Philippines - Angat Water Supply Optimization Project

Document of The World Bank FOR OFFICIAL USE ONLY 1 A3/al-Pi- Report No. 7801-PH STAFF APPRAISAL REPORT PHILIPPINES ANGAT WATER SUPPLY OPTIMZATION PROJECT August 23, 1989 Infrastructure Operations Division Country Department It Asia Regional Office This document has a rsdcted distribution md may be used by eciplents only in the performane of tbei officall dudes. Its contents may not otherwise be disclosed wihout Wodd Bak aothoon  CURRENCY EQUIVALENTS Currency Unit Peso (F) I Peso - US$0.047 US$1 P 21 (April 1989) WEIGHTS AND MEASURES I meter (m) - 39.37 inches (in) 1 square meter (sq m) c 10.8 square feet I kilometer (km) 0.62 mile I hectare (ha) . 10,000 square meters (sq m) or 2.47 acres I cubic meter (cu m) D 264 US gallons, approximately I metric ton I cubic meter per second (cums) - 22.82 million US gallons per day Gigawatt hour (GWH) - I million kilowatt hours (kwh) liter (I) 0.26 US gallons liter per capita per day (lcd) - 0.26 US gallons per capita per day metric ton (ton) - 2,205 lbs or I cubic meter of water ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank COA Commission on Audit DBM Department of Budget and Management DOF Department of Finance DOH Department of Health DPWH Department of Public Works and Highways EA Engineering Area (MW'fs Engineering and Design Department) ERR Economic Rate of Return GC Government Corporation LWUA Local Water Utilities Administration MIS Management Information System MSA M\SS Service Area MWSS Meiroo.mlitan Waterworks and Sewerage System NCR National Capital Region NEDA N4tional Economic and Development Authority NPC National Power Corporation NRW Non-Revenue Water NWRC National Water Resources Council OECF Overseas Economic Cooperation Fund of Japan PMO Project Management Office PNB/UB Philippine National Bank and Union Bank RWDC Rural Waterworks Development Corporation RWSA Rural Water Supply and Sanitation Association WD Water District FISCAL YEAR January 1 to December 31  FOR OMCIAL USE ONLY PHILIPPI ANGAT WATER SUPPLY OPT7MITION PROJECr Loan and Project Summary Borroen: Metropolitan Waterworks and Sewerage System (MWSS). Guaraut3on Republic of the Philippines. Deneficiaties: The City of Manila and 36 neighboring municipalities. US$40 moilion equivalent. T-ems 20 years, including 5 years of grace, at the Bankes standard variable interest rate. The proposed project would supply water to meet the expected water demand in MWSS service area (MSA) until te . year 2000. The project has been designed to: (a) increase MWSSs water production capacity; (b) provide 15 cubic meters per second of water for an additional population of 3 million persons; (c) expand the distnbution system to increase service coverage to 75% of the MSA by 1994, particularly in poor neighborhoods; (d) improve the efficiency of MWSS's operations; and (e) strengthen MWSS's finances as well as its planning and management information systems. The project would be cofinanced by the Asian Development Bank (ADB) and the Overseas Economic Cooperation Fund of Japan (OEC?), and includes the construction of water transmission, treatment and distnbution facilities, ie. a 6 km tunnel, 18 km of aqueducts, 35 km of water mains, 520 km of distnbution pipelines, a water treatment plant for 10.6 cubic meters per second, and a water reservoir (260,000 cubic meters). During the project period, MWSS would continue to develop its institutional capabilities by carrying out a satisfactory Development Program aimed at improving the corporations's financial performance, planning and operating efficiency. ad Rid= The project would maximize benefits from existing investments, postponing alternatve investments costing three times those of the proposed project. It would provide urgently needed water to the MSA, which has about half of the county's industrial base, its commercial center and a population of about 9 million people. The project would: (a) eliminate water rationing and low pressures for about 5 million people who are already served; (b) distnbute water supply benefits to the entire MSA; (c reduce the dependence of commercial and industrial consumers on deep welis and excessive use of underground water, which is damaging the aquifer, (d) restore normal pressures, decreasing the potential health risk posed by sewage infiltration into unpressurized distibution mains; and (e) strengthen one of the countrys largest corporations, which would influence other water utlities in the Philippines. There are no unusual project risks. The major risk, ie., delayed implementaton of the various components which could postpone overall project completion by one or more years, is mitigated by MWSSs experience with similar works and the fact that the raw water transmission system, the critcal component of the project, has already been contracted. when this component is completed, any other completed works would produce immediate benefits by using the existng facilities. Failure This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - to reduce non-revenue water would tncrease the cost of water and reduce the population benefited under the proJect However, the resuts achieved in paiu of the distribution already rehabilitated indicate that the proposed "--mrevenue water targets are achievable. Poiect C5 Local Foreimn Total - (USS mfllion) - IBRD-Financed Works 27.7 22.7 50.4 ADB-Financed Works 31.2 54.1 85.3 OECF-Financed Works 33.6 42.7 76.3 Locally-Financed Works 19.4 4.6 24.0 Base Cost (December 1988) 111.9 124.1 236.0 Physical Contingencies 8.3 9.3 17.6 Price Contingencies 12.5 18.3 37.8 Total Proiect Cost / i39.7 151.7 291A Interest During Construction 37.3 33.2 70.5 Total Finangcia R.eautred 177.0 184.9 361.9 Fina Plan World Bank 12.9 27.1 40.0 Asian Development Bank 37.5 92.5 130.0 OECF Loan (Govenument's Equity to MWSS) 29.3 50.7 80.0 Bonds-Local Banks 46.3 8.9 55.2 Intemal Cash Generation 28.8 5.7 34.5 Other Local Funds 22.2 - 22.2 TOTAL 177.0 184.9 361.9 Esmated sbement Bank Fiscal Year FY90 FY21 FY92 FY93 EY94 FY95 (US$ milion) Annual 5.2 6.8 8.4 10.0 8.0 1.6 Cumulative 5.2 12.0 20.4 30.4 38.4 40.0 cnoic Rat of Retum: 15% Mag: IBRD21605 M/ Incduding taxes and duties equivalent to US$7.6 million.  PHIUPNES ANGAT WATRlt SUPPLY OPTEMATON PROJECr Table of Conten Loan and Proiect Summary i 1. THE WATER SUPPLY AND SEWERAGE SECTOR . . . . . . . . .1 Sector Background . . . . . . . . . . . . . . . . .1 Sector Organization . . . . . . . . . . . . . . . . 2 Sector Financing ................. 2 Sector Issues and Constraints. . . . . . . . . . . . 2 Previous Bank Lending . . . . . . . . . . . . . . . 4 Sector Strategy ................. 4 2. WATER DENAND ................. 5 The Project Area ................. 5 Population.. ............... 5 Levels of Service ................. 5 Water Demand. ............... . 6 New Water Connections . . . . . . . . . . . . . . . 7 Non-Revenue Water . . . . . . . . . . . . . . . . . 7 Forecasted Demand and Supply . . . . . . . . . . . . 8 Production Capacity ............... . 8 3. THE PROJECT.9 Project Origin. 9 Rationale for Bank Involvement . . . . . . . . . . . 9 Project Objectives . . . . . . . . . . . . . . . . . 9 Project Description. 9 Project Cost .11 Financing Plan .11 Project Implementation . . . . . . . . . . . . . . . 13 Technical Assistance .14 Procurement .14 Disbursements . . . . . . . . . . . . . . . . . . . 14 Project Supervision .15 This report is based on the finding of an appraisal mission consisting of X. Fernandez (financial analyst), J. Koxel (sanitary engineer), and consultants F. Nielsen (municipal engineer) and K. Waterhouse (sanitary engineer) Who visited Manila in April 1989. The report was edited by P. Brereton.  - iv - 4. THE BORROWER .16 The Borrower and Executing Agency. 16 Personnel and Training . . . . . . . . . . . . . . . 16 Operations and Maintenance . . . . . . . . . . . . . 17 Billing and Collection . . . . . . . . . . . . . . . 18 Accounting and Auditing . . . . . . . . . . . . . . 18 5. FINANCIAL ANALYSIS .... . . ...... . . . . . . 19 Past and Current Financial Performance . . . . . . . 19 Water and Sewerage Tariffs . . . . . . . . . . . . . 20 Overall Financial Plan And Inv :stment Program . . . 20 Financial Projections . . . . . . . . . . . . . . 22 Monitoring and Evaluation . . . . . . . . . . . . . 23 6. ECONOMIC AND SOCIAL ANALYSIS . . . . . . . . . . . . . 24 Project Benefits . . . . . . . . . . . . . . . . . . 24 Least-Cost Solution . .24 Economic Rate of Return . . . . . . . . . . . . . . 25 Marginal Cost . . . . . . . . . . . . . . . . . . . 25 Affordability . . . . . . . . . . . . . . . . . . . 26 Impact on the Urban Poor . . . . . . . . . . . . . . 26 Environmental Impact . .27 Project Risks . .27 7. AGREEMENTS TO BE REACHED AND RECOMMENDATION . . . . . 28 ANEXS: Annex 1 Existing Water Supply and Sewerage Systems . . . . 29 Annex 2 Water Demand ..... . . . . ....... . . . 34 Annex 3 Project Description .... . . . ....... . . 49 Anmex 4 Project Cost Estimates and Financing Plan .... . 51 Annex 5 Implementation Schedule . . . . . . . . . . . . . . 58 Annex 6 Economic and Social Analysis . . . . . . . . . . . 59 Annex 7 Estimated Schedule of Loan Disbursements . . . . . 67 Annex 8 MWSS's Development Program . . . . . . . . . . . . 68 Annex 9 Water and Sewerage Charges . . . . . . . . . . . . 73 Annex 10 MWSS's Financial Projections . . . . . . . . . . . 77 Annex 11 Monitoring Indicators . . . . . . . . . . . . . . . 80 Annex 12 Assumptions for Financial Projections . . . . . . . 81 Annex 13 Documents Available in the Project Files . . . . . 84 CHART: MWSS's Organization Chart MAP: IBRD-21605  1. THE SECTOR Sector Ba Ir I systems are Metropolitan Manila, where only about 750,000 people or 9% of the metrapolitan popladon 1.1 The provision of water supply and are served, and three other cities wher service is sanitation serviees in the Phflippines ha improved provided to the central areas. Because of the limited considerably over the past two decades. Following a sewerage systems and inefficient private sanitary major sector review in 1973, the current sector waste disposal facflities, untreated or poorly treated institutions were established and sector objectives, domestic sewage is a major source of water pollution. strategies and development plans defined. Between 1972 and 1980, water supply senvces were extended 1.3 The Philippine has abundant water to an additional three million people, bringing the reourcs for domestic water supply, irrigation and tota population with access to safe water to around industral use. Average annual rainfall is about 22 million or about 45% of the population. By end- 2,300 mn, and there are 18 major and over 400 1987, about 63% of the population had access to safe principal vers, abowt 60 natural lakes, and a water, including 31% which was served by piped signdicant well-documented quantity of groundwater. osptems. The rest of the pouato (about 21.2 However, most of the rain is concentrated in four million) relied on open dug wells, rainwater cisterns, months, the monsoon season, when floods and lakes, ponds and streams of often doubtful quality tyhoon damage are major problems. During the Although absolute service levels are improvln& the remainder of the year, the rivers dry up, necessitating quaity of service in the areas covered is often poor, expensive dawrs and water regulation. With rapid with low water pressures throughout and rationed population growth, the most accessible water sources, service in some areas. and the least costly to develop for community use, are already exploited, and mey are now inadequate to 1.2 Santation services have also been support the present service areas. Development of exanding. Although the 1980 census estimated that water sources to serve the larger urban areas in the only about 56% of the population had access to future will thus need to exploit more distant rivers, at water-borne sewerage (either sanitary sewers or a higher development cost. Simialy, the supply of combined sewer/storm drain systems), septic tanss or rural communities increasingly requires development pits for excreta disposal, a survey by the Depaent of deeper groundwater, at increased costs. Water of Heath (DOH) at end-1986 showed that about 69S pollution is also a growing problem, and in 1986 the of all households had safe excre disposal facilities, National Pollution Control Commission identified 37 about 15% had unsafe facMites and about 16% had major and principal rives as seriously polluted due to none at alL In terms of population seved, about 62% discharges from domestic sewage, municipal solid of the rural and 80% of the urban populaions had wastes and industial wastes. Health statisdcs reflect access to saniay facilides, with Metropolitan Manila this situation, indicating the nationwide prevalence of having the hiest serwve level at 93%. Pit or pour- water-bome and sanitation-related diseases. flush latrines predominate throughout the countly. In Substantdal improvement of the countys water supply Metrpolia Manila, the dominant disposal facilites and sanitadon systems must therefore have high are septic tns, many of which are not well priority, to reduce the incidence of these diseases and maintained and are inefflcient in treating the wastes to improve the general living standard of the which they disbcharge to surface water drainage populaion. systems. The only areas with sanitry sewerage  .2 - Sector Owiganizat illingness to pay for them. Accordngy, individual house connections are usuaUly provided in the larger 1.4 The National Water Resources Council metropolitan and provincial urban arsa, standpipe (WRC), which includes representatives of the various systems on the basis of the community's financial sector institutions, is responsible for coordination and ability and wllingness to pay for them, and wells with integration of al aeivities related to development and hand pumps in the 'ural areas. Tarifts In management of water resources The Metropolitan Metropolitan Manil- have allowed MWSS to eam a Waterworks and Sewage System (MWSS, fnancial rate of return of 8% on its revalued net fixed established in 1972, is responsible for the assets in operadon. For provincial water supply development, operation and maintenance of water (WDs), tariff are supposed to generate adequate supply and sewerage systems in or around levels of revenue to meet operation and maintenance Metropolinan Manila. The MWSS Service Area MSJA) costs and cover debt servicing costs or depreciaton, of about 150,000 ha includes Mania City, four whichever is greater. In rural areas, tariffs are neighborng cites and 32 municipalities. The Local expected to meet operation and maintenance costs Water Utilities Admisation (LWUA), established in and the capital costs of distnbution works related to 1973, is responsible for providing technical and individual connections; the Government usualy financial assistance for water supply and sanitadon fiances the remaining capital costs. However, because development to about 730 provincial cities with of extensive poverty and political reluctance by some populations above 20,000 and, since 1987, to rural local governments to increase tariffs, water tariffs in communities. Both MWSS and LWUA are semi- the WDs are usually Inadequate, resting in financial autonomous corporations under the Department of deficits and ddayed payments to LWUA, jeopardizing Public Works and Highways (DpWH). The the financial viability of the sector. For water entites Department of Health (DOH) implements the rumal with excessive debt burden, some grant fiancing may sanitation program and monitors drnkig water be needed to strengthen thewr finances and provide a quality, reasonable debt to equity ratio. 1.5 The operation and maintr e of 1.7 Due to the depressed economic provincial water supply sysms is the responsiolty of conditions and politicl changes that occurred duing locally-established Water Districts (WDs), which are 198486, ivestment in water and sanitation services also semi-autonomous public uties, sering one or the sector declined. However, in 1987, the more ;inicipalte. Rural Water Supply and Govment confirmed its commitment to sector Sanitation Assocations (RWSAs) are responsible for development by adopting a Water Suipply and the rural systems. By end-1988, some 290 WDs and SanitationMaster Plan which provides a well- more than 200 RWSAs had been esblished. integrated, but overly ambitious package of policies, programs and projects to be implemented in two Sector F-maoif g stages, from 1988 to 1993 and from 1994 to the year 2000. Initiation of LWiUKs part of the program was 1.6 SectordevelopmentInMetropolitanManUa delayed due to _ magement and staff conflicts, but is financed through funds selfgenerated by MWSS the recent approval of a new LWUA Adminsatr government equity contributions, and forig or local ensures that implementaton wil now proceed. loans. LWUA, which is a fmancial intermediary for the remaining cities, is also funded through Sec d C govenmment contnbutions and loans, and on.lends these funds to WDs for stem deelopment The 1.8 Despite the progress made, a nber of municipalities served by the WDs nonnally nake some issues and constraints stil impede sector development equity contribution to self fance part of the cost of and performance, including problems related to development, while the financially weaker WDs funding, planning, the sector instiuons, and receive some goverment grants The RWSAs also operating efflciency. receive government equity contributions and benefit from grants provided through bilater asisnce. 1.9 Bundg. The avalability of local funds The G'vernmes general poliy is to develop systems for system financing has been generally inadequate on the basis of a community's financl ability and Governent countepart funds have not been available  -33. when needed, largely due to economic crime and operations to the 12 regions, as DOH and DPWiH have competing demands, but also as a result of utrealistic already done, In order to better serve the provincial planning and budgetin. Furthermore, funds which population and improve collections. Flurthermore. shcould have been generated by the WDs, LWIJA and since LWUA is moving progressively to serve the MWSS have not mateialied because of inadequate smaller municipalities, which may not have sufficient tariffs, high levels of unaccounted-for water (para custonmes to pay for adequate accounting,engineering 1.16), debt revauation both in dollar and in pesos, and managem-ent~, it may need to mrate larger and poor collection efficiency. districts or :ven provincia water systems, allowing economies of scale and cross-subsidization which 1.10 BIlin-f and Poor biling and would ensur the proviion of water servies to all collection efficiency need to be addressed. Excessive muciatesn each region. Fuinally LWUA (and to accounts receivable and Mlegal connections reduce a lesse extent MWSS) nmangement and labor need sector revenes and result. mn higher tariffs for the to improve their relationship to prevent operational population paying their bills LWUA has a serious disruptions like those which slowed and impaired problem due to the poor collecton performance of the LWUA operations fr'om 1987 to 1989. WDs; its collection efficiency declined fr-om 76% of bfilings in 1981 to 51% in 1987, and has been as low 1.14 Institutional development in the WDs as 25% to 30% for RWSA-operated sysems. MWSS arid the RWSAs in the regions has been limited, has improved its collecton rate, but fiurther efforts are causig institutonal, operational and financial needed to reduce its accounts receivable, which are problems, particularly in the smaller and poorer approaching six months of billing, particularly fot RWSAs. Since the provision of servces in the rural other government agencies (para 4.12). areas relies mainy on commuinity participation, the success of such programs will largely depend on 1.11 Pang.Development in the sector moiiigcommunity support for the development tends to be adverely effected by optimistic planning and maintenance of water suPPlY and santation and goals. Historical informoation on imlmnain facfilites. capacity and expenditure rates is overlooked in the planning process, as is the availabilit of local 1.15 Groundwater Use, Excessive use of countepat fuds. The lack of pragmatic plans is a groundwater in the Manila Metropolitan Region is constaint to sector development since invesatment depleting the aquifer and resulting in intrusion of plans must often be reduced during project salinity in thte areas near Manila Baty. However, there impemetaton,cauing loans and budgets to be is little that can done until MWSS can provide undertlie.similry, water demand projections are additional water, end shortages and ensur a more often unrealistc, resultin in overivtitment, low relable supply. Curmtaiig the use of groundwater for water sales, underutilized capacity and finawcia existing industria uses, when the cannot be deficifts Consequentiy, under the proposed project~ supplied by MWSS, would have a negative impact on emphasis has been given to inmpoing water demand industrial production and employment. The larest forecast and fnancial planning, and estblishing usern of groudwater in depleted zones hav been improved mnonitoring and management information identified by MWSS, and adequate transmiz 'on and systems durin mlmetto (pam. 5.13). distribution facilties would be provided under the proposed project to supply them reliably and reduce excessive water abstraction in thee zones. If these 1.12 AnttuinalAraements. The overall problems persist after adequat supply capacities are orgnization of the sector is basically sound, with one provided by, 1994, it would be necessary to enact majo exception. NWRC coordinates water resources legislation establishing more rigorous controls on development, but no institution exists to coordinate water use and allowing MWSS to charge for the use sewerage and sanitaton activities. Therefore sewage of underground water, to reduce its excessive use and disposal, sanitation and pollution control receive less contribute to the financing of expanded water supplY attention tha WLtr supply. failites in the MSA. 1.13 Sevealoganztoa changes are also 1.16 Onerationa ffceny The water supply needed within LWUAL First. it should decentralize its agencies curently receive no reveue for a large  -4 - portion of the water distribute. MWSS, for example, 1.19 Project iplementation has normally has had non-revenue water (NRW) of almost 60%, but been slow, with delays of two wr more years, largely is now canying out a large-scale program to gradually due to macroeconomic problems related to th: reduce NRW to below 40% by 1994 (see paras. 2414 countr8s difficult econoWlc and political situation and 2.15j. LWUA has also begun to focus on NRW culminating in the 1986 revolution. These problems problems in the WDs, which wfll require leak resulted in high inflation, large currency devaluations, detection programs as well as the implementation of shortages of countepart funds, business failures by measures to prevent such problems, including contrac.ors, a major reorganizadon of sector unproved specifications for pipe materis and meters, istitutions and changes in sector management and and rigorous inspection of pipeie instlation. key staff In all instiutions. 1.20 Recognizing these consDa, the Bank. Previous Bk Ig under its S. ecial Action P.rogram, attempted to faciitate implementation by, ariong other things, 1.17 Except for a loan in 1964 for increasing disbursement percentages, establshing developmaent of the Metropolitan Manila water supply special accounts, and working with the project entties system, the BankWs involvement in the sector to amend project scope. These measures, combined essentally started in 1977 with the First Provincisi with actions taken by the implementing agencies to Cities Water Supply Project (Loan 1415PH, US$23 adjust to the new crc nces, helped ameliorate million, Project Performance Audit Report No. 6422) the situation somewbas Howtver, changes in the to improve water supply to five provincial towns. scope of some projects meant that about US$60 'nce then, five additional loans have been made milion equivalent (about 20% of tme Bank loans p Aviding for (a) expanon of water supply and ounding) coutd not be utfied before loan closing sewerage in Metropolitan Manila (Loan 1615-PK and had to be cancelled. Some institutional US$35.5 milion in 1978 (Project Completion Report achievements were also diminished, due to No. 7153); Loan 1814-PH, US$63.0 mMion in 1980, discontinuity in top management positions and uneven and Loan 2676-PH, US$69.09 million in 1986); (b) professional interesL water supply in provincial towns (Loan 1710/Credit 920-PH, US$38.0 milion in 1979); and (c) a national program of rural water supply and sanitation (Loan Sector Ste 2206-PH US$35.5 million in 1982). 1.21 The Banles role in the sector is to assist 1.18 The above-mentioned projects have the Govennment in implementing its sectoral program substantially met or are expected to meet their through the provision of needed financial resources physical and institutional objectives, although they and in gradually soving the sector issues and have suffered construction delays and fallen somewhat constraints mentioned above. The Bankes past short of their financial goals. Instiutionally, the involvement in the sector has been instrumemal in projects have been important in helping to establish helping the Government to develop a well-conceived and set satisfactory orgazation structnes and insutonal framewok and policies for the sector. in byiaws, implement exesie training programs, the uture, given existing levels of service, Bank improve the technology used, establish biling and assistance will focus on the provison of serice to the accounting nems, and provide the capacity to urban poor as well as continued improvement in implement inestments reulting in a lare expansion institutional capabilities, partculary in planning and of water and sewerage services (pares. 1.1 and 1.2). system operation and maintenance.  2. WATER DEMAND The Project Area 8.1 persons (about 1.4 households) per connection. However, a census of about 360,000 households in 54 2.1 The proposed project would assist MwSS zones in the NCR indkates that the population to increase its water supply production capacity to already served is larger than estimated, averaging senre 37 municipalities in the MWSS Service Area about 9 persons per connection (1.5 households). This (MSA.) and a total population of almost 9 milon (see value wa used for the water demand in this report, Map). This ipcludes Metro Manila proper, also reducing itie estimates of the population to be served referred to as the National Capital Rcgion (NCR), and the reported per capita consumption. which is the countr/s most developed and fastest- growing area as well as its cultural, economic and PERCENTAGE SERVED WITH WATER BY MWSS political center. The NCR includes the cities of Manila, cPECNTG AS W^IT R Caloocan, Pasay and Quezon City and another 13.5 - _ _ _ _ municipalities, and has about 13% of the countrys s _ _ _ _ _ population and more than half of its large industries. m _ _ - _ f 1_ - - - _ However, 2.5 milion persons live in blighted areas with minimum servi. es and poor housing. 2.? The MSA area of about 150,000 ha I -