Philippines - Water Districts Development Project

Report No. PID4903 Project Name Philippines-Water Districts Development... Project Region East Asia and Pacific Region Sector Water Sector Project ID PHPE4576 Borrower Land Bank of the Philippines for the SSD Loan and MWSS for the PPA Loan Implementing Agency For SSD Loan: Ms. Cecille Borromeo, Vice President, Land Bank of Philippines, Building No. 2. Senator Gil Puyat Avenue, Makati City Fax: 632-817-4619 E-Mail: Cborromeo@mail.landbank.com For PPA Loan: Mr. Ed. Santos, MWSS Regulatory Office, MWSS Building, Katipunan Road, Balara, Diliman, Quezon City Fax: 632-921-2887 E-Mail: mwssrvea@philonline.net Date Initial PID Updated May 28, 1999 Approval of Project Restructuring May 14, 1999 1. Country and Sector Background Significant policy changes have occurred in the Philippine Water Sector in the last few years. In 1994, the highest policy making body in the country, the NEDA Board, chaired by the President of Philippines, passed Resolutions Nos. 4 and 5, which laid out the national policies toward water supply and sanitation provisioning in the country. Following this, in December 1994 the President convened a Water Summit in Manila in which all leading stakeholders participated and endorsed the broad policy recommendations of the NEDA Board as a means of tackling the problem of rapidly deteriorating levels of service in urban centers of the country. In June 1995, a National Water Crisis Act (RA 8041) was enacted. Under this legislation, the Executive Branch was vested with special powers in order to reorganize sectoral agencies, induce greater private sector participation and improve the overall institutional environment. The Joint Executive-Legislative Water Crisis Commission established under the above Act recommended a fairly comprehensive set of policy options, strategies and approaches aimed at managing water resources in a sustainable manner. Since the new administration has assumed office the policy thrusts in the water sector have been reaffirmed, with a continued focus on enhancing private sector participation and a greater focus on extending water and sanitation services to the poor. These national sector policy changes have led to significant organizational changes within the water supply and sanitation sector. In the Metro Manila area, the Manila Waterworks and Sewerage System (MWSS) was privatized in  August 1997 through the award of two Concession contracts. In the Water Districts serving secondary cities and towns, considerable interest is being shown by investors in supporting different forms of private sector participation, ranging from Build Operate and Transfer (BOT) to Management and Concession Contracts. On the wastewater side, following the decentralization of investment decision-making to Local Government Units (LGUs) after the passage of the Local Government Code, City Councils in some large secondary cities have signaled their willingness to invest in basic sanitation infrastructure, in order to improve the environmental and health conditions of their communities. The Water Districts Development Project (WDDP) and a companion LGU Urban Water and Sanitation Project (LGUUWSP, under implementation), finances investments aimed at supporting the National Government's efforts at improving sectoral capacity to deliver basic water supply and sanitation services to consumers. The WDDP focus is two-fold. First, to test out a public performance audit system in the Metropolitan Waterworks and Sewerage System (MWSS). Second, to finance investment programs in sewerage, on-site sanitation, drainage development and urban environmental improvements in low income communities based on LGU and community demand. 2. Objectives The specific project objectives are: (i) To assist the Government of the Philippines in developing transparent regulatory mechanisms in order to facilitate private sector participation in water utilities. (ii) To help Local Government Units (LGUs) and water districts of participating cities plan and implement sewerage and sanitation investments based on their residents' wishes and willingness to pay. Thus, the project will deliver sustainable water and sanitation services through two broad types of interventions. For water supply, technical assistance will assist MWSS pilot a public performance audit system (the PPA loan). For sewerage, sanitation and drainage and poverty-targeted interventions, an investment program will be developed collaboratively with households, civil society and city councils (the SSD loan). This will enable the technical staff to respond to community needs, and thus ensure sustainability of investments. The SSD loan was approved by the Board in September 1997 to finance sewerage, sanitation and drainage investments in the cities of Davao, Cagayan de Oro, Cotabato City and Calamba. However, following the financial problems experienced during the Asian Crisis the four LGUs did not agree to participate in the project. On the request of the borrower, the Land Bank of the Philippines (LBP), the SSD loan has been restructured in May 1999 into a line of credit for sewerage, sanitation and drainage investments on the basis of demand from any LGU willing to borrow on the project lending terms. 3. Benefits The PPA component is piloting a new approach to furnishing consumers with transparent information on service quality, reliability and satisfaction. The experience gathered from this program could fundamentally alter the way service providers and consumers interact with each other. The PPA Loan is a piloting exercise, but has the potential of sparking private sector interest to enter into long-term contracts with Philippine water utilities. In turn, - 2-  these contracts could provide much needed additional investments, management expertise and client-oriented services through which service delivery and coverage would improve. The SSD loan has both policy and project related benefits. The policy-related benefit of the restructured SSD Loan is that it will enable the Government of the Philippines to prototype technical, financial and institutional procedures through which the sanitation policy framework gets translated into investment programs in the secondary cities and towns. The project-related benefits are improved sanitation services on a sustainable basis in participating cities. The expectation is that when residents perceive the benefits of improved sanitation, the demand for follow-up loans in other parts of the city would increase. Investments in trunk infrastructure (i.e. trunk sewerage and primary drainage) proposed under the SSD loan, will benefit about 300,000 persons. The sewerage component will serve mainly the initial service area of each city, which involves the relatively large consumers of piped water supply (office buildings, hotels, etc.). While this number of beneficiaries is relatively limited, investments are costly and progress will have to be incremental. The project experience will assist national policy makers learn on how best a demand-based approach could be scaled up through other financing channels available to the LGUs. Investments in the feeder infrastructure under the SSD loan (i.e. through the Baronage Environmental Sanitation Plan) will benefit a much larger proportion of low-income residents. The expected benefits will be reductions in morbidity caused by gesture-intestinal disease, medical expenses and working days lost because of illness will decline substantially. The BESP investments will therefore target the low income communities of the participating LGUs, and is expected to benefit about 280,000 persons. 4. Project Risks As over nineteen months had passed without loan signing, commitment risks was a major concern addressed during the SSD reappraisal. LBP will be shouldering the credit commitment risk by signing the Loan Agreement immediately after Board approval. The proposed revisions in loan documents mitigates its credit commitment risks by providing flexibility for LGUs of all classes (Province, City, Municipality and Baronage) to participate according to the services they want and are willing to pay for. There is, however, the continued risk of LGUs backing out before project implementation by failing to enter into the subsidiary loan agreements with the LBP. These risks remain a major concern until the loan is declared effective. The borrower proposes to utilize the time between loan signing and effectiveness to obtain the commitments of the LGUs by entering into the respective subsidiary loan agreements. Overall, the possibility of significant downstream benefits if the project implementation were successful, has led to the restructuring of this high risk-high return project into a program loan. 5. Description The project consists of two loans. The first, the PPA component will finance technical assistance designed to pilot and field test a privatized public performance audit system. Independent auditors will monitor, evaluate and publicly report the performance of the two MWSS concessionaires. The second -3 -  SSD component, which was restructured on May 14, 1999) will finance trunk and feeder infrastructure investments in LGUs that express demand for the options offered under the loan. Trunk infrastructure consists of financing detailed design, construction and rehabilitation of (i) sewage collection, conveyance and treatment infrastructure, and (ii) primary drainage infrastructure. Feeder infrastructure development will be financed through Barangay Environment and Sanitation Plan (BESP). This component will finance the design and construction of water supply, sanitation, neighborhood drains and solid waste management in barangays (or local neighborhood communities) based on resident's wishes and willingness to pay. In each of the participating subprojects collected sewage will be treated before release into the water bodies. 6. Financing The World Bank loan will be for US$38.6 million, of which US$36.3 million will finance the SSD component , and US$2.3 million will finance the PPA component. The remaining US$16.0 million or 29t of project costs would be financed by participating LGUs from their budgets, by users of services and MWSS Regulatory office respectively for the two loans. 7. Project Implementation The project's two components will have separate implementation arrangements. The PPA component will be implemented through MWSS. For the SSD component, a Project Management Office (PMO) has been established by the Land Bank of the Philippines. A team of internationally-recruited design and supervision consultants, appointed by and financed from the project will support the PMO throughout project implementation. In each of the LGUs, Project Management Units (PMU) will be established by the mayor's office. Water Districts staff will participate in the PMUs; and if necessary manage operations and maintenance of the constructed system. Civil works for the construction of sewerage systems in each of the participating cities will be procured on the basis of International Competitive Bidding. Locally manufactured goods would be granted a preference of 15t, or the amount of custom duties, whichever is lower. National Competitive Bidding would be used to procure civil works contracts for drainage. Very small works for the construction of on-site or communal sanitation facilities will be done through force accounts by participating LGUs. 8. Sustainability of Project Investments The sewerage and water supply financing responsibilities have been divided between the investment and operations and maintenance (O&M) phases in order to ensure the sewerage investments can be sustained. In the investment phase, LGUs will be the borrowers because they have the capacity to finance investments both through the IRA mechanism, and their ability to raise additional revenues locally. Moreover, the LGUs consist of democratically elected councilors who are responsive to the preferences of the electorate, consisting of local communities. However, as the LGUs lack both (i) an enforcement mechanism to ensure that users pay for services and (ii) technical expertise to operate and maintain the infrastructure efficiently, it was felt the Water Districts needed to be fully responsible for actually operating and managing the sewerage infrastructure. The Board of Directors of - 4 -  the participating Water Districts agreed to this arrangement because sewerage development falls within their original mandate, as defined in the Provincial Water Utilities Act of 1973. In order to assure sustainability, the proposed sewerage systems will finance their O&M costs through user charges levied on the monthly water bill from consumers who are convinced the services will benefit them. Households that do not pay their bills would face the risk of water being cut off by the WDs. It is felt that this threat is sufficient to assure payment of the sewerage surcharge and loan for property connections. For sanitation and drainage investments, the subprojects will vary substantially in coverage, characteristics and costs, due to the different levels of income and living standards in the various communities. As much as possible, sanitation cost recovery will be the responsibility of NGOs and private contractors; O&M will be the responsibility either of contractors/NGOs or the entire community (say, for micro-drainage infrastructure and community sewers). 9. Lessons Learned from Past Operations in the Country/Sector The World Bank's urban water sector lending program in the Philippines over the last two decades has largely focused on the MWSS or the Metro Manila area. It has supported four loans for water supply and one for sewerage since 1978, totaling US$264 million. Outside the Metro Manila area, the Bank financed the Provincial Cities Water Supply Project for US$23 million (Loan 1415-PH) to improve water supply in five towns of Luzon, and the Water Supply in Provincial Towns Project for US$38 million (Loan 1710/Credit 920-PH) in 1979. The Water Supply component of the Second Subic Bay Freeport Project (Loan 3745-PH) is US$32.6 million. In rural water supply, the Rural Water Supply Project for US$35.5 million (Loan 2206-PH) and the First Water Supply, Sewerage and Sanitation project for US$85 million (Loan 3242-PH) were financed in 1982 and 1990 respectively. Evaluations of earlier World Bank or IDA-financed water supply projects outside Metro Manila were responsible for shifting Bank assistance from project lending to economic and sector work in the late 1980s and early 1990s. These assessments indicated that the project performances were hurt by the absence of a well-articulated sectoral policy framework, the lack of transparent financing criteria, inadequate management incentives to run water utilities as commercial enterprises, and political interference in the setting of water tariffs to fully cover costs of delivering services. 10. Poverty Category The project aims at improving access of urban populations to safe water supply and sanitation. Although the overall impacts would benefit the urban poor in Metro Manila and the participating secondary cities, the only specific poverty-oriented subcomponent is the proposed BESP investments (through the SSD component of the project, as discussed earlier in the section on Project Benefits). 11. Environmental Aspects The project is classified as an Environmental Category A operation. It would have a marked net positive environmental impact by: (a) facilitating access of urban populations to reliable and adequate water supply; (b) reducing the - 5 -  level of human exposure to untreated wastewater, thus providing public health benefits; (c) providing basic drainage infrastructure in areas prone to flooding; and (d) providing basic sanitation facilities to the urban poor. Relatively minor potential negative effects include short-term air, water and noise pollution and disturbances to traffic and commercial activities. These will be mitigated by planning and scheduling construction, and by developing and enforcing strict pollution control regulations for the project sites. During the operational phase the local water district is being involved to operate and maintain the facilities because these utilities have adequate technical expertise to handle any operational emergencies that may occur. 12. Program Objectives Categories: The restructured project has a substantial component aimed at mitigating the worst aspects of urban poverty. Its key objectives - improving access of urban residents to safe water and sanitation services - would benefit the poor, who currently are most affected by unsatisfactory water and sanitation services. 13. The InfoShop The World Bank 1818 H Street, N.W. Washington D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Note: This is information on an evolving project. Certain activities and/or components may not be included in the final project. Processed by the InfoShop week ending June 4, 1999. 7 6 -6-