippines and the European Union, in order to operationalize the Water Utilities Private Sector Participation Facility. 3. The Loan Agreement has been executed between the Nordic Development Fund and the Development Bank of the Philippines. 2. Other [classify according to covenant types used in the Legal Agreements.] 1. Subsidiary Loan Agreements are finalized between the DBP and each participating LGU 2. Each participating LGU establishes a Project Management Unit 3. DBP shall furnish to the Bank (i) semi-annual reports on or about April 30 and October 31 of each year commencing April 30, 1999, and (ii) a mid-term report on or about June 30, 2000. H. Readiness for Implementation Z 1. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. O 1. b) Not applicable. Z 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation. Z 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. O 4. The following items are lacking and are discussed under loan conditions (Section G): I. Compliance with Bank Policies Z 1. This project complies with all applicable Bank policies. l 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies. Vija Jagannath M6hav Varma Vinay K Bhargava Team Leader Sector Manager/Director Country Manager/Directo -18- Annex 1: Project Design Summary LGU Urban Water and Sanitation Project Key Performance Hierarchy of Objectives Indicators Monitoring & Evaluation Critical Assumptions Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission) Living standards in Philippine Improving trends in public 1. National Policy documents 1. Government adherence to towns and cities improved. health and urban on urban service provisioning its strategy, as stated in the environmental indicators by and living standards. NEDA Board Resolutions, 2020: 2. World Development Report remains committed 1. 90% of LGU residents and other internationally receive reliable water supply, compiled documents on basic at least 16 hours a day. urban service provisioning. 2. 90% of urban population 3. Benchmark Philippines has access to safe drinking sector performance and water. compare to other developing 3. In the 20 largest cities countries. outside Manila 80% of wastewater is collected and treated. onu-a1erieprvsinn Key Performance Hierarchy of Objectives Indicators Monitoring & Evaluation Critical Assumptions Program Purpose: End-of-Program Indicators: Program reports: (from Purpose to Goal) Reliable and sustainable water Program implementation NEDA and DILG monitor and 1. Lessons learned from the and sanitation services strategy fully integrated into evaluate policy lessons for APL process are going to provided by commercially the national policy by 2007: the sector through: generate support in the operated enterprises to national government, and secondary cities and towns of 1. The program design is 1. NEDA-sponsored national among other major donors. the Philippines. replicated through a number policy documents of successor projects by the NG and ODA financing. At least one successor projects by OECF or ADB. Phase I (A PL I): Proto-typing 2. At least $ 25 million of PFI 2. Sector Reports from World and testing a demand-based investments by the end of Bank and other donors framework, that provides APL3. 3. Program Completion participating LGUs with 3. Subsidies from the national Report sustained water and sanitation government to the water sector services, and provides are reduced to zero for level incentives for private sector Ill systems (i.e. systems with participation. house connections). Phase I (APL2): Based on the 4. PSP arrangements take lessons learned from APLI, place in at least 50% of the adjusting and modifying the water utilities receiving project design, and applying it investments. to about 100 LGUs in order to create a sufficiently large market to attract a PSP-led water operators industry. Phase II (APL3): APL2 5. Amalgamation of generates sufficient private neighboring systems is sector operator interest to accomplished wherever a attract private financing of cluster of small LGUs access water supply infrastructure, project investments. This would enable a further scaling up in LGU coverage, 6. Performance indicators of with the role of DBP water utilities in the program changing fromn a retailer to a are significantly better than wholesaler of financing to LWUA averages: (see private sector banks interested standard performance in water Supply and sanitation indicators list below). infrastructure investments. 7. Participating towns provide at least 16 hours of water supply a day. -20 - Key Performance Hierarchy of Objectives Indicators Monitoring & Evaluation Critical Assumptions Project Development Outcome / Impact Project reports: (from Objective to Purpose) Objective: Indicators: 1. Provision of improved and 1. 30% of the participating DILG monitors and evaluates 1. Successor LGU sustainable access to water LGUs in the first and second success in implementing administrations will remain supply and sanitation in about batch of APLI successfully NEDA Board Resolution No. committed to maintaining 35 pilot project towns. complete project 4 and 6 with assistance from agreements with regard to implementation (i.e. provide DBP-PMO through: tariffs and honoring long-term the planned quality water -Semi-annual progress reports contracts with the private supply to communities). Supervision mission reports sector for operations and -Program mid-term Reviews maintenance 2. One third of those LGUs Consumer surveys and public contract with the private performance audits sector to operate and maintain the newly constructed systems. Impact indicators of APLI in participating LGUs in Year 2002: Water Supply component (see project documents per details) - Increase in water supply in cu. meters (target vs. actual) Service coverage increase (target vs. actual) - Service reliability (target vs. actual) - Financial ratios of LGU water utilities - Unit price of vended water Sanitation component - On-site systems (target vs. actual)r -21- Key Performance Hierarchy of Objectives Indicators Monitoring & Evaluation Critical Assumptions Output from each Output Indicators: Project reports: (from Outputs to Objective) component: 1. Water supply systems in 1.1 Ten systems are completed DBP-PMO and DILG 1. Newly elected LGU project towns constructed. and operational according to through: administrations will remain approved design specifications -Semi-annual progress reports committed to agreements 2. Project Operational by negotiation. -Supervision mission reports between the project and Manuals designed and -Evaluation mission reports communities; approved 2.Project Management Office 2. IRA allocations to LGUs in DBP operational by Board will continue Presentation. 3. NDF Credit Agreement is signed by the DBP by Board Presentation Project Components I Inputs: (budget for each Project reports: (from Components to Sub-components: component) Outputs) (Phase 1) Target Actual DBP-PMO and DILG 1. DBP-PMO is established at $0.40 $0.40 through: by Board presentation Completion of feasibility $0.10 Semi-annual progress reports 2. DBP-PMO and DILG work studies in Batch I towns $0.70 -Supervision mission reports effectively in preparing second Finalization of PSP contracts $22.63 -Project Implementation Plan batch for implementation in Completion of feasibility $1.55 1999 studies in Batch 2 towns $0.78 3. Co-financing of technical Investments in water supply $1.90 assistance is available on time Sanitation Drainage Technical assistance for water supply, sanitation and drainade -$22- Annex 2: Project Description LGU Urban Water and Sanitation Project By Component: Project Component 1 - US$23.3 million Water Supply This component will finance civil works, equipment and supervision for improved water supply systems for small towns that have traditionally been viewed as having"non-viable" and poorly functioning water utilities normally managed by municipal agencies themselves. Selection of project towns and technical options to be used in them have been demand driven, using consultations at household, community (Barangay), and local government levels, based on the project team's assessment of borrowing capacity using the GOP guidelines and a long-term financial planning model developed for this purpose. This component will finance the construction of new systems as well as the rehabilitation and expansion of existing systems. The constructed systems will be operated and managed, as far as practicable through leasing (affermage) and management contracts with private sector operators. Otherwise, the LGU concerned shall create an independent water utility duly registered under Philippine laws. Project Component 2 - US$1.6 million Sanitation.Program This component will finance physical improvements in household toilets, on-site sanitation facilities, including soakaway pits for septic tank effluents or the disposal of wastewater flows arising from augmented water supplies hygiene education. Funds will be on-lent to the LGUs and would be administered by the water supply operators and recovered from the water bills on an installment basis over five years. Selection of beneficiaries will be demand driven and on the basis of first come first served. Project Component 3 - US$ 0.8 million Urban Drainage Program This component will finance investmentsand consultant services in micro-drainage infrastructure. Selection of towns for this component will be demand driven except where it would be encouraged to mitigate adverse impacts of the augmented water supplies. Project Component 4 - US$1.5 million Water Utilities Private Sector Participation Facility: A number of LGUs and Water Districts have been receiving proposals from the private sector for participation in their operations, most frequently through unsolicited offers for BOT (build, operate and transfer). Experience from recent water utility privatization in the Philippines has shown that evaluation of such proposals is highly complex and procedures cumbersome enough to induce the spread of non-competitive alternatives in the market. This Facility, which will provide concessional TA from the EU ($ 1.5 million to be recovered through a success fee), will be through the creation of a revolving pre-investment fund. The Facility will finance a technical assistance program to help LGUs and Water Districts prepare Information Memoranda as a basis of bidding by private operators, evaluate such proposals, and identify the most appropriate form of more competitive private sector involvement. EU cofinancing will finance preparatory work, such as feasibility studies, financial analysis and legal options studies leading up to the finalization of an Information Memorandum. The component cost will be recovered through success fees. -23 - Project Component 5 - US$2.5 million Support for Preparation of Next Batches of Projects: This component, which will provide concessional TA from the Nordic Development Fund (NDF) and other bilateral donors will cofinance this component through the creation of a revolving fund from which LGUs can access resources for: (a) Water Supply: Feasibility studies and detailed engineering designs for approximately another 80 towns, to be selected in a demand-driven way from towns that have confirmed commitment to participate on the basis of project rules. Several bilateral donors are currently examining these subprojects for possible funding through grant financing from their respective Consultant Trust Funds and bilateral assistance programs. Hence no separate cost estimate has been included. (b) Swerage development in secondary cities: Improvements in water supply and increasing concerns about the impact of pollution on availability of water and other environmental amenities are increasing the potential demand for sewerage systems. DENR has identified a list of 16 cities that need substantial investments in sewerage to mitigate the adverse impacts of municipal pollution. Project Component 6 - US$2.0 million Institutional Capacity Building Program: This component, which will provide technical assistance at concessional rates will be co-financed by the NDF, and continued into APL2. The cost estimate for APLI is US$2 million. The Program is designed to strengthen managerial and technical capacities of organizations and staff that will be involved in (i) the implementation of the project, (ii) the regulation of private operators (if applicable), and (iii) assisting LGUs build institutional capacity and appropriate training programs. 1. Role of Capacity Building Program: The Capacity Building Program will respond to the need for assisting the LGUs to effectively and efficiently carry out their roles and responsibilities as outlined in the implementing Rules and Regulations (IRR) of NEDA Board Resolution No. 4 (Series of 1994): Financing - The LGUs shall be responsible for mobilizing resources to finance water supply improvements through their own resources, through borrowing or by tapping private sector financing; Management - LGUs shall adopt commercial principles in the operation and management of water utilities in order to provide cost-effective and reliable services to consumers whether management of the system is a direct responsibility of the LGU or is contracted out to the private sector; Project Planning and Development - LGUs shall be required to prepare and update, on an annual basis, their sector plans consistent with the National Master Plan for the Sector; Approval and Award of Contracts - The LGUs shall be required to conduct public bidding in accordance with the provisions of law and shall have the final authority to approve and award contracts for water supply and sanitation projects within their jurisdictions; Application for Water Rights - LGUs or concerned water utility shall apply for water rights from the NWRB prior to implementing a project that would require extraction of water: Public Performance Audit - The LGUs shall establish a system of public performance audit for public and private water utilities focusing on critical performance indicators; and - 24 - Formation and Capacity Building of BWSAs/RWSAs - The LGUs are responsible for organizing and training the BWSAs and RWSAs to operate and manage Level I and II water systems, respectively and for providing assistance in registering the same with the designated registering body. II. Assistance in improving management of LGU water utilities:The Project envisages two management options: * management by LGU through the setting up of a separate economic enterprise or a water utility registered as an SEC company, and * delegation of system management responsibility to the specialized private sector entities through a suitably crafted contract that protects the interests of the LGU (which is the borrower of the loan), consumers (who desire value in terms of services for the money they pay), and the operator (who would require transparency in price setting and regulatory arrangements) or service contractors providers (such as, for billing and collection etc.). In situations where the LGUs decide to set up a separate economic enterprise, additional technical assistance will be necessary. III. Training Programs: There will be training needs at the levels of the participating LGUs, as well as at the national level. The training for LGUs will be categorized into: (a) General Trainin - This will involve the implementation of training program for all participating LGUs covering the following subjects: * Water Utility - LGU Roles, Responsibilities, Performance Monitoring and Regulatory protocols * Lease or Management Contract Supervision * LGU Financial Planning and Investment Management * Implementing the Environmental Monitoring and Management Plan * Public Performance Audit * Supervision of sanitation investments by households (b) Specific Training: This will cover training to suit the public managed water utilities (i.e. under LGU Management) * Water System Management - Operations and Maintenance Protocols for Water Supply production, transmission and distribution systems * Development of procedures for managing water utilities on the basis of commercial principles - Billing, Collection protocols * Efficient administration of contracts with service providers, including development of standard contracting forms * Bookkeeping and Financial Management procedures IV. Equipment and Other Resources: Capacity building will also include the provision of logistical support and equipment as well. The following equipment are proposed to be financed as a part of the capacity building component of the Project: * Provision of computers and equipment for the Public Water Utilities under LGUs Management; * Provision of computers and two cars for DILG - PMO monitoring and supervision; * Printing, reproduction and dissemination of pertinent literature reference materials, documents, kits, handbooks; and * Preparing of Newsletter and other information dissemination type of activities to sharing the best - 25 - practices. In order to maintain consistency and focus with the APL Program objectives, an annual institutional capacity building program review will be conducted jointly between the national government, represented by the Technical Working Committee, the NDF and the World Bank. Second LGU Urban Water and Sanitation Project (APL2) Likely conditions to Proceed for APL2: To be met before commitment of APL2: * Devolution of operation, management, and revenue collection responsibilities under long-term commercial arrangements in 12 LGUs; * Project-funded system improvements fully operational in 10 LGUs APL2 Development Objective: Devolve operation and management of water supply and sanitation services to qualifying commercial entities in 80 LGUs, together with continued improvement in the service delivery and financial sustainability in the participating LGUs (2001-:2004) The IBRD-Funded Project (US$60 million) would likely finance : construction of water supply and sanitation facilities in 80 LGUs throughout the Philippines, focusing on the facilitation of subregional systems, wider involvement of different forms of private sector participation in those water utilities, and improved institutional capacity in participating LGUs Other donors would likely finance technical assistance under Cofinancing arrangements (US$ 7 Million): completion of feasibility studies using the LGUUWSP design principles, continued expansion in the use of the Water Utilities Private Sector Participation Facility, institutional capacity building in LGUs, particularly with re&ard to local environmental management, financial management and staff training.. Financing by LGUs participating in the Project (US$20 million): This would provide LGU equity for the project in the form of land acquisition and equity finance from internal resources. Pject Financing Data (Indicative) Processing Time Table (Tentative) IBRD Loan: $60 million Appraisal December 1999 Bilateral Cofinancing $7 million Negotiations February 2000 LGU Equity $20 million RVP Approval March 2000 Total: $87 million Effectiveness May 2000 Estimated FY01 FY02 FY03 FY04 Disbursement (US$ million) - 26 - Annual 10 15 15 20 Cumulative 10 25 40 60 Likely conditions to Proceed for APL3: * Devolution of operation, management and revenue collection responsibilities under long-term management contracts and leasing arrangements in 40 additional LGUs * Achievement of a working ratio less than 0.50 in at least 80 LGU water utilities receiving financing from APLs I and 2 * Achievement of at least 16 hours of water per day to connected households in participating urban areas with completed systems through APLs I and 2 investments * Average of 80% of consumers satisfied with service performance in participating LGUs * At least 60% of households in a barangay connected to the water supply system Third LGU Urban Water and Sanitation Project (APL3) APL3 Development Objective: Devolve operation and management of water supply and sanitation services to qualifying commercial entities in 130 LGUs, together with continued improvement in the service delivery and financial sustainability in the participating LGUs, and graduation of GFIs from retail financing to wholesale financing (2003-2007) The IBRD-Funded Project (US$100 million) would likely finance : construction of water supply and sanitation facilities in 130 LGUs throughout the Philippines, focusing on the facilitation of subregional systems, wider involvement of different forms of private sector participation in those water utilities, and improved institutional capacity in participating LGUs Other Donors would likely finance technical assistance under Cofinancing arrangements (US$ 3 Million): completion of feasibility studies using the LGUUWSP design principles, continued expansion in the use of the Water Utilities Private Sector Participation Facility, institutional capacity building in LGUs, particularly with regard to local environmental management, financial management and staff training. Private Financial Institutions (US$20 million) would likely cofinance: construction of water supply and sanitation facilities in the subregional systems envisaged in the project. Financing by LGUs participating in the Project (US$13 million): This would provide LGU equity for the project in the form of land acquisition and equity finance from internal resources. Project Financing Data (Indicative) Processing Time Table (Tentative) IBRD Loan: $100 million Appraisal December 2001 Bilateral Cofinancing $3 million Negotiations February 2002 -27 - Private Financing $20 million RVP Approval March 2002 LGU Equity $13 million Effectiveness May 2002 Total: $136 million Estimated FY03 FY04 FY05 FY06 FY07 Disbursement (US$ million) Annual 10 20 20 30 20 Cumulative 10 30 50 80 100 LOCAL GOVERNMENT UNIT URBAN WATER SUPPLY AND SANITATION PROJECT (LGU-UWSSP) As of October 15, 1998 List of Municipalities with Letter of Intent REGION PROVINCE MUNICIPALITIES CAR Abra I Dolores Kalinga 2 Pinukpok 3 Rizal 4 Tabuk I Ilocos Norte 5 Laoag City 6 Pinili Ilocos Sur 7 Sinait La Union 8 Rosario II Isabela 9 San Pablo 10 Sto. Tomas 11 Delfin Albano 12 Sta. Maria 13 San Mariano 14 Naguillan 15 San Isidro Nueva Vizcaya 16 Ambaguio 17 Bagabag 18 Solano Quirino 19 Aglipay 20 14agtipunan Ill Pampanga 21 San Simon -28 - IV Batangas 22 San Luis Laguna 23 Pangil 24 Pila 25 Rizal Quezon 26 Sariaya 27 Bordeos 28 Gen. Malvar 29 Mauban 30 Panukulan 31 Patnanungan 32 Pagbilao 33 Palilio 34 Sampaloc 35 .Tayabas 36 Infanta 37 Jumalik 38 Real 39 Lucban Marinduque 40 Boac 41 Gasan Oriental Mindoro 42 San Teodoro 43 Baco 44 Calapan 45 Victoria 46 Bansud 47 Gloria 48 Bongabong 49 Mansalay 50 Calapan 51 Roxas Palawan 52 Puerto Princesa City 53 Aborlan 54 Bataraya 55 Brook's Point 56 El Nido 57 Narra 58 Quezon 59 Rizal 60 Roxas 61 San Vicente 62 Taytay 63 Kalayaan 64 Sofronio Espanola 65 Agutaya 66 Araceli 67 Abordo (Linacapan) 68 Busuanga - 29 - 69 Coron 70 Cuyo 71 Dumaran 72 Cagayancillo 73 Balabac 74 Magsaysay 75 Culion V Camarines Sur 76 Garchitorena 77 Minalabac 78 Gainza 79 Tinambac 80 Bula Sorsogon 81 Pilar VI Iloilo 82 Balasan 83 Banate 84 Miagao 85 Batad Guimaras 86 Sibunag Negros Oriental 87 Bais City 88 Ayungon 89 Bindoy 90 Valencia 91 Guihulngan 92 Vallehermoso 93 Dauin VII Cebu 94 Badian 95 Sogod Bohol 96 Antequerra 97 Corella 98 Loboc 99 Dimiao 100 Mabini 101 Ubay 102 Duero VIII Biliran 103 Cabugcayan 104 Kawayan Eastern Samar 105 Calbayog City Leyte 106 Julita Southern Leyte 107 San Juan Western Leyte 108 Almagro 109 daram 110 Marabut -30- Ill Pagsanghan 112 Paranas 113 San Jorge 114 Sta. Margarita 115 Tagapul-an 116 Talalora 117 Zumarraga 118 Basey IX Zamboanga del Sur 119 Ramon MagsaysaN 120 Midsalip 121 Sominot 122 Titay 123 Tungawan 124 Rosales 125 Vincenso Sagun 126 Margosatubig 127 San Miguel 128 San Pablo 129 Bayog 130 Siay 131 Tabina 132 Labangan 133 Malangan 134 Guipos 135 Pagadian City 136 Ipil 137 Molave 138 Diplahan X Bukidnon 139 Kitaotao 140 Cabanglasan 141 Kadingilan 142 Damulog 143 Dangcagan 144 Pangantican 145 Manolo Fortich Misamis Oriental 146 Salay 147 Talisayan 148 Balingasag Misamis Occidental 149 Don Victoriano Camiguin 150 Sagay 151 Mahinog XI Davao del Sur 152 Matanao 153 Sulop 154 Malalag 155 Sta. Maria 156 Padada 157 Hagonoy 158 Kiblawan - 31 - Davao del Norte 159 Kapalong 160 Sto. Tomas Lanao del Norte 161 Magsaysay 162 Sapad 163 Sultan naga Dimaporo 164 Maigo 165 Kapatagan 166 Kolambogan 167 Lala 168 Salvador XII North Cotabato 169 Matalam 170 Magpet 171 Carmen Sultan Kudarat 172 Bagumbayan CARAGA Agusan del Sur 173 Trento 174 Veruela 175 Sta. Josefa 176 Loreto 177 Talacogon Surigao del Norte 178 Burgos 179 Claver 180 Dapa 181 Sison 182 Taganaan 183 Placer 184 Bakuag 185 Gigaquaet 186 Plaber 187 Tubod 188 Alegria 189 Mainit 190 San Francisco 191 Malimuno 192 Surigao del Sur 193 Carrascal 194 Lanuza 195 Dinagat ARMM Tawi-Tawi 196 Bongao - 32 - Annex 3: Estimated Project Costs LGU Urban Water and Sanitation Project Local Foreign Total Project Cost By Component US $million US $million US $million Water Supply construction 10.8 8.6 19.4 Supervision during construction 0.9 0.9 Sanitation 1.2 1.2 Hygiene education for sanitation 0.2 0.2 Drainage 0.6 0.6 Consultant for drainage 0.1 0.1 Total Baseline Cost 13.1 8.6 22.4 Physical Contingencies 1.3 0.8 2.1 Price Contingencies 0.7 0.4 1.1 Total Project Costs 1;8 9.8 25.6 Front-end fee 0.2 0.2 Total Financing Required 15.8 10.1 25.9 - 33 - Annex 4: Cost Effectiveness Analysis Summary LGU Urban Water and Sanitation Project Saumary of benefits and costs: The project aims to test a demand-based framework in the provision of water services in about 250 towns nationwide which are deemed non-viable systems under existing sector rules. The initial phase to be funded under APLI covers about 35 towns, of which 12 towns have completed project preparation and involves a total of 31,000 connections. The objective of the project is to demonstrate that economically and financially viable systems can be built and operated in these towns by designing technical solutions whose cost can be recovered through tariffs that have been agreed upon with the beneficiaries prior to construction. Subject to sufficient progress in using the demand-based approach in APL 1, the program would be scaled -up in APL2 in terms of the number of towns to be covered. In APL2, the target is to cover an additional 80 towns and in APL3, another 130 towns. Also; in APL 3 it is expected that government financial institutions (GFIs) would be in a position to wholesale loans and induce private sector banks to invest in LGU systems, and for these systems to be increasingly managed and operated by the private sector primarily through lease and concession contracts. The assumption for proceeding to APL3 is that economic and financial viability is demonstrated in the earlier phases. In this type of a program loan, it is not possible to have a prior estimation of the net present value or the economic internal rate of return for the whole project. This is because specific investments in the towns which would choose to participate are subject to negotiations between prospective beneficiaries and their respective LGU officials and their acceptance of the project rules regarding loan financing and cost recovery through user payments. However, the project design provides adequate assurance that technical solutions would be both economically and financially viable. In particular, the project rules require that tariffs should at least cover for the operation and maintenance costs and that users of the improved systems agree to the proposed tariff levels. Nonetheless, since this is a learning-by-doing project, economic performance would be continually monitored. The framework provides that the project may be modified as necessary in order to achieve its economic worth. The LGU systems, which will be largely replaced in this project, perform poorly and usually for a very limited number of hours. The economic consequences are (1) that the current systems generate very low levels of direct-user benefits, and (2) people even for those already connected to the existing system are forced to seek alternative sources of water which are often expensive, time consuming and unsafe from a health perspective. With the improved system, many would be able to switch to more or exclusive use of the better and much more reliable services. They will therefore be able to avoid some of these costs, that is, money, time and health costs, while generating increased direct-user benefits. With the exception of health costs which are often difficult to quantify but are nonetheless real costs, the direct-user benefits, consumer surplus and cost savings would be estimated for the individual subprojects as these are prepared. In general, it is expected that direct-user benefits would be sufficient to -34- economically justify the projects. Considering consumer surplus and cost savings benefits would substantially increase the economic return of the sub-projects. However, from the perspective of society, the latter may only be a transfer if users opt to shift their spending from water to some other commodity or if the improved system results in a loss for the existing LGU-managed water utility or water vendors. In such a case, there would be no real savings to society, although a real gain from cost savings would have accrued to the consumers. On the basis of the initial 12 towns, the required tariffs to fully cover the investment and operating costs are considerably lower than the costs that users at present incur to get water. This being the case, it is expected that the consumer surplus and cost savings would be significant for those who will be served under the improved system and are able to use more water at a lower price. While it is difficult to estimate the exact consumer surplus without more information on the shape and elasticity of demand, it is expected that this is positive and may be substantial. For the initial 12 towns, the economic internal rate of return was estimated for each sub-project with the economic benefits comprising of direct user benefits, consumer surplus and cost savings. For the base case scenario, certain assumptions were adopted meant to approximate the most likely situation in these towns upon the operation of the improved systems. It is assumed that per capita water consumption levels would increase gradually towards full capacity, the reason being that it is possible for users to maintain their current water sources at least in the initial years of operation of the improved system. It is also assumed that a demonstration effect would be needed before the full target of served population is achieved. With these assumptions, the average EIRR for the 12 towns is 21.3 percent (using a discount rate of 15 percent) with direct-use and consumer surplus benefits only. Additional cost savings benefits would increase ubstantially the EIRR in all the initial 12 towns. Adopting more optimistic assumptions of full capacity in terms of per capita water consumption levels upon system operation and the target served population would provide a much higher average EIRR. Also, the EIRR estimates did not include possible consumption of institutional and commercial/industrial users. On the average, it is estimated that this would be an additional 15 percent in direct -use benefits. Table 1 presents a summary of the EIRR estimates for each of the 12 towns under the above assumptions. From Table 1, a conservative scenario indicates that direct-use benefits, used as a proxy for revenues, may not be sufficient to reach a positive NPV. Thus, close monitoring is necessary especially while preparing the next batch of sub-projects. The aim is to ensure that these systems can be fully financed from the agreed levels of tariffs and that the level of services provided by the improved systems are both economically and financially viable. However, with the consideration of consumer surplus and cost savings, all 12 towns in the initial bE ch are economically viable. The 6 towns in the Isabela cluster were evaluated as a privately-managed amalgamated system; the rest of the towns were evaluated as individual publicly-managed systems. On the whole, the sensitivity analyses show that even with much more conservative assumptions such as lower consumption levels, lower served population and a higher -35- investment cost, the 12 sub-projects are economically viable when direct-use benefits, consumer surplus and cost-savings are considered. While there are variable results among the initial 12 towns, the innovations introduced by the project through rules and incentives in the provision of improved water services is worth testing. The APL mode under which the project would be funded provide sufficient safeguards and triggers to indicate the appropriateness of moving forward to the next APLs. Table I Summary of Economic Analysis - LGUUWSP Pas* case Economic Return 6 15% Discount Rate W/ Dired*Use Benefit W1 Dir. BeneHt & Cons. Tumius NPV EIRR BCR NPV EIRR BCR Municipality (P '000I (%. (P '0001 (%)0 Isabela Province Aurora (1,714) 12.18 1.00 (335) 14.49 1.12 Cabatuan (133) 14.86 1.14 5,088 20.09 1.38 Luna (1,542) 11.33 0.97 (378) 14.19 1.11 Mailig (1,364) 11.64 0.99 (1.748) 10.78 0.94 Quezon (2,042) 12.51 1.02 3,038 18.27 1.35 San Mateo 776 15.79 1.18 6,795 21.39 1.44 Laguna Province Magdalena (8,160) 7.44 0.80 78,359 55.79 4.49 Camarines Sur Province Camaroan (3,361) 8.70 0.81 17,342 34.95 2.89 Bukidnon Province Baungen (2,298) 11.36 1.01 6,159 21.06 1.53 Kalilangan (2,576) 11.93 1.02 8,820 21.48 1.59 Lantapan 4,600 18.56 1.28 25,138 25.60 1.88 Misamis Occidental Province Sapang Dalaga (1,163) 11.59 0.98 1,684 18.26 1.39 Average 11.38 21.26 LGUs are able to participate in this project if they are willing to borrow as opposed to receiving government grants. This has been done very little by LGUs in the past. It has only become a serious consideration for LGUs since the recent decentralization of task and revenues. Consequently, they have incentives to pay attention to costs and the means of repayment. Sir -e user fees are a means of repayment, they have an incentive to learn more about the willingness-to-pay of users. The users, in turn, have incentives to make sure that a proposed improvement has value to them equal to or higher than what they -36- are willing to pay. Sector technicians in turn need to learn how to operate in an environment of relatively hard budget constraints, bounded by the LGU's willingness to borrow and the users' willingness to pay. In this regard, one piece of developmental learning has already occurred as participating LGUs in this first phase have all opted for professional management by private sector operators, who are familiar with working in this kind of environment. There are, of course, risks in this demand-oriented approach, even though it should lead to substantial economic and service benefits. Learning is necessary for all parties and it is unrealistic to expect that it will occur at the same pace for everyone or with uniform depth everywhere. The phased approach to the project is desirable to mitigate the risks because it offers a means to capture on-going lessons and apply the lessons learned. In the end, collaborative assessment of benefits and costs by LGUs, city councils, and users will determine economically viable investments and improvements when given a voluntary opportunity to participate. A summary of net fiscal impact is shown in Table 2 below: Table 2 Sumnary of Net Fiscal impact (NFI) LGU4kban Waster Supply and Sanitation Project (LGUAlWSP) (P 'V0) Im_a Aurora Cabatuan Luna M S ateo _QunL Taxes inv-etment 5,842 502 740 343 337 848 524 O&M 11,875 421 1,280 417 407 1,309 621 Totl 17,717 923 2.020 760 744 2,157 1,145 TalRs investment 32,532 2,146 3,625 1,489 1,388 3,790 3,323 O&M 2,520 141 354 129 126 369 201 Total 35,052 2287 3,979 1,598 1,514 4.159 3,524 FOm premium investment (15,192) (1,001) (1,692) (895) (648) (1.768) (1,551) O&M (1,178) (66) (165) (80) (59) (172) (94) Total (16,368) (1.067) (1,857) (755) (707) (1.940) (1,645) NUOFiscalmacti 36.401 2.143 4.142 _ 1.603 1_ 1.551 4.376 3.024 Laauna Prov Camarines Su B MIs- .a... Items Ma n .Caramoan .. Baunon . MMAQ Kallianan 5aan ata Taxes investment 850 80 432 84 '03 499 O&M 1,436 429 1,155 2,746 1,307 347 Total 2,286 509 1,587 2,830 1,910 846 Tarffs investment 3,329 2,091 2,283 5,659 2,981 448 O&M 294 138 238 293 160 77 Total 3,623 2,229 2,521 5,952 3.141 525 Forex premium Investment (1,554) (976) (1,066) (2.641) (1,391) (209) O&M (137) (64) (111) (137) (75) (36) Total (1,691) (1,040) (1,177) (2.778) (1,466) (245) Net Fiscal I + .4 1.69, 2.931 6.004 3.585 1.126 -37- Main Assumptions: Economic Costs. Project investment and recurrent costs are based on 1997 prices. The financial price of the investment and operation and maintenance costs were converted to their economic prices using the following assumptions which are based or the NEDA-ICC project evaluation guidelines: - Tariff rate on imported inputs - 30%; - Tax on local inputs - 10%; * Premium on foreign exchange - 20%; and * Shadow rate for unskilled labor - 0.60. Cost of physical contingency was assumed to be 10 percent of basic construction cost and land, and the cost of construction supervision, at 4 percent of basic construction cost, land and physical contingency. For the operation and maintenance costs, it was assumed that 30 percent of the costs of energy, chemicals and maintenance wculd be imported inputs. The asset life for new/improved system was assumed to be 50 years for both civil works and equipment. Economic Benefits. Project economic benefits consist of (a) direct-use benefits, (b) consumer surplus, and (c) cost savings. For a privately-managed system, collection efficiency of 97 percent was assumed and for a publicly-managed system, 90 percent. The estimates did not include possible consumption of institutional and commercial/industrial users. On the average, it is estimated that this would be an additional 15 percent of direct-use benefits. In the estimation of consumer surplus and cost savings, for those consumers who go to nearby rivers and springs to do their laundry and other needs, the cost attributed to time spent was assumed to be 30 percent of the estimated per capita income foregone. This translates into the income of about 1.5 to 2 persons in a household, who are usually the economically active members of the household. Official data on average household size and minimum daily wage for each town were also used in the estimation of consumer surplus and cost savings. Discount Rate. The rate used in discounting flows to their present value is 15 percent. Sensitivity Analyses. Sensitivity of the net present value and economic internal rate of return were checked against the following scenarios: Scenario 1: Lower consumption levels a. For slow urbanizing towns, consumption levels were assumed to be as follows: 1999-2000 60 lpcd 2001-2003 80 lpcd 2004- 2010 100 lped -38- b. For fast urbanizing towns, consumption levels were assumed to be as follows: 1999-2000 80 lpcd 2001-2010 100 lpcd Scenario 2: Lower served population a. For relatively high results of willingness-to-connect survey (above 80% of target population), served population was assumed to be as follows as percentage of target: 1999-2000 60% 2001-2010 80% b. For relatively low results of willingness-to-connect survey (below 80% of target population), served population was assumed to be as follows as percentage of target: 1999-2000 40% 2001-2003 60% 2004-2010 80% Scenario 3: 20% in(rease in investment cost Scenario 4: Combination of Scenarios 1, 2 and 3 Cost-effectiveness indicators: The average.per capita investment cost was calculated for the 12 towns, about US$ 58.17. The highest per capita cost calculated was for Caramoan, Camarines Sur, about US$ 104.67 and the lowest calculated was for Lantapan, Bukidnon, about US$ 34.47. The rage of per capita costs calculated are comparable with other international projects for the same size of towns. IIf the difference between the present value of financial and economic flows is large and cannot be explained by taxes and subsidies, a brief explanation of the difference is warranted, e.g. "The difference between financial and economic costs arises from price controls on the inputs." 2These indicators should compare the project with a suitable comparator, e.g. unit project costs of alternative project designs or international standards. -39- Annex 5: Financial Summary LGU Urban Water and Sanitation Project Years Ending Affordability Analysis for Participating LGUs The financing rationale for the Water Supply Project suggests a two-phased development wherein, the LGUs carry the load of financing by assuming the project loans. The affordability analysis has verified whether the'LGUs have adequate internally available funds in the loan amortization period to fully repay the loans. Thereafter, wherever possible, the water systems are contracted out through affermagellease arrangements to prequalified PSP operators. In situations where PSP operators are available, the latter will assure the remittances of project revenues sufficient to reimburse the LGUs of their debt servicing needs arising from the project loans. This also includes the reimbursement of the LGUs' equity contributions. Recurrent costs will be the responsibility of the operators. The cost-sharing nature of the financing scheme required an analytical approach which could assess the borrowing capacity of the LGUs and the financial feasibility of the water supply systems. This is accomplished by applying an innovative methodology through the use of the LGU Long-term Financial Planning Model, developed under an earlier project - the Water Districts Development Project This methodology has involved a three-step process. First, a preliminary financial assessment was undertaken for each of the participating LGUs to determine their 5-year investment envelope (potential) for which a portion of which would be earmarked for water projects. Second, a total project budget ceiling was derived that would fit the borrowing capacity of the LOU. Finally, tariff levels were derived based on a uniform formula that ensures full recovery of capital and recurrent cost plus provision for a nominal return on the capital invested. Details of current financial operations and the overall condition of the 12 LGUs are available in project files. It suggests that there are potentials to leverage infrastructure investments, although the current financial performances leave room for considerable improvements. Based on these data, LGU projected performance was computed for each of the participating LGUs before the engineering feasibility studies. The projected performance took into account a number of important financial management parameters which clearly demonstrate the ability of each LGU to undertake the proposed water supply investments on financial grounds. These have formed the basis of estimating the budget envelopes available with each participating LGU. Discussions with Mayors, Municipal Councils and communities on affordability and tariffs were based on these estimates of affordability. Financing Plan for LGUs Participating in Phase I: -40- LGU-UWSP Project Financing Plan (1998 - 1999) in US$ milliors Aurora, Isabela 1998 1999 2000 2001 Total Financing Requirement Investment Program - 0.400 - - 0.400 Capitalized Interest - 0.029 0.062 0.071 0.162 Total - 0.429 0.062 0.071 0.562 Sources of Funds Development Bank of t e Phil. - 0.386 0.056 0.064 0.505 Irtemal Sources - 0.043 0.006 0.007 0.056 Total - 0.429 0.062 0.071 0.562 Cabatuan, Isabeia Financing Requiremeni Investment Program - 0.640 - - 0.640 Capitalized Interest - 0.046 0.099 0.114 . 0.259 Total - 0.686 0.099 0.114 0.899 Sources of Funds Development Bank of the Phil. - 0.618 0.089 0.102 0.809 Internal Sources - 0.069 0.010 0.011 0.090 Total - 0.686 0.099 0.114 0.899 Luna, Isabela Financing Requirement Investment Program - 0.273 - - 0.273 Capitalized Interest - 0.020 0.042 0.049 0.111 Total - 0.293 0.042 0.049 0.384 Sources of Funds Development Bank of the Phil. - 0.264 0.038 0.044 0.346 Internal Sources - 0.029 0.004 0.005 0.038 Total - 0.293 0.042 0.049 0.384 -41- Mallig, Isabela Financing Requirements Investment Program - 0.263 - - 0.263 Capitalized Interest - 0.019 0.041 0.047 0.106 Total - 0.282 0.041 0.047 0.369 Sources of Funds Development Bank of the Phil. - 0.253 0.037 0.042 0.332 Internal Sources - 0.028 0.004 0.005 0.037 Total - 0.282 0.041 0.047 0.369 Quezon, Isabela Financing Requirements Investment Program - 0.535 - - 0.535 Capitalized Interest - 0.039 0.083 0.095 0.217 Total - 0.574 0.083 0.095 0.752 Sources of Funds Development Bank of the Phil. - 0.516 0.075 0.086 0.677 Intemal Sources - 0.057 0.008 0.010 0.075 Total - 0.574 0.083 0.095 0.752 San Mateo, Isabela Financing Requirements Investment Program 0.694 - - 0.694 Capitalized Interest - 0.050 0.108 0.123 0.281 Total - 0.744 0.108 0.123 0.976 Sources of Funds Development Bank of the Phil. - 0.670 0.097 0.111 0.878 internal Sources - 0.074 0.011 0.012 0.098 Total - 0.744 0.108 0.123 0.976 -42- Magdalena, Laguna FRnancing Requirements Investment Program - 0.642 - - 0.642 Capitalized Interest - 0.038 0.081 0.091 0.210 Total - 0.680 0.081 0.091 0.852 Sources of Funds Development Bank of the Phil. - 0.510 0.061 0.068 0.639 Internal Sources - 0.170 0.020 0.023 0.213 Total - 0.680 0.081 0.091 0.852 Caramoan, Camarnes Sur Financing Requirement Investment Program - 0.370 - - 0.370 Capitalized Interest - 0.027 0.057 0.066 0.150 Total - 0.397 0.057 0.066 0.520 Sources of Funds Development Bank of the Phil. - 0.357 0.052 0.059 0.468 Internal Sources - 0.040 0.006 0.007 0.052 Total - 0.397 0.057 0.066 0.520 Baungon, Bukidnon Financing Requirement Investment Program - 0.390 - - 0.390 Capitalized Interest - 0.028 0.061 0.069 0.158 Total - 0.419 0.061 0.069 0.549 Sources of Funds Development Bank of the Phil. - 0.377 0.055 0.062 0.494 Internal Sources - 0.042 0.006 0.007 0.055 Total - 0.419 0.061 0.069 0.549 -43- Kalilanga, Buiddnon Financing Requimrements Irvestment Program - 0.526 - - 0.526 Capitalized Interest - 0.038 0.082 0.094 0.214 Total - 0.564 0.082 0.094 0.739 Sources of Funds Dwecpment Bank of the Phil. - 0.508 0.074 0.084 0.665 Intenal Sources - 0.056 0.008 0.009 0.074 Total - 0.564 0.082 0.094 0.739 Lantapan, Bukidnon Financing Requirements investment Program - 0.792 - . - 0.792 Capitalized Interest - 0.057 0.117 0.123 0.298 Total - 0.849 0.117 0.123 1.089 Sources of Funds Develpment Bank of the Phil. - 0.764 0.106 0.111 0.980 Intemal Sources - 0.085 0.012 0.012 0.109 Total - 0.849 0.117 0.123 1.089 Sapang Dalaga, Misamis Occ. Financing Requirements Investment Program - 0.213 - - 0.213 C4pitalized Interest - 0.015 0.033 0.038 0.086 Total - 0.228 0.033 0.038 0.299 Sources of Funds Development Bank of the Phil. - 0.205 0.030 0.034 0.269 Internal Sources - 0.023 0.003 0.004 0.030 Total - 0.228 0.033 0.038 0.299 -44- Total Financing Requirements Investment Program - 5.737 - - 5.737 72% Capitalized Interest - 0.407 0.867 0.979 2.252 28% Total - 6.144 0.867 0.979 7.990 100% Sources of Funds Development Bank of the Phil. - 5.428 0.768 0.867 7.063 88% Internal Sources - 0.716 0.099 0.112 0.927 12% Total - 6.144 0.867 0.979 7.990 100% -45- Annex 6: Procurement and Disbursement Arrangements LGU Urban Water and Sanitation Project Procurement Procurement arrangements described below is for the Bank-funded parts of the project. Separate arrangements for cofinanced parts are being developed by the Government of Philippines and the Development Bank of the Philippines with the Nordic Development Fund and the European Union for the Institutional Capacity Building Program and the Water Utilities Private Sector Participation Facility respectively. Procurement methods (Table A) Procurement of works and consultant services funded wholly or partly by Bank Loan will be carried out in accordance with Bank procurement guidelines ("Guidelines for Procurement under IBRD Loans and IDA Credits" of January 1995 revised in January and August 1996 and September 1997 and the "Guidelines for Selection and Employment of Consultants by World Bank Borrowers" of January 1997 revised in September 1997). Project Management Office of the Development Bank of the Philippines (DBP-PMO) assisted by consultants will supervise procurements of works and consultant services for each LGU's sub-project. The Technical Working Committee (DBP, DILG and DOF) will implement or supervise p rocurements of private sector participation (PSP) operators to operate and maintain constructed water supply systems under an affermage contract arrangement. Project cost by procurement arrangement is presented in Table A. Civil works would include construction and rehabilitation of water supply systems, sanitation and drainage infrastructure involving sub-project of LGUs. These are small infrastructure contracts to be constructed in participating LGUs with a wide geographically spread through out the Philippine islands. While foreign bidders would be allowed to biI, if interested, due to size and location, it is expected that these contracts would not attract them. Works for the construction of the water supply systems, which will include providing and installing equipment, one for each city, will be procured as follows: a) individual civil works contracts estimated to exceed US $ 50,000 equivalent, up to an aggregate amount not exceeding US $22.2 million equivalent will be procured under National Competitive Bidding (NCB) procedures acceptable to the Bank. A procurement side letter will be issued by the Government detailing the procedures under local rules that are not acceptable to the Bank, and which will not be followed under this Loan. The project Operational Manual includes sample bidding documents and procedures (standard NCB procedures customized for the project in advertising, preparing tender documents, opening bids, evaluating bids and preparing evaluation report, and awarding contract) in compliance with Bank procurement guidelines and specifically designed for this type of infrastructure contract. DBP will include these procedures and the obligation of using the sample bidding documents as a conditionality in the Subloan Agreements to be signed with the LGUs; and b) individual civil works contract estimated to cost less than US $50,000 equivalent, up to an aggregate amount of US $2.1 million equivalent will be procured through simplified procurement procedures similar to national shopping. The procedure will apply government procedures by -46- comparing at least three price quotations from qualified contractors. Participation of non-governmental organizations (NGOs) would be acceptable, if they are qualified. The project operational manual will include sample shopping documents in compliance with Bank procurement guidelines and specifically designed for this type of procurement. Consultant services, estimated at US$1.38 million will be needed to support project implementation. Of this, US$1.0 million will be financed the construction supervision consultant who will assist the PMO in project implementation and the remaining, US$0.40 million will be needed for individual specialists to support the LGUs staff in implementing the Hygiene Education for Sanitation and Drainage components. The terms of reference for evaluating proposals will be developed by DBP, with technical assistance from the Bank. Procurement Management: All civil works procurement for the implementation of subprojects, financed by the loan/equity mix, will be undertaken by participating LGUs and supervised by DBP-PMO and DILG-PMO. Each LGU shall establish a bidding committee with, at least the third highest ranking official of the municipality as a Chairman. The procurement lead time as specified in Administrative Order No. 129 shall be observed. However, as most of the participating LGUs lacks the capacity to handle procurement under internationally funded project, DBP-PMO will provide technical assistance through consultants to guide them throughout the procurement process until contract award. The project will involve the selection of private sector participating (PSP) operators to supervise, operate, and maintain constructed water supply systems. This selection will be handled by a selection committee established by the concerned LGU/s under procedures agreed with the borrower. Preparation of the tender document will be the responsibility of the DILG. The terms of reference for evaluating proposals are being developed with technical assistance from the Bank as a part of project preparation, while future technical assistance will be financed by the grant from the Euro-ean Union. This process is being overseen by the Project's Technical Working Committee consisting of DOF, DBP and DILG. Prior review thresholds (Table B) All civil works contracts procured according to NCB with a value of at least US$ 300,000 equivalent each and the first five (5) civil works contracts per year regardless of amount, up to an aggregate of $ 21 million equivalent, will be subject to the Bank's prior review. Prior review of civil works include bidding documents, evaluation reports and draft contracts accounting to about 73% of the total amount of works contracts. Prior Bank review would also be required for contracts of individual consultants estimated to cost at least US$ 50,000 equivalent and contracts of firms estimated to cost at least US$ 100,000 and estimated to total US$ 1.20 million. Prior review procedures will apply regardless of the value of consultants' contracts with respect to draft letters of invitation and contracts, terms of reference, sole source selection, qualification criteria, evaluation reports, award proposals and final contracts when substantial differences to original draft are made. For other contracts of works and goods not subjected to prior review, the Bank will review them on a random sample basis, one out of five contracts, after they have been awarded. Procurement Implementation Schedule: Phase 1 of the project will involve civil works for twelve LGUs with approved project designs through the development and consolidation of the project implementation plan (Barangay Action Plans). For these towns, feasibility studies and detailed engineering designs were completed by negotiations. Implementation of procurement activities will commence upon negotiations according to Bank's procurement guidelines (January 1995 revised September 1997). Phase II of the project is expected to involve an additional 27 towns, for which construction would start by 2000. To -47- expedite project implementation activities, DBP will create the project management office (DBP-PMO) by loan negotiations. The DBP-PMO will be guided by the Project Implementation Plan, which already has guidelines on how technical, financial, economic and institutional appraisal of subprojects will be carried out. This office should be adequately staffed by the end of bidding for civil works of Phase 1. The selection of consultants for construction supervision could start as a parallel activity with bidding for civil works. The General Procurement Notice has been published on Development Business of July 16, 1998. Disbursement Allocation of loan proceeds (Table C) Disbursement of the proceeds of the loan would be made against expenditure categories as shown in Table C. Use of statements of expenses (SOEs): For Civil Works and goods contracts below US$300,000 equivalent, consulting firms contracts below US$100,000 equivalent, individual consultant contracts below US$50,000 equivalent, sub-loans and grants and All administrative, operational and training expenditures, withdrawal applications will be supported by Statement of Expenditures (SOEs). For civil works and goods contracts over US$300,000 equivalent, consulting firms contracts over US$100,000 equivalent and individual contracts over US$50,000 equivalent, withdrawal applications would be supported by full documentation and signed contracts. Special account: To facilitate loan disbursement, the Development Bank of the Philippines will open and maintain a separate special deposit account, in a commercial bank specifically authorized for this purpose by the Bangko Sentral ng Pilipinas, on terms and conditions satisfactory to the Bank, including appropriate protection against set-off, seizure and attachment. The Special Account, which would cover the Bank's share of eligible expenditures under all disbursement categories, would have an authorized allocation of US$2.00 million with an initial withdrawal of US$1.00 million and the balance to be withdrawn when the amounts disbursed and committed total US$8.00 million. Applications to replenish the Special Account, supported by appropriate documentation, would be submitted regularly (preferably monthly, but not less than quarterly) or when the amounts withdrawn equal 50 per cent of the initial deposit. The Special Account shall be audited annually by the auditors acceptable to the Bank. ACCOUNTING, FINANCIAL REPORTING AND AUDITING: Project expenditures will be separately recorded and reported by each implementing agency under the Financial Information System for Foreign Assisted Projects (FISFAP) developed by the Commission on Audit (COA) funded by the Bank's Institutional Development Fund (DF). By next year, the objective is to use it in all new projects. Its features are: (a) application of commercial methods of accounting; (b) use of a perpetual inventory method; (c) an improved chart of account and coding system; (d) a clear recording and reporting of accounting data from LGUs to the lead implementing agencies, and (e) generation of accurate and timely financial reports that are needed by agency management, oversight agencies and funding institutions. The system will run on a financial accounting software which has the capability of customization or programming modification to suit the needs of the project. Project disbursements to LGUs are routed through subsidiary loan agreements signed between the Development Bank of the Philippines and LGOUs. DBP has established policies and procedures by which these subsidiary loans are monitored. DBP will produce separate financial reports for each project, and accounting for subsidiary loan disbursements. The accounting, disbursement and record keeping functions -48- are segregated and independent of each other. DBP relies on statement of expenditures by LGUs to release funds. DBP does not have sufficient staff to review financial management arrangements in each LGU, but relies on COA verification and approval of SOEs. In order to ensure sound financial management of subprojects, the PMO at DBP will be staffed with qualified and experienced financial analysts and financial management specialists who will be responsible for financial appraisal of subprojects, based on the long-term financial planning model developed by the project team, before feasibility studies commence. This staff will prepare action plans to implement FISFAP system. The staff will also review periodically the financial management arrangements of sub-projects and the effectiveness of internal control procedures. All LGUs are required to prepare standard financial management reports quarterly and submit to the DBP-PMO. These reports will be in a format acceptable to the Bank, and will be used for monitoring of project progress by the DBP. DBP-PMO will be responsible for consolidation of the LGU financial management reports and the consolidated reports will be submitted to the Bank quarterly. In addition, the DBP-PMO will be responsible for preparing annual consolidated project financial statements based on the financial statements prepared by the LGUs. DBP-PMO will require that LGU financial statements are audited by COA and render an opinion thereon. DBP-PMO will be responsible for submission of the consolidated project financial statements for the audit by COA. COA will perform an audit of the project financial statements and render an opinion. A separate audit of the operations of the Special Account and the withdrawal of expenditures through statement of expenditure will also be carried out by COA who will provide a separate opinion inereon. -49- Table A: Project Costs by Procurement Arrangements (US$ million equivalent) Procurement Method Expenditure Category ICB NCB Other N.B.F. Total Cost 1. Works 0.0 22.2 2.1 0.0 24.3 (0.0) (19.9) (1.8) (0.0) (21.7) 2. Goods 0.0 0.0 0.0 0.0 0.0 (0.0) (0.0) (0.0) (0.0) (0.0) 3. Services 0.0 0.0 1.4 6.0 7.4 (0.0) (0.0) (1.4) (0.0) (1.4) 4. Miscellaneous 0.0 0.0 0.0 0.0 0.0 (0.0) (0.0) (0.0) (0.0) (0.0) 5. Front-end fee 0.0 0.0 0.2 0.0 0.2 (0.0) (0.0) (0.2) (0.0) (0.2) Total 0.0 22.2 3.7 6.0 31.9 (0.0) (19.9) (3.4) (0.0) (23.3) Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff of the project management office, training, technical assistance services, and incremental operating costs related to (i) managing the project, and (ii) re-lending project funds to local government units. - 50 - Table Al: Consultant Selection Arrangements (optional) (US$ million equivalent) Consultant Selection Method Services Expenditure QCBS QBS SFB LCS Ca Other N.B.F. Total Cost Category I . A. Firms 0.0 1.0 0.0 0.0 0.0 0.0 4.5 5.5 (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) B. Individuals 0.0 0.0 0.0 0.0 0.0 0.4 1.5 1.9 (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) Total 0.0 1.0 0.0 0.0 0.0 0.4 6.0 7.4 1 (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) 1\ Including contingencies Note: QCBS = Quality- and Cost-Based Selection QBS = Quality-based Selection SFB = Selection under a Fixed Budget LCS = Least-Cost Selection CQ = Selection Based on Consultants' Qualifications Other = Selection of individual consultants (per Section V of Consultants Guideleines), Commercial Practices, etc. N.B.F. = Not Bank-financed Figures in parenthesis are the amounts to be financed by the Bank loan. - 51 - Table B: Thresholds for Procurement Methods and Prior Review' Contract Value Contracts Subject to Threshold Procurement Prior Review Expenditm Category (US$ thousands) Method (US$ millions) 1. Works Less than $50,000 Simplified procedure First five contracts similar to national each year $1 million shopping $50,000 and above NCB $300,000 $20 million 2. Goods 3. Services Firms - regardless of QBS More than $100,000 $1 value million - Individual - Less than Individual Selection More than $50,000 $1 $100,000 million 4. Miscellaneous 1 _ _ _ _ _ Total value of contracts subject to prior review: $23.0 million Overall Procurement Risk Assessment Frequency of procurement supervision missions proposed: One every months (includes special procurement supervision for post-review/audits) Thresholds generally differ by country and project. Consult OD 11.04 "Review of Procurement Documentation" and contact the Regional Procurement Adviser for guidance. - 52 - Table C: Allocation of Loan Proceeds Expenditure Category Amount In US$million Financing Percentage Works 21.7 89 Consultancy 1.4 100 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0__ _ _ _ _ _ _ _ _ _ _ _ _ Total Project Costs 23.1 Front-end fee 0.2 100 Total 23.1 - 53 - Annex 7: Project Processing Schedule LGU Urban Water and Sanitation Project Project Schedule Planned Actual Time taken to prepare the project (months) 26 28 First Bank mission (identification) 12/02/95 12/04/95 Appraisal mission departure 02/01/98 05/10/98 Negotiations 05/01/98 10/16/98 Planned Date of Effectiveness 10/10/98 05/01/99 Prepared by: N. Vijay Jagannathan Preparation assistance: Martha Ochieng Bank staff who worked on the project included: Name Speciality Harvey Garn Economist Luiz Claudio Tavares Engineer Aldo Baietti Financial Analyst Heinrich Unger Engineer-Environmental Specialist Cecilia Vales Procurement Specialist Karen Jacob Community Participation Specialist Mariles Navarro Economist George Calderon Financial Analyst Albert Wright Engineer Hoi-Chan Nguyen Legal Counsel - 54 - Annex 8: Documents in the Project File* LGU Urban Water and Sanitation Project A. Project Implementation Plan Including Operational Guidelines for: I.Preparing technical design 2. Financial Projections of LGU Borrowing Capacity using Long-term Financial Planning Model 3. Economic Appraisal of Subprojects 4. Resettlement and Compensation Guidelines 5. Environmental Assessment Guidelines B. Bank Staff Assessments 1. Financial Projections for all participating LGUs 2. EDI-sponsored National Seminar on LGU Water Supply Proceedings (June 1997) 3. Back-to-Office Repoirts in October 1996, June 1997, October 1997, March 1998, September 1998 C. Other 1. CarlBro Kampsax Kruger: LGUUWS Project Feasibility Reports (3 Volumes) 1996 2. Department of Interior and Local Government Implementing Rules and regulations for NEDA Board resolution No. 4 3. NEDA Board Resolutions Nos. 4 and 5 of 1994 series, NEDA Board Resolution No. 6 of 1996 series *Including electronic files - 55 - Annex 9 MOP Schedule D Generaed: 10/30/98 Status of Bank Group Operations in Philippines Operations Portfolio Difference Between expected FicalOriinal mount in US Millions and actual Project ID Year Borrower Purpose IBRD IDA Cancellations Undisbursed Origz Frm Rev'd Number of Closed Projects: 126 Active Pro ects PH-PE-4569 n 1998 REP OF PHILS EARLY CHILD DEV. 19.00 0.00 0.00 19.00 0.00 0.00 PH-PE-4576 1998 GOP WATER DISTRICT DEV. 56.80 0.00 0.00 56.80 3.60 0.00 PH-PE-4595 1998 GOP COMMUNITY BASED RESO 50.00 0.00 0.00 50.00 2.77 0.00 PH-PE-51386 1998 GOP SZOPAD SOCIAL FUND 10.00 0.00 0.00 9.75 1.50 0.00 PH-PE-37079 1997 GOP AGRARIAN REFORM COMM 50.00 0.00 0.00 46.12 3.12 0.00 PH-PE-40981 1997 SUBIC BAY METRO. AUTH. SECOND SUBIC BAY 60.00 0.00 0.00 58.92 37.92 0.00 PH-PE-4602 1997 REP OF PHILS. THIRD ELEM EDUCATION 113.40 0.00 0.00 110.40 35.56 0.00 PH-PE-4613 1997 GOP WATER RESOURCES DEVE 56.00 0.00 0.00 56.01 19.52 0.00 PH-PE-4571 1996 GOP TRANS GRID REINFORCE 250.00 0.00 0.00 153.24 -43.91 0.00 PH-PE-4611 1996 GOP MNLA 2ND SEWERAGE PR 57.00 0.00 9.00 48.00 31.99 1.00 PH-PE-4614 1996 LBP RURAL FINANCE II 150.00 0.00 0.00 34.56 -27.42 0.00 PH-PE-4567 1995 GOVT OF THE PHILS WOMENS HEALTH & SAFE 16.00 0.00 0.00 15.77 3.72 0.00 PH-PE-4594 1994 NPC AND PHOC LEYTE CEBU GEOTHERMA 211.00 0.00 0.00 31.86 31.85 PH-PE-4607 1994 GOV OF PHILIPPINES LEYTE LUZON GEOTHERM 0.00 PH-PE-4609 1994 SBMA SUBIC BAY FREEPORT 40.00 0.00 0.00 3.18 1.99 0.00 PH-PE-4568 1993 GOP URB HEALTH A NUTRITI 0.00 70.00 0.00 51.36 31.59 0.00 PH-PE-4589 1993 GOP IRRIG OPER SUPP II 51.30 0.00 0.00 20.08 17.30 0.00 PH-PE-4599 1993 GOVT. OF PHILIPPINES TAX COMPUTERIZATION 63.00 0.00 0.00 23.96 24.01 0.00 PH-PE-4538 1992 GOP SECOND VOCATIONAL TR 0.00 36.00 0.00 10.16 9.06 0.00 PH-PE-4592 1992 GOP MUNICIPAL DEV III 68.00 0.00 0.00 30.83 26.86 7.84 PH-PE-4597 1992 GOP HIGHWAY MANAGEMENT P 150.00 0.00 0.00 47.36 43.31 -.77 PH-PE-4558 1991 GOVT. OF PHILS. ENV. A NAT. RES. MGT 158.00 66.00 0.00 17.00 13.71 0.00 PH-PE-4572 1991 ROP COMMUNAL IRRIG. II 46.20 0.00 3.34 14.77 18.13 .93 PH-PE-4552 1990 R.P. COCONUT FARMS DEVT. 121.80 0.00 .85 35.38 36.24 19.84 Total 2,028.50 172.00 13.19 1,032.48 401.53 284 Active Projects Closed Projects Total Total Disbursed (IBRD and IDA): 1,160.22 6,824.59 7,984.1d of which has been repaid: 42.17 3,652.49 3,694.65 Total now held by IBRC and IDA: 2,145.13 3,213.37 5,358.50 5mount sold 60.00 31.35 31.35 Of which repaid 00.00 31.35 31.35 Total Undisbursed 01032.48 41.23 1,073.71 a. Intended disbursements to date minus actual disbursements to date as projected at appraisal. Note: Disbursement data is updated at the end of the first week of the month. -56- Annex 9 MOP Schedule D Philippines STATEMENT OF IFC's Committed and Disbursed Portfolio As of 30-Sep-98 (In US Dollar Millions) Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1967/88 MERALCO 7.32 0.00 0.00 0.00 7.32 0.00 0.00 0.00 1970/86188/89 PLDT 17.69 0.00 0.00 12.39 17.69 0.00 0.00 12.39 1974/79 Maria Cristina 0.00 .44 0.00 0.00 0.00 .44 0.00 0.00 1979/90 General Milling 0.00 1.73 0.00 0.00 0.00 1.73 0.00 0.00 1980/82/89/90/94/95 AACT 21.90 2.73 0.00 0.00 18.40 2.73 0.00 0.00 1989 H&QPV-I 0.00 .75 0.00 0.00 0.00 .75 0.00 0.00 1990 Avantex Mill 5.63 1.98 0.00 0.00 * 5.63 1.98 0.00 0.00 1992 Bacnotan 4.20 5.63 0.00 3.00 4.20 5.63 0.00 3.00 1992 Pilipinas Shell 0.00 0.00 11.63 0.00 0.00 0.00 11.63 0.00 1993 H&QPV-I 0.00 2.50 0.00 0.00 0.00 2.40 0.00 0.00 1993 Pagbilao 51.00 10.00 0.00 8.60 51.00 10.00 0.00 8.60 1993/94 Mindanao Power 0.00 4.50 0.00 0.00 0.00 4.26 0.00 0.00 1994 Walden Mgmt 0.00 .05 0.00 0.00 0.00 .05 0.00 0.00 1994 Walden Ventures 0.00 3.75 0.00 0.00 0.00 1.88 0.00 0.00 1995 Sual Power 30.00 0.00 0.00 196.00 17.60 0.00 0.00 131.80 1996 All Asia Growth 0.00 4.00 0.00 0.00 0.00 4.00 0.00 0.00 1996 All Asia Manager 0.00 .04 0.00 0.00 0.00 .04 .00 0.00 1996 All Asia Venture 0.00 .01 0.00 0.00 0.00 .01 0.00 0.00 1997/98 Far East Bank 25.00 15.00 0.00 50.00 25.00 10.00 0.00 50.00 Total Portfolio: 162.74 53.11 11.63 269.99 146.84 45.90 1.63 205.79 Approvals Pending Commitment Loan Equity Quasi Partic :997 BATAAN P/E 30.00 0.00 10.00 163.00 998 DRYSDALE 15.00 0.00 0.00 10.00 998 H&Q PVIII 0.00 7.50 0.00 0.00 997 MAGSAYSAY LINES 8.00 3.00 0.00 26.50 967 MANILA ELECTRIC 0.00 0.00 0.00 .36 998 PRYCE GASES 10.00 0.00 3.00 5.00 997 PT&T 30.00 5.00 0.00 30.00 995 SUAL THERMAL 0.00 17.50 0.00 0.00 PWR 998 2/2/98 45.00 0.00 0.00 15.00 Total Pending Commitment: 138.00 33.00 13.00 249.86 -57- Annex 10 Philippines at a glance .nsg East Lower- POVERTY and SOCIAL Asia & middle- Philippines Pacific income Development diamond* 1997 Population, mid-year (millions) 73.4 1,753 2,285 Life expectancy GNP per capita (Atlas method, USS) 1.220 970 1,230 GNP (Atfas method, US billions) 89.6 1,707 2,818 Average annual growth, 1991-97 Population (%) 2.3 1.3 1.2 Labor force (%) 2.7 1.4 1.3 GNP Gross per Iprimary Most recent estimate (latest year available, 1991-97) capita enrollment Poverty (% of population below national poverty line) 54 Urban population (% of total population) 56 32 42 Life expectancy at birth (years) 66 69 69 y Infant mortality (per 1,000 ive births) 36 38 36 Child malnutrition (% of children under 5) 30 16 .. Access to safe water Access to safe water (% of population) 85 84 84 Illiteracy (% ofpopulation age 15+) 5 17 19 Gross primary enrollment (% ofschool-age population) 116 115 111 Philippines Male . 118 116 - - - Lower-middle-income group Female .. 116 113 1 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1976 1986 1996 1997 Economic ratios* GDP (US$ billions) 17.2 29.8 82.8 82.2 Gross domestic investmentlGDP 32.9 16.0 24.0 24.8 Trade Exports of goods and services/GDP 19.3 26.3 40.5 49.0 Gross domestic savings/GDP 26.9 19.9 15.2 14.5 Gross national savings/GDP 27.7 19.3 19.3 18.8 Current account balance/GDP -6.4 3.2 -4.8 -5.2 Domestic Interest payments/GDP 1.0 3.8 2.1 2.3 Investment Total debt/GDP 35.1 94.5 49.7 55.2 Savings Total debt service/exports 16.9 33.7 14.4 Present value of debt/GDP .. .. 46.6 43.9 Present value of debtlexports .. .. 96.3 73.5 Indebtedness 1976-86 1987-97 1996 1997 1998-02 (average annual growth) GDP 1.8 3.2 5.7 5.3 .. - Philippines GNP per capita -0.8 1.4 4.5 3.3 .. - - - Lower-middle-income group Exports of goods and services 6.0 9.5 15.4 17.5 _. STRUCTURE of the ECONOMY 1976 1986 1996 1997 Growth rates of output and Investment(%} (% of GDP) 20 Agriculture 29.3 23.9 20.6 18.7 20 Industry 35.7 34.6 32.1 32.2 0 Manufacturing 25.4 24.6 22.8 22.3 -l 92 93 94 es as 97 Services 35.1 41.5 47.3 49.2 T -20 Private consumption 62.3 72.1 72.8 72.5 -3o. Generalgovemmentconsumption 10.8 8.0 11.9 13.0 - GDI - GDP Imports of goods and services 25.2 22.4 49.3 59.4 (average annual growth) 1976-86 1987-97 1996 1997 Growth rates of exports an( ports (%) Agriculture 1.4 1.8 3.0 3.7 25 Industry 0.7 3.1 6.3 6.0 20 Manufacturing 0.5 3.0 5.6 4.2 Is Services 3.2 3.9 6.5 5.4 lo Private consumption 2.4 3.7 5.3 3.7 General govemment consumption -0.3 3.9 5.2 0.6 A Grossdomesticinvestment -3.2 6.3 15.6 9.2 . 92 93 94 9s as 97 Imports of goods and services 2.1 11.3 16.7 14.4 - Exports ---Imports Gross national product 1.5 3.8 6.9 5.5 Note: 1997 data are preliminary estimates. The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete. 58 Philippines PRICES and GOVERNMENT FINANCE 1976 1986 1996 1997 Inflation (%) (% change) 2o Consumer prices 9.2 0.8 8.4 5.1 1s Implicit GDP deflator 8.3 3.0 7.8 6.0 lo Government finance s (% of GDP, includes current grants) 0 , , g Current revenue .. 13.0 18.9 .. 02 03 04 5 go o7 Current budget balance .. 1.4 - GDP dofator a-CPI Overall surplus/deficit .. -5.0 0.3 .. TRADE (US$ millions) 1976 1986 1996 1997 Export and Import levels (US$ millions) Total exports (fob) .. 4,842 20,543 25,228 40.O Coconut oil 333 571 673 35.000 Sugar .. 103 136 83 30000 Manufactures .. 2,672 17,106 21,488 25.00 Total imports (cif) .. 5,044 31,885 36,355 20.OD Food .. 193 1,578 1,435 6.0 AU Fuel and energy 869 3,008 3,074 1 Capital goods .. 839 10,472 14,369 W9 91 92 9 4 9 6 9 Export price index (1995=100) .. 76 100 .5 Import price index (1995=100) .. 61 101 .. OExports 0 Imports Terms of trade (1995=100) .. 124 99 .. BALANCE of PAYMENTS (US$ millions) 1976 1986 1996 1997 Current account balance to GDP ratio (%) Exports of goods and services 3,262 7,702 27,627 34,359 & - I - - Imports of goods and services 4,381 5,868 41,371 50,477 03 94 95 00 07 Resource balance -1,119 1,834 -13.744 -16.118 Net income -253 -1,321 9.202 10,735 Net current transfers 268 441 589 - 1,080 .3 Current account balance -1,105 954 -3,953 -4,303 ' Financing items (net) 1.051 184 8,060 7,666 - Changes in net reserves 54 -1,138 -4.107 -3,363 .6 Memo: Reserves including gold (US$ millions) .. .. 11,745 8,768 Conversion rate (DEC, locaVjUS$) 7.4 20.4 26.2 29.5 EXTERNAL DEBT and RESOURCE FLOWS Composition of total debt 1976 1986 1996 1997 1996 (US$ millions) (US$ millions) A: 4,666 Total debt outstanding and disbursed 6,039 28,204 41,214 45,433 G: 7.969 B: 193 IBRD 316 3,017 4,666 4,194 C:405 IDA 27 92 193 195 Total debt service 571 2,961 5,778 .. D:3,079 IBRD 35 406 766 636 IDA 0 1 3 3 Composition of net resource flows Official grants 61 401 246 Official creditors 212 198 -310 .. E: 12.085 Private creditors 883 294 1,859 F: 12.817 Foreign direct investment 132 127 1,408 Portfolio equity 0 0 1,333 .. World Bank program Commitments 226 151 528 60 A - IBRD E - Bilateral Disbursements 102 197 457 305 B - IDA D - Other multilateral F - Private Principal repayments 14 170 426 336 C - IMF G - Short-term Net flows 88 27 31 -31 interest payments 20 238 343 303 Net transfers 68 -210 -312 -335 Development Economics 9/15/98 59 MAP SECTION 츤
Группа Всемирного банка · Project Appraisal Document
Philippines - Local Government Units (LGU) Urban Water and Sanitation Project
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