Philippines - Manila Urban Development Project

F Document of The World Bank FI L E C 0 O Y FOR OffICIAL USE ONLY Rqport No.P-1763-PH REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK MOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON PROPOSED LOANS TO THE REPUBLIC OF THE PHILIPPINES FOR A MANIJLA URBAN DEVELOPMENT PROJECT May 17, 1.976 This docut has * reteited distributlon and may be ued by reipents only In the performane of their afcial duiks. Its coaten may ." otherwise be diswlosed withot World Bank salborlntlon.  CURRENCY EQUIVALENTS US$1.00 Pesos 7.50 Pesos 1,000 - US$133.00 Pesos I million - US$133,000 FISCAL YEAR Through 1976: July I - June 30 Beginning 1977: January 1 - December 31 ABBREVIATIONS DBP - Development Bank of the Philippines DPII - Cepartmenit of Public Highways DPWTC - Department of Public Works, Transportation and Communications MMA - Metropolitan Manila Area MMC - Metropolitan Mantla Commission MWSS - Metropolitan Waterworks and Sewerage System NHA - National Housing AuthoriLy PNB - Philippine National Bank PBSP - Philippinc Business for Social Progress TFDPO - Tondo Foreshore/Dagat-Dagatan Development Project Office (formerly Tondo Foreshore Developmient Authority)-  FOR OFFICIAL USE ONLY REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON PROPOSED LOANS TO THE REPUBLIC OF THE PtlILIPPINES FOR A MANILA URBAN DEVELOPMENT PROJECT 1. I submit the following report and recommendation on proposed loans to the Republic of the Philippines for the equivalent of $32 million to help finance a Manila Urban Development Project. They would consist of a Bank loan of $22 milLion for a term of 22 years, including a grace period of 5 years, and an Interest rate of 8-1!2 percent per annum, and a Third Window loan of $10 million on standard Third Window terms. Of the proceeds of the loans, $17.6 million would be relent to the National Housing Authority (NHA) on the same term3 as those of the Bank loan to finance upgrading of the Tondo Fore- shore, the sites and seTvices development at Dagat-Dagatan and technical assistance to NHA; $1.3 million would be relent to the Manila Water Supply and Sewerage System (MWSS) on the same terms as the B-.ak loan for construction of a new sewer outfall and related works. Of the balance, the Government would allocate $10.8 million to the Department of Public Highways (DPH) for construc- tion of major roads, and! for the traffic engineering improvm--nts and $2.3 million to the Department of Public Works, Tranaportation and Communications (DPWTC) to finance techrilcal assistance. PART I - THE ECONOMY-/ 2. A basic econortic mii'sion visited the Philippines in April/May 1975 and its report, "The Ph.lippili.s Priorities and Prospects for Development," Is expected to be distrlbuted to the Executive Directors in the next few days. Paragraphs 3-21 below are a suimmary of that report. The previous economic report, "Currenit Economic Position and Prospects of the Philippines" (No. 568-PH of November 7, 1974), was circulated to the Executive Directors on November 11, 1974. Ainex I of this President's Report contains country economic data. 3. During the 1960s, the economy grew in real terms at the rate of 5-6 percent per annum. However, the rate of growth was less than the level tlat might have been achlieved if the considerable natural and human resources of the Philippines had been exploited more effectively. Moreover, the bene- fits of growth were not distributed widely and unemployment rose. Low levels of taxation resulted in Inadequate public Investment in necessary infrastruc- ture and soclal servicen. Relatively weak export performance, combined with a failure to reduce the Import dependence of domestic Industry, resulted in a steady deterioration In the balance of payments position. 4. During 1970-72, the authorities adopted policies of monetary and fiscal restraint in order to lay a firm basis for future growth. With assistance from the Connultative Group, they succeeded in improving substan- tially the maturity structure of the external public debt. Real GNP during that period Increased al: about 5 percent a year. In 1972, the Government I/ This part, except for paragraph 11, which has been added, is the same as the President's Report for the Chico Irrigation Project - Stage I (Report No. p-1783-1?H), dated March 11, 1976. Thi[sdocumenthas armstred distribution and may be used by recipients only in the performance oftheiroMcialduties.Its contents may not otherwise be disclosed without World Bank authorization.  -2- initiated a serJes of social and economic reforms In the country including an agrar:an reform program, tax reforms, and an administrative reorganization. These programs are beginning to show results. 5. In 1973 there was a sharp increase in the level of economic acti- vity in the Philippines. This upsurge was led by the international commodity boom, whlch resulted In higher export incomes, a strong recovery in agricul- tural and industrial production for the domestic market and an expansion in public and private Lnvestment. The growth in real GNP doubled to 10 percent. 6. Like most countries, the Philippines was profoundly affected by the tumultuous events in the world ecoaomy that began with the jump in the prices for food and petroleum in late 1973. With international trade the equivalent of almost hakf of its GNP, the Philippines proved quite vulnerable to the Impact of world inflation, the increase in oil prices and the prolonged re- cession In the industrialized countries. This sequence of events has tempo- rarily frustrated the Government's attempt to accelerate the rate of develop- ment, and in 1974 GNP Increased by only about 6 percent in real terms. While adverse effects of the recession were cushioned somewhat in 1974 by a modest Improvement in the external terms of trade, the Philippines has been even more seriously affected In 1975 by the continued rise in import prices and reduced demand for Philippine exports. The real growth of GNP in 1975 is estimated to have been at about the 6 percent rate of the previous'year. Improvement in the growth performance in 1976 can be expected only if recovery takes place in the economietn of the Philippines' main trading partnere. 7. Agricultural production has grown at an average rate of 3.2 per- cent per year during the l970s, a period which has been affected by unusually adverse weather conditions. Rice production increased by 25 percent in 1973-74, but due to serious damage by typhoons, it grew by only 1 percent in 1974-75, and the Government had to import 200,000 tons in the first half of 1975 to ensure adequate stocks. However, initial indications are that the outlook for rice production in 1975-76 is bright. The Government is giving the highest priority to Increasing agricultural production and has initiated a number of programs designed to expand the use of fertilizer, irrigation and supervised credit. It has also intensified efforts to expand social services needed in rural areas, incluiding rural electrification. health and family planning services as well aa small-scale road and irrigation projects. 8. Although progress has been slower than initially planned, the Government has made some progress with its agrarian reform program for the nation's one million tenant farmers who grow rice and corn. By December 1, 1975, the Government had issued Certificates of Land Transfer in respect of 208,000 of the 424,000 ten"ats on holdings of over 7 he; thus, title to 366,000 ha of the total of 1325,000 ha occupied by such tenants has been transferred. The Government has raised the cash portion of the compensation package to landlords to redtuce their reslstance to land reform, but strong administrative efforts will be necessary. to ensure continued progress In the implementation o, the program.  9. Industry accounts for almost 30 percent of net domestic product, one-third of total fixed Investment and 15 percent of total employment. In- dustrial production, which grew by 12 percent in 1973, was adversely affected lit 1974 by the world-wide economic slowdown and grew by only 3.6 percent in 1975. This decline Is primarily a result of depressed demand for Philippine exports on the part of the country's main trading partners and the concomitant slowdown In the rate of economic growth In the Philippines. Nonetheless, the long-term prospects for Industrial growth are favorable because of the natural and human resource endowment of the Philippines and a very active private sector. 10. The Government has made significant progress In increasing public Investment. The ratio af public Investment to GNP is currently about 3 per- cent compared with 1.8 percent in FY72. The Government has also Implemented a series of long needed tax reforms and improvements in tax administration. These reforms, aided by the increased economic activity, the boom in export lncomes, and domestic Inflation, resulted in a 36 percant increase in national government tax revenues in FY73, and an estimated 47 percent In FY74. As a result, the ratio of national government tax revenues to GNP has Increased from an average of 9 percent in 1970 to an estimated 12.3% in FY74 and stayed at this level In FY75. 11. Significant financial reforms have also been enactel. At the begin- ning of 1976, the Central Bank issued circulars designed to help rationalize the level and structure of deposit and lending rates, and deposit rates were raised for the second time in 18 months; long-standing statutory ceilings on the long-term lending rates of banking institutions were increased from 12-14 percent to 19 percent per annum, and the ceilings on short-term lending rates were also raised. Effoits were also made to control short-term market opera- tions and strengthen the organized banking Institutions. These actions are an Important step In improving the mobilization and allocation of domestic resources- in the Philtppines. 12. In the latter part of 1973, inflation emerged as a major problem in the Philippines and In 1974 consumer prices rose by almost 40 percent. The rise was caused by the large increase in liquidity that came with the export boom in 1973-74, and by a number of cost-push factors, including the higher rate of world inl'lation. To deal with this problem, the Government adopted contractionary raonetary and fiscal-policies, and attempted to reduce the impact of inlElation on consumers by subsidizing such essential goods as wheat, imported rice, and cooking oil. As a consequence of the Government's measures, t:he annual rate of Inflation decreased to less than 20 'ercnet at the end o! 1974 and less than 10 percent in 1975. 13. The rapid inflation In 1974 exacerbated the decline in real wages which had begun in 1970O. Overall, there was a decline of about 20 percent in rea' wages during 1974. In order to offset the deterioration of real wages In urban areas, the Government Increased the salaries of Government employees and directed private firms to grant emergency crst of living adjustments to employees earning less than P 600 per month. Nevertheless,  - 4 - real urban wage Incomes declined and redtuced the (itmzild for manufactured products, which contributed to thie poor performance of the manufacturing sector in 1974. The depression In the urban areas was partly offs;et by the improvement In rural Incomes that stemmed ftom cont inued high prices for agrliculttural commodities. 14. On the externall side, th,e Phillipphie balance of payments bene- fitted considerably from the international commodity price boom during 1973. HLigh prices for thie c,antry's chief exports, Including coconut products, sugar, copper and wood products resulted In a 70 percent boos- in export earnings and a balance of payments surplus of about $670 million. Since mid-1974, the external trade position has deteriorated, due to the sharp Increases in the prices of oil and other imports, less favorabl- prices [or lhillippine exports, and reduced volume of some exports restilting from the recession In the economies of the Philippines' main trading partners. As a result, the overall balance of payments surplus fell to about $100 million In 1974, and a deficit of about $400 million was recorded in 1975. Inter- national reserves stood at around $1.1 billion at the end of 1975, the equivalent of about three months Imports. 15. Thie outlook for 1976 Is for exports to Increase by about 12 percent In real terms on the assumption that there will be some international econo- mic recovery. Imports will need to grow by about 7 percent in real terms In order to malr,tain the growth of the economy. Due to a modest deteriora- tion of the termn of trade, the current account deficit may reach about $l.0 billion compared to $860 million In 1975. Medium and long term c.apital Inflows are expectedl to finance most of this deficit, producinig an overal I halance of payments deficIt of about $200 million. Such a defLcit can he managed withiout serious pressure on reserves through litiLlizaitIon of IMF facilities andl by short--term foreign borrowing by the Central Bank. 16. The overall level of debt of the Philippines is expected to remain within re.,3onable limits, as the r"tio of debt service payments to exports and non-factor serv;ces woulcd average about 16-17 percent during the rest of tills decade. At present, the Bank/ICA simare In total debt outstanding Is about 10 percent and Its share in d'-at-service Is about 4 percent. Thlese shares are expected to Increase semewhat in the yeatrs ahead. 17. Foreign assistanc,E- on concessionajL terms will be essential to help to finance the larger investment expenditures whLich will he necessary for thie country's development. In order to ensure thalt disbursement of external assistatnce reaches levels commensurate with the level of development expend- itures which wil be required (luring tihe latter part of the decade, total commitments of officlal assistance will need to be maintained In real terms at iteast ait thie Level of about $500 miltion which was arhileved in 1974. The onsul tat Ive C.roup for the 'hil ippLnes at Its meet ing In lar Is on October 1, t1975, aigreel th at It would be redsonable for. tht Ii I I IIIpplne Government to seek aId.rommlirments of about $600 million during 1976; anothler meetLng of the IConsutitt tIve (;routp h..s been cal led for June 15 anid Ih, 1976 mainly to review prospvcts and needls over the next 5-10 years, whichi were anal.yzed in the KBatk's most rereLnt economic report.  -5- Growt'h Prospects 18. Despite the slowdown In the growth of tthe economy, which is primarily a result of worldwide economic conditions, the Covernment remains committed to regaining the growth momentum which began In 1973 to provide for a con- tinued increase In incomes and employment. High priority must be accorded to expandIng employment opportunities - In the short-term as well as the long-term - because unemployment and underemployment are still high, and the labor force continiues to grow at 3 pereent a year. 19. Priority must also be given to expanding food production for the doxnestic market, to expanding industrial export productlon and to accelerat- Ing development of local energy resources. The difficulties experienced during the last two years in Importing sufficient quantities of food at reasonable prices, especially cereals, have Increased the Government's resolve to achieve self-sufficiency In rice and co-n as soon as possible. The Govern- ment rightly recognizes tlhat rhe Increased cost of petroleum and other Imports cannot he financed indefinitely by borrowing abroad, and it is actively en- couraging both local and Foreign investors to expand the productive capacity of export Industries and I:o undertake major new import-replacing investments. Because It will take time for these Investments to have an Impact on the balance of payments, the Government is seeking Increased supporr from the international financial community to help carry out its development program and to ease the adjustment to higher petroleum and other import prices. Be- cause of the substantial easing of the external debt burden which has taken place In the last several years, the Philippines now has the capacity to borrow externally larger amounts of capital to support Its development program, provided substantiial amounts can be borrowed on favorable terms. 20. Given the likely availability of resources and the expected growth in various sectors, It Is reasonable for the Government to plan for a longer term growtlh ln GNP of about 7 percent a year in real terms. To achieve this objective, increaqed Investments will be necessary In a wide range of Industries. Public Investments also need to be Increased. A new public infrastructure program Is being prepar. ., and the Government Is putting emphasis on developing nuclear and Indigenous power sources and on Irrigation, feeder roads and other prcjects to support Increased food production. The Government has made considerable progress in recent years in building up the capacity of public sector agencies to prepare and execute projects. However, there will be a need for continued efforts to strengthen this aspect of ad- ministration. The ratio of public Investment to CNP will need to rise from the present level of 3 percent to at least 5 percent by 1980. To support this level of investment, the Government will need to Intensify its tax efforts so that the ratlo of national taxes to'GNP continues to rise from Its present level of 11-12 percent to 14.5 percent by 1980. 21. The Government's ambitious development program will continue to require foreign resources In addition to the capital which would become available for the financing of the foreign exchange component of develop- ment projects. Some financing of local costs is justified, especially for  projects of economic and social Importance which need only limited amounts of foreign exchange. In viev of the Philippines balance of payments and ex- ternal debt position, and taking Into account the country's performance in economic development and its relatively low per capita income, the Philip- Pines is considered eligible for Third Window loans from the Bank. One Third W.'ndow loan of $25 million for the Third Education Project has already been approved by the Executive Diirectors, ard one additional Third Window loan of $10 million Is propGsed as part of the financing for the Manila Urban Development Project. PART II - BANI) GROUP OPERATIONS IN THE PHILIPPINES 22. By April 30, 1976, the Philippines had received 35 Bank loans and 3 IDA credits totallinlg $886.7 million, net of cancellations. About 33 percent of the Bank/IDA lending. $293 million, has been for infrastructure projects In power, transpoLtation, and water supply and $63 million has been for population and educatiDn projects. Of the remainder, about $280 million has been for agriculture and about $250 million for industry. There has been a marked Improvement In the way Bank financed projects in the Philippines have been executed In the last three years, compared with experience in the 1960s, when shortages of peso counterpart funds combined with poor administration to cause serious problems. All on-goIng projects are now being implemented reasonably well. Annex 1I contains a summary statement of Bank loans, IDA credits and IFC investments as of March 31, 1976 and notes on the execution of on-going projects. 23. The Bank's lendl.ng program has been designed to continue to support the Philippine development: effort with its particular emphasis on agriculture and Infrastructure. Shortages of domestic revenues led to low investment for these purposes In the past. T'ie last three years have seen major changes which have helped to overcome these constraints and both the ambitious Phllipplne development program and the Bastk's lending program have been de- signed to make good past neglect and tc meet future needs. Commitments of $165.1 million in FY74 and $208 million in FY75 compared to an average of about $30 million a year in the preceding five years. 24. Five loans totalling $212 million have so far been approved in FY76. The proposed loans for the Manila Urban Development Project, together with loans for a Second Fisheries Project and for a Second Grain Processing Project, which are being presented this month, are the last scheduled for consideration during this fiscal year. Loans for a highways and a power project may be ready for presentation In the first half of FY77. 25. IFC has made commitments In the Philippines totalling $76.2 mil- lion for Investments in 13 companies in the fields of development banking, power, telecommunications., ceramic tiles, paper, petroleum products, nickel mining and refining, chemicals and synthetic fibers. Of these investments, as of March 31, 1976, $19.1 million had been sold, $0.4 million cancelled and $3.7 million repaid, leaving a net portfolio of $53.0 million. On the  same date, all commitments were fully disbursed. Preliminary proposals have been received for an aluminLtim smelter and other projects in the pulp and paper, dinaerware, metal alloys and shipbuilidng fields. PART III - THE SECTOR A. Urba,n Development in the Philippines 26. The Philippines will continue to feel the impact of population growth and urbanization in the rnext two or three decades. The population is forecast to reach 77 million by the year 2000 (from 41 million in 1974), with the urban population growing from 32 percent to approximately 46 percent. The number of people living in urban centers could grow from 13.2 million in 1975 to 35 million by the year 2000. 27. The urb.inization problems facing the country are accentuated by the predominance of metropoliLtan Manila. The Metropolitan Manila Area (MMA) had an estimated ponulation Ln 1975 of 5.5 million, or 13 percent of the national total. With an average annual growth rate of 5 percent since 1960, Manila's population is increasing faster than those of other urban areas, which had been growing at 3-4 percent annually, because of higher rates of migration to Manila. If present trends continue, 23 million persons could be living in the Manila region-by the end of the century, .ully 65 percent of the urban and 30 percent of the total population. 28. The Government has recognized the magnitude of the problems facing the urban sector. It Is planning and executing programs in the MMA, which faces !'y far the most serlous of the Philippines' urban problems. It is also trying to promote decentralization in urban growth by developing small- and medium-sized cities In addition to channeling resources into the MMA. 29. Rapid growth En the service sectors, especially the informal service sector 1/, has prevented urban population growth from being translated into open unemployment in the cities. As in most cities, this sector accounts for over two-thirds of total urban employment. It is likely that a large portion of the growth In service sector employment has been in the informal service subsector, which Is estimated to account for over 60 percent of total ser-ice employment in both urban and rural areas. 30. Despite the significantly higher average Incomes of urban areas compared to rural areas, living standards are not necessarily higher, and substantial poverty exists. If absolute otandards of poverty are used, 1/ Includes domestic services and personal services In transport, commu- nication, government, commerce, business water and sanitation and recreation.  about 30 percent of the urbar, population, or 3.2 million persons, were estimated to be living at or below the r-inimum suboistence level in 1971, with Inadequate housing and limited or no access to water, toilets and electrie!ity. 31. The housing shortage and Inadequacy of service levels in urban areas Is severe and ls growing rapidly. The 4.5 percent average annual growth rate In urban housing construction from 1960 to 1970 implies that the growth lr housing in urban areas junt kept pace with population growth and did not allow for the replacement of physically inadequate dwelling units. At the end of the 1960s, only half of a!Ll urban dwe!lling units had piped water, a fifth electricity for lighting, anl a tenth had a flush toilet. 32. The urban poor occupy the least desirable of this already inadequate housing stock. They are at a particular disadvantage because of relatively inactive public sector involvement in housing construction and financing, and because neither private nor Ipublic housing finance programs have significantly assisted the lower income groups. 33. The Government's response to these problems has been to promote decentralization In urban growth by developing small- and medium-sized cit1es in addition to channeling resources Into the MMA. The Government has recently Initiated several Important programs to encourage the development of small and medium scale industries, many of which provide employment in cities outside MMA, and a municipal water supply program to establish effective water supply systems In a large number of cities. But, this two-pronged approach cannot obscure the fact that by far the largest part of the country's urban problems is concentrated In Manila. B. Urban Development in the Metropolitan Manila Area (MMA) 34. Manila has a larger area (870 sq km), a larger population base and a faster annual population growth rate than other urban areas In the Philippines; a higher unemployment rate than the national average (11 percent In Manila compared to 7 percent nacionally in 1971); and by far the worst housing conditions In the country. While the proportion ef the urban poor Is about the same In Manila as In other urban areas, Manila's poor are the largest concentrated poverty group in the Philippines totalling 1.5 million, or nearly one half of the Philippines' urban poor. 35. Employment In the MMA presently accounts for about 10 percent of the national total. In 1971, 1.5 million persons were employed In the MMA, of which 960,000 (or 64 percent) were i'. che services sector. Of the balauce, industry employed 29 percent, and agriculture and other 7 percent. Although the lnformal subsector provides a large amount of employment, the earnings and savings potential in that subsector is often not much greater than that found in rural areas. In 1971, median family income in the MMA was estimated by the  - 9 - Bureau of Cens1JS and Statistics to be about $825. Htowever, as a result of inflation between 1972-74, real wages in the MMA declined, witlh wages for unskilled workers declining by about 25 percent. 36. The city's most pressing problems relate to shelter, health and nutrition, urban transport and institutional capabilities. An acute housing shortage has been caused by rapid population growth, an inadequate existing housing stock, and the absence of a coordinated institutional framework to address construction and financing of housing. In 1972, approximately 50 percent of physically inadequate dwelling units in the Philippines and 80 percent in all urban areas were in the MIA. About 1.8 million persons now live in substandard structures on unserviced lots with a very low level of environmental sanitation. 37. The inadequ:cy of sanitation facilities and of health and medical services, compoutnded by flooding and standing stap,.nant water, have led to a deterioration in the level of health. Cases of typhoid, cho'era, other gastro- intestinal infections and malnutrition have risen noticeably since 1968, and It Is clear that population increases have strained available medical and health facilities. 38. The MIIA also suffers from major Lransportation problems. Chronic congestion has become a common condition because of pcpulation growth and a rapid growth in che number of private passenger vehicles. In i975, the MMA had about 325,000, or 42 percer,t of all registered motor vehicles, of which 70 percent were private passenger vehicles. The situation is exacerbated 1, ineficilent use of exisCing road capacity. Public transport is mostly pro- ,lded by the private sector,which, because of deterioration in financial conditions and uncertainty about Government policy towards private sector fleet owners, has steadily reduced its investments in vehicle maintenance and fleet renewal in recent years. 39. The organization of local governments in the MIA has not been conducive to effective metropolitan-wide planning or administration. Hlow- ever, in November 1975, the Metropolitan Manila Commission (KMC), headed by a general manager, was established and consolidated 17 jurisdictions into one. Previously, the MMA's government was fragmented into 32 juris- dictions. 40. The largest slum, and the one in most pressing need of basic urban services, is the Tondo Foreshore. The Tondo was reclaimed from the sea in the late 1940s and squatters moved In shortly thereaftet. This community, the upgrading of which is the centerpiece of the-proposed project, covers almost 180 ha and has a population of 27,500 families (180,000 persons) in 17,500 structuireb. The median family income 'is about $576 a year, whlic is abouLt 'o percent of the median income of the MMA. 41. In the Tondo, the tajority of households are first-generation mig- grants. Because of its central location, the Tondo has been a convenient place from wiich to attempt to find employment and to adjust to urban life.  - 10 - 42. Some land registration by squatter families has taketn place mostly in tthe old foreshore (Old Tondo), whirh comprises approximately one third of tht total area. I'he new foreshore area (New Tondo) is still largely publicly ow.:At Lan(i. The fact that some households have tenure, or have been offered it, while others I e no legal right, has given rise to much unrest over the years. 43. The Tondo's level c-f environmental sanitation is veLy low because of the high population density, iniadequate water and sewerage facilities and very paor drainage. Partly as a result of this, the area'* residents suffer Froni severe health pr'3blems. According to a 1975 survey, infant mortality is about 130 per 1,,000 live birtlhs per year; 80 percent of pre- :achiool children are undernaourished; more than three-quarters of the population suffer from roundworms; 30 percent of the adult female population and more than 40 percent of the children suffer from anemia; and much of the population also suffers scvere Vitamin A deficiencies. In 1974, there were around o00 hospital admissions fer caolera in Tondo, and 707 deaths attributed to tuber- culosis. 44. Until now, the Government's main response to the problems of slum and squatter areas has been at series of id hoc prnjects generally involving major relocations to distant sites, which have not been very successful. Principal difficulties have been a lack of nearby employment opportunities and inade(quiate services, especially transportation. The Covernment is now planning a program, of which the proposed project is a part, designed to uipg.ade hlighted areas in the M1A, provide better employmnent opportunities and Improve Lhe standards of operation of the respor.sible Government agen- cies.. To hegin Lhis program, thte Government in 1974 created the Tondo Fore- shore fievel opment Authority (TFt)A) which, together with appropriate G;overn- ment. agenicies, was to be iesponsible for executing a program of upgrading the I'OIldo) iForeshore. The TFD)A has now been incorporated into the National Housing Authlority (NIIA), which was created in July 1975, to consolidate the six agencies formerly concerned with thc provision of housing in order to help meet the growing requirements for improved shelter in the Phiilippines. 45. 'The poor health and living conditions of the large percentage of famlli.2s living in slum and squatter areas suggest that the higbest priority, in the near term, should be to extend minimum urban services to the worst slum areas. Thisf effort, if made on a comprehensive area-by-area basis and accompanted by measures whic:h regularize land tenure, should help improve the living conditions of Manila's poor. At the same time, a long-term shelter program can be und(ertaken to heir meet the needs of the approximately 40,000 new families being added L nually to the population and slow the spread of squatter areas. The Government' s programs discussed in thc precedtng para- graph are important steps to help meet these needs. 46. Ccrn3derable devclopment is taking.place in the areas immediately adjoin intnig thf' Tondo Foreshore. immediately to tthe south, reclamation and construrt loi of the Internal:ional Port is taking place. The first phase of port Improvement will require the relocation of approximately 1,500 squatter  families to Dagat-Dagatan two miles away. At Dagat-Dagatan, reclamation is continuing on 367 ha of unused fishponds, the first 40 ha of which would be used by the proposed project. To the northwest of Dagat-Dagatan, reclamation and construction of a fisheries port and associated industrial area at Navotas, partially financed by the Asian Development Bank (ADB), is nearly complete, and will soon require the relocation of several thousand squatters to Dagat- Dagatan. PART IV - THE PROJECT Purposes of the Project 47. The major components of the project %ould respond directly to the shelter, sanitation, employment and infrastructure problems of the Tondo Foreshiore and to the urban transport and institutional problems of Manila in general. The upgrading of the Tondo and the new sites and services devel- opment in Dagat-Dagatan would provide 180,000 persons in a major slum and squatter area with secure land tenure and adequate urban services, in such a manner that project beneficiaries will be able to afford to pay for these services. The traffic improvement component would focus on low-cost, high- return investments for al'L of Manila by providing for urgently needed traffic control measures and equipment necessary for the efficient use of existing infrastructure. The project would help strengthen two new institutions, the National Rousing Authority (NHA) and the Metropolitan Manila Commission (MMC), by providing technical assistance; it would also have a formative Impact on the Governmen't's3 urban program because it would be its first comprehensive slum upgrading project. In the course of the four-year project implementation period, the NRA is expected to significantly increase its capacity to plan and implement similar upgrading and sites and services projects in other parts of Manila and in other cities in the Philippines. 48. Looking beyond i:he individual components, the project aims to assist the Government in Initiating a new approach to the city's prensing shelter and sanitation problems and to encourage transport investment pro- jects Involving relatively low capital input. The project seeks to de- monstrate that upgrading and improvement in situ is an appropriate alter- native to resettlement, wiich has hitherto been the policy adopted by the Government. The integratLon of health, nutrition and other social service Improvements with physical improvements in water supply, sewerage and drainage, both in the Ton(lo Foreshore and at Dagat-Dagatan, is expected to demonstrate an approach which is not only comprehensive but is also replic- able in other slum areas of Manila and other cities in the Philippines. 49. The project was prepared by the Government with assistance of various short-term consultants. Bank missions appraised the project in .1uly and November 1975 and negotiations were held in Washington in April 1976 . The Government's negotiating team was lcd by Hlis Excellency Eduardo Z. Romualdez, the Philippine Ambassador to the United States. The Staff Project Report (No. 1032a-P11) is being distributed separately to t'e Executive Directors, dinnex Ill provides a loan and project summary.  - 12 - Project Components and Design Standards 50 The project would provide improved environmental sanitation infra- structure and social services for the Tondo Foreshore, one of Manila's worst slums, develop a first phase of sites and services settlement at neighboring Dagat-Dagatan and build and improve trunk roads in the Tondo Foreshore area. It would also provide traffic engi:neering and management improvements and technical desistance for the Metropolitan Manila Government. Included in the project, at the request of the Government, is technical assistance for national tranEsportation planning. The project would include: (a) Tondo Foreshore UpUrading. Upgrading a 180 ha area, with a population after development of about 160,000 persons living in 15,000 st:ructures, by providing basic urban infrastructure and health, education and other welfare services, materials for house improvement and cottage industry loans, about 1,000 new serviced lots and core units on now vacani: land, and about 15 ha of land for industrial and commercial use; (b) Dagat-Dagatan. Devielopment of a residential community for about 20,000 persons after development on about 40 ha by provid4ng basic infrastructure and health, education and other welfare services, materials for housc improvement and cottage industry loans, 2,000 residential lots with simple sanitary core units for lease with option to purchase by families displaced from the Tondo Foreshore, and about 3.5 ha of land or industrial/commerical use; (c) Offsite Infrastructure. Rehabilitation of the exist- ing Tondo Sewerage Pumping Station and construction of a new outfall sewer to replace the existing sewer, which has deteriorated to the point that it is inadequate for the ,:fficient and sanitary discharge of existing or anticipated sewage flows from the Tondo Foreshore; and construction of stabilization ponds and temporary (above ground) water mains at Dagat-Dagatan; (d) Major Roads. Construction of 5.4 km of the R-10 road between C-1 and Dagat-Dagatan, construction of 1.7 km of circumferential roads C-2 and C-3 and construction of 0.4 km of the Dagat-Dagatan road to provide access to the Dagat-Dagatan resettlement site and to facilitate traffic movement out of the tnternational Port ar.a; (e) Traffic Improvement. Construction of junction improvement, road markings and footpaths, and bus shelters and provision of signals, signal-linking equipment and mobile radios to improve the use of existing infrastructure; and  - 13 - (f) Technical Assistance. Consultants (about 46 man-years) would be retained by: (I) the NItA for detailed design and constructton super- vision of the physical works In the Tondo Foreshore and Dagat-Dagatan; organization, management and finar.cial planning for the NiA and the Tondo Foreshore Development Unit; and feasibility studies to develop a possible second urban development project; (ti) the Metropolitan Waterworks and Sewerage System (MWSS) for detailed engineering of the outfall sewer; (iii) the Department of Highways (DPIH) for detailed design of project roads and for design and implementation of the traffic engineering and management component of the project; (iv) the Department of Public Works, Transportation and Communications (DPWTC) for: a metropolitan Manila transport/land-use study; and on behalf of the MMC for a fiscal base s.tudy, a cadastral survey for metro- politan Manila to update the existing survey which covers only half the land, a municipal services study, and staff training; and (v) the DPWTC to assist in preparing a national trans- portation investment plan for 1977-80 and a national transport systems study; and to help strengthen the planning capalilities of the various Government transportation agencies. 51. The design standards selected for the Tondo Foreshore and Dagat- Dagatan provide for individual water and sewer hookups and, in the case of Dagat-Dagatan, for individual electricity connections. These design stand- ards were selected after Cull consideration of several alternative solutions ranging from indtvidual pit latrines to group facilities. They would minimize the need for relocation oF Tondo Foreshore residents, but nevertheless about 500 families would be relocated to Dagat-Dagatan because of improvements to roads and the introductiona of infrastructure. Tn addition, the project would provide sites at Dagat-Dagatan for another 1,500 families, most of whom would be dislocated from the Initernational Port area because of Port expansion and from the Navotas Fisheries; Port. All iots at1Dagat-Dagatan would be provided wtth a common wall, basic plumbing and a concrete floor, all of which would be financed by the monthly lease payment. New lot occupants would bring exist- ing structures from their present location. A variety~of materials for house Improvement would also be available for purchase, and house materials loans would be available to enable project beneficiaries to make improvements.  - 14 - Project Execution and Management 52. The NHA, estabLished in late 1975 to plan and execute a national housing program, would be the principal Government agency implementing the project. The staff of the former TFDA has been absorbed by the NHA and are now in the Tondo Foreshore/Dagat-Dagatan Development Project Office (TFDPO), which is the uniit in the NHA with prime responsibility for executing the Tondo Foreshore and Diagat-Dagatan parts of the proposed project. The NHA would also be responsible for coordinating very closely with the other Gov- ernment agencies which execute other parts of the project: (a) the DPH, which would be executing the major roads components and the traffic improvement component, for the execution of which it has agreed to institute a training program for traf- fic engineers in traffic engineering and management satisfac- tory to the Bank by December 31, 1976 (see Section 3.04 of the Loan Agreement); (b) the MWSS, which would construct the sea outfall sewer and thie Tondo Pumping Station and which would provide technical aHsistance to the NHA for the water supply and sewerage elements; (c) the DPWTC, which would be responsible for major flood drainage works, the transport/land-use study, the fiscal base study, the cadastral survey, the municipal services study, and staff training; and (d) the Development Bank of the Philippines (DBP), and at NHA's option, the 2hilippine National Bank (PNB) or Philippine Business for Social Progress (PBSP), which would administer the lines of credit for cottage industry. In addition, the DPWTC will be executing agency for the technical assistance in national transportation planning. These agencies are suitably staffed and organized to carry out their responsibilities under the proposed project; the DPII, the MWSS and the DPWTC would also employ suitably qualified consult- ants on terms and conditions satisfactory to the Bank (see Section 3.03 of the Loan Agreement). 53. The NIIA would also coordinate with six other agencies which would be taking over operation and maintenance of project facilities, once they have been completed by the NHA: (a) the Department of Education and the Manila City Schools Office, which would be responsible for operation and maintenance of the completed educational facilities; (b) the Department of Health and the Manila City Health Office, which would be responsible for operation and maintenance of the health centers and clinics; and  - 15 - (c) the National Nutrition Council and the POPCOM, which would run the nutrition and family planning programs, respectively, Included in the project. 54. The relevant responsibilities of the agencies involved have been spelled out in a draft Presidential Letter of Instruction (LOI). In order to ensure that the NBA, a, new agency, can successfully execute and manage the project, the project includes financing fcr a substantial amount of technical asststance in engineering, planning, organization and financial management. The NHA agreed, during negotiations, that-this would be carried out by suitably qualified consultants on terms and conditions satisfactory to the Bank (see Section 3.013 (b) of the Loan Agreement). The employment of engineering consultants by NHA and the issuance and effectiveness of the LOI would be conditions of the effectiveness of the proposed loan (see Sections 7.01(b) and 7.01(c) of the Loan Agreement). 55. The NHA also agreed, during negotiations, to a satisfactory plan of organization for the TFDPO (see Section 4.04 of the Loan Agreement) and agreed to arrangements satib-actory to the Bank for filling key staff posi- tions with suitably qualified personnel (see Section 4.05 of the Loan Agreement). In addition, the NtA agreed to establish and staff a project monitoring and evaluation system to monitor the progress of the project (see Section 4.03 of the Loan Agreement). With these arrangements, the Government would be able to execute the project satisfactorily. Project Cost and Financirt 56. The estimated total cost of the project is $65 million, with a foreign exchange componernt of $32 million, or 49 percent of total project costs. The estimates include an overall 10 percent physical contingency allowance. This includesi a 25 percent allowance on tertiary infrastructure items, because of great clifficulties in determining in advance of actual work tlhe specific requirements of each individual lot; and a 56 percent allowance on the intercepitor sewer, because of extremely difficult soil con- ditions. The estimate also includes an allowance for increases in domestic and foreign prices on the basis of an annual increase of 10 percent cal- culated in accordance with the Bank's guidelines. The average man-month cost of consultant services itl estimated to be $5,800. The project is scheduled for completion by March 1981. 57. The proposed Bsnk loans for this project would be for the equivalent of $32 million and would constst of a Third Window Loan of $10 million and a Bank loan of $22 million. The loans would be made to the Government and would finance the foreign exchange costs. Of the balance of $33 million, the NHA would finance $19.2 million, the MWSS $0.3 million and the Govern- ment $13.5 million. The Bank loan would be for a term of 22 years, including a grace period of 5 years, at the standard Bank interest rate. The Third Wtndow Loan would be made on standard Third Window Loan terms.  - 16 - 58. Of the total proceeds of the loans, $17.6 million would be relent to the NHA under a subsidiary loan agreement, on the same terms as those of the Bank loan, to help finance the Tondo Foreshore, Dagat-Dagatan, tech- nical assistance to NRA, and lines of credit for materials for house improve- ment and cottage industry; snd $1.3 million would be relent to MWSS under a subsidiary loan agreement on the same terms as those of the Bank loan, to help flnance the outfall sewer and the Tondo Pumping Station. The conclusion of the subsidiary loan agreements would be conditions of effectiveness of the proposed Bank loan (see Section 7.01(a) of the Loan Agreement). About $10.8 million would be allocated to the DPH for construction of the major roads and for the implementation of the traffic engineering component; and $2.3 million would be allocated to DPWTC to finance the land-use/transport study, the nattonal transportation p:Lanning assistance, and the fiscal base study, the municipal services study, training and cadastral surveys that DPWTC is admin- istering for the MetropolLtan Manila Commission. For the housing materials loans ($2.9 million), NRA would enter into an agreement with DBP, and for the cottage industry loans ($0.4 million) with DBP and, at NHA's option, with PNB or PBSP to administer the loans. The onlending institutions would receive a 3 percent spread on funds and provide loans to ultimate borrowers at an inte- rest rate of not less thanm 12 percent per annum. For cottage industry loans, a special one-time fee of 2 percent would also be charged and retained by NRA, which would share the risk of default under arrangements to be agreed with the lending institutlons referred to above. Cost Recovery for the Tondo Fo.-ashore and Dagat-Dagatan Components 59. While housing has been increasingly recognized as an urgent need and squatting on unserviced land has become an increasingly difficult pro- blem, mobilization of resources into the housing sector has been hindered in the recent past by the belief that the poor cannot afford to pay for the housing and services they would receive, and that large-scale subsidies would be required to initiate any substantial program. The general approach adopted for the proposed project was to seek full cost recovery, while simultaneously including in the project other sources of revenue that could be used to help pay for the project and thus reduce charges Lo the low-income families now living in the area. Project charges to beneficiaries have, therefore, been reduced by the amount of revenue anticipated from the sale or lease of about 19 ha of industrial and major commercial property in the project area. The sale and lease of this property is expected to produce gross revenues equiva- lent to about $13.5 million. 60. In Dagat-Dagatan, costs would be further reduced by a total of $2.5 million, which is the esttmated incremental cost of upgrading the lots of those families who have to be relocated in Dagat-Dagatan because of works being undertaken by the Philippine Port Authority (PPA) and the DPH, which are tmplementing res.pectlvely a port expansion project at the International Port and the major road projects in the Tondo Foreshore area. The Covernment agreed during negotiatiorts to make satisfactory arrangements for the provision of the funds necessary tco pay for the incremental cost of providing lots to families who will have tco be resettled as a result of the port expansion and  - 1 7 - highway construction (see Section 5.05 of the Loan Agreement). These arrange- ments would enable the NHA. to charge Identical lease prfces in bothi the Touido Foreshore and Dagat-Dagatan, even though uiniL costs at Dagat-Dagatan are higher than tht unit upgrading ccsts at the Tondo Foreshore. The total cost of the Tondo Foreshore and Dagat-Dagatan infrastructure, excluding schools and health clinics, is $27.9 million. The cost reductions, totalling about $16 million, would leave a net balance of about $12 million to be recovered from project beneficiar!es to finance the full cost of the internal infrastructure in the Tondo Foreshore and at Dagat-Dagatan. The Government agreed during negotiations to recover these costs (see Section 5.04 of the Loan Agreement). 61. Cost recovery in Tondo and Dagat-Dagatan will generally be through 25-year renewable leases, with an option to purchase after 5 years. Monthly lease pa)ments (and assessment taxes) would be set to cover development costs referred to in the preceding paragraph over 25 years at an annual interest rate of 12 percent. A feature of the lease will be its transferability. Lease holders may sell their leases should they decide to move. Sitice thie lease in this case will be an increasingly valuable asset and will have many similarities to ownership it is expected that there will be a considerable incentive to residents to continue to make monthly payments and to invest in nnd improve their property. 62. The project has 'been designed to enable the great majority of existing Tondo Foreshore residents to afford the project benefits. A lease payment of $0.13/sq m per inonth equivalent would cover full development costs after the cost reductions diescribed paragraph 60 above. In addition, a family would pay normal charges for water and sewerage, property taxes and, if connected, electricity. It is estimated that an average family would make a monthly payment of $6.60 for all these expenditures except electricity in 1978, compared to $3.75 in 1974. In real terms, this would be an increase of $1.15 per month-by 1978. On this basis, an average size lot could be afforded by about 75 percent of the Toondo Foreshore families, and a somewhat smaller lot could be afforded by about 85 percent. 63. It has not been possible to provide individual living accomodations that would be affordable b', all income groups In the Tondo Foreshore, but the vast majority of persons with incomes below the 15th percenttle are tran- sients and/or renters of smiall rooms. These persons are expected to continue renting rooms in the area and to receive substantial indirect benefits from the project. Procurement and Disbursement 64. Civil works contracts of more than $1 million each, for a total of about $14 miltio.n, would be awarded on the basis of international competitive bidding in accordance with Bank Group Culdellnes. Because of the need to undertake the work in small areas on a block-by-block basis, civil works con- tractm of less than $i million eac'a, for a total of about $15 million, are not sititable for international competitive bidding. These wouldl be awarded on the basis of competitive bidding advertised locally in accordance with Covernment procedures which are acceptable.  65. For equipment and material procurement,except materials for house Improvement, all contracts above $100,000 would be procured on the basis of international competitive bidding in accordance with Bank Group Guidelines. A preference limited to 15 percent of the c.i.f. price of imported goods, or the customs (luty whichever is lower, would be extended to local manufactuirers in the e-valuation of bids. Contracts below $100,000 and for materials for house imp-ovement ($2.9 million), which would be phased over the project implementation period and cannot conveniently be bulked, would be awarded on the basis of competitive bidding advertised locally in accordance with Govern- ment procedures whichi are acceptable. For the cottage industry loans ($400,00o). equipment would he procured on the basis of DBP's,guidelines, whichi are satisfactory. 66. For the Tondo Foreshore, Dagat-Dagatan, offsite infrastructure, major r0ad and traffic engineering components, disbursements would be made against 100 percent of the c.i.f. cost of directly imported equipment, mate- rials and supplies, and 65 percent ot such items procured locally. For civil works, the disbursement percentages are based on the estimated foreign exchange costs and, with the exception of the outfall sewer, would be at the rate of 40 percent against certified monthly progress payments or expenditures. For the outfall sewer, disbursements would be made against 60 percent of expend- itures. For consultants' services, disbursements would he made against I00 percent of foreign costs or 80 percent of total expenditures. Disburse- ments for small-business loans would be made against 60 percent of the value of loans against supporting evidence of disbursements on a quarterly basis. 67. Retroactive financing is recommended for about $2 millilon equiva- lent for consultants' services in assisting with project preparation since September 1975 and for initial civil works carried out at Dagat-Dagatan and the Tondlo Foreshor-~ since January 1976. This work was essential tor the effective initial implementation of the project and was undertaken in consultation with the Bank. Moni toring 68. The Government has included a system of monitoring in the project. This will enstire that data essential to project execution is provided to pro)jec, managers, and that the design and execution of future projects be- nefits from the experience cf this project. Monitoring of the upgrading, SiLeSf and services, health and employment generation components of the prolect wLIL he under the general supervision of a special unit within the NIIA. Monitoring of the trarsportation component will be the responsibility of the P'lanning and Project Development Office (PPDO) in the DPWTC. .Jstification and Economic Analysis 69. Thle Tondo Foreshore and Dagat-Dagatan components will improve the health and living conditions of the Tondo Foreshore residents, stimulate the cre;ation by Lhe private sector of approximately 800 jobs in the indus- trlal/commerctal estate and create 200 jobs through the cottage industry loan  - 19 - program. Approximately 12,000 man-years of direct employment, associated with project construction activities, will also be created. The transport- ation component would improve the efficiency of the existing road network, through improvements in the capacity of key junctions and also through pro- vision of important links in the circumferential-radial road network of the city that would serve to divert port-related traffic away from the heavily congested urban center. The provision of technical assistance to DPWTC for the new Metropolitan Manila Commission (MMC) would assist the development of the new Manila Government and help improve metropolitan-wide management and cadastral information. 70. The project would: directly benefit the 180,000 persons now residing in the Tondo Foreshore areaL, who are among the poorest families in Manila. The current median family income in this Tondo area is about $576 a year which, with an average family size of 6.6 persons, is a per capita income of $87 a year. 71. The benefits of the traffic improvement compone~nt would be more widely distributed, but lower income people would derive considerable benefit from the reduction in traffic congestion and urban travel time and the im- provement in safety conditlons. The portion of the R-10 constructed under the project would provide for more efficient distribution of port traffic, and would provide access to the Dagat-Dagatan site. 72. The measurement of economic benefits for the slum upgrading, sites and services, and industrial estates components of the project is based upon estimates of increases in property values brought about by the provision of infrastructure and other services; and on this basis, the economic rate of return for the residential component is 21 percent, and the economic rate of return for the industrial/commercial development in the project area is 40 percent. 73. The benefits arising from the major road components were considel4d to be savings in road transport costs of all diverted traffir from their pre- sent heavily congested routes in the central Business Distr.ct to the project roads. The economic rate of return for the R-10 road is edtimated to be 36 percent (between circumferential roads C-1 and C-2) and 45 percent (between C-2 and the Dagat-Dagatan road). For the section of C-2 to be construc- ted tnder the project, the economic rate of return is estimated to be 18 percent. Rates of return for the C-3 and the road in Dagat-Dagatan were not calculated because the works are very small. The estimated weighted average economic rate of return fc,r the Tondo Foreshore, Dagat-Dagatan and major road components of the project is 27 percent. Conclusions, Major Loan Conditions and Recommendations 74. The project wouJLd be the first attempt to tackle some of the major problems facing metropolitan Manila and, if successful, should demonstrate the practicality of this approach for upgrading the standards of living of the 3.2 million persons now estimated to be living at or below the minimum  - 20 - subsistence level there and in other fast growing urban areas. It would also help the Government to develop institutions and formulfte polictes and pro- grams which deal efficiently with the problems of urba.i growthl. ?S. During the course of project preparation, several issues were addressed, the most importamt of which were: (a) Land-Use. The original propcsals for the Tondo Foreshore area involved a lDw density development that would have entailed demolition of most housing units and relocation of up to some 70 percent of the Tondo residents. To reduce the amount of relocation, the alignment of the R-10 was shifted from a path that would cut through the center of the area to an alignment along the port wall that minimizes relocation, and still neets the present and anticipated access needs of the port. The proposed density levels were also increased. (b) Design Standards. The standards of the core units and the sizes of lots to be provided in Dagat-Dagatan were reduced, an'd the use of self-help house construction was increased in order to reduce costs and ensure affordability. In the Tondo Foreshore, 'houses would be realigned along roads and footpaths to improve circulation after consultation with the residents of particular blocks to minimize social disruption. (c) Land Tenure. Tenare in the Tondo area is a long-standing political issute, the satisfactory resolution of which was critical to the achievement of the project's social objectives and the orderly implementation of the project. A Presidential Decree has been signed recently, which now provides long-term leases to residents with options to purchase after five years. (d) Cost Recoverv. Bank staff and the Government discussed the question of cost recovery extensively during the early stages of project preparatlon and the Covernment recognized thiat effective cost recovery was essential given the very large future investments necessary to meet growing urban needs. The recovery formula described in paras. 59 - 63 is the result of these discussions and has the full support of the Philippine Govermnent. 76. I'he major risks inherent in the project relate to the fact that the NIIA is newly created and Inexperienced in the type of work proposed. The project would require i high level of cooperation and coordination be- tween the NIIA and dtfferen agencies of the Government, as well as with the residents of the Tondo area; It would also require a major commitment by the Government in staff, financing and effort to ensure successful execution. The Government is fully aware of the organizational efforts involved and has agreed to take the necessary steps to ensure successful execution, since it  - 21 - attaches high priority to the urban sector. The covenants relating to NHA are discussed in paras 'i4 and 55 of this report. Inter-agency coordination would be ensured through the Presidential Letter of Instruction (LOI) des- cribed in para. 54. The risks associated with the project are considered reasonable in light of the substantial benefits to the urban poor .hat would be generated. Technical. assistance and monitoring and evaluation arrangements have been incorporated to assist management in the execution of this project and design of future projects. In addition, supervision, at least in the initial stages of project implementation, would require a heavy commitment of the Bank's staff time. PART V - LEGAL INSTRUMENTS AND AUTHORITY 77. The draft Bank and Third Window Loan Agreements between the Republic of the Philippines and the Bank, the Report of the Committee provided for in Article III, Section 4 (iiI) of the Articles of Agreement of the Bank and the text of the resolutions approving the proposed loans are being distributed separately to the Executive Directors. 78. Special conditions of the project are listed in Section III of Annex IV. The following would be additional condltions to the effectiveness of the loan agreements: (a) the conclusion of subsidiary loan agreements between the Government and NHA and the Government and MWSS referred to in para 58, (b) employment of engineering consultants by NHA referred to in para 54, and (c) the issuance and effectiveness of the Letter of Instruction (LOI) referred to in para. 54. 79. 1 am satisfied that the proposed loans would comply with the Articles of Agreement of the Bank and that the Third Window loan would comply with the established criteria for such loans. PART VI - RECOMMENDATION 80. 1 recommend that the Executive Directors approve the proposed loans. Robert S. McNamara President Attachments May 17, 1976  'I* U - :. o.,o a~~~~~~ ~ ~ 5 CM >n4 4 ;' vU '4 - o: .. 04. ;;