Philippines - Manila Second Sewerage Project

Document of The World Bank Report No. 15346-PH STAFF APPRAISAL REPORT REPUBLIC OF THE PHILIPPINES MANILA SECOND SEWERAGE PROJECT APRIL 12, 1996 Infrastructure Operations Division Country Department I East Asia and Pacific Region  CURRENCY EQUIVALENT (as of January 1, 1996) Currency Unit = Peso (P) 1.0 Peso = US$0.04 US$1.0 = P 25.0 WEIGHTS AND MEASURES 1 meter (m) = 39.37 inches 1 kilometer (km) = 1,000 meters or 0.62 miles 1 square meter (m2) = 10.8 square feet 1 square kilometer (km2) = 0.38 square miles 1 hectare (ha) = 10,000 square meters or 2.47 acres 1 cubic meter (m3) = 1,000 liters or 264 US gallons 1 liter (1) = 0.26 US gallons 1 liter/capita/day (lcd) = 0.26 US gallons/capita/day 1 million liters/day (Mld) = 1,000 cubic meters/day 1 metric ton (t) = 1,000 kilograms or 2,205 pounds ABBREVIATIONS AND ACRONYMS BOD = Biochemical Oxygen Demand CORPLAN = Corporate Planning Department, MWSS DPWH = Department of Public Works and Highways ECC = Environmental Compliance Certificate EIA = Environmental Impact Assessment EIS = Environmental Impact Statement EMB = Environmental Management Bureau EMP = Environmental Management Plan Government = Republic of the Philippines MM = Metro Manila MMDA = Metro Manila Development Authority MWSS = Metropolitan Waterworks and Sewerage System NCR = National Capital Region NEDA = National Economic Development Authority NGO = Non-governmental Organization NRW = Non-revenue Water PCG = Philippine Coast Guard SSD = Sewerage System Department MWSS FINANCIAL YEAR January 1 - December 31  PHILIPPINES MANILA SECOND SEWERAGE PROJECT Contents Page No. Loan and Project Summary .............................. iv I. BACKGROUND Metro Manila ..................... 1 Wastewater ......................1 Water pollution ......................1 Institutions ......................1 Development targets ..2...................2 Previous Bank lending ..2...................2 Rationale for Bank involvement .....................3 II. THE PROJECT AREA AND SERVICES Project area ...............................4 Water supply service ...4............................4 Drainage, sewerage and solid waste disposal ...............................4 Water pollution control ...5............................5 Operation and maintenance ................................5 Demand for the project ...6............................6 HI. THE PROJECT Project origin ..................7 Objectives ..................7 Description ..................7 Status of preparation ..................8 Cost estimate ..................8 Financing plan ..................9 Implementation ................. 10 Land lease and acquisition ................. 10 Procurement ..................1 I Disbursement ................. 12 Environmental impact ................. 13 Supervision ................. 15 This report was prepared by Messrs. Anjum Altaf, Jaroslav Kozel, Albert Wright, John Nicholson and Ms. Manida Unkulvasapaul who appraised the project in July 1995. Ms. Martha Ochieng and Ms. Kajal Jagatsing helped prepare the report. The project was reviewed by peers Messrs. Edouard Motte and Rajagopal Iyer, and cleared by Mr. J. Shivakumar, Chief, EAlIN, and Ms. Pamela Cox, Acting Director, EAI.  (ii) IV. THE IMPLEMENTING AGENCY Implementing organization ................................. 16 Metropolitan Waterworks and Sewerage System ................................. 16 Organizational structure ................................. 16 Staffing and training ................................. 16 Performance and management ................................. 17 Development programs ................................. 17 Institutional issues ................................. 17 Private sector involvement ................................. 18 Project implementation ................................. 18 V. FINANCIAL ANALYSIS Planning and budgeting .................... 19 Rate structure and revenues ................... 19 Accounting and auditing ................... 20 Billing and collection ................... 20 MWSS financial performance ................... 21 SSD financial performance ................... 21 Project financing ................... 22 Monitoring and evaluation ................... 23 VI. PROJECT JUSTIFICATION Project benefits ............... 24 Rate of return ............... 25 Least-cost solution ............... 26 Data base establishment ............... 28 Project risks ............... 28 VII. AGREEMENTS REACHED AND RECOMMENDATION Agreements .30 Recommendation .31 ANNEXES 1. Services in the project area .32 2. Project description .40 3. Project cost estimate .44 4. Implementation schedule .49 5. Summary of project implementation action plan .50 6. Estimated schedule of loan disbursement. 5 1 7. Environmental assessment .52 8. Project supervision plan .62 9. SSD financial statements .65 10. Assumptions for financial projections .68 11. Project performance monitoring .70 12. Rate of return . 76 13. Documents and data available in the project file .82  ORGANIZATION CHARTS I1. Organization of MWSS .............................. 83 2. Organization of Sewerage System Department .............................. 84 3. Organization of Project Inplementation .............................. 85 MAP IBRD No 27244: Location of the project  I  (iv) PHILIPPINES MANILA SECOND SEWERAGE PROJECT Loan and Proiect Summary Borrower: Metropolitan Waterworks and Sewerage System. Guarantor: Republic of the Philippines. Implmentin Agency: Metropolitan Waterworks and Sewerage System. Beneficiarv: Not applicable. Poverty: Not applicable. Amount: US$57.0 million equivalent. Terms: 20 years, including 5 years of grace, at the Bank's standard variable interest rate. Commitment 0.75% on undisbursed loan balances, beginning 60 days after Fee: signing, less any waiver. Financing Plan: See para. 3.10 Net Present Not applicable. Value: Map: IBRD No. 27244 Project ID No: 4611  I  1. BACKGROUND Metro Manila 1.1 Metro Manila (MM), the National Capital Region, covers about 636 km2 along the eastern shore of Manila Bay. MM is the Philippines' primary administrative center, with a concentration of commerce, industry and services. Its eight cities and nine municipalities had a 1995 population of 8.9 million, about 30% of whom - mainly migrants from rural areas - live in about 600 slums. Population pressures, ineffective control of industrial growth, and an absence of development planning have overloaded the region's infrastructure and caused rapid environmental deterioration. Wastewater 1.2 About 18% of MM wastewater is collected by a sewer network and discharged untreated into Manila Bay. The remainder is discharged into the public drainage system either directly or through approximately 1 million household septic tanks constructed under the Sanitation Code. Most of the septic tanks do not have on-site soil absorption systems and are rarely desludged. Water Pollution 1.3 Most of the pollution generated from domestic, industrial, and commercial activities in MM eventually ends up in the three primary water bodies: the rivers and canal system, Laguna de Bay, and Manila Bay - a large shallow coastal water supporting thousands of fishing families. As a result, the river system in MM is biologically dead, Laguna de Bay increasingly turbid, and the eastern shoreline of Manila Bay is unsuitable for recreation. The daily water pollution load generated in 1995 was estimated at about 980 tons of biochemical oxygen demand (BOD), of which 40% was from residential wastewater, 38% from industries and 22% from solid waste dumped in rivers. Institutions 1.4 Water supply and sewerage services in MM are provided by a government corporation, the Metropolitan Waterworks and Sewerage System (MWSS), which also provides water supply and sanitation services to one city and 19 municipalities in neighboring Rizal and the northern part of Cavite provinces. Responsibility for drainage is divided between the Department of Public Works and Highways (DPWH), which develops and operates the main flood-control system, and the cities and municipalities, which build and maintain street drains. 1.5 The responsibility for planning and coordinating several metro-wide services - transport and traffic management, solid waste management, pollution control, flood control, drainage, sewerage, land use planning, and zoning - was recently vested in the Metropolitan Manila Development Authority (MMDA) established in March 1995. Its policy-making and governing body is a council composed of all MM mayors. The chairman of the council has the rank of a cabinet member and is appointed by the President. 1.6 Other agencies involved in sector activities are DPWH, which oversees MWSS, the Department of Health, which monitors drinking water quality, the National Water Resources  2 Board, which coordinates water resources development and management, and the Environmental Management Bureau (EMB) of the Department of Environment and Natural Resources (DENR), which plans environmental management, including enforcement of regulations. EMB is also responsible for studies and programs aimed at reducing industrial pollution, and safe disposal of toxic and hazardous waste. The National Economic and Development Authority (NEDA) is the central agency for national development planning and coordinates programs, projects and policies initiated by other government agencies. Development Targets 1.7 Among the Government's key development objectives is economic development without environmental degradation. This is reflected in'the 1993-98 Medium-Term Development Plan (MTDP) and the MWSS Strategic Plan. The guiding principles in the MTDP include decentralization, private sector-led development, public consultation, cost recovery, and social equity. The MTDP provides a policy framework for MM water quality management strategy, which includes programs for (a) expanding and improving the quality of sanitation services, and (b) controlling the major sources of pollution in the area's waterways. It also provides the framework under which water supply and sewerage master plans are being prepared for MM. Previous Bank Lending 1.8 The Bank has supported MWSS with four loans for water supply and one for sewerage and sanitation'. All projects have been completed and the completion reports (except for Ln 3124, which closed on December 31, 1995) found the projects to have substantially achieved all physical objectives. Bank strategy in the sector is to support Government investment programs to improve sewerage and sanitation. The proposed project would be the Bank's second major sewerage and sanitation operation in the MM area; the first was the US$63 million loan for the Manila Sewerage and Sanitation Project (Ln 1814-PH, 1980), which was cofinanced by the Asian Development Bank. The project constituted the first phase of the sewerage master plan and included rehabilitation of deteriorated sanitary sewers in the central area, extension of sanitary sewers in adjacent areas, construction of combined sewers in about 14 km2 of low-income areas, and upgrading of combined sewer and septic tank maintenance operations. 1.9 The start of the project coincided with the onset of economic difficulties in the Philippines. As a result project completion was delayed by five years, some components were not completed and others failed to have the anticipated impact because of the budgetary squeeze during the economic crisis. Two project sub-components in particular failed to measure up to expectations; the Sewerage System Department (SSD) was established under the project but was deprived of resources resulting in premature decay of physical infrastructure; and the septic tank maintenance could not be launched as the EMB failed to designate a landfill site for disposal of septage. Given the circumstances, the performance audit report (No. 13204) found that the project substantially achieved its objectives of extending the coverage of the sewer system and construction of combined drainage and sewer system in low-income areas. Manila Metropolitan Water Supply Project, Ln 386-PH (1964); Manila Water Supply II, Ln 1615-PH (1978); Manila Sewerage and Sanitation Project, Ln 1814-PH (1980); Metropolitan Manila Water Distribution Project, Ln 2676-PH (1986); Angat Water Supply Optimization Project, Ln 3124-PH (1989).  3 Rationale for Bank involvement 1.10 The proposed project is consistent with the Country Assistance Strategy2 which identified the need for upgrading infrastructure and improving management of human and industrial waste in MM. In the improved economic situation, assistance can be resumed to MWSS to upgrade wastewater infrastructure and take necessary steps in managing human waste consistent with the environmental objectives of the Philippines and of the Bank. The Bank is also considering assisting the Government in preparing separate projects addressing MM's industrial pollution and solid waste management problems. 1.11 Since 1970s the Bank has shared with the Government and MWSS a concern about the status of sewerage and sanitation services in MM and its funding of the first project puts it in an advantageous position to support the agency's overall long-term development program. The Bank has recently helped arrange assistance from the Japan International Cooperation Agency (JICA) in formulating a long-term development program through updating the 1979 water supply and sewerage master plan. Studies on the new 1996 master plan were completed in early 1996. The updated plan envisages urgent renovation of the water distribution network to address the current extremely high level of non-revenue water, development of a major new water source, and a complementary distribution network. The plan also proposes changing from separate to combined3 sewerage systems, and includes the construction of interceptor sewers, septage4 treatment plants, and wastewater treatment plants. The proposed project conforms with the provisions of the master plan. 2 Memorandum of the President dated February 15, 1996. 3 Combined sewers provide one pipe for both surface water drainage as well as wastewater which is required to first pass through a septic tank to remove solids. Hygienically superior separate sewers provide separate pipes for each service. 4 Septage is the septic tank contents, including the liquid and the solid matter settled in the lower part of the tank.  4 2. THE PROJECT AREA AND SERVICES Project Area 2.1 Metropolitan Manila ranges from low-density predominantly agricultural parts to highly congested areas where a large informal sector coexists with the formal sector. While roughly 56% of MM's population is employed, over 40% of households live below the poverty level in slums, some occupying strips of land alongside railroad tracks and rivers. Population growth has outstripped basic services, resulting in unhygienic and unpleasant living conditions, especially for the poor. Annex 1 provides a detailed description of the project area and services. Water Supply Service 2.2 Water supply is provided by MWSS. In 1994 the daily average production was 2.8 million m3. Out of 815,000 service connections about 93% were residential using about 66% of the water sold. Most of the raw water (97%) comes from surface sources, and the rest from deep wells. The current production capacity of 2.9 million m3/d is being increased to 4.0 million m3/d in 1999. The quality of distribution system is a cause of serious concern, as NRW, of which the major part is believed to be leakage, amounted to about 59% of production.' So far, attempts to deal with the problem have been only marginally successful. Further improvements are to be undertaken following on-going extensive studies of the distribution network. Drainage, Sewerage and Solid Waste Disposal 2.3 MM terrain is flat and subject to flooding. Natural drainage is provided by the Marikina and Pasig Rivers and short streams and canals (esteros), many of them interconnected. The natural drainage system is complemented by an infrastructure network, divided into main and street drainage. The Flood Control and Drainage Division of DPWH maintains the rivers and main drainage facilities; street drainage is maintained by cities and municipalities. Both systems suffer from frequent blockages caused by solid waste dumped in the drains and smaller streams. 2.4 Sewer system coverage in MM is very low. The majority of the population (5.5 million) discharge wastewater into street drains via about 1 million septic tanks, and another 2 million living in blighted areas dispose of liquid and solid wastes directly into drains and rivers. Only about 1.4 million people are served by the three separate sewerage systems, Central, Ayala, and Dagat-Dagatan. The Central sewerage system covers 26 km2 or 70% of Manila city and serves a population of about 1.2 million. The Ayala and Dagat-Dagatan systems, in Makati and Malabon municipalities, cover areas of 6 km2 and 5 km2, respectively, and serve 0.1 million people each. The Central system discharges untreated wastewater into Manila Bay, the Ayala system has a conventional activated sludge plant and the Dagat-Dagatan system provides treatment in waste stabilization ponds. About 114 km of sewers in 41 minor sewerage systems provide simple treatment in 39 communal septic and 2 Imhoff tanks. Except for the Central system, all others discharge their output into the nearest river. 1 In 1995 the NRW was reduced to 52% of production.  5 2.5 Because of low priority accorded to sewerage and sanitation infrastructure maintenance during the period of the economic crisis, the existing facilities have deteriorated. The Central sewerage system suffers from broken pipes and manholes and surcharges in wet weather. Lift stations are not adequately maintained, one of the twin pipes in the siphon under the Pasig river is blocked, several pumps at the main Tondo pumping station are not functioning, and the outfall pumping main into Manila Bay has restricted capacity, possibly because of blocked diffuser outlets. Treatment at the newer plant at Dagat-Dagatan is satisfactory, but the performance of the Ayala treatment plant is inadequate. The MWSS program for desludging septic tanks started under the Bank-financed Manila Sewerage and Sanitation Project (para 1.8) cannot be implemented due to absence of septage treatment facilities or designation of agricultural land suitable for waste disposal. 2.6 The solid waste generated in MM, estimated in 1995 at 5,500 tons per day is partly collected (about 75%) by the MMDA and private contractors and deposited in two sanitary landfills. Some uncollected waste is buried or burned at source, but the majority of it is dumped into drainage and open waterways. Water Pollution Control 2.7 Inadequate control of municipal and industrial liquid and solid waste over the last decade, combined with a large expansion of squatters and rural in-migration, have resulted in rapid degradation of water quality and the Government has recently initiated corrective steps. The municipalities and non-governmental organizations (NGOs) are gradually resettling squatters from the strips along rivers and improving collection of solid waste. DENR has tightened control of toxic and hazardous wastes, and commissioned studies aimed at finding ways to reduce industrial waste and the resulting pollution of water and air. DENR's programs for pollution control will include enforcement of stricter effluent regulations and coordinated plans for joint industrial treatment facilities. Operation and Maintenance 2.8 The sewerage and wastewater facilities are operated and maintained by the Sewerage Systems Department (SSD) of MWSS. Its facilities include (a) the Central system network, secondary boosting and the main Tondo pumping stations; (b) the Ayala system network and wastewater treatment plant; (c) the Dagat-Dagatan system network and waste stabilization ponds, and (d) minor sewerage systems with Imhoff and community septic tanks. Under the proposed project, SSD would employ contractors to desludge septic tanks, maintain appropriate records, and operate a pilot septage treatment plant to be built at Dagat-Dagatan. Unscheduled cleaning of septic tanks on owner request will be provided by SSD's staff. 2.9 Maintenance of the network, equipment, and laboratory facilities is inadequate. The project would supply equipment to improve maintenance and introduce procedures needed to correctly estimate budgetary allocations for preventive maintenance.  6 Demand for the Project 2.10 MWSS implemented the first phase of 1979 master plan during 1980-89 (Manila Sewerage and Sanitation project, para 1.8) and completed studies for the second phase of the plan. It became apparent, however, that the plan could not be implemented as envisaged, due to reluctance to bear the high cost of the conventional separate sewerage systems. Meanwhile, existing sewerage facilities fell into disrepair due to inadequate maintenance, the program for sewer house connection slowed, and the desludging of septic tanks practically stopped due to lack of facilities for septage disposal. 2.11 The proposed project is designed to address these problems. It would provide for collection, treatment, and disposal of sludge collected from septic tanks (septage), rehabilitate existing sewerage facilities, and accelerate provision of sewer house connections. It also includes provision of specialized equipment to improve maintenance and design support for the follow-up combined sewerage system that will make use of existing septic tanks. 2.12 The project's septage management component has widespread support among political decision makers, the regulatory community, and the general public in Manila. The First Lady, as the chairperson of the Pasig River Rehabilitation Committee, has endorsed the goal of raising water quality in the Pasig River. It is clearly understood by all parties concerned that this goal is not achievable without the septage management component of the proposed project.  7 3. THE PROJECT Project Origin 3.1 The 1979 sewerage master plan envisaged a phased expansion of the conventional separate sewerage system, which now serves about 1 million people. Only a part of the plan was implemented, and follow-up works were discontinued because of prohibitive costs. Subsequent reviews have indicated that using the existing drainage network and about 1 million household septic tanks would be a less expensive alternative for the remaining population. This would require periodic removal of septage from the septic tanks, however, and MWSS now lacks the treatment facilities or dump sites needed for septage disposal. 3.2 MWSS has, thus, developed a two-stage septage management plan. In the first phase (1996-99) MWSS would desludge some 300,000 tanks while building a pilot (200 m3/day) septage treatment plant. Most of the septage would be barged some 40 km off the Philippine coast and dumped in the deep Pacific waters of the Marianas Trench.' Based on the data acquired during the first phase, the second phase (2000-07) would be used to build technically and institutionally appropriate land-based septage treatment plants, which would allow ocean dumping to be terminated in 2003. Objectives 3.3 The proposed project is intended to help the Government improve the quality of sanitation services and enable MWSS to: (a) radically expand its septage management program and establish the conditions needed for medium-term low-cost improvement of sewerage services in MM, and (b) reduce pollution in MM waterways and Manila Bay, thereby reducing the health hazards associated with human exposure to excreta. 3.4 Project performance monitoring will track the success of the project in accomplishing its objectives, review what worked and what did not, and ensure that results of dispersion modeling, ongoing environmental monitoring, and public consultations during the implementation of the septage conveyance and disposal components are fully incorporated into future septage management plans. Details of the monitoring and evaluation system and key project performance indicators confirmed during negotiations are described in Annex 11. Description 3.5 The project would include: (a) building three barge loading stations for septage disposal at sea under a private collection and disposal contract, (b) building a pilot septage treatment plant, (c) rehabilitating the Central and the Ayala sewerage systems, the Ayala treatment plant, and constructing about 10,000 individual sewer connections, and (d) providing maintenance equipment, tools, spare parts and laboratory instruments. Implementation support would include (a) construction supervision and environmental monitoring and management assistance, (b) Deep ocean dumping of much larger quantities of septage has been carried out by Japan and other countries for many years, and is considered environmentally safe. See Para 3.27 and Annex 7  8 preparing designs and documents for the follow-up expansion of the sewerage system and septage treatment plants, and (c) preparing documents for the Manila Water Supply III project. 3.6 Private contractors would desludge 300,000 septic tanks during the project and transport the septage to the treatment plant and to the barge loading stations for disposal at sea. The septic tanks would be selected from areas in the vicinity of the Pasig River to yield immediate water quality benefits and living condition improvements in low-income areas. Each of the three barge- loading stations (at Napindan, Estero de Vitas and Paranaque) would have the capacity to transfer about 500 m3/d of septage from collecting vehicles to barges. The pilot septage treatment plant (200 m3/d) would be located at Dagat-Dagatan. It would chemically separate the liquid and solid components of septage, aerate the liquid portion in existing oxidation ponds, and dewater the solid portion which would be disposed in the San Mateo sanitary landfill. Upgrading of the Central sewerage system would include repairing defective pipes and pumping stations and minimizing the entry of rain water to the system; at Ayala, the pumping station and sedimentation tanks would be repaired to provide mechanical treatment. New sewer connections would increase the population served by the Central system by about 80,000. The SSD would be strengthened with specialized equipment for sewer cleaning, vehicles, tools and spare parts; the MWSS central laboratory would obtain instruments to modernize operations. A detailed description of the project is in Annex 2, and the locations of the works are shown on map IBRD No. 27244. Status of Preparation 3.7 Detailed designs and draft bidding documents for the project were completed in January 1995 by MWSS, assisted by the Original Engineering Consultants (Japan) and DCCD (Philippines), retained by MWSS and financed under the Japanese Grant Fund. MWSS would arrange for minor modification and completion of the documents, including environmental management plans. Cost Estimate 3.8 Project cost is estimated at P 1,906 million (US$76.2 million). The foreign currency requirement is estimated at P 697 million (US$27.9 million) or 37% of the total. Base costs reflect end-1995 price levels. Physical contingencies are estimated at US$3.0 million, or 5% of base costs and price contingencies at US$12.9 million, or about 20% of base cost plus physical contingencies and assume the following annual rates of inflation: for local costs 7% for 1995, 6.5% for 1996, 6% for 1997, 5.5% for 1998 and 5% for 1999-2000; and for foreign costs 2.6% for 1995 and thereafter. Exchange rates have been adjusted to reflect purchasing power parity on the basis of inflation rates for local and foreign costs. 3.9 The total cost of implementation support is estimated at US$10.9 million representing about 3,200 person months of which about 1,930 person months would be the cost of construction supervision, environmental monitoring and management assistance, about 890 person months would be the cost of detailed engineering designs of the follow-up expansion of sewerage system and septage treatment plants, and about 380 person months would be the cost of preparing documents for the Manila Water Supply III project. The input of national consultants is estimated at 3,030 person months while the expatriate input is estimated at 170 person months. The cost estimates prepared by the consultants, based on similar works undertaken in recent  9 years, were found satisfactory during appraisal. They are shown in Annex 3 and summarized in Table 3.1. Table 3.1: Project Cost Estimate .Item Local Forgn Total Local Forgn Total % of l Total l _____________________ Peso Million US$ Million Septage management 169 177 346 6.79 7.05 13.84 23 Central system 1/ 284 153 437 11.34 6.14 17.48 29 Ayala Rehabilitation 129 95 224 5.16 3.80 8.96 15 Support facilities 34 138 172 1.38 5.50 6.88 11 Land lease & acquis. 114 0 114 4.56 0.00 4.56 8 Implem. support 155 60 215 6.21 2.39 8.60 14 Base cost 886 622 1,508 35.43 24.89 60.32 100 Phys. contg. 44 31 75 1.77 1.24 3.02 5 Price contg. 279 43 322 11.16 1.74 12.90 21 TOTAL COST 2/ 1,209 697 1,906 48.36 27.87 76.23 126 I/ including P 250 million for construction of sewer connections 2/ includes taxes and duties estimated at US$8 million Financing Plan 3.10 The proposed Bank loan of US$57.0 million equivalent would finance about 75% of the total project cost or 100% of the foreign exchange requirements and 60% of local costs. The remaining US$19.2 million or 25% of the total project cost would be financed by MWSS from internal cash generation (Table 3.2). Retroactive financing equal to US$300,000 is recommended for expenses incurred after July 15, 1995, to reimburse MWSS for the cost of consulting services prior to loan signing on the basis of advanced contracting to be approved by the Bank. The financing plan was confirmed at negotiations. The borrower would be MWSS and the Republic of the Philippines would be the guarantor. The proposed Bank loan would be for 20 years, including five years of grace, at the Bank's standard variable interest rate. Table 3.2: Project Financing Plan Source Local Forgn Total % of ------ US$ million ----- Total Loans IBRD 29.13 27.87 57.00 75% Capital Contributions MWSS cash generation 19.23 0.00 19.23 25% TOTAL 48.37 27.87 76.23 100%  10 Implementation 3.11 The project would be implemented by MWSS and carried out by contractors. The bulk of the implementation is expected between June 1996 and December 1999. Construction of new facilities, rehabilitation works and sewer connections would be executed by four civil work supply and install contracts supervised by the MWSS Construction Section. The collection of septage and its disposal would be managed by SSD and carried out under three contracts, one for each barge loading station; each of these contracts would combine the collection from a defined area with sea disposal, the activities to be carried out by private contractors. Pilot operation of the septage treatment plant at Dagat-Dagatan would be carried out by SSD staff. Collection and evaluation of data on septic tanks, on characteristics of septage and on pilot operation would be managed by the MWSS Applied Research and Quality Control Department. 3.12 The MWSS implementing units would be assisted by consultants, to be appointed for four years starting September 1996. The consultants duties would include (a) supervising contractor compliance with specifications for new works and goods, adhering to construction schedules, testing and commissioning completed works; (b) supervising contractor compliance with specifications for septage collection, transportation and sea disposal; (c) monitoring and evaluation of septage management; and (d) advising on training of staff to operate completed facilities. Outline terms of reference are attached with the project implementation action plan prepared by MWSS and appraised and accepted by the Bank in July 1995. In December 1996 MWSS would also establish an advisory panel of technical, institutional, and management specialists to assist in guiding the pilot treatment operations and evaluating them in relation to the designs of future septage treatment plants. At negotiations, it was confirmed that the Government will arrange for periodic independent audit of the monitoring and evaluation system (see para 38, Annex 7). The project implementation organization is shown in Chart 3. 3.13 Septage collection, barging at Napindan and Estero de Vitas loading stations, and sea disposal are expected to begin in January 1997; the Paranaque barge loading station is expected to operate from May 1999. The Dagat-Dagatan treatment plant is expected to start pilot operations in January 1998. The rehabilitation and upgrading of the Central and Ayala sewerage networks and the Ayala treatment plant is expected to start in January 1997 and be completed in December 1998. Preparation of designs and bidding documents for septage treatment plants to be built as part of the second phase of the septage management plan (para 3.2) is expected to be carried out from January 1998 through December 1999. The implementation schedule is shown in Annex 4. At negotiations, MWSS confirmed adherence to the project implementation action plan defining the scope and timing of actions needed to carry out the project successfully. The action plan is available in the project file and is summarized in Annex 5. MWSS has experience with much larger contracts for civil works and equiptnent installation than contemplated under the proposed project, and the proposed schedule for the septage management component is considered realistic; however, the sewer system rehabilitation component may encounter delays due to permissions required in connection with excavation works in MM. Land Lease And Acquisition 3.14 The units to be built under the project include the pilot septage treatment plant, which would be located next to the Dagat Dagatan oxidation ponds on MWSS land, and two of the  11 barge loading stations, which would entail the use of existing facilities to be leased together with a plot of land from DPWH. Only minor additions would be made to the latter for protection against septage spill and for washing tankers and parking areas. Execution of the lease agreement between DPWH and MWSS would be a condition for loan effectiveness. The third loading station, to be constructed in 1998, would be located on land to be reclaimed in Manila Bay and procured by MWSS when the reclamation is completed. All other rehabilitation-works would be located on MWSS land so that no land acquisition or population relocation would be required by the project. Procurement 3.15 Procurement would be carried out in accordance with the Procurement Guidelines under ]BRD Loans and IDA Credits, dated January 1995 (1996 reprint). Civil works for three geographically distributed barge loading stations (US$1.6 million), unlikely to be of interest to foreign bidders, would be procured through national competitive bidding procedures acceptable to the Bank. 3.16 Civil works for construction of the pilot septage treatment plant and all rehabilitation works (US$49.3 million) would be procured through international competitive bidding following pre-qualification of bidders and using the Bank's Standard Bidding Documents (SBD). ICB procedures and SBD would also be used for procuring the bulk of maintenance and laboratory materials and equipment (US$7.7 million). Materials and equipment packaged in individual contracts that do not exceed US$200,000 each or US$1.0 million in aggregate amount, would be procured through NCB procedures acceptable to the Bank. For procurement under ICB procedures, domestic goods would be allowed a preference margin of 15% of C.I.F. bid price or the amount of customs duties, whichever is lower for bid evaluation. Procurement arrangements are summarized in Table 3.3. 3.17 The three major civil works contracts that comprise the bulk of procurement (US$49.3 million) would include supply and installation of electrical and mechanical equipment. The contracts and estimated costs are: (a) construction of Dagat Dagatan septage treatment plant (US$15.9 million); (b) rehabilitation of Ayala sewerage network and wastewater treatment plant (US$11.4 million), and (c) rehabilitation of Central sewerage system (US$22.1 million). 3.18 Consultants to assist with supervision of construction, management and monitoring of septage operation, and various studies and designs (US$10.9 million) would be selected in accordance with the Guidelines for Use of Consultants by World Bank Borrowers using the Bank's Standard Form of Contract for Consultants' Services. Due to a tight project schedule, MWSS intends to employ a firm of consultants to help with minor modifications of bidding documents completed earlier, finalize environmental management plans for all components, and assist with starting the bidding process (para 3.7). Advanced contracting for these services, estimated in total at US$150,000, would be carried out in accordance with the Bank's Procurement Guidelines. 3.19 Prior Bank review would be mandatory for civil works contracts estimated to cost more than US$5.0 million, and contracts for goods estimated to cost more than US$1.0 million. This would cover about 90% of the value of the goods contracts and about 95% of the value of the  12 civil works contracts. All other contracts would be subject to Bank post review procedures. All consultancy contracts will be subject to prior review except for those estimated to cost less than US$100,000 for employment of consulting firms or US$50,000 for employment of individuals. For the exceptions, prior Bank review shall be required for terms of reference for such contracts, sole source procurement, assignments of critical nature, and amendments to contracts raising their value above the threshold limits. Table 3.3: Project Procurement Arrangements 1/ (US$ million) Project Element | Procurement Method NBF 3/ Total | ICB | NCB | Other 2/ Co Civil Works 49.31 1.60 | _ 50.91 _____ (36.59) 1 (1.20) __(37.79) Equipment 7.68 1.00 | | 8.68 (7.68) (0.65) (8.33) Implementation Support 10.88 10.88 (10.88) (10.88) Land Acquisition 5.76 5.76 (0.00) (0.00) Total 56.99 2.60 10.88 5.76 76.23 (44.27) (1.85) (10.88) (0.00) (57.00) 1/ Includes contingencies; amounts in parentheses are to be financed by the Bank. 2/ Includes engagement of consultants. 3/ NBF (Not Bank-Financed). Disbursement 3.20 The proceeds of the Bank loan would be disbursed against: (a) 100% of foreign expenditure for civil works; (b) 50% of local expenditure for civil works; (c) 100% of local expenditure (ex-factory) for locally manufactured equipment and materials, or 65% of local expenditure for other equipment and materials procured locally, and (d) 100% of total expenditure for consultant services, training and studies. An amount of US$300,000 would retroactively reimburse expenditure for consulting services incurred after July 15, 1995. 3.21 Disbursements would be made on the basis of Statements of Expenditures (SOE) for actual expenditures against: (a) contracts of less than US$5.0 million equivalent for civil works, (b) contracts of less than US$1.0 million equivalent for goods, and (c) consultant's contracts of less than US$100,000 equivalent for firms and US$50,000 equivalent for individuals. Supporting documentation for these expenditures would be retained by MWSS, made available for review by Bank supervision missions, and regularly audited by auditors acceptable to the Bank. 3.22 To facilitate loan disbursement, MWSS may, for purposes of the project, open and maintain in dollars a special deposit account (Account) in a commercial bank specifically authorized for this purpose by the Bangko Sentral ng Pilipinas on terms and conditions  13 satisfactory to the Bank, including appropriate protection against set-off, seizure or attachment. The Account which would cover the Bank's share of eligible expenditures in all disbursement categories would have an authorized allocation of US$2.0 million to be withdrawn from the Loan Account and deposited in the Account, provided, however, that unless the Bank would otherwise agree the authorized allocation shall be limited to an amount equivalent to US$1.0 million until disbursements and outstanding commitments against the loan equal or exceed the equivalent of US$10.0 million. Applications for replenishment of the Account, supported by documentation, would be submitted regularly (not less than quarterly) or when the amount withdrawn equaled 50% of the initial deposit. During negotiations agreement was reached whereby MWSS would establish and hold the Special Account in a commercial bank acceptable to the Bangko Sentral ng Pilipinas and IBRD. 3.23 Project implementation would extend over six years, starting from September 1996. All major works would be substantially completed on December 31, 1999. To allow for completion of studies and rehabilitation works, which may experience delays, the loan will be closed on December 31, 2001. A schedule of estimated disbursements as well as a profile of disbursement under previous Bank-assisted water and sewerage projects is shown in Annex 6. Environmental Impact 3.24 The project would have a marked net positive environmental impact by: (a) reducing the level of human exposure to raw wastewater, with public health benefits; (b) reducing organic pollution of MM waterways and Manila Bay, and protecting groundwater from contamination, and (c) increasing MWSS capacity to control pollution. The project has an Environmental Category A rating because of sea disposal of septage but no adverse impact on the marine environment is expected (para 3.27). Relatively minor potential negative effects include: (a) traffic and noise during construction; (b) increased levels of noise and odor during septage collection and shipping and operation of the pilot treatment plant, and (c) possible accidental or improper discharge of septage. Mitigating actions to limit these and possibly other negative impacts are identified in the Environmental Impact Assessment (EIA) and Supplementary Reports and would be implemented during project execution. Public consultations would be held as appropriate. No relocation of population is required by the project. 3.25 MWSS has submitted an Environmental Impact Assessment (EIA) for the project to the Bank and complied with information disclosure and public consultation requirements. The documents were distributed to the Bank's Public Information Center and the EIA summary was made available to the Board on June 2, 1995. In July 1995 MWSS also submitted to the Bank a supplementary EIA report containing outlines of environmental management plan (EMP) for each project component. In response to comments from the Bank and EMB, a revised supplementary EIA report was submitted in December 1995. During project implementation, the environmental impact of each component would be monitored separately in accordance with the detailed EMPs (see Table A 7-2 for schedule). At negotiations, assurances were obtained that MWSS would (a) agree to completion of the detailed EMPs according to schedule, (b) submit annually, starting from December 31, 1996, a report summarizing the results of monitoring the compliance with the EMPs, and (c) submit annually, starting from June 1997, a report containing the independent audit of the septage management operation.  14 3.26 In accordance with national environmental regulations, MWSS also submitted the project EIA to the Philippine EMB for review. The receipt by MWSS of Environmental Compliance Certificates (ECC) for collection, barging and sea disposal; Dagat-Dagatan pilot septage treatment plant; and rehabilitation of the Central and Ayala sewerage systems and Ayala treatment plant would be a condition for loan effectiveness. 3.27 The project would (a) reduce the BOD loading of the rivers and shoreline of Manila Bay by an estimated 30%, and (b) improve sanitary conditions within the project area, extending to about 15 km2, thus reducing the level of human exposure to raw wastewater and improving public health. It is estimated that from the total residential water pollution load of 390 t/d of BOD about 30% or 130 t/d of BOD would be removed from MM's waterways by effective performance of existing septic tanks and improved Central and Ayala sewerage systems. The Bank engaged an independent outside expert to visit the Philippines and evaluate the likelihood that deep sea disposal of septage might have an adverse impact on the marine environment. The expert concluded that on the basis of internationally available data, the environmental risk in the sea disposal of septage is minimal. This is due to both the relatively low levels of contaminants in septage, and the exceptionally high dispersion characteristics of the disposal site, which is more than 40 km from the nearest shoreline. Against this insignificant risk, the accelerated collection and sea disposal of septage will give rise to significant and measurable benefits in the Pasig River and inner Manila Bay. The expert's report is available in the project file. 3.28 The sea disposal option was selected after extensive studies and evaluation of alternatives, including disposal in the 'lahar" lava remaining from the eruption of Mt. Pinatubo, incineration, and dewatering in combination with disposal in sanitary landfills, all in the context of the short time frame of several years for which the interim disposal site is needed to obtain basic data for designing land-based permanent treatment of septage. In addition to being the least-cost solution among the above alternatives, sea disposal presents an advantage in requiring relatively minor investments in permanent structures, as almost all costs are recurrent, and it allows disposal - with its important benefits for the urban environment - to begin quickly. Sea disposal also provides operational flexibility to increase, decrease, or completely stop the collection and disposal of septage without the serious impact on operations that would occur using any other technology. 3.29 The identified sea disposal site is one of eight waste disposal sites designated by the Philippine Coast Guard in 1991 in accordance with the London Convention2. The site is located approximately 115 km from the barging stations, outside normal fishing grounds, about 20 km off the nearest navigation lane, with ocean depth about 2,300 m. During November to March, the current flows westward away from the shores; from May to October, under the influence of the strong southerly wind, it moves towards Luzon's west shores in a north to north-easterly direction, the typical travel time to the nearest shore being approximately ten days. Confirmation of the environmental impact of sea-dumping through a mathematical model prepared by an independent consultant would be a condition of loan effectiveness. Barging frequency is estimated at 240 days a year, taking into account non-navigable conditions and mitigating reasons. The combined collection and disposal contracts would allow cessation of septage collection during periods of inclement weather thereby obviating the need for storage facilities. The proposed 2 The 1972 Convention on the Prevention of Marine Pollution by dumping waste and other matter was held in London on 29 December 1972, entered into force on 30 August 1975 and was amended in October 1978, September 1980, and November 1993.  15 monitoring and mitigating actions, revised in December, 1995, are summarized in Annex 7 and considered to be satisfactory. 3.30 Possible negative effects identified in the EIA report include increased levels of dust, noise, odor, traffic and water pollution during: (a) construction and operation of the pilot STP; (b) collection of septage, and (c) sea dumping. These impacts would be mitigated through proper design and installation of pollution control facilities, and effective implementation of an environmental management plan, including provision of enclosed, ventilated buildings with deodorizing equipment for transfer activities; installing buffer zones or noise barriers; using vacuum trucks to collect septage; limiting working hours and vehicle speed; installing traffic signals; providing tow trucks; and monitoring environmental quality. Dewatered sludge will be disposed of at San Mateo sanitary landfill. Mitigating measures are included in detailed designs and contract documents. Supervision 3.31 The proposed project would be supervised semi-annually in the field to review implementation progress, technical matters, construction quality, compliance with loan covenants, and environmental requirements, and to discuss relevant matters with the Government and implementing agencies. A mid-term review would be organized in October 1998 to evaluate project implementation, tariff status and compliance with the EMP. The sea disposal of septage would be evaluated at this review based on the results of the monitoring program and the need to adhere to the cessation timetable of 2003 would be reassessed. Activities at headquarters would involve reviewing progress reports and procurement actions and preparing various project-related correspondence. Supervision would require about 58 staff-weeks over the life of the project, of which about 30 staff-weeks would be in Washington and 28 staff-weeks in the field. Supervision would require expertise in sanitary engineering, water and air pollution control, environmental issues and financial analysis. 3.32 MWSS would forward to the Bank semi-annual progress reports, various annual environmental, financial and audit reports, and an evaluation report on project implementation within six months of project completion (para 5.21). The proposed supervision plan as well as outlines of progress reports, water quality status report and the evaluation report are shown in Annex 8. At negotiations, the format and content of these reports were agreed with MWSS.  16 4. THE IMPLEMENTING AGENCY Implementing Organization 4.1 The project would be implemented jointly by MWSS Construction, which would employ and supervise respective contractors, MWSS Engineering, which would collect and evaluate data on septage and guide environmental monitoring, and MWSS Operations, which would employ and supervise contractors to collect and dispose of the septage. The SSD would operate the facilities after construction of the septage treatment plant and rehabilitation of sewer networks. A project management office would be established within Engineering to coordinate project implementation. MWSS has carried out similar activities and is experienced in implementing this type of project. Metropolitan Waterworks and Sewerage System 4.2 MWSS is a government corporation established by charter in 1971 to develop, operate and maintain water supply, sewerage, and sanitation systems in and around MM. MWSS has non-profit status and is exempt from most taxes and duties. MWSS also has some quasi- regulatory functions, including setting bylaws relevant to its service functions. The MWSS Board has the power to set tariffs and ratify its budget after it is approved by the Office of the President. Like all government-owned corporations, MWSS is subject to: (a) NEDA approval of its investments; (b) a rate-of-return limit of 12%; (c) civil service employment rules and salary structures, and (d) public sector procurement rules. Organizational Structure 4.3 Corporate powers and functions are vested in a Board of Trustees appointed by the President of the Philippines. The ex-officio Chairman of the Board is the Secretary of DPWH. The chief executive of the corporation, the administrator, is also appointed directly by the President. The administrator is assisted by a senior deputy administrator, six deputy administrators (DA) responsible for engineering, construction, operations, customer services, finance, and administration, and the corporate planning and management information systems groups. Some customer service functions (metering, billing, collection, and minor leak repair) are decentralized to eight geographical customer service sectors reporting to DA customer services. The MWSS organization structure is shown in Chart 1. 4.4 The SSD, under the deputy administrator for operations, is responsible for sewerage and sanitation services. The department has three divisions: operation and maintenance; sewer connection extension and field investigation, and septic tank maintenance. Its organization is shown in Chart 2. Staffing and Training 4.5 In 1995 there were 6,954 MWSS employees, including 2,154 casual workers. MWSS is overstaffed compared to similar utilities elsewhere; the number of water-related employees per thousand water connections is 7.5 compared to 5.5 for the Bangkok Metropolitan Waterworks Authority, while the number of sewerage-related employees per thousand sewerage connections is  17 5.1, which is satisfactory. Employees are remunerated under the general civil service salary/benefits scale. MWSS contracts out some services, including delivery of water bills and collection of payments, and regular desludging of septic tanks. Recently, the corporation has begun contracting out some distribution system leak repairs. 4.6 MWSS conducts in-house training in most technical areas relevant to its activities, and managerial and personnel development training. It also conducts an annual exchange of staff with the Metropolitan Waterworks Authority of Bangkok. Performance and Management 4.7 Most financial parameters continue to indicate adequate performance. In relation to comparable utilities, its rate of return on assets and billing efficiency are high, and tariffs are average. However, service delivery is an area of concern. While the quality of water is good, pressure is low with frequent shortages and a significant percentage of the population remains unserved or underserved. Sewer service coverage is very low, and most septic tanks have never been desludged. The most financially threatening problem continues to be the high proportion of non-revenue water (NRW). After declining through the late 1970s from around 50% to around 46% it has risen to an estimated 55% to 60% of production as new capacity has come on stream. This, and other evidence of premature decay of capital equipment, indicates deficient maintenance. MWSS plans to reduce NRW to 30% by the 2000 through major investments in network rehabilitation and renovation. Data for the first seven months of 1995 show an NRW decrease of 1% a month - to 53% in July - through intensive leak repairs. Development Programs 4.8 MWSS needs to make major capital investments in the near future to reduce the population without water and sanitation services, improve the unsatisfactory state of its facilities, and address significant environmental problems. While investment alternatives have been studied, adequate attention has yet to be given to their financing and management requirements. Institutional Issues 4.9 While major capital investments are required, the very high level of NRW threatens the viability of future investments. While lack of maintenance over a prolonged period is the proximate cause of the situation, MWSS has not yet clearly identified the roots of its maintenance problems. Efforts to improve performance have focused on computerization to generate management information, and training and capacity building to improve personnel skills; these do not seem to have made a significant difference in improving key performance indicators, in particular NRW. The Water Supply and Sewerage Master Plan completed in early 1996 includes an institutional analysis to determine the underlying causes of the unsatisfactory performance and suggest changes to enable the agency to successfully finance, build, and - most importantly - maintain its facilities.  18 Private Sector Involvement 4.10 MWSS is considering a number of unsolicited proposals for increased private sector participation in its operations. Most of these pertain to water supply; expressions of private sector interest involve offers for investments in source development and water treatment plants on a build-operate-transfer basis. There has been one limited proposal for private participation in operating a part of the sewerage system. Recently, MWSS, with strong support from the Government, has initiated studies, with the IFC as the lead advisor, to evaluate private participation in the form of concessions to improve service levels and reduce NRW. Septic tank desludging has been carried out by private contractors employed by MWSS and is to be greatly expanded under the proposed project. The proposed project is compatible with a privatization scenario, as septage collection and disposal will be bid out to private contractors. 4.11 The exact scope of the proposed concession arrangements for MWSS have not been determined as yet. Responsibility for investment in and operation of the sewerage and sanitation systems could be completely transferred to the private concessionaire or shared in some way with the national Government, the newly formed MMDA and local government units. At negotiations, the Government confirmed that in the event of changes in the responsibility for providing sewerage and sanitation services in MM from MWSS to another entity during implementation of the project, it would consult the Bank prior to undertaking any such changes or restructuring. Project Implementation 4.12 SSD's resources and organization are adequate to implement the proposed project, except for the need to train the management and operational staff of the pilot septage treatment plant. Its engineering department would provide the research support required during implementation of the pilot phase for collecting and evaluating data needed to design the subsequent phase of the septage management plan. It would coordinate with agencies involved in water pollution control, such as the Pasig River Committee, and be assisted by consultants and professionally guided by an advisory panel (para 3.12). 4.13 Land-based disposal of treated sludge would be required for the first time after operations begin in the pilot septage treatment plant, scheduled for 1998. The functions of the existing disposal and contract service section of SSD septic tank maintenance division would need to be expanded and staff trained to adequately undertake the new activity. The training would be provided by the suppliers of equipment and would be included in contract documents.  19 5. FINANCIAL ANALYSIS Planning and Budgeting 5.1 MWSS annual budgets are approved by its Board subject to approval by the Office of the President. The operational expenditure budget for sewerage operations is prepared by SSD. Assurances were obtained during negotiations that MWSS would prepare separate budgets for SSD, including income statements and balance sheets for FY97 and thereafter. In addition to annual budgets, the MWSS corporate planning group (CORPLAN) makes ten-year investment, financial and operational projections. Rate Structure and Revenues 5.2 CORPLAN reviews the adequacy of water supply and sewerage charges each year. Its policy for tariff formulation considers the actual costs of operations and maintenance, including depreciation, and estimated future costs, plus a rate of return on net fixed assets in operation of at least 8% to provide for improvement and expansion of the systems, and a margin to ensure perpetuation of the organization. The review, including requests for tariff increases, is submitted to the Board for approval. 5.3 All customers connected to MWSS water supply are metered and billed at progressive block rates. There are residential, commercial, and industrial bands. The residential bands have nine blocks ranging between 10 and 100 m3/month, and commercial and industrial users have three blocks ranging from 25 to over 100 m3/month. Metered water supply is used as the base for calculating sewerage and environmental charges. The sewerage charge - 50% of the water bill - is levied on consumers with sewer connections to cover costs of operation and maintenance of sewerage systems. An environmental charge of 10% is levied on all water supply bills to cover the cost of desludging septic tanks and other environmental protection measures. 5.4 Residential consumers pay 30% less than the average charge per/m3, while commercial and industrial consumers pay 45% and 70% respectively above the average. A significant subsidy, therefore, is provided to residential customers, with the greatest benefit going to low-consuming, low-income households. During 1996, both the MM water supply and sewerage master plan study and the IFC-led privatization initiative are expected to recommend changes in the MWSS tariff structure and levels, including charges for sewerage services. 5.5 Over 1989-92 MWSS increased water and sewerage and environmental charges in line with annual inflation, but the Board has not approved an increase since May 1992. In December, 1995, MWSS management submitted a request to its Board for a raise in the average water tariff from the current P 6.43/m3 to P 8.78/m3. SSD needs the revenues from this increase (arising from accompanying sewerage and environmental charges) to carry out its sewerage system development plans (Para. 5.18). Implementation of this water tariff increase, including indexed sewerage tariff and environmental charges would be a condition of effectiveness. 5.6 To compensate for revaluation of the peso against a basket of international currencies, MWSS introduced an automatic currency exchange rate adjustment (CERA) in 1984 that tracks  20 MWSS's foreign debt service per cubic meter of water sold against 1984 reference values. The CERA surcharge is equivalent to 15% of the current average tariff. Accounting and Auditing 5.7 MWS S's accrual-based accounting procedures are generally satisfactory and are set by the Commission on Audit (COA), a separate constitutional body. Sewerage system accounts have been separated from water transactions since 1988. The SSD bank account pays direct operating expenses, while other costs are apportioned at the end of each month between the two services using an inter-fund receivable/payable account. During negotiations, assurances were obtained that, commencing from FY97, cash transfer of the difference between the water and sewerage inter-fund receivable and payable accounts would be made at the end of each quarter, and the account closed at each year end. Billing, collections and payroll are computerized, and MWSS is transferring the balance of its accounting procedures, including SSD, to a new computerized system which is expected to be in operation by the end of 1996. Project accounts would be kept by the finance office. 5.8 MWSS accounts, including for SSD, are audited by COA, and in recent years there have been no qualifications with significant implications for the financial statements. During negotiations, assurances were obtained that the financial statements of MWSS, including separate ones for SSD, will be audited by independent auditors acceptable to the Bank. These statements and audit reports would also include a separate opinion on the Statement of Expenditures and the Special Account for the Bank loan, and would be submitted to the Bank within six months of the close of each fiscal year. Billing and Collection 5.9 Customers are charged for water supply and sewerage services on a combined computerized monthly bill. At the end of 1994 there were 824,460 customer accounts, 90,510 of which had sewerage connections. Meter reading is done by the eight decentralized sectors, and the results are forwarded to the computer services center at the head office, which prepares bills and maintains the accounts receivable ledger. Bills are hand-delivered by contract collection agents employed by customer services, who also collect payments from customers. Bills can also be paid directly to MWSS branch offices, and customers are required to pay within ten days of delivery. If bills are unpaid after one month, enforcement action, including disconnection, may be taken. 5.10 The present method for processing collections is based on an 'bpen-item" system under which receipts are matched to bills before posting to the accounts receivable ledger. This creates delays of up to six months in updating the ledger, however, and MWSS recognizes that the system is inadequate and fails to provide timely, accurate information. A new computerized billing and accounts receivable system is being prepared for staged introduction in the eight sectors between September 1995 and March 1996. Bills showing total amounts due, including arrears, should improve debt collection. 5.11 The net realizable value of accounts receivable is a problem area for MWSS. At the end of 1994 it equaled 110 days of S SD's sales, which is unsatisfactory. Assurances were obtained  21 from MWSS that, commencing from FY96, its net accounts receivable would not exceed 90 days of billing. The accounts receivable ledger was last reconciled in 1990. The new billing and accounts receivable system will have reconciled and up-to-date customer balances transferred to the new system during its introduction. The bad debt provision for 1994 was 2%, which will also be reviewed when balances are transferred to the new system. MWSS Financial Performance 5.12 The audited financial performance of MWSS covering all its activities related to water supply and sewerage indicate a satisfactory financial position from 1990 through 1994. Revenues increased by 10% a year, and expenses by 14.8%, over the same period. While net income steadily increased until 1992, a slight decline in 1993 was mainly caused by an increase in financial charges; the decline continued in 1994 because of a jump in interest charges and non-cash expenses, mainly higher depreciation, following the revaluation of assets. Although operating results deteriorated in 1994, there was a net income before taxes of P 667.24 million equivalent to 18% of total revenues generated for the year, with a rate of return of 8%. Since 1990, total assets have grown at 9% a year, mainly due to an increase in fixed assets from capital works projects. The current financial position is considered satisfactory. 5.13 Financial ratios similarly indicate adequate performance, with the current ratio ranging between 4.3 and 5.0 suggesting that MWSS has been very liquid; the operating ratio has averaged 55%, and the debt equity ratio has ranged between 41% and 48%. Cash flow, however, has been a problem due to increased debt-service payments. In 1994 MWSS's long term debt was P 8.39 billion, with a debt service ratio of 1.23%. A financial status study of MWSS prepared by Deloitte Touche Tohmatsu in November 1993, and comparative financial statements for the 1990- 94 period, are available in the project file. SSD Financial Performance 5.14 SSD's financial performance since 1988, when records started to be kept separately from water, has resulted in net operational surpluses each year. Since 1992, operational revenues have increased by 15% due to higher water volumes, and operational costs increased by only 3%. Other financial ratios are generally satisfactory, with a current ratio of 3.0 and an operating ratio at 47%. These results have, however, reflected less than adequate operation and maintenance, due to slow procurement procedures and cash restraints, and much of SSD's plant and equipment is in a poor state. Cash flow continues to be a major problem due to debt service obligations and failure to achieve revenue targets. SSD's total debt at the end of 1994 was P 820 million, with a debt service ratio of 1.5. SSD comparative financial statements for the 1990 to 1994 period are available in the project file. 5.15 SSD internal cash generation and loans finance capital projects and operations. The revenue earning capacity of the sewerage charge, however, will always be limited to the number of customers connected to the sewer network, while the environmental charge grows in direct proportion to the growth in water revenue. The sewerage charge on its own is insufficient to fund all SSD's costs, and the environmental charge is, therefore, used to support sewerage operations and service foreign loans.  22 Project Financing 5.16 SSD's capital spending requirements and financial plan for 1995-99 are shown in Table 5. 1, and include the commencement of the proposed third sewerage project. The Bank loan of US$57 million equivalent would finance 30% of SSD's financial requirements over the period. The SSD financial plan was confirmed during negotiations. Table 5.1: SSD FINANCIAL PLAN 1995-99 Item Peso (Million) US$ (Million) Sources Gross Internal Cash Generation 3308.0 132.4 74 Less: Debt Service 1384.0 55.4 30 Net Internal Cash Generation 1924.0 77.0 44 Loan IBRD-Second Sewerage P 1425 million + Loan Third Sewerage P1150 million 2575.0 103.0 56 Total Sources 4499.0 180.0 100 Requirements Proposed Second Sewerage P 1906 million + Proposed Third Sewerage P 1938 million 3844.0 153.8 85 Interest During Construction 335.2 13.4 7 Total Financing Requirements 4179.2 167.2 92 Additions to Working Capital 319.8 12.8 8 Total Requirements 4499.0 180.0 100 5.17 SSD financial projections are shown in Annex 10, and the assumptions used to prepare them in Annex 11. One of the goals of the project is to improve SSD performance; accordingly, MWSS has prepared operation and maintenance guidelines for its sewerage system as a basis for establishing adequate annual budget allocations and evaluating SSD performance. 5.18 To achieve internal contribution targets for the proposed development of the sewerage system, it will be necessary to double SSD's revenues from P 616 million achieved in 1994 to P 1,367 million by the end of the implementation period in 1999. The projected increase in revenues is based on assumed annual tariff increases and reductions in NRW as outlined in Annex 10. 5.19 During negotiations, assurances were obtained that MWSS would take all necessary measures, including adjustments of the structure or levels of sewerage rates, to produce, for each fiscal year starting in 1996, funds from SSD's internal sources equivalent to not less than 25% of SSD's annual average capital expenditure. 5.20 To ensure payment of debt service obligations related to sewerage activities, assurances were obtained that MWSS would not incur any debt for its sewerage activity unless a reasonable  23 forecast of SSD's estimated net revenues for each fiscal year during the term of the debt to be incurred is at least 1.2 times the estimate of sewerage activity debt service requirements. Monitoring and Evaluation 5.21 Performance would be monitored against the implementation schedule (Annex 4) and the project implementation action plan (Annex 5). The implementation agency's operational, financial, and management performance will be assessed against monitoring indicators (Annex 11). During negotiations, assurances were obtained that MWSS would submit to the Bank (a) no later than March 31 and September 30 of each project year, commencing on September 30, 1996, semi-annual project progress reports, including revised project cost estimates and implementing schedules, (b) no later than March 31 of each pr'oject year, commencing on March 31, 1997, SSD's annual updated financial projections, and (c) no later than six months after completion of the project the evaluation report on project implementation.  24 6. PROJECT JUSTIFICATION Project Benefits 6.1 The proposed project includes the following components: (a) a pilot septage management program, which will test out options for improving the management of the approximately 1 million septic tanks constructed through private financing in MN, (b) rehabilitation of the existing sewer infrastructure, and (c) addition of 10,000 new house connections to the existing sewer system. The benefits from these programs will be in the form of abatement of fecal contamination around MM households and in neighborhood drains and canals. While most of these benefits are not easily quantifiable, the impacts of such investments in terms of public health and environmental improvements are known to be significant. 6.2 Owing to the lack of prior experience in septage management, there is a need to test out options on a pilot basis before a full-scale septage management plan can be implemented. The pilot program tests out how best incentive structures and investments can be matched with each other so that septage is collected, conveyed and disposed in a sustainable and efficient manner. The experience gained from the interim solution of desludging, barging and ocean dispersal of septage will provide information on the number, condition, accessibility and average size of the septic tanks and the characteristics of their content. Additional information would be gained on how the private sector can be provided with incentives to participate in this operation. The experience gained from construction and actual operation of a pilot septage treatment facility through public investments is expected to provide data for optimal technological design, sizing and location of septage treatment plants to be constructed in the future. Data from the two sub- components together provide the basis for the development of MWSS's long-term septage management plan. 6.3 The scale of the proposed pilot exercise is large: 300,000, or approximately a third of MM's septic tanks would be desludged over the life of the project. This effort is expected to substantially improve the performance of septic tanks which, with periodic desludging, function as fairly effective instruments for pollution abatement, reducing organic pollution between 30% and 65% depending upon design, and removing up to 90% of suspended solids. Without desludging, the performance of septic tanks is severely compromised, and a maximum of 10% BOD removal can be expected. While the health and amenity benefits are difficult to quantify, what is clear is that there are significant benefits in the form of reduction in fecal contamination through the proper operation of these septic tanks. 6.4 In terms of overall scale, the approximately one million septic tanks in MM represent household investment equivalent to a current replacement value of about US$400 million. Without proper septage collection, conveyance and disposal, not only is this substantial private sector investment not yielding benefits, but is aggravating public health risks by exposing MM residents to fecal contamination at their homes and neighborhoods. The health risks are greatest for the low-income residents, who reside in densely populated areas with poor drainage. Under the project, a capital investment of US$14 million would restore approximately 300,000 septic tanks to full effectiveness with significant public health benefits. Moreover, these 300,000 tanks would be selected in the proximity of the Pasig River to maximize the impact in terms of reducing  25 the pollution load in the river. Again, it is difficult to assign a monetary value to the resulting health and aesthetic benefits. 6.5 The second project component involves rehabilitation of the Central and Ayala sewerage systems. These systems, with a current replacement value of US$98 million, are under- performing due to cumulative lack of repair and maintenance. The project will invest US$17 million to restore the benefit stream from these facilities in a sustainable manner in the future. Sustainable operation and maintenance of these systems would reduce overflow of sewage during rain and floods in the service area, thereby resulting in positive health benefits. 6.6 The third project component would provide 10,000 new house connections to existing sewer systems at a cost of US$10.5 million. This is the only revenue generating component in the project and would add an estimated US$1.5 million per year to SSD revenues in current prices by 1999. Health and environmental benefits would result from the expanded coverage of the water- borne sewer system in MM, which is presently very low. 6.7 The project aims to improve health and environmental conditions throughout MM. However, low-income households will benefit disproportionately because they reside in the areas covered by the pilot project. These households appear to be having some of the most poorly maintained septic tanks in the city despite paying the monthly environmental charge to MWSS. Rate of Return 6.8 The benefits from the project in terms of environmental improvements and better health to residents are difficult to value in monetary terms, though the physical impacts in terms of reduction in neighborhood fecal contamination, abatement of pollution in urban drains and water bodies are considerable. An economic rate of return based on a full cost-benefit analysis thus cannot be calculated for the project which is justified based on a least-cost analysis. However, lower-bound estimates for individual project components can be computed based on the following simplifying assumptions: (a) that existing charges levied by MWSS for sewer and sanitation services reflect consumer willingness to pay and are a measure of total economic benefits (private and public) to households; and (b) that without adequate maintenance and proper operation (to be ensured through project investments), full economic benefits from existing assets are not realized even though the tariff charges are paid in full. The first assumption is conservative, as willingness to pay for improved services may actually be higher than existing charges, and also because households usually undervalue public benefits. Household willingness to pay would also not include the value of the information required to design the future sanitation system. Details of the stylized economic rate-of-return analysis are presented in Annex 12 and some of the key finding are summarized below. 6.9 The rate of return for new sewer connections is the simplest to compute since both costs and revenues are well defined. The IRR is 10%, assuming that there is no increase in SSD O&M costs because of higher personnel cost (MWSS is over-staffed); the IRR falls to 4% if it is assumed that these costs increase in proportion to the number of connections (10%). 6.10 The sewer system rehabilitation component has an economic rate of return of 8%, assuming that without the project only half of potential economic benefits (based on SSD  26 revenues as a proxy for consumer willingness to pay) are realized from existing assets and that O&M costs increase by 50% after the project to maintain the full benefit stream. The IRR falls to 4% if it is assumed that 60% of full benefits are being realized without the project. 6.11 The economic return of the septic tank maintenance component depends on the manner in which the collected septage is disposed of If ocean dumping of septage is chosen as a permanent disposal method, the IRR would be 12%, assuming that septic tanks without the project investments yield only 10% of full benefits; the IRR would fall to 9% if septic tanks without the project are assumed to yield 20% of full benefits, and to only 5% if without the project they are assumed to yield 30% of full benefits. However, if ocean dumping of septage is chosen as an interim solution, capital costs of the order of US$150 million and steady state recurring costs of US$35 million per year would be needed to replace sea disposal by land-based septage treatment plants. This represents recurring costs of approximately US$3 per household per month. Recent studies indicate that, at the present household income levels in the Philippines, this would exceed the willingness to pay of most households in MM for this type of service. For this reason, the MWSS septage management plan proposes septage treatment capacity to be increased gradually to full capacity only by 2003. By then, income levels are expected to have risen sufficiently to enable more of the costs to be covered through user charges. 6.12 For the proposed project as a whole, the only incremental revenues are from the 10,000 new sewer connections. These revenues are not enough to cover the full costs of the project resulting in a negative net present value. Therefore, if project implementation is justified on the basis of its environmental and health benefits, either a subsidy from the government or a tariff increase would be required to ensure full cost recovery for MWSS. The financial analysis shows that a 7% increase in the water tariff would generate sufficient incremental revenues for MWSS to cover all costs of the entire project. However, if the cost is to be recovered entirely from incremental revenues of the SSD (i.e., from incremental sewer and environmental charges) a larger increase in the water tariff would be needed. This follows because, while sewer and environmental charges are indexed to the water charge, the number of sewer connections is significantly less than the number of water connections. The analysis in Annex 12 shows that the project breaks even with a water tariff increase of 35% if only the incremental sewer and environmental revenues are used to defray project costs. Given that there has been no tariff increase since May 1992, MWSS considers a water tariff increase of this magnitude to be presently feasible and affordable. Least-Cost Solution 6.13 The difficulties in quantifying economic benefits from environmental projects has usually led to objectives being defined to ensure achievement of relevant externally mandated criteria (e.g., minimum water and air quality standards) to protect public health and improve living conditions. In MM, the Government, as part of its commitment to environmentally sustainable development, has adopted the target of reducing the existing pollution load in terms of BOD by 20% and of significantly improving Pasig River water quality by the end of 1999. In such situations, the least-cost criterion is the operationally relevant one in guiding the choice of feasible technical options to achieve project objectives.  27 6.14 On-site disposal of domestic wastewater using private septic tanks connected to soakaways or leaching pits is not feasible in MM due to high residential density. Three technical options can be considered for off-site disposal: (a) extension of existing separate sewer systems; (b) conversion to combined drainage and sewer system without household septic tanks, and (c) conversion to combined drainage and sewer system with household septic tanks. The first option in MM is unaffordable to most households; in addition, with only 10% of the MM area covered by water-borne sewerage the additional investment costs are prohibitively high. The second option is feasible only if all surface drainage segments in the service area are eliminated and replaced by sub-surface conduits; this is unlikely in the near future given the additional investment costs required. The third option, if properly operated, is the most viable in the present situation: it utilizes existing investments in private septic tanks; prevents untreated excreta flowing through surface drains; and allows the possibility of upgrading the system (i.e. bypassing septic tanks when surface drains are eliminated and interceptors installed) in the future. 6.15 Septic tank management imposes higher recurring costs than piped sewerage, as it requires the periodic collection and disposal of the septage accumulated in septic tanks. The collection of septage using vacuum trucks is common to all septage management options. However, various alternatives are possible for disposal including disposal at sea, land application, treatment at wastewater treatment plants, and independent septage treatment facilities. 6.16 All the above alternatives were considered in the project feasibility study. Land application was found to be cost-ineffective because of the distance to environmentally and socially acceptable disposal sites. Complete treatment at wastewater treatment facilities was ruled out because the major existing facility at Ayala is too small and located in a high-income commercial and residential area unsuited to regular collection vehicle traffic. Sea disposal, while found to be the cheapest alternative, was considered environmentally unacceptable as a permanent solution unless the project's implementation experience indicates otherwise.' 6.17 Given the above factors, and the assumption that the volume of septage will continue to increase with the increasing number of septic tanks, a strategy on how best septage treatment can be expanded in a sustainable manner is necessary. Under the project, a pilot septage treatment plant is proposed to be constructed at the site of the existing Dagat-Dagatan wastewater treatment facility. Sludge from Dagat-Dagatan and septage collected in excess of the capacity of the pilot plant would be disposed at sea. Sea disposal is scheduled to cease in 2003 by which time sufficient treatment capacity is planned to be in place. The combination of phased construction of septage treatment capacity, utilization of an existing wastewater treatment plant, and temporary sea disposal represents the most practical and least-cost option for the septic tank management program if sea disposal is only available as a temporary solution. 6.18 Rehabilitation of the Ayala and Central sewerage systems represents delayed maintenance and is the least-cost solution for that project component in the present circumstances. The Ayala sewerage system was built by a private developer in the early 1950s and ownership was transferred to MWSS in 1991. The system is in need of extensive repairs. The Central sewerage 1 Five septage management options: treatment (physical, biological, chemical), sea disposal, lahar site disposal, dewatering, and incineration, were reviewed and their costs were estimated. Sea disposal is the least expesive option ($15,000/m3), followed by disposal in the lahar lava fields resulting from the Mt. Pinatubo emption (18,000/m3-the practical application of this method is still in the research stage) and land-based chemical/biomedhanical treatment ($11 5,000/m3).  28 system was built in 1904-11 and last rehabilitated over 1981-85. Since then its performance has deteriorated due to insufficient maintenance. Rehabilitation after cumulative neglect is not a substitute for regular maintenance and repair, and the project loan covenants would ensure that MWSS sets aside sufficient funds for adequate maintenance in the future. The sewerage master plan currently under preparation will recommend the tariff structure and level and other measures required for this purpose. Data Base Establishment 6.19 As mentioned above, the proposed project is a learning-by-doing exercise with the idea of generating sufficient information on institutional and technical options for future sewerage and sanitation strategy in the entire metropolitan area. Such a data base requires information on the number, location, and average size of septic tanks, their adequacy, repair, and accessibility, the contents and characteristics of the septage, the efficiency of the treatment plant, and MWSS's capacity to manage collection and treatment arrangements. The pilot project provides an effective mechanism for gathering information to optimize the technical and institutional design of the major investments planned for 1999 and beyond. Project Risks 6.20 There is little risk of adverse impact on the marine environment due to sea disposal of septage; both the Government's Environment Management Bureau and an independent external consultant engaged by the Bank to evaluate the likely impact of sea dumping concluded that the risk was minimal due to the low levels of contaminants in domestic septage and the exceptionally high dispersion characteristics of the disposal site, which is more than 40 km from the nearest shoreline. Confirmation of the environmental impact of sea-dumping through a mathematical dispersion model prepared by an independent consultant would be a condition of loan effectiveness. 6.21 There is some risk of short-dumping of the septage by contractors. Adequate supervision and monitoring, including the presence of Coast Guard personnel on the vessels and random checking, and the presence of considerable traffic in Manila Bay should minimize this risk. Significant protection would also be provided by contractual clauses imposing strong sanctions, which should serve as a strong disincentive against violations. 6.22 There is also a risk of delays in building septage treatment plants and possible continuation of sea disposal beyond the stipulated period. The advantage of the sea disposal option, which entails relatively low capital costs, is that it can be inexpensively terminated once the capital investment has been recovered, whether the proposed septage treatment plants are ready or not. The proposed project includes financing for the design of future sewerage and sanitation investments required to phase out sea disposal of septage by the year 2003. At negotiations, MWSS confirmed its commitment to the cessation timetable (see para 3.13). 6.23 There are no other unusual risks associated with the project. Some resistance to connecting to the sewer system is possible particularly if households are satisfied with existing arrangements and want to avoid paying the sewerage charge. However, the planned expansion of 10,000 connections is small in a metropolitan area the size of MM. Further, it is expected that the  29 sewerage charge may be extended to all consumers in the future since wastewater from all households enters either the separate sewer system or the combined sewer and drainage system. This would eliminate the disincentive to connect. 6.24 The inability of MWSS to manage the increased scale of the septic tank management program could also pose a project risk. This risk will be minimized by giving a contract for the operation and management of the entire septage collection and disposal arrangement to the private sector. This would also increase private sector participation in MWSS operations, which is considered desirable by the Government. 6.25 Continued inadequate maintenance of rehabilitated and newly constructed facilities would constitute a risk to the project and undermine its economic justification. This problem would be addressed by ensuring that revenue generated from sewerage and environmental charges is sufficient and not diverted for other purposes and that the budgetary provision for maintenance and repair is adequate. As part of project preparation, SSD has undertaken an asset inventory and produced maintenance guidelines which would be used to ensure adequate budgetary allocation for preventive and regular maintenance. 6.26 Another potential risk is the possibility of delayed implementation of rehabilitation of separate Central and Ayala sewerage networks by one to two years due to the uncertainties of rehabilitation works and difficulties with excavation in MM under heavy traffic conditions. The concentration of all rehabilitation works in one contract would attract a larger and more experienced contractor, which would mitigate that risk.  30 7. AGREEMENTS REACHED AND RECOMMENDATION Agreements 7.1 During negotiations, assurances were obtained from the Government and the MWSS that: (a) MWSS would establish and hold the Special Account in a commercial bank specially authorized for this purpose by the Bangko Sentral ng Pilipinas on terms and conditions acceptable to the Bank (para 3.22); (b) MWSS would submit a report summarizing the results of monitoring the compliance with the EMPs annually starting from December 31, 1996 and a report containing an independent audit of the septage management program annually starting from June 1997 (para 3.25); (c) MWSS would prepare a separate budget for the overall sewerage activity including the income statement and balance sheet for FY97 and thereafter (para 5.1); (d) Commencing during FY97, cash transfer of the difference between the water and sewerage inter-fund receivable and payable accounts would be made at the end of each quarter, and the account closed at each year end (para 5.7); (e) MWSS financial statements, including separate ones for SSD, as well as Special Account and Statements of Expenditure, will be audited by independent auditors acceptable to the Bank, and will be submitted to the Bank within six months of the close of each fiscal year (para 5.8); (f) MWSS net accounts receivable would not exceed three months of billing commencing from FY96 (para 5.11); (g) MWSS shall take all necessary measures including adjustments of the structure or levels of sewerage rates and shall produce, for each fiscal year starting in 1996, funds from SSD's internal sources equivalent to not less than 25% of annual average of SSD capital expenditure (para 5.19); (h) MWSS shall not incur for its sewerage activity any debt unless a reasonable forecast of SSD's net revenues for each fiscal year during the term of the debt to be incurred shall be at least 1.2 the estimate of the debt service requirements for the activity (para 5.20); (i) MWSS would send the Bank (a) no later than March 31 and September 30 of each project year, commencing on September 30, 1996, semi-annual project progress reports, including revised project cost estimates and implementing schedules, (b) no later than March 31 of each project year, commencing on March 31, 1996, SSD's annual updated financial projections, and (c) no later than six months after completion of the project the evaluation report on project implementation (para 5.21); and  31 (j) MWSS would adhere to the timetable for cessation of sea disposal of septage (para 6.22). 7.2 At negotiations, the Government and the MWSS confirmed (a) project financing plan (para 3.10), (b) adherence to the implementation action plan defining the scope and timing of actions (para 3.13), (c) format and content of progress and project evaluation reports (3.32), and (d) SSD financial plan (para 5.16). 7.3 At negotiations, the Government confirmed that in the event of changes in the responsibility for providing sewerage services in MM from MWSS to another entity during implementation of the project, it would consult the Bank prior to undertaking any such changes or restructuring (para 4.11). 7.4 The following would be conditions of loan effectiveness: execution of lease agreement between DPWH and MWSS (para 3.14); receipt by MWSS of ECCs for collection, barging and sea disposal, Dagat-Dagatan pilot septage treatment plant, and rehabilitation of Central and Ayala sewerage systems and Ayala treatment plant (para 3.26); the implementation of water tariff increase, including indexed sewerage tariff and environmental charge (para 5.5); and completion of mathematical modeling of septage dispersal at the ocean disposal site (para 6.20). Recommendation 7.5 Subject to the above assurances and conditions, the proposed project constitutes a suitable basis for a Bank loan of US$57.0 million equivalent, for a period of 20 years, including a grace period of five years, at the Bank's standard variable interest rate. The borrower would be MWSS and the Government would provide the loan guarantee.  32 ANNEX 1 PHILIPPINES MANILA SECOND SEWERAGE PROJECT Services in the project area General 1. Metro Manila (MM) covers an area of about 636 km2 along the eastern shore of Manila Bay. MM is the primary administrative and cultural center, with the highest concentration of commerce, industry, manufacturing, banking and education services. It comprises eight cities and nine municipalities' with total 1995 population of 8.9 million. The built-up area occupies about 300 km2 or 47% of the total area. About 2.5 million or near 30% of the total, mainly migrants from rural areas, live in about 600 slums. The combined effects of population pressures and ineffective control of industrial growths, have contributed to the overloading of the existing infrastructure and to a rapid deterioration of the environment. 2. The sewerage and street drainage services are provided by the Metropolitan Waterworks and Sewerage System (MWSS), a government corporation established in 1971, and by each municipality, respectively. Canals, rivers and main drainage works controlling floods are maintained by the Department of Public Works and Highways (DPWH). The responsibility for planning and coordination of several metro-wide services, namely transport and traffic management, solid waste management, pollution control, flood control, drainage, sewerage, land use planning and zoning was recently vested in the Metropolitan Manila Development Authority (MvMDA) established in March 1995. Its policy-making and governing body is a council composed of all MM mayors, the chairman of the council has the rank of a cabinet member and is appointed by the president. Water Supply 3. Water in MM and neighboring Rizal and part of Cavite provinces is supplied by MWSS and about 2,200 private wells. In 1994 the MWSS daily average production was 2.8 million m3, of which 1.15 million m3 was sold (0.67 million m3 to residential users, 0.3 million m3 to commercial users, 0.12 million m3 to government users and 0.06 million m3 to industries) and 1.65 million m3 was non-revenue water. Water was sold through 815,000 connections of which 93% were residential. The water supply system capacity is about 2.90 million m3/d. MWSS is expanding its production and distribution capacity to 3.1 million m3/d in 1996 and 4.0 million m3/d by 1999. 4. Only specific areas of MM, plus some parts of Bacoor and Kawit in Cavite are served by MWSS's central distribution system; peripheral areas in the north, east and south and the other parts of Cavite and Rizal rely predominantly on isolated MWSS or private groundwater systems. Water use through private wells in 1994 was estimated at 0.94 million m3/d, of which 0.46 million The cities of Manila, Makati, Mandaluyong, Muntinlumpa, Pasay, Pasig, Quezon and Calookan and municipalities of Las Pinas, Malabon, Marikina, Navotas, Paranaque, Pateros, San Juan, Taguig and Valenzuela.  33 ANNEX I m3/d was residential, 0.40 million m3/d industrial and 0.07 million m3/d commercial use. Of the total, 0.64 million m3/d was used in MM and the rest in Rizal and Cavite. Sewerage Services 5. The physical infrastructure for the provision of sewerage and sanitation services in the service area are separate sanitary sewerage systems, public (communal) sanitation facilities, and private septic tanks. There are five sanitary sewerage systems in operation in the area: (i) the Central Sewerage System, (ii) the Ayala System, (iii) the Dagat-Dagatan System, (iv) the Quezon City System, and (v) the National Housing Authority Systems. Central Sewerage System 6. The Central Sewerage System (CSS) is designed Jo operate as a separate sanitary sewerage system to serve an area of 26.17 km2 or 70% of Manila city. In 1994, the number of household connections to the system was 85,000 and it was estimated that the system serves about 930,000 people (based on the planning figure of 11 persons per water connection). In 1991, about 21,000 households (pop. 230,000) within the system were not connected. The CSS was originally constructed during 1904-11. It consists of two collection networks, north and south of the Pasig River, of about 187 km of sewer mains, initially covering an area of about 18.3 km2. Its trunk and main sewers are mostly made of cast-in-place concrete, while the majority of smaller lines (525 mm and below) are made of vitrified clay. It has a double barrel siphon under Pasig River made of 2 x 600 mm diameter CI pipes encased in concrete. 7. The northern system includes the Legarda and Sta. Cruz lift stations and the southern includes the Paco, Malate, Luneta and Port Area lift stations. Both systems terminate at the Tondo station which pumps the wastewater through a 1050 mm outfall 3.8 km into Manila Bay. The Sta. Ana sewerage system, constructed in 1935-37, includes the collection system and a lift station, initially discharging into a communal septic tank with an effluent pipe to the Pasig River. This system was connected to the CSS within the phase I expansion program (1981-85), under which the communal septic tank was abandoned, and the lift station discharge pipe connected directly to the Paco trunk line. 8. The expansions carried out within the phase I increased the original service area by 7.87 km2. Apart from the connection of the Sta. Ana system to CSS, the following major expansions to the central service area have been made: a) Pandacan Catchment (3.61 km2) was provided with a separate sewerage system consisting of 31 km of sewer mains ranging from 200-900 mm diameter; b) Dagupan Catchment separate system (2.76 kM2) consists of 59 km of sewer mains and laterals of 200-1200 mm diameter; c) Tondo Foreshore Catchment separate sewerage system was developed by the National Housing Authority (NHA) during 1976-79 and was taken over by MWSS and connected to the central sewerage system in 1985. It covers an area of 1.5 km2. 9. The phase I rehabilitation works not only replaced the dilapidated facilities but also increased their capacity to cope with the greater wastewater flows. The Tondo station rehabilitated under phase I includes a bar-screen house, pump station building, four dry-pit type non-clog centrifugal pumps with two variable-speed and two constant-speed drives, and electrical  34 ANNEX 1 and control equipment for automatic operation. The capacity of the station is 5.0 m3/s. The new Bay outfall includes 3.9 km of 1800 mm diameter pipe of which 1.2 km are on-shore and 2.7 km offshore. Screened raw wastewater is discharged through this outfall into the Bay via a 350 m diffuser section at a depth of 11 m. 10. A major objective of the phase I project was the rehabilitation of the collection system and of the seven lift stations. The original contract for sewer rehabilitation included a comprehensive TV-inspection, as well as cleaning and rehabilitation of the entire central collection system. It further included: (a) raising of manholes and replacement of all unserviceable and substandard CI frames and covers; (b) grouting of leaking pipe joints and repair of damaged pipes and (c) construction of overflows with flap valves and closing or plugging inflow sources such as drainage bypasses without flap valves. 11. However, the project was substantially reduced due to shortage of funds. It was divided into smaller construction contracts with one providing equipment for MWSS's cleaning and rehabilitation unit. Further, the additional manholes were reduced to 93. The construction of overflows with flap valves was limited to six and design was greatly simplified to further reduce cost. TV-inspection was reduced to selected pipes below 450 mm diameter. The TV inspection revealed many badly cracked sewer pipes, leaking pipe joints, misaligned pipe sections, and sagged lines with considerable siltation. Examination of the Pasig River twin-pipe inverted siphon revealed an obstruction in the eastmost pipe. The reduced capacity of the siphon causes backing of sewage to the Luneta lift station. The obstruction could not be removed during the program. Similarly, a majority of various defects was not repaired due to lack of funds. The rehabilitation program of the seven lift stations included converting the existing dry pits to wet pits, repairing sub- and super- structures, constructing external by-pass structures, installing new non-clog submersible sewage pumps and electrical equipment. There are three to five identical pumps in each station with one unit providing stand-by capacity. The proposed external by-pass structures were not implemented during the rehabilitation program due to limited outside space at the Paco and Legarda lift stations. 12. Despite the rehabilitation carried out within the phase I, the collection and lift functions of CSS are in poor condition. While the system is designed to be operated by gravity with several intermediate lift stations, most of the time, it is operated under surcharged conditions due to: (a) heavy surface water inflows from esteros and drainage canals during times of high tide; (b) reduced capacity of the Tondo station since the two variable speed pump-sets have worn impellers and are out-of-operation and (c) clogged and broken sewer pipes which allow the lift stations to operate for only a few hours daily. 13. Other defects and deficiencies are: (a) thirty overflows to drainage lines or esteros are without flap valves; (b) twenty-eight major defects on sewer lines are on record but never repaired; (c) about 21,000 house connections are still to be installed in the expanded central service area. Homeowners are reluctant to connect for two reasons (i) reluctance to pay for the internal house and plot pipe relocation and (ii) despite the fact that service connections are made free of charge, the beneficiaries of the Tondo Foreshore and Leveriza NHA projects refuse to connect due to deficient sewer lines (silted and obstructed lines, overflowing manholes); (d) SSD  35 ANNEX I maintenance equipment is dilapidated or not operational; and (e) vital spare parts for mechanicalUelectrical equipment (a pre-requisite for smooth operation) are not in stock. Ayala System 14. The Ayala Sewerage System covers an area of 6.0 km2, of which 3.7 km2 are high-income residential areas, 1.8 km2 are used by commerce (Makati Commercial Center and the high rise office blocks in Salcedo and Legaspi Villages), and 0.2 km2 are occupied by institutions (hospital, colleges and churches). The rest is open space (parks). The system has 3,009 house connections. The population equivalent of the commercial/institutional service is estimated at 85,000. 15. It is located in a part of Makati known as the Ayala sub-division, and development was started in the early 1950 by the Makati Development Corporation, now called Ayala Land Corporation (ALC). During 1958-64, the ALC constructed a separate sanitary sewerage system along with a trickling filter wastewater treatment plant (WTP); all subdivisions developed thereafter were provided with a sanitary sewerage network connected to the treatment plant. During 1977-79, the trickling filters were abandoned and replaced by an activated sludge plant, and expanded to its present capacity of 40,000 m3/d. The Ayala Sewerage System was operated by the ALC until July 1991 when the ownership was transferred to MWSS. 16. The sewerage network is operated by gravity with the flow being collected at the WTP situated in the low lying south-western tip of the service area adjacent to the high-income residential neighborhood. The sewerage system has 69 km of sewer pipes from 200 mm-1050 mm, all made of reinforced concrete. The WTP has a designed capacity to provide primary and secondary treatment for an average flow of 40,000 m3 per day. Secondary treatment uses an activated sludge process. The final effluent from the plant is discharged into the Maricaban Creek. Sludge from both the primary and secondary treatment is conveyed in primary and secondary anaerobic digesters for stabilization. Digested sludge is dried in beds and collected by farmers and used as soil conditioner/fertilizer. 17. The plant is overloaded and periodically overflows to surface streams. There are two main reasons for the surcharged conditions: first, the network capacity is reduced due to pipe defects and clogging, the most critical being the trunk line along EDSA highway which is the main artery of the scheme. Second, unauthorized surface water connections have been made, resulting in large volumes of surface water entering the separate sewer network. Eliminating these defects would reduce wastewater flows to below the present capacity of the two trunk sewers entering the WTP. The plant is presently under-performing for the following reasons: (a) the plant is in poor state of repair; (b) some of the mechanical equipment has been removed from service; (c) most, if not all, of the existing mechanical and electrical components are worn out, making a reliable and continuous operation impossible; (d) spare parts for the old equipment cannot be obtained; (e) all the measuring and control equipment is either removed from service or inoperable; (f) several concrete structural components' systems and many of the electrical conduit systems are severely corroded; (g) blowers serving the secondary aeration processes are operated only a few hours during daytime, when nearby residents are least likely to complain about odors. To avoid complaints about noise, blowers are not operated during night hours. In order to keep a  36 ANNEX I certain level of aeration, floating aerators are operated and (h) the digester gas piping system and gas flare have been removed; gas generated in digesters is discharged directly to the atmosphere. Dagat-Dagatan System 18. Dagat-Dagatan is one of the major sites and services housing projects developed by the NHA during 1979-86. It covers parts of the municipalities of Navotas, Malabon, and the cities of Caloocan and Manila. It has an area of 3.32 kM2, which was reclaimed by an average landfill of 2.5 meters. The sewerage system comprises about 18 km of sanitary sewers, a pumping station and wastewater treatment in oxidation ponds. The ponds cover an area of approximately 5 ha. Of the three modules initially planned, each having an aerated, facultative and polishing pond, only two have been constructed. The site of the third module has been occupied by squatters. In 1991 MWSS took over the facilities. Quezon City System 19. Quezon City has 41 minor sub-divisional sewerage systems covering a total service area of about 13 km2. The total sewer length is about 114 km ranging in diameter from 200 mm to 600 mm. Of the 41 systems, 39 have a communal septic tank and two are provided with Imhoff tanks. As of 1994, 23,300 households were connected. Some of the communal septic tanks have become inaccessible due to obstructions by illegal buildings. Desludging of the treatment facilities is not done regularly. National Housing Authority Systems 20. The National Housing Authority has nine sub-divisional sanitary sewerage systems built as part of their housing projects which they are expecting to turn over to MWSS. One of these, the Karangalan sewerage system in Cainta (Rizal), has just been turned over to MWSS. The others are: Martin de Porres sewerage system in Cubao, Quezon City, Tangos sewerage system in Tangos, Navotas, Capri sewerage system in Novaliches, Quezon City, Maricaban sewerage system in Pasay City, Maharlika Village sewerage system in Taguig, Leverita sewerage system in Malate, Manila City, Juan Luna sewerage system in Tondo, Manila City, Bangong-Nayon sewerage system in Antipolo, Rizal. Public Sanitation Facilities 21. There are 25 community-managed public sanitation facilities (PSF) in MM. The facilities in each unit incrude: public faucets, toilets, bathrooms and laundry areas. Wastes from these facilities are collected and treated in septic tanks. Private Septic Tanks 22. Most of the population in MM rely on private individual septic tanks for their sanitation services. While it is estimated that there is about one million the actual number is not known. One of the goals of the proposed Manila Second Sewerage Project is to acquire information on the number of such private individual septic tanks during the first phase (1996-98) of the project.  37 ANNEX 1 In later projects, several septage treatment plants (with an aggregate capacity of 3,000 m3/d) would be constructed. 23. As a rule, the septic tanks have no soil absorption systems, nor are they regularly desludged. Consequently, the effluent is discharged, along with the sludge (septage), into the inland waterways, typically through the existing storm drains. Unserviced septic tanks are estimated to contribute at least 150 tons of BOD per day into the inland waterways. 24. Desludging services are provided under a special program known as STAMP, an acronym for Septic Tank Maintenance Program. It was developed under METROSS I which provided financing for collecting vehicles. There are two parallel septic tank emptying services in operation: scheduled and unscheduled. Scheduled services, provided by private contractors retained by MWSS, were initially expected to achieve desludging of about 120,000 tanks annually or each septic tank once in a five-year period. Each contractor serving a specific service area was also responsible for transporting the septage and securing suitable sites for its disposing. Because most contractors had difficulty in securing sites acceptable to the Environmental Management Bureau, only two operate at present. Both discharge the collected septage at a stone quarry leased from a private owner about 65 km north of MM. The MWSS monitors the contractor's operations both at the pick-up point and at the disposal site. Arrangements are under way to engage four additional septage collection contractors. 25. Unscheduled services, designed to meet customer emergencies as well as desludging communal septic tanks, are provided by staff of the Septic Tank Maintenance Division of SSD. The collected septage is discharged into the Luneta lift station from where it is pumped along with other wastewater to the Tondo Pumping Station for final disposal through the marine outfall. The MWSS uses six 11.7 cubic meter tanker trucks and three portable gasoline-driven diaphragm pumps. 26. Households are charged separately for the unscheduled service; the scheduled services are covered by a 10% environmental charge levied on all MWSS water bills. From 1981 to June 1992, 17,144 septic tanks, or on an average 1,550 tanks annually, were desludged under the scheduled maintenance program. In 1991, however, only 1,160 septic tanks were serviced, far below 120,000 annually to meet the MWSS target of five-year cycle of desludging. From 1981 to June 1992, 5,183 septic tanks were desludged under the unscheduled program, with 212 being serviced from January to June of this year. 27. The key constraints to acceptable servicing of septic and Imhoff tanks in MM are: (a) difficulty in identifying sites to meet the Environmental Management Bureau's requirements for the disposal of the great volume of septage; (b) lack of access to many septic tanks, and (c) necessity and difficulty in liquefying septage, which involves diluting it with water adding volume to the septage. To address the constraints, it has been proposed that: (a) MWSS should provide adequate treatment facility to facilitate final disposal of septage; (b) regulations and enforcement (for septic tank location) be more rigorous for those obtaining building permits and (c) the use of concrete mix vibrators, rather than adding water for liquefying sludge.  38 ANNEX 1 Drainage 28. Drainage is one of the most important infrastructure systems in MM since a considerable part of the area is flat and its river system is charged with high flows originating in higher reaches during the five-month rainy season. The drainage system in MM covers most of the built-up area; however, Rizal and Cavite provinces have only very limited facilities. The drainage system has two components: (a) the flood control and main drainage system, and (b) the local street drainage system. 29. The flood control and main drainage system represents the primary collection for flood control. It includes a network of 450 km of rivers and open canals 2.0 m to 60 m wide, about 41 km of box culverts and closed conduits of large diameters, 835 km of collecting drains of various diameters and 12 flood control pumping stations (capacity 172 m3/s in total), flood gates and retention ponds. The main drainage facilities are provided, operated and maintained by the Flood Control and Drainage Division of DPWH. 30. The local street drainage system consists of several thousand kilometers of open and covered drains and pipes with diameters less than 750 mm. It represents the secondary and tertiary collection network, which empties itself into the primary or main storm drainage system. The Local Government Code of 1991 assigns the responsibility for the street drainage system (and public sanitation) to MM cities and municipalities; these responsibilities are usually carried out within the city engineers department in connection with road construction and maintenance. While the main drainage system is reasonably well maintained, the street drains are generally poorly constructed and inadequately maintained. The technical documentation on the type, size, length, location, etc. of street drains is available in the city engineers departments but is usually incomplete. 31. By default, though not by design, the drainage system serves as a combined storm and sanitary sewer system. This is because, in addition to functioning as conduits for storm water drainage, they also carry sanitary wastewater effluent from septic tanks which are generally designed without any soil absorption systems. This is deemed to be one of the major sources of pollution of the inland waterways in MM. Solid Waste Management 32. The responsibility for solid waste management and disposal in Metro Manila, rests with the newly established Metro Manila Development Authority (MMDA). This includes the formulation and implementation of policies, standards, programs, and projects for proper and sanitary collection and disposal. It also includes the implementation of alternative programs to reduce, reuse and recycle solid wastes. 33. The amount of solid waste generated in MM was estimated in 1995 to be about 5,500 tons per day. Of the quantity generated, about 75%-80% is collected. Some of the rest is partly buried or burned at source, but the majority is deposited into drainage systems, esteros and rivers, thereby making a significant contribution to the pollution of inland waterways. In 1995 there were two open dumping stations, one transfer station, and two sanitary landfill sites. The two  39 ANNEX 1 sanitary landfill sites are the San Mateo landfill located in the north, and the Carmona landfill in the south. They are being operated provisionally, pending detailed designs and an environmental impact assessment. It is envisioned that the landfills, planned to be completed in 1998, would accept dewatered sludge from future septage or wastewater treatment plants.  40 ANNEX 2 PHILIPPINES MANILA SECOND SEWERAGE PROJECT Project description General 1. The improvement of wastewater services in Metro Manila (MM), outlined in the 1979 sewerage master plan, envisaged a phased expansion of the conventional separate sewerage system. Only a part of its first phase, however, was implemented and foliowing phases had to be discontinued on account of prohibitive costs. Subsequent reviews have indicated that adoption of a combined sewerage system which would utilize the existing drainage network and the large number of household septic tanks would allow a gradual, and less expensive alternative for wastewater services and reduction of pollution. Based on these findings, MWSS' consultants under JICA financing are now preparing a new (1996) sewerage master plan which will propose phased upgrading of existing facilities into a combined sewerage system. 2. Properly operated septic tanks could remove from wastewater at least 30% of the pollution expressed in BOD, a key condition for which is periodic removal of the sludge from the tanks; an adequate desludging program, however, has never been implemented in MM due to unavailability of any treatment facility or sites suitable for disposal of septage. 3. A septage management plan developed within the project addresses that deficiency. The plan aims at desludging during 1996-2010 each of the one million septic tanks estimated to exist in MM. Since current data necessary for locating and constructing a large-scale septage treatment plant are not available the plan proposes to acquire in the first phase (1996-1999) the necessary data through (a) providing a pilot septage treatment plant with the capacity of 200 m3/day and (b) desludging about 300,000 tanks. In the second phase (1999-2005) and the third phase (2006- 2010), which would both essentially coincide with the phased upgrading of the sewerage system, the master plan proposes the construction of several septage treatment plants with an aggregated capacity of over 3,000 m3/d, and desludging about one million tanks. The plants will be designed on the basis of one year operation of the pilot plant and evaluation of data on characteristic and spatial distribution of septage acquired during desludging of the 300,000 tanks. The septage collected during the data acquisition and the treatment plants construction will be disposed of at an allocated dumping site in the sea. The dumping of septage will start in early 1996 with a quantity of about 1,000 m3/d, which will increase to 1,500 m3/d during 1999-2001 and decrease to 600 m3/d in 2003. The sea dumping will be terminated at the end of 2003. Project components 4. The project will: (a) construct three barge loading stations for temporary disposal of septage at sea under a private collection and disposal contract, (b) construct a pilot septage treatment plant, (c) rehabilitate the central and Ayala sewerage systems, Ayala treatment plant, and construct about 10,000 sewer house connections in the MWSS service area and (d) provide maintenance equipment, tools, spare parts and laboratory instruments. The technical assistance  41 ANNEX 2 will (i) help implement the project including support for environmental monitoring and management, (ii) prepare designs and documents for the follow-up expansion of the sewerage system and the septage treatment plants, and (iii) prepare documents for implementation of the next water supply project. 5. The proposed project is intended to help the Government improve the quality of sanitation services and to enable MWSS to radically expand its septage management program in order to: (a) quickly reduce the pollution of Metro Manila waterways and Manila Bay, (b) reduce the health hazards associated with human exposure to sewage, and (c) establish the conditions needed for gradual low-cost improvement of sewerage services in Metro Manila. Septage management 6. The septage management represents pilot operation which covers three aspects namely: (i) collection and hauling of septage from septic tanks, (ii) sea dumping of septage, and (iii) pilot septage treatment plant. Based on the estimated distribution of septic tanks, the Metro Manila area is subdivided into collection areas, first two and the third later, served by three barge loading stations (Napindan, Estero de Vitas first and Paranaque) and by the Dagat Dagatan pilot septage treatment plant. The collection, hauling and sea dumping of septage will also include extensive data gathering on the quality and quantity of septage, types and state of repair of tanks. These activities will be aggregated into one contract for each barging location and treatment plant and carried out by contractors employed by MWSS. The specification for collection will require that priority be given to the Pasig River area and that at least 80% of septage be pumped by vacuum pumps provided with deodorizing chamber for vacuum exhaust in order to protect the environment during the collection. 7. The barge loading stations are: Napindan, located at the confluence of the Napindan and the Pasig rivers, Estero de Vitas, located at the Manila Bay shore adjacent to the mouth of the Estero de Vitas in Navotas, and Paranaque, to be located on land to be reclaimed along the Paranaque Channel. The on-going reclamation is to be completed in 1997 and includes deepening of the Channel to six meter depth. The stations will operate as typical load transfer stations and will consist of: pipes to convey the septage from the septage tanker to the barge, water flushing facility to clean the tanker with the river or Bay water, small office to monitor the station operations, parking place for septage tankers, and barge berthing with appropriate moorings. 8. The dumping area for septage designated by the Philippine Coast Guard is located 68 km off Corregidor Island at the inlet to Manila Bay from Luzon Sea. In the initial three years only the barge loading stations at Napindan and Estero de Vitas will be operational. The third station at Paranaque will be constructed in 1999 after the ongoing land reclamation in the area is completed. The dumping cycle is approximately 44 hours consisting of loading (12 hours), navigation (12 hours one way) and spread dumping (8 hours). The vessel could be either a tanker-type barge towed by a tugboat or a tanker ship. In either case the vessel draft must be low to conform to the shallow conditions in the barge loading stations. The sea dumpsite environment will be monitored jointly by the barging contractor, MWSS and the Coast Guard with results to be submitted to the Environmental Management Bureau.  42 ANNEX 2 9. The treatment will be provided at the existing plant at Dagat-Dagatan where septage will be delivered by collection vehicles. The treatment will be provided by one module of 200 m3/d capacity. Septage will pass through grit removal and screening to a coagulation tank and, from a holding tank, pass through a 15 m3/hr centrifuge. The filtrate from the centrifuge will be pumped through a dilution tank to the existing lagoons for treatment. Sludge from the centrifuge will be re-dosed with polymer and passed through a secondary centrifuge. Thereafter, de-watered sludge, grit and screening will be disposed of at San Mateo sanitary landfill. Rehabilitation of central sewerage system 10. The works to be carried out under the project will include: (a) pipeline and manhole renovation; (b) installation of flap valves; (c) pumping station and lift station improvements; (d) provision of standby equipment; (e) cleaning the Pasig River siphon and Tondo outfall diffuser outlets; (f) construction of about 10,000 new house connections to sewers. 11. These components are aimed at restoring the system to its designed capacity with gravity flow conditions being maintained between pumping stations. To attain this, backflow from esteros and inland rivers into the sewerage system must be eliminated and pumping stations will be upgraded to ensure continuous operation. The Pasig river crossing will complement the existing twin-pipe syphon under the river. At present one of the pipes is blocked and will be cleared under the project. 12. The activities included are as follows: (a) pipeline renovation: repair of 28 identified major, and 100 minor defects, construction of (i) 30 overflow structures with flap valves to prevent backflow, (ii) 30 new manholes and procurement of 2000 manhole frames and covers and (iii) new by-pass structures at Paco and Legarda pumping stations, (b) upgrading of pumping stations: installation of new screens of stainless steel and grit traps at Tondo pumping station and seven lift stations, provision of spare parts for pumping stations; provision of standby pumps and generator at each pumping station; removal of blockages from the siphon and diffusers at the end of the Tondo outfall sewer; and new sewer connections as required. Rehabilitation of Ayala sewerage and treatment 13. The project will: (a) replace a defective sewer in EDSA with 486 m of 1050 mm pipe; (b) repair about 30 sewer defects; (c) construct 20 new manholes; procure 200 manhole frames and covers; construct 30 m of 2 x 600 mm syphons on Amorsolo Street, and (d) construct three new overflow sewer lines 30 m long and 900 mm diameter with manholes and flap valves, along Amorsolo Street. 14. Since the on-going Master Plan studies will propose changes affecting the role of the plant within the overall system in Metro Manila, the project proposals have been limited to reinstatement of the mechanical pretreatment, i.e. of inlet works and primary sedimentation tanks. The inlet pumps will be replaced and the grit tank's mechanical equipment comprising a grit collector, grit pump, rotary blowers and an air diffuser will be replaced. The primary sedimentation tanks require new inlet baffles, sludge scrapers and effluent weirs for each of the four tanks.  43 ANNEX 2 Laboratory and maintenance equipment 15. Equipment to be provided under this component of the project will include vehicles, machinery and tools needed for improved maintenance of the sewerage system and pumping facilities and specialized furniture, equipment, apparatus and materials to upgrade MWSS' laboratories. Institutional Support 16. The project support will include consulting services for: (a) construction supervision; (b) implementation of pilot septage management program, (c) design of programs to assess and minimize environmental impacts, and (d) preparation of follow-up sewerage and water supply development projects. 17. Consultants will assist MWSS in day-to-day supervision of the construction program. Their duties will include verifying compliance with specifications for works and goods, supervising adherence to construction schedules, testing and commissioning completed works and equipment, advising on training of staff to operate completed facilities, preparing procurement documents and preparing progress reports and other documents needed for carrying out the works. 18. With regard to the pilot septage management program, consultants will assist MWSS in (a) training, licensing and selecting collection and barging contractors; (b) identifying data to be gathered by (i) the contractors on septic tanks' volume, design, location, state of repair, accessibility and users, and volume of septage disposed in the sea, and (ii) MWSS on operation of septage treatment plant at Dagat-Dagatan, such as BOD, SS and daily quantity of incoming septage and performance of treatment units; (c) identifying parameters to assess environmental impacts of these activities; and (d) ensure compliance with contracts specifications. On the basis of comments received from various agencies and during public consultations on the environmental impact assessment report consultants will help MWSS in preparing final environmental management plans. 19. Consultants will prepare designs and documents for implementation of the sewerage master plan now under preparation (third sewerage project), the second phase of septage management plan (fourth sewerage project), and for the proposed Manila water supply III project on basis of TOR to be prepared upon completion of respective studies.  44 ANNEX 3 PHILIPPINES MANILA SECOND SEWERAGE PROJECT Project cost estimate List of tables: 1. Table A 3.1 Base cost and contingencies, annual expenditures in US$. 2. Table A 3.2 Base cost and contingencies, annual expenditures in Peso. 3. Table A 3.3 Total cost including contingencies, annual expenditures in US$. 4. Table A 3.4 Total cost including contingencies, annual expenditures in Peso.  45 ANNEX 3 PHILIPPINES MANILA SECOND SEWERAGE PROJECT PROJECT COST Table A 3.1: Base Cost and Contingencies, Annual Expenditures in USS -- MILLION PESO --- % Of - MILLION USS -- Phys. % - MILLION US$-- WORKS Base Contin- Foreign Local Foreign Total Cost Local Foreign Total gencies 1995 1996 1997 1998 1999 1. Septage Management Civil Works 126 32 158 10.5% 5.06 1.26 6.32 5.0% 20.0% 0.00 2.72 2.84 0.63 0.13 Equipment 43 145 188 12.5% 1.73 5.79 7.52 5.0% 77.0% 0.00 2.86 3.76 0.75 0.15 2. Central System 2/ Civil Works 257 64 321 21.3% 10.27 2.57 12.84 5.0% 20.0% 0.00 2.05 4.37 3.60 2.82 Equipment 27 89 116 7.7% 1.07 3.57 4.64 5.0% 77.0% 0.00 1.39 2.32 0.79 0.14 3. Ayala Civil Works 109 27 136 9.0% 4.35 1.09 5.44 5.0% 20.0% 0.00 1.80 2.01 1.47 0.16 Equipment 20 68 88 5.8% 0.81 2.71 3.52 5.0% 77.0% 0.00 1.06 1.23 1.16 0.07 4. Maint. Equip. ,Labor. Civil Works 0 0 0 0.0% 0.00 0.00 0.00 5.0% 20.0% 0.00 0.00 0.00 0.00 0.00 Equipment 34 138 172 11.4% 1.38 5.50 6.88 5.0% 80.0% 0.00 3.10 3.10 0.69 0.00 5. Implem. Support Studies 66 44 110 7.3% 2.64 1.76 4.40 5.0% 40.0% 0.00 0.00 1.10 1.54 1.76 Supervision 89 16 105 7.0% 3.57 0.63 4.20 5.0% 15.0% 0.08 1.30 1.30 0.97 0.55 6. Land Acquisition Compensation 50 0 50 3.3% 2.00 0.00 2.00 5.0% 0.0% 0.00 1.00 1.00 0.00 0.00 Lease 64 0 64 4.2% 2.56 0.00 2.56 5.0% 0.0% 0.00 1.28 1.28 0.00 0.00 BASE COST 886 622 1508 100.0% 35.43 24.89 60.32 41.3% 0.08 18.55 24.31 11.59 5.78 PHYSICAL CONTINGENCIES 44 31 75 5.0% 1.77 1.24 3.02 41.3% 0.00 0.93 1.22 0.58 0.29 PRICE CONTINGENCIES 279 43 322 21.4% 11.16 1.74 12.90 13.5% 0.01 2.70 4.93 3.16 2.09 TOTAL PROJECT COST 1/ 1209 697 1906 126.4% 48.36 27.87 76.23 36.6% 0.10 22.18 30.46 15.33 8.16 1/ Includes taxes equivalent to about USS8.0 million; 2 includes sewer house cornections Due to rounding the last digit in totals may appear different than the sum of digits  46 ANNEX 3 PHLIPPINES MANILA SECOND SEWERAGE PROJECT PROJECT COST Table A 3.2: Base Cost and Contingencies, Annual Expenditurs in Peso -MILLION PESO--- % Of - MIUON USS- Phys. % ----MILLON PESO-- WORKS Base Contin- Foreign Local Foreign Total Cost Local Foreign Total gencies 1995 1996 1997 1998 1999 1. Septage Management Civil Works 126 32 158 10.5% 5.06 1.26 6.32 5.0% 20.0% 0 68 71 16 3 Equipment 43 145 188 12.5% 1.73 5.79 7.52 5.0% 77.0% 0 71 94 19 4 2. Central System 2/ Civil Works 257 64 321 21.3% 10.27 2.57 12.84 5.0% 20.0% 0 51 109 90 71 Equipment 27 S9 116 7.7% 1.07 3.57 4.64 5.0% 77.0% 0 35 58 20 3 3. Ayala Civil Works 109 27 136 9.0% 4.35 1.09 5.44 5.0% 20.0% 0 45 50 37 4 Equipment 20 68 88 5.8% 0.81 2.71 3.52 5.0% 77.0% 0 26 31 29 2 4. Maint. Equip.,Labor. Civil Works 0 0 0 0.0% 0.00 0.00 0.00 5.0% 20.0% 0 0 0 0 0 Equipment 34 138 172 11.4% 1.38 5.50 6.88 5.0% 80.0% 0 77 77 17 0 5. Implem. Support Studies 66 44 110 7.3% 2.64 1.76 4.40 5.0% 40.0% 0 0 28 39 44 Supervision 89 16 105 7.0% 3.57 0.63 4.20 5.0% 15.0% 2 33 33 24 14 6. Land Acquisition Compensation 50 0 50 3.3% 2.00 0.00 2.00 5.0% 0.0% 0 25 25 0 0 Lease 64 0 64 4.2% 2.56 0.00 2.56 5.0% 0.0% 0 32 32 0 0 BASE COST 886 622 1508 100.0% 35.43 24.89 60.32 41.3% 2 464 608 290 145 PHYSICAL CONTINGENCIES 44 31 75 5.0% 1.77 1.24 3.02 41.3% 0 23 30 14 7 PRICE CONTINGENCIES 279 43 322 21.4% 11.16 1.74 12.90 13.5% 0 68 123 79 52 TOTAL PROJECT COST 1/ 1209 697 1906 126.4% 48.36 27.87 76.23 36.6% 2 555 762 383 204 i/ Includes taxes equivalent to about USSS.0 million; 2/ include sewer house connections Due to rounding the last digt in totals may appear different than the sum of dpits  47 ANNEX 3 PHILIPPINES MANILA SECOND SEWERAGE PROJECT PROJECT COST Tablc A 3.3: Total Cost Including Contingencies, Annul Expenditures in USS ---- - - - - ------- --MILLION PESO ---- %Of --MILLIONUSS- Phys. % ---Million USS - WORKS Total Contin- Foreign 1995 1996 1997 1998 1999 Local Foreign Total Cost Local Foreign Total gencies 1. Septage Management Ciifl Works 168 35 204 10.7% 6.74 1.41 8.14 5.0% 20.0% 0.00 3.37 3.72 0.87 0.18 Equipment 58 161 219 11.5% 2.31 6.44 8.76 5.0% 77.0% 0.00 3.24 4.41 0.91 0.19 2. Central System 2/ Civil Works 359 73 432 22.7% 14.36 2.92 17.28 5.0% 20.0% 0.00 2.55 5.71 4.95 4.08 Equipment 36 100 136 7.1% 1.44 3.99 5.43 5.0% 77.0% 0.00 1.58 2.72 0.96 0.17 3. Ayala Civil Works 147 30 178 9.3% 5.90 1.22 7.12 5.0% 20.0% 0.00 2.22 2.63 2.02 0.24 Equipment 28 76 104 5.4% 1.10 3.04 4.14 5.0% 77.0% 0.00 1.20 1.45 1.41 0.09 4. Maint. Equip.,Labor. Civil Works 0 0 0 0.0% 0.00 0.00 0.00 5.0% 20.0% 0.00 0.00 0.00 0.00 0.00 Equipment 46 153 198 10.4% 1.83 6.11 7.94 5.0% 80.0% 0.00 3.49 3.61 0.83 0.00 5. Implem. Support Studies 95 51 146 7.7% 3.81 2.03 5.84 5.0% 40.0% 0.00 0.00 1.39 2.03 2.42 Supervioio 122 18 140 7.3% 4.88 0.71 5.58 5.0% 15.0% 0.10 1.63 1.72 1.34 0.80 6. Land Acquistion Compensaon 66 0 66 3.5% 2.63 0.00 2.63 5.0% 0.0% 0.00 1.28 1.36 0.00 0.00 Lease 84 0 84 4.4% 3.37 0.00 3.37 5.0% 0.0% 0.00 1.63 1.74 0.00 0.00 TOTAL PROJECT COST I/ 1209 697 1906 100.0% 48.36 27.87 76.23 36.6% 0.10 22.18 30.46 15.33 8.16 1/ Inchldes taxes equivalent to about USS8.0 milion; 2/ includes sewer house connections Due to rounding the lst digit in totas may appear different than the sum of digits  48 ANNEX 3 PHILIPPINES MANILA SECOND SEWERAGE PROJECT PROJECT COST Tablc A 3.4: Total Cost Including Contingencies, Annuil Expenditures in Peao --- - ---------- M11-M0LLION PESO--- % Of -MILLION USS--- Phys. % -- MljimO PESO- WORKS Total Contin- Foreigp 1995 1996 1997 1998 1999 Local Forign TotAl Cost Local Forign Total gencies 1. Septage Manaement Civil Works 168 35 204 10.7% 6.74 1.41 8.14 5.0% 20.0% 0 84 93 22 5 Equipment 58 161 219 11.5% 2.31 6.44 8.76 5.0% 77.0% 0 81 110 23 5 2. Central System 2/ Civil Works 359 73 432 22.7% 14.36 2.92 17.28 5.0% 20.0% 0 64 143 124 102 Equipment 36 100 136 7.1% 1.44 3.99 5.43 5.0% 77.0% 0 39 68 24 4 3. Ayala Civil Works 147 30 178 9.3% 5.90 1.22 7.12 5.0% 20.0% 0 56 66 51 6 Equipment 28 76 104 5.4% 1.10 3.04 4.14 5.0% 77.0% 0 30 36 35 2 4. Maint. Equip.,Labor. Civil Works 0 0 0 0.0% 0.00 0.00 0.00 5.0% 20.0% 0 0 0 0 0 Equipment 46 153 198 10.4% 1.83 6.11 7.94 5.0% 80.0% 0 87 90 21 0 5. Implem. Support Studies 95 51 146 7.7% 3.81 2.03 5.84 5.0% 40.0% 0 0 35 51 61 Supervision 122 I1 140 7.3% 4.88 0.71 5.58 5.0% 15.0% 2 41 43 34 20 6. Lind Acquisition Compenation 66 0 66 3.5% 2.63 0.00 2.63 5.0% 0.0% 0 32 34 0 0 Lease 84 0 84 4.4% 3.37 0.00 3.37 5.0% 0.0% 0 41 43 0 0 TOTAL PROJECT COST 1/ 1209 697 1906 100.0% 48.36 27.87 76.23 36.6% 2 555 762 383 204 1/ Includes taxes equivment to about USS8.0 milion; 2/ includes sewer house connections Due to rounding the last digit in totals may apper different than the sum of digits  49 PHILIPPINES ANNEX 4 MANILA SECOND SEWERAGE PROJECT IMPLEMENTATION SCHEDULE COMPONENT/YEAR 1996 1997 1998 1999 2000 2001 Quarter 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 Treatment plant (200 m3/d) BBBAAACCCCCCCCCCCCCCCCCCZCZZZCz3ZZ3ZCtZCZCZZ3Z3333ZU Barge transfer: Napindan BBAACCC Est. de Vitas BBAACCCOOOOOOO Paranague BBAACCCCCOOOOOOOOOOOOOOOOOOOOO Upgrading Central i/ BBAACCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCC Upgrading Ayala BBAACCCCCCCCCCCCCCCCCCCCCCCCCC Maint.& laborat. BBBAALh L T.T.TLLLTLTT.. Impl. support: Constr. superv DDDDSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSS Monitoring & eval. - E-----E-----E-----E-----E-----EEEEEEE Studies & designs for follow up projects DDDDDDDDDDDDDDDDDDDDDDDDDDD Land Acquisition XXXX Lease Legend: AAA - Contract award EBB - Bidding, invitation and evaluation CCC - Construction of facilities DDD - Studies, designs and preparation of documents EEE - Monitoring and evaluation of data LLL - Delivery and installation of laboratory and equipment 000 - Operations of septage pilot facilities SSS - Construction supervision XXX - Land acquisition and lease 1/ includes sewer house connections  50 ANNEX 5 PHELIPPINES MANILA SECOND SEWERAGE PROJECT Summary of project implementation action plan Start End Months Activity Sevage management 1) detailed designs and documents N/A 12/95 N/A 2) bidding, evaluation, award civil works Napindan & De Vitas 07/96 09/96 3 3) construction Napindan, De Vitas 10/96 12/96 3 4) bidding, evaluation, award civil works Dagat Dagatan plant 07/96 12/96 6 5) construction and installation Dagat Dagatan 01/97 04/98 16 6) testing, c9nunissioning Dagat Dagatan 02/98 04/98 3 7) land acquisition barging transfer Paranaque 01/98 05/98 5 8) bidding, evaluation, award civil works Paranaque 05/98 09/98 5 9) construction Paranaque 11/98 04/99 6 10)bidding, evaluation, award collection and barging transfer 07/96 10/96 4 Napindan, De Vitas (incl. Dagat Dagatan later) Rehabilitation 1) detailed designs and documents N/A 12/95 N/A 2) bidding, evaluation, award central, Ayala 07/96 10/96 4 3) construction central and Ayala 11/96 06/99 32 Laboraton and maintenance eguipment 1) detailed designs and documents N/A 01/95 N/A 2) bidding, evaluation, award 07/96 10/96 4 3) delivery and installation 11/96 03/98 17 Implementation sunnort 1) construction supervision, monitoring septage management, 09/96 12/99 39 evaluation 2) designs follow up projects 09/97 12/99 28  51 ANNEX 6 PHILIPPINES MANELA SECOND SEWERAGE PROJECT Estimated schedule of loan disbursement (in US$ million) Year and Loan Loan Loan Sector Bank's Semester Disbursement in Disbursement Disbursement Disbursement Fiscal Ending Semester Cumulative Percent of Total Profile Year 1996 30-June 0.0 0.0 0 1 31-Dec 5.0 5.0 9 6 1997 30-June 6.0 11.0 19 14 31 -Dec 8.0 19.0 33 23 1998 30-June 9.0 28.0 49 35 31-Dec 8.0 36.0 63 44 1999 30-June 7.0 43.0 75 55 31-Dec 6.0 49.0 86 58 2000 30-June 4.0 53.0 93 64 31-Dec 2.0 55.0 96 71 2001 30-June 1.0 56.0 98 75 31-Dec 1.0 57.0 100 80 2002 30-June 0.0 57.0 100 86 31 -Dec 0.0 57.0 100 91 2003 30-June 0.0 57.0 100 97 31-Dec 0.0 57.0 100 100 Note: The sector disbursement profile has been developed on the basis of several typical water supply and one sewerage project which do not reflect the civil works contract involved in construction of the pilot septage treatment plant (two 5-story buildings) and concurrently executed contract for rehabilitation of sewerage network.  52 ANNEX 7 PHILIPPINES MANILA SECOND SEWERAGE PROJECT Environmental Assessment Introduction The proposed Manila Second Sewerage Project is expected to have a beneficial effect on Metro Manila's environment by significantly reducing water-borne pollution, which would have positive public health benefits for its 8.9 million residents. By rehabilitating the Central and Ayala sewer systems, providing 10,000 additional individual sewer connections, and evacuating some 300,000 septic tanks, it is expected to reduce BOD pollution of Manila's waterways by some 30%. Disposing of treated septage from those tanks through deep-sea dumping - a temporary measure until adequate land based treatment and disposal facilities come on-line - is not expected to have an adverse effect on the marine or coastal environments. All project components have been reviewed by the Philippine Department of Environment and Natural Resources (DENR) under the Environmental Impact Statement Law, and discussed with community organizations and non-governmental organizations (NGOs). DENR ruled that a full Economic Impact Assessment (EIA) was required for the construction of the Dagat-Dagatan septage treatment plant (STP) while Project Descriptions (PDs) that briefly describe potential environmental impact were adequate for septage collection, construction of barge loading stations, sea disposal, and rehabilitation of the Central and Ayala systems. MWSS carried out impact assessment studies with assistance from consultants in 1994 and submitted them to DENR in May 1995. DENR issuance of Environmental Clearance Certificates (ECCs) will be a condition of loan effectiveness. A separate EIA report complying with Bank format was submitted to the Bank, and a summary was circulated for Board review in June 1995. The report and the summary are available in the project file. During appraisal, the EIA reports and other related documents were reviewed and an overall environmental management plan (EMP) was prepared. The EMP will be implemented by MWSS, assisted by contractors and project supervision consultants. The plan will be integrated into bidding and contract documents, and the contractors responsible for project activities will be responsible for environmental monitoring. MWSS will be responsible for monitoring and reporting compliance. A revised EIA report, including the EMP, taking into account Bank/ASTEN comments was submitted to the Bank in January 1996 and was found satisfactory. These reports are available in the project file. The Dagat -Dagatan Septage Treatment Plant The Dagat-Dagatan STP component was subjected to a full environmental assessment, including consultation with local residents. The proposed STP (2 ha) will be built on a vacant area of MWSS's 15 ha wastewater treatment plant site. The plant is located along a stagnant creek, and is surrounded by a concrete wall to prevent encroachment by squatters. The low-lying area is  53 ANNEX 7 subject to frequent flooding and is about 1 km from the Smokey Mountain open dump site. The area is a low-income community with a high density of squatters and poor environmental quality. Eighty-two percent of residents surveyed in the perception study reacted positively to the project and viewed it as a possible source of employment. Some raised issues of inadequate piped water supply in the area, decreases in land values, increases in odor and noise, and traffic congestion due to septage collection tankers. Measurements suggested that apart from dust, air quality in the area is within the standards for commercial/industrial areas. Noise levels (61-75 dBA) are within the 75 dBA maximum, and traffic appears to be the main source of noise. Noise levels at the plant site are about 61 dBA, but those at roadside are 72-75 dBA. Traffic on most of the main roads is heavy. The EIA showed that the STP, if properly operated, would raise pollution levels only marginally, as the daily effluent level would be increased by less than p.25% (from 8,300 m3/d to 8,500 m3/d). Most of the impact during construction (noise, vibration, and traffic) would be temporary and localized and the EMP includes measures to minimize these effects. Existing lagoons treat about 8,300 m3/d of wastewater and the effluent-6 mg/l BOD, 33 mg/l suspended solids (SS)-is discharged into Maypajo creek. Measurements showed a high level of water pollution in the canal, especially BOD, SS, COD, oil/grease, and coliform bacteria. The BOD level upstream of the discharge point is 42 mg/l while that at downstream is 29 mg/l. To comply with the effluent standards, the STP was designed to remove about 87% BOD and 98% SS from the incoming septage (5,500 mg/l BOD, 15,000 mg/l SS) and the supernatant (733 mgfl BOD, 244 mg/l SS) will be further treated in the existing treatment lagoon which will be upgraded by aeration. The final effluent (40 mg/l BOD and 35 mg/l SS) will be discharged (8,500 m3/d) into Maypajo River; this is equivalent to about 340 kg/d BOD and 300 kg/d SS. The main potential environmental problems and EMP mitigation measures are summarized in Table A 7-1.  54 ANNEX 7 Table A 7-1: Environmental Problems and Mitigation Measures for Dagat Dagatan STP Potential Problems Proposed mitigation During construction: a) higher levels of dust, noise, soil erosion, a) erect temporary sound-barrier around work flooding, waste, and traffic: noise level from sites and avoid simultaneous use of heavy equipment would be 70-79 dBA at 10 m, 50- equipment; limit daytime work, 20 km/hr 69 dBA at 30 m from the source; with proper speed; provide regular watering, good sound-barrier, noise at the property line (10 maintenance of equipment, and temporary m) would be about 60 dBA and vibration drainage and storage facilities for filling and would be 55-69 dBA; at 20 km/hr traffic noise excavation soil; improve access roads to work would increase by 8.5 and 5.5 dBA at 0 and 5 sites; complete drainage works immediately m distance from the road; the heaviest volume during initial phase of construction; and of traffic would be 60 trucks/d. monitor noise level. During operation: b) Odors (organic and sulfur compounds) b) treat odor in a carbon absorption tower-, mainly from the trucks inside loading zone and collect and treat all air inside the plant; carry septage treatment units; noise from equipment out all operations in the well ventilated would be 65-85 dBA; with proper housing building; install double wall for plant facilities; and insulation about 15 dBA can be reduced; cover the units generating noise and odor; possible flooding; traffic load would be 60 plant shrubs and trees in the area; design collection vehicles per hour. drainage for a 20 year storm frequency; design plant layout for effective flow of traffic. c) generate 22 m3/d of dewatered sludge; c) dispose of waste at San Mateo sanitary create potential health hazard to workers; landfill; ensure good ventilation and hygienic increase dust, but this would be small and operation of the facilities and STP and good mostly confined within the plant boundary (15 maintenance of equipment and machinery; ha); spill of septage; accumulation of septage establish emergency plan; avoid parking of when STP is not in operation. collection trucks along the roads and public areas; suspend desludging when STP is not in operation. d) malfunction of STP operation can increase d) monitor effluent and receiving waters, the level of water pollution in the receiving noise, and odor; treat all wastewater stream, noise, and odor. generated within the plant. Under the EMP, the measures proposed in Table A 7-1 b) were included in the detailed design of the STP while those proposed in a) and c) will be included in bidding and contract documents. MWSS staff will be responsible for operating and monitoring the STP. A plant operation manual, including details for housekeeping and prevention of accidents, will be prepared and strictly followed. Odor and noise levels in the STP and water quality (BOD, COD, dissolved oxygen (DO), SS, oil/grease, total coliform) in receiving water will be monitored. Effluent characteristics will be monitored as part of the treatment performance monitoring program.  55 ANNEX 7 Septage Collection and Sea Disposal The proposed project's septic tank evacuation and sea disposal component involves minimal environmental risks and is the least-cost method of reducing urban pollution until the required septage treatment capacity comes on line' While septage collection and hauling would increase noise, odor, and other nuisances to residents, these effects are expected to be minimal, and operational guidelines are being prepared defining detailed work to be taken by the contractors at each stage of collection and hauling to minimize these effects and ensure proper data collection. The guidelines will cover data collection methods, necessary equipment and chemicals, data recording forms, health precautions, and procedures for giving advance notice to residents. Noise during suction of septage can rise to about 73 dBA, which is considered tolerable, and would be of short duration. A study to assess the impact of septage hauling on the traffic in Estero de Vitas and Dagat Dagatan areas, taking into account future road development and expansion, concluded that the impact would be small given existing traffic levels of 1,000-5,000 cars/hr and would not increase average delays per vehicle and cycle times or greatly decrease operating speeds along the roads leading to the sites. The guidelines will ensure that septage with high concentrations of heavy metals and toxic substances will not be collected during the first two years, but data on locations and types of land use (industries, households, etc.) will be recorded. Contaminated septage would be collected and treated in the pilot STP after it is in operation. Contractors would be required to (a) use trucks, at least 80% of which would be equipped with special vacuum cars, and provide periodic inspection and maintenance; (b) follow the operational guidelines; (c) ensure safe driving and adequate training of drivers and crews to deal with spill of septage; (d) plan work schedules and route selection to avoid rush hours and minimize collection time; (e) have available tow trucks and effective communication systems, and (f) establish a special team with equipment and chemicals to deal with septage spills. Training would be required to ensure that the guidelines are followed. Barge loading stations will be built at Napindan, Estero de Vitas, and Paranaque. Each of the three stations would serve about 48 vehicles (mostly 4 m3 and 10 m3 vacuum trucks) a day and each truck would bring in two to three loads of septage a day. The Napindan and Estero de Vitas stations will be built in early 1997. The Napindan station is located about 16 km from the Pasig river mouth; it is being used as an equipment depot and berthing facilities are available. Construction will be limited to surface paving and minimal excavations for site development and drainage, concreting, and pipe works. The proposed site for Estero de Vitas at Manila North harbor.is part of R-10 road right-of-way and is presently in temporary use as a solid waste transfer station. Construction will involve site Five septage managent options: tmataent (physical, biological, chemical), sea disposal, lahar site disposal, dewataing, and inineration, we revieved and teir costs re estmated. Sea disposal is the least expensive option (S15,0001m3), followed by disposal in the lahar lava fields resulting from the Mt Pinatubo auption (I 8,000/m-the pactical applicatiom of this mehod is sdll in the research stage) and land-based cemicalibiomnhaical frebent (S115,000/n3).  56 ANNEX 7 grading, excavation, filling, and concreting works. Measurements suggested that dust levels in the proposed sites often exceed standards, but noise levels are within standards. The proposed sea disposal site is more than 40 km from the nearest shoreline and the water depth is about 2,300 m. This is not a normal fishing area and is about 20 km from the nearest navigation lane. Over November-March, the current moves (0.4-1.5 km/hr) westward away from shore. From May to October, it moves (0.7-1.8 km/hr) toward the west coast of Luzon. Navigation is often not possible during July-September. Sea water temperature is about 16-38 C; density is 1.02 ton/m3; and salinity is 33.3 parts per thousand. Deep-sea disposal of relatively benign septage is not covered by the 1972 London Convention on the Prevention of Marine Pollution by Dumping of Wastes and Other Matters (LDC, ratified by the Philippines in 1973) which controls the dumping of toxic and hazardous chemicals. The proposed dumping site, however, meets the LDC criteria for hazardous waste disposal, and was designated an allowable dumping site by the Philippine Coast Guard in 1991. The site is well within Philippine national waters, and there is no question of trans-boundary pollution. Deep-ocean disposal of septage is not unusual in industrialized countries. Japan has been using this alternative since the mid-1930's, and dumped more than 3 million tons offshore in 1993, the last year for which information is available. The United States and the United Kingdom also make use of deep-ocean septage and sewage disposal. A review of the literature on deep-ocean septage disposal - available in the project file - shows that treated sewage disposal into open waters with high flushing characteristics has relatively little impact on the receiving environment. Even within the mixing zones themselves, coliform and other bacteria die off within 15 minutes of disposal. Some authors have noted that disposal may improve the productivity of nutrient-deficient waters. The disposal method will be similar to that being used in Japan (spread disposal), whereby septage is pumped out (at a speed less than 0.5 m3/sec) through submerged outlets (5-7 m below water surface) while the vessel is moving (at a speed not less than 4 knots) along a 10-km radius. Barges would make one trip every two days. The environmental impact during construction of barge loading stations is expected to be minor. Under the EMP, contractors will be instructed to carry out the works with due attention to: providing advanced notice to residents and the public before beginning construction and taking measures to reduce noise and other impacts, including installation of proper embankments; erecting sound-barriers around work sites; prohibiting night work, the use of large machines, construction vehicle parking on public roads, and disposal of solid waste and other construction materials into waterways and public places. These requirements will also be included in the bidding and contract documents for Paranaque when it is built in 1998. Under the proposed project, it is expected that short term aesthetic impacts (color, turbidity, smell) will occur in the disposal area during disposal of septage. Given the water depth and turbulence in the area, biodegradability of the septage, and the spread disposal operation, no adverse long-term impact is likely. During the most critical period in August when the surface  57 ANNEX 7 currents move landward at a speed of about 1.0 knot, septage would take 10 days to reach the nearest shoreline (Bataan) which is about 45 km from the disposal site. Over December-March, the septage may never reach the shore as the current is outward to sea. Deposition of solids within a 20 km radius (1,256 km2) would be 0.04 mm after 65,000 ton of septage are discharged during the first 3 years. Some positive benefits on fish and other marine life can be expected due to the availability of organic matter and nutrients. Water samples were collected along Bataan and southern part of Zambales in November 1995 and tested (for oil, grease, COD, transparency, SS, N, P, plankton, etc.) to provide background data for monitoring the impact of sea disposal. It is anticipated that single contracts covering septage collection, hauling, and sea disposal would facilitate smooth operation and provide flexibility to adjust work programs that would obviate the need for costly storage facilities at the three barge loading stations. To minimize potential barge loading problems, the stations were designed to operate as typical load transfer stations, with pipes to convey septage from tanker trucks to barges, flushing facilities to clean tankers with river or bay water, small offices to monitor station operations, parking places for tankers, and barge berthing with appropriate anchorages; the layouts were designed to facilitate smooth traffic flow and operation. The barge loading station will be the key check point to inspect the performance of the contractors. Septage quantities would be recorded and samples taken for laboratory analysis. The septage would be transferred to the barge through securely fastened hoses and wastewater from washing of collection trucks would be discharged into receptacles for eventual discharge to the barge or tanker vessel. Discharge of solid and liquid wastes into the river would be strictly prohibited. To ensure acceptable barge loading and sea disposal, monitoring of noise, odor, and water quality at the barge loading stations will be carried out, as will monitoring of water quality at the disposal site and along Bataan and southern Zambales shoreline. Appropriate actions will be taken if adverse impacts occur. Under the EMP, routine monitoring of sea conditions (wind direction/speed, current direction/speed) and water quality (color, transparency, oil/grease, floating materials) will be carried out at the disposal site before and after disposal. Periodic measurements of water quality (pH, temperature, salinity, DO, COD, oil, grease, SS, N, P, plankton, transparency, color) and a release of drift cards at the disposal site and along the nearest shorelines will be carried out. An operational manual will be prepared to identify steps to be taken and the equipment required during loading and sea disposal of septage to ensure the following: maintaining hygienic conditions of operation and safety of workers, minimizing noise and odor impacts; prohibiting discharge of solid and liquid wastes into the waterways and Manila Bay; proper operation and recording of septage disposal and monitoring of possible adverse effects. An administrator will be assigned permanently to each barge loading station to ensure efficient transfer operations, including proper record keeping and septage sampling. Disposal of septage will be carried out under close supervision by the Philippine Coast Guard.  58 ANNEX 7 Contractors will be required to comply with the following: * Vessels must be of low draft to conform to the shallow conditions in the barge loading stations; have closed decks to prevent odor and other nuisances; and be multi-compartmented and properly equipped to ensure stability and safety; * Make available clean-up facilities to take care of accidental spillage due to ship collision or other accidents and other equipment to carry out the water quality monitoring program; * Follow operational guidelines for barge loading and sea disposal, carry out the disposal operation under close supervision of PCG, and submit the record/results to MWSS; * Adjust the collection and barging schedule to minimize potential adverse effects. Sewer System Rehabilitation and Upgrading The Central and Ayala systems are old and conditions and performance are very poor. The systems would be rehabilitated over three years, and civil works are expected to be limited. The Ayala plant (40,000 m3/d capacity) now operates about 8 hrs a day and about 20,000 m3/d of influent (230 mg/l BOD, 150 mg/l SS) is treated; the effluent (62 mg/l BOD, 50 mg/l SS) is discharged into the nearby receiving water. Measurements suggested that BOD and SS levels in the receiving water during January to May are about 62 mg/l and 50 mg/I, respectively. The main impacts include traffic, air, noise, vibration, odor, and water pollution during rehabilitation. To minimize these impacts, contractors will be instructed to carry out the works with due attention to: providing advanced notice to residents and the public before construction begins and taking actions to minimize traffic congestion and other impacts, including immediate resurfacing after completion of works; limited use of noisy jack hammers and daytime work; and properly trained workers. These conditions will be included in the bidding and contract documents. After rehabilitation, collection capacity and efficiency of the Central system would be improved, thus improving sanitary conditions and reducing water pollution in the service area. This would, however, increase the level of BOD loading at the outfall area in Manila Bay. The EMP indicated that the existing water quality monitoring at the outfall area will be continued with close coordination with other related activities. Implementation of the sewerage and sanitation master plan (updated in 1996) would significantly reduce BOD loading into Manila Bay. After rehabilitation of the primary treatment unit of Ayala wastewater treatment plant, the effluent would be 126 mg/l BOD (26% removal) and 98 mg/l SS (38% removal). Existing secondary treatment, however, will be in operation and the final effluent wili not exceed the standards and the water quality in the receiving water will not be worse off. Rehabilitation works will ensure reliable operation of the primary treatment facilities which are presently in poor condition. Rehabilitation of the secondary treatment facilities will be considered during implementation of the master plan. Water quality in the receiving water will be monitored.  59 ANNEX 7 Public Information And Consultation As part of the EMP, it is anticipated that successful and timely implementation of the project will require close consultation and coordination among concerned parties and cooperation of residents and the public. During preparation of the project, consultation activities (publication, meetings, hearing) were used to obtain views and comments on the project. MWSS held consultative meetings with concerned local government officials in June 1995 and with local NGOs in December 1995. These activities will be continued during implementation of the project with emphasis given to (a) promoting knowledge on septic tank management and cooperation of homeowners and (b) providing advance notice to residents and the public before the beginning of civil works. The latter would be included in bidding and contract documents. Implementation of Environmental Actions The environmental actions (Table A 7-2) would be carried out by MWSS with assistance of a consultant.  60 ANNEX 7 Table A 7-2: Schedule of Environmental Actions Activity Start Completion 1) Public information and consultation: * advertisement, meetings 06/95 contin. * consultation ordered by EMB 01/96 contin. * prepare plan for public information 01/96 04/96 * periodic consultation 01/96 contin. 2) Construction Napindan and E. de Vitas: * prepare final EMP 04/96 06/96 * obtain ECG 01/96 06/96 * monitor and report on compliance 05/96 semiannual 3) Septage collection, barging, dumping: * sea water monitor, 01/96 annual * prepare data base 01/96 04/96 * prepare final EMP 04/96 06/96 * prepare guidelines (method, forms) 04/96 06/96 * obtain ECC/permit 01/96 06/96 * training 06/96 12/96 * monitor and report on compliance 08/96 12/99 4) Construction Dagat-Dagatan STP: * prepare final EMP 04/96 06/96 * obtain ECG 01/96 07/96 * monitor and report on compliance 07/96 semiannual 5) Operation of Dagat-Dagatan STP: prepare final EMP 04/96 06/96 prepare guidelines for housekeeping 01/97 04/97 * training 05/97 12/97 * monitor treatment performance 01/98 12/98 * monitor and report on compliance 01/98 12/00 6) Rehabilitation of Central and Ayala: * prepare final EMP 04/96 06/96 * obtain ECC 01/96 06/96 * monitor/report on compliance 07/96 semiannual 7) Operation of the Central and Ayala: * prepare final EMP 04/96 06/96 8) Construction of Paranaque: * prepare EIA report 01/98 04/98 * prepare initial EMP 04/98 05/98 * obtain ECC 05/98 10/98 * monitor and report compliance 11/98 04/99 9) Planning of follow up projects: prepare TOR for DD 01/99 06/99 *prepare EIA for proposed facilities 01/99 06/99 Legend: EMB=Env. Management Bureau, EMP=Env. management plan, ECC=Env. certificate of compliance, BD=-Bidding documents, DD=Detailed designs, WQ=Water quality  61 ANNEX 7 Environmental Clearance Certificates DENR is expected to issue ECCs for the project (for septage collection and disposal, including construction of barge loading stations; for the Dagat-Dagatan STP;and for rehabilitation of the Central and Ayala sewer systems) by early 1996. Deep sea disposal of septage at the proposed site will require vessel permits from the PCG. The permits would be issued to the contractors and septage discharge would be supervised and monitored by PCG. An operational record of the locations, amounts, and types of dumping will be maintained by the PCG. Monitoring and Institutional Capacity MWSS, with the assistance of consultants and oversight by the advisory panel, would monitor compliance with the ECCs and carry out the data collection programs for septage management. Monitoring results would be submitted to DENR/EMB and the World Bank periodically. The technical and laboratory capacity of MWSS would be strengthened under the project. The central laboratory would be appropriately equipped for sample collection and analysis and the laboratory at Dagat-Dagatan would be upgraded for routine analysis of STP performance. DENR would periodically monitor and audit compliance with the ECCs, assisted by independent contractors. Compliance with the sea-dumping permit would be monitored by PCG, DENR, and MWSS.  62 ANNEX 8 PHILIPPINES MANILA SECOND SEWERAGE PROJECT Project Supervision Plan Bank Supervision Input into Key Activities 1. The staff input indicated in the table below is in addition to regular supervision needs at headquarters to review progress reports, procurement actions, correspondence, etc., which is estimated at 5 staff weeks during FY96, 5 staff weeks during FY97 through FY99 and 10 staff weeks in FY 2000. Accordingly, the total Bank supervision input is estimated at 56 staff weeks, of which 30 staff weeks would be at the headquarters and 26 staff weeks in the field. Bank Field Supervision Input into Key Activities Approximate Dates Expected Skill Staff Input (month/year) Activity Requirements (staff weeks) Oct/1996 Supervision mission (work progress, pro- Project Engineer curement, financial Financial Analyst performance) Environmental Specialist 4 1997/1998 Supervision mission (3 missions) (work progress, fi- Project Engineer nancial performance) Financial Analyst 8 Oct 1998 Supervision mission Mid-term (work progress, fi- Project Engineer review nancial performance, Financial Analyst environmental aspects) Environmental Specialist 6 1999 Supervision missions (2 missions) (work progress, Project Engineer environmental Financial Analyst aspects, evaluation) Environmental Specialist 8 Borrower's Contribution to Supervision 2. Overall coordination of the project would be the responsibility of MWSS. This would include inter alia (i) providing guidance on timing and form of reporting implementation progress; (ii) arranging meetings with government officials during mission's field visits; (iii) chairing mission's opening and wrap-up meetings; and (iv) ensuring timely information to the Bank and proposals for satisfactory resolution of any unexpected issue occurring during implementation.  63 ANNEX 8 3. The following reports on implementation progress would be submitted to the Bank: semiannually: (a) project status reports on implementation, including monitoring of state of environment; annually: (b) monitoring the compliance with EMPs; (c) annual updated SSD financial projections; (d) audited SSD financial statements, including a separate opinion on Statement of Expenditures and the IBRD Special Account for the Bank loan; and other: (e) evaluation report on project implementation. Outline of semi-annual component status report 4. The semi-annual component status report will be prepared by MWSS. The report should comprise a descriptive part and appendices; the descriptive part should not exceed twenty pages and should cover the following items: (a) General description of the project. A concise summary of project objectives, description, financing, initial and latest estimated costs, initial and latest schedule, key data of loan and project agreements and of various amendments; (b) Project overview and physical accomplishment. Status of implementation progress for each part of the project, procurement, information on inspection of manufacturing, input of supervising consultant; monitoring of ECC compliance and evaluation of septage operation during the reported period; (c) Financial status. List of awarded contracts with dates of award, start and completion of contract, allowed time extensions and variations, contract amounts in various currencies and status of disbursement for contracts, projected and actual disbursement S-curve for the total and the loan; (d) Problems affecting implementation. Description of problems and proposed or taken actions. 5. App2ndices will list personnel provided by MWSS, by the consultant and by contractors, key meetings, important visits on site, photographs, location plan of the project showing planned and achieved progress and monitoring indicators. Outline of the evaluation report on project implementation 6. The evaluation report will be prepared by MWSS. It should not exceed ten pages and the performance judgments and analyses should cover the following specific aspects: (a) Project objectives. A concise statement and evaluation of major objectives as presented in the SAR, including any changes made during implementation. The evaluation will assess the clarity of the objectives, their realism, and whether they are important for the country and sector. (b) Achievement of project objectives. An assessment of the project's success (substantial, partial, negligible) in achieving its major objectives - e.g. sector policy  64 ANNEX 8 improvements, financial objectives, institutional development, physical objectives, other social objectives, environmental objectives, and public sector management and private sector development. (c) Implementation record and major factors affecting the project. An analysis of the factors that affect implementation. The factors are divided into those not generally subject to government control, those subject to government control, and those subject to MWSS control. (d) Bank performance. An assessment of the Bank's performance (highly satisfactory, satisfactory, deficient) in project identification, preparation assistance, appraisal, and supervision. (e) MWSS performance. An assessment of the performance of MWSS (highly satisfactory, satisfactory, deficient) in preparing, implementing, and operating the project. (f) Assessment of outcome. A rating of outcome (highly satisfactory, satisfactory, unsatisfactory, or highly unsatisfactory) based primarily on how well the project achieved its objectives and how sustainable it is likely to be. (g) Future operation. A description and assessment of the plan for the project's future operation, including understanding the measures to maximize the project benefits, and the indicators for monitoring and evaluating future operations. (h) Key lessons learned. A discussion of the most significant positive and negative lessons learned from the project's implementation, showing how they are reflected in the arrangements for its future operations. This section also identifies those lessons most relevant to similar ongoing and future projects in this sector in the Philippines. 7. MWSS will submit the evaluation report to the Bank not later than six months after completing the project.  65 ANNEX 9 PHILIPPINES METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM SEWERAGE SYSTEM DEPARTMENT INCOME STATEMENT 1992-2002 (Millions of current PESO) <---- - - Actual -> <-- -----Forecast- --------> YearendedDecember31 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 WATERCONS.BYSEWERCONN.(M 60.98 67.47 71.09 81.00 82.55 84.32 86.51 88.70 90.89 93.08 94.18 AVE.SEWERAGE CHARGE (PESO/m 3.417 3.812 3.781 4.226 5.628 6.032 6.420 6.881 7.110 7.480 7.862 INCREASE IN SEWERAGE TARIFF 11.58% -0.83% 11.77% 33.18% 7.190/o 6.42% 7.18% 3.33% 5.20% 5.11% WATERBILLED(Mm3/Y) 382.99 397.11 418.94 445.53 466.01 479.54 527.74 549.29 628.53 683.00 740.28 AVE.ENVIRONMENT CHARGE (PES 0.683 0.762 0.756 0.845 1.126 1.206 1.284 1.376 1.422 1.496 1.572 INCREASEINENV.TARIFF 11.58% -0.83% 11.77% 33.18% 7.19% 6.42% 7.18/o 3.33% 5.20% 5.11% OPERATIONAL REVENUES Seweage charge 271.41 290.75 307.27 342.27 464.55 508.64 555.38 610.33 646.21 696.22 740.39 Envirornenal chrge 262.00 289.28 307.81 376.52 524.49 578.51 677.j6 755.87 893.71 1021.70 1163.94 Otheroperationl revenue 0.88 1.31 0.93 0.88 0.89 0.89 0.89 0.89 0.89 0.89 0.89 TOTAL OPERATIONAL REVENUE 534.29 581.34 616.01 719.66 989.93 1088.04 1233.82 1367.09 1540.81 1718.81 1905.21 OPERATIONAL COSTS Wages 99.76 111.69 100.47 164.64 175.75 186.74 197.48 207.84 218.23 229.15 240.60 Power 12.00 14.64 22.30 21.74 24.37 25.89 28.68 30.88 32.42 34.04 37.33 Supplies &materiak 6.09 6.53 5.45 6.75 10.81 11.48 12.14 12.78 13.42 14.09 14.80 Othercosts 29.72 41.14 23.15 33.77 68.76 73.06 77.26 88.10 92.50 97.13 101.98 Septage collection/haulage 0.00 0.00 0.00 0.00 44.70 94.98 100.44 179.72 188.70 198.14 208.04 Septage sea disposl 0.00 0.00 0.00 0.00 27.63 58.72 49.68 98.04 102.94 108.09 90.78 septage trement 0.00 0.00 0.00 0.00 0.00 0.00 81.56 85.84 90.14 94.64 163.68 TOTALDIRECTCOSTS 147.57 174.00 151.37 226.90 352.02 450.87 547.25 703.19 738.35 775.27 857.21 Provisionforbaddebts 10.08 11.57 12.28 29.07 49.50 54.40 61.69 68.35 77.04 85.94 95.26 Franchise tax 0.00 0.00 0.00 9.20 19.78 21.74 24.66 27.32 30.80 34.36 38.09 Real popertytax 0.00 0.00 0.00 0.00 2.85 3.38 4.80 6.33 8.49 11.90 15.01 Franchise tax subsidy 0.00 0.00 0.00 -9.20 -19.78 -21.74 -24.66 -27.32 -30.80 -34.36 -38.09 TOTAL COSTS 157.65 185.57 163.65 255.97 404.36 508.66 613.74 777.88 823.88 873.11 967.49 INCOME BEFORE DEPRECIATION 376.64 395.77 452.36 463.69 585.56 579.39 620.09 589.20 716.93 845.70 937.73 Depreciation 159.16 174.67 123.08 58.02 83.78 103.12 138.S8 177.38 214.72 289.84 371.91 INCOMEBEFORE INTEREST 217.48 221.10 329.28 405.67 501.79 476.26 481.21 411.82 502.21 555.86 565.81 Interestexpense 152.70 211.38 185.36 306.62 56.00 45.53 33.63 24.75 117.83 106.23 259.20 Interet income 0.00 0.00 0.00 1.67 5.22 11.31 14.99 20.79 13.09 12.70 13.45 NETTAXABLEINCOME 64.78 9.72 143.92 100.72 451.01 442.05 462.57 407.86 397.47 462.33 320.07 Income tax 0.00 0.00 0.00 0.00 157.85 154.72 161.90 142.75 139.12 161.82 112.02 Tax sbidy 0.00 0.00 0.00 0.00 -157.85 -154.72 -161.90 -142.75 -139.12 -161.82 -112.02 NET SURPLUS 64.78 9.72 143.92 100.72 451.01 442.05 462.57 407.86 397.47 462.33 320.07 WORXINGRATIO 27.62% 29.93% 24.57% 31.53% 35.56% 41.44% 44.35% 51.44% 47.92% 45.11% 44.99% AVERAGENETFASSETSINOPERA 2569 2996 2558 1809 1983 2383 3286 4532 5763 7656 10347 RATE OF RETURN 2.52% 0.32% 5.63% 5.57% 22.74% 18.55% 14.08% 9.00% 6.90% 6.04% 3.09%  66 ANNEX 9 PHILIPPINES METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM SEWERAGE SYSTEM DEPARTMENT SOURCE AND APPLICATION OF FUNDS 1992-2002 (Millions of current PESO) <-- -- Actual <--- <--- ---------------- Forecast ---- - ----> YcareendedDecember31 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 SOURCE OF FUNDS INTERNAL CASH GENERATION Netincomebeforeint.expense 217.48 221.10 329.28 407.34 507.01 487.57 496.20 432.61 515.30 568.56 579.26 Depreciation 159.16 174.67 123.08 58.02 83.78 103.12 138.88 177.38 214.72 289.84 371.91 Othernon cash debits &credits 10.08 11.57 12.28 29.07 49.50 54.40 61.69 68.35 77.04 85.94 95.26 Incidental revenue 0.00 0.00 0.00 2.98 9.17 26.74 47.32 66.83 91.03 123.33 163.09 INTERNAL CASH GENERATION 386.72 407.34 464.64 497.41 649.45 671.84 744.09 745.18 898.09 1067.68 1209.53 CAPITAL CONTRIBUTIONS Government contribution 0.00 0.00 18.40 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 GOVERNMENT SUBSIDY 0.00 0.00 0.00 9.20 177.63 176.46 186.56 170.08 169.91 196.17 150.11 GRANT 0.00 0.00 24.55 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 LOANS Proposed IBRD Second Sew.Proj 0.00 0.00 0.00 0.00 500.00 500.00 375.00 50.00 0.00 0.00 0.00 Proposed Third Sew.Proj 0.00 0.00 0.00 0.00 0.00 0.00 575.00 575.00 575.00 575.00 300.00 Proposed Fourth Sew.Proj 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1250.00 1250.00 1250.00 TOTAL LOANS 0.00 0.00 0.00 0.00 500.00 500.00 950.00 625.00 1250.00 1825.00 1550.00 TOTAL SOURCE OF FUNDS 386.72 407.34 507.59 506.61 1327.08 1348.30 1880.65 1540.25 2318.01 3088.85 2909.64 APPLICATION OF FUNDS DEBT SERVICE Amortization 103.54 110.20 128.10 109.63 126.28 129.58 160.40 56.43 155.25 154.58 352.81 Interest 152.70 211.38 185.36 306.62 73.75 98.78 138.06 184.53 262.20 378.36 477.95 TOTAL DEBT SERVICE 256.24 321.58 313.46 416.25 200.03 228.35 298.46 240.95 417.45 532.93 830.75 CAPITAL EXPENDITURE Proposed Second Sewerage Proj. 0.00 0.00 0.00 2.00 555.00 762.00 383.00 204.00 0.00 0.00 0.00 Interest during construction 0.00 0.00 0.00 0.00 17.75 53.25 84.31 99.40 0.00 0.00 0.00 Proposed Third Sewerage Proj. 0.00 0.00 0.00 0.00 0.00 388.00 775.00 775.00 775.00 775.00 387.00 Interest during construction 0.00 0.00 0.00 0.00 0.00 0.00 20.13 60.38 100.63 140.88 0.00 Proposed Fourth Sewerage Proj. 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1656.00 1656.00 1656.00 Interest during construction 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 43.75 131.25 218.75 TOTAL CAPITAL EXPENDITURE 0.00 0.00 0.00 2.00 572.75 1203.25 1262.44 1138.78 2575.38 2703.13 2261.75 CHANGE IN WCAPITAL EXCEPT C 0.00 0.00 166.20 -73.81 -35.13 -23.79 -20.49 -40.27 5.21 -6.79 -285.41 TOTAL 256.24 321.58 479.66 344.44 737.64 1407.81 1540.41 1339.46 2998.04 3229.27 2807.09 CASH INCREASE (DECREASE) 130.48 85.76 27.93 162.18 589.44 -59.51 340.23 200.80 -680.03 -140.42 102.55 TOTAL APPLICATION OF FUNDS 386.72 407.34 507.59 506.61 1327.08 1348.30 1880.65 1540.25 2318.01 3088.85 2909.64 0 0 0 0 0 0 0 0 0 0 0 DEBT SERVICE RATIO 1.5 1.3 1.5 1.2 3.2 2.9 2.5 3.1 2.2 2.0 1.5 AVE-INTERNAL CONT.TO INVEST 0.0 0.0 108.7% 62.3% 46.7% 41.0% 29.9% 24.3% 22.3% 36.3% 43.2%  67 ANNEX 9 PHILIPPINES METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM SEWERAGE SYSTEM DEPARTMENT BALANCE SHEET 1992-2002 (Mfillions of cunent PESO) <------ Actual ---- > <--- --------- ----- -----Forecast ---- -------- AltDecember 31 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 ASSETS REVALUED FIXED ASSETS Fixed assetsain operation 3631.08 4814.75 2811.01 2990.81 3335.03 3903.33 5152.41 6530.65 8405.40 11288.64 14057.04 Accumulated depreciation 917.86 1402.83 987.52 1109.67 1265.58 1444.64 1662.97 1923.50 2234.39 2635.95 3139.66 NET REV.FASSETS IN OPERATION 2713.22 3411.92 1823.49 1881.14 2069.46 2458.70 3489.45 4607.15 6171.01 8652.69 10917.37 WORK IN PROGRESS 99.60 73.52 61.27 165.93 572.75 1203.25 1262.44 1138.78 2575.38 2703.13 2261.75 TOTALFIXDCPDASSETS 2812.82 3485.44 1884.76 2047.07 2642.21 3661.95 4751.88 5745.92 8746.39 11355.81 13179.12 CURRENT ASSETS Cash 10.20 18.47 12.15 133.44 722.88 663.37 1003.60 1204.40 524.37 383.95 486.49 Gross Accounts receivable 349.97 480.20 626.38 576.32 635.72 701.00 775.03 857.05 949.50 1052.63 1166.94 Less:Allowance for bad debts 58.13 69.60 81.86 103.43 152.93 207.33 269.02 337.37 414.41 500.36 595.62 Net accounts receivable 291.84 410.60 544.52 472.89 482.79 493.67 506.01 519.68 535.09 552.28 571.33 Inventories 3.42 3.32 2.65 2.82 3.10 3.69 5.23 6.91 9.25 12.97 16.37 Other assets 3.45 3.93 3.91 4.13 3.44 3.44 3.44 3.44 3.44 3.44 3.43 TOTAL CURRENT ASSETS 308.91 436.32 563.23 613.28 1212.21 1164.17 1518.28 1734.43 1072.15 952.63 1077.62 TOTAL ASSETS 3121.73 3921.76 2447.99 2660.35 3854.42 4826.11 6270.17 7480.35 9818.53 12308.45 14256.74 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.01 0.00 CUJRRENT LIABILITIES Accounts payable 103.69 111.32 78.35 80.92 125.54 160.80 195.17 250.78 263.32 276.49 305.71 Current portion of L/Tdebt 110.18 112.90 109.63 129.80 129.58 160.40 56.43 155.25 154.58 352.81 0.00 TOTAL CURRENT LIABILITIS 213.87 224.22 187.98 210.72 255.12 321.20 251.59 406.03 417.90 629.30 305.71 FOREIGN LOANS 861.82 859.25 690.46 586.14 994.10 1333.70 2227.28 2697.03 4367.45 5839.64 7389.64 LOCAL LOANS 20.34 20.34 20.34 20.34 20.34 20.34 20.34 20.34 20.34 20.34 20.34 TOTAL LIABELITIS 1096.03 1103.81 898.78 817.20 1269.56 1675.24 2499.21 3123.40 4805.69 6489.28 7715.69 EQUJITY Asset revaluation surplus 803.83 1578.34 417.86 577.04 699.31 824.45 971.87 1166.47 1425.06 1742.78 2190.67 Operational surplus 1221.87 1239.61 1106.81 1213.96 1664.97 2107.02 2569.59 2977.45 3374.93 3837.26 4157.33 Grant-in-aid 0.00 0.00 24.55 24.55 24.55 24.55 24.55 24.55 24.55 24.55 24.55 Govermnent subsidy 0.00 0.00 0.00 9.20 177.63 176.46 186.56 170.08 169.91 196.17 150.11 Government equity 0.00 0.00 0.00 18.40 18.40 18.40 18.40 18.40 18.40 18.40 18.40 TOTAL EQUITY 2025.70 2817.95 1549.22 1843.15 2584.86 3150.87 3770.96 4356.95 5012.85 5819.16 6541.05 TOTAL LIABELITIS AND EQUTITY 3121.73 3921.76 2448.00 2660.35 3854.42 4826.11 6270.17 7480.35 9818.54 12308.44 14256.74 CUTRRENT RATIO 1.4 1.9 3.0 2.9 4.8 3.6 6.0 4.3 2.6 1.5 3.5 L/T DEBT AS % OF CAPrTALIZATIO 27.6% 2 1.9% 28.2% 22.0% 25.8% 27.6% 35.5% 36.1% 44.5% 47.4% 5 1.8% DEBT/EQUITY RATIO 42.54% 30.49% 44.57% 31.80% 38.46% 42.33% 59.06% 61.90% 87.13% 100.35% 112.97%  68 ANNEX 10 PHILIPPINES MANILA SECOND SEWERAGE PROJECT Assumptions for financial projections 1. The financial statement projections are in current Philippine Pesos. Figures for 1992 through 1994 are actual. Local inflation rate of 7.0% per annum has been added for 1995, 6.5% for 1996, 6.0% for 1997, 5.5% for 1998, and 5.0% from 1999 through to the end of the projection period in 2002. The assumed Peso to US Dollar exchange rate for the projection period was set at Peso 25.00 equals US$1.00. Income Statement 2. Revenues: Sewerage charges have been projected to increase in line with estimated increased water supply volumes, plus 10,000 additional sewer house connections, and annual increases of sewerage tariffs. Environmental charges have been projected to increase in line with estimated increased water supply volumes, and annual increases of sewerage tariffs. Water supply volumes are projected to increase with additional production facilities; NRW is projected to be 53.5% in 1995, 53.0% for 1996 and 1997, 50.0% for 1998 and 1999, 49.0% for 2000, and reduce by three percent per annum thereafter. Tariffs Average water supply and sewerage tariffs including CERA are assumed to increase by 12% in 1995; by 33% in 1996, and by local annual inflation thereafter. 3. Operational Costs: Wages The projections include wages and benefits for SSD staff, and an apportionment of MWSS staff costs relative to the work performed on behalf of sewerage operations. Power Projected to increase in line with new barge stations operation, and new STP operation. Supplies and materials/other costs Projected expenses increased in line with additional operation and maintenance activities to be undertaken by SSD. Septage collection/disposal/sea dumping The projections cover the contractors' costs of desludging septic tanks and disposal of the septage at sea and at STP. Septage treatment The projections include all costs to cover septage treatment and final disposal of the sludge. Provision for bad debts Based on past experience, this has been estimated at 5% per annum. Franchise and income taxes MWSS has been exempt these taxes since inception, but exempt status is presently under review by GOP. Based on the present position of negotiations between GOP and MWSS, the projections assume that these taxes will be levied effective from FY96 and the amounts will be returned by GOP in the form of a government subsidy. Depreciation The calculation of 2.50% per annum has been made on the weighted average of all fixed assets in operation. Balance Sheet 4. Fixed assets Include network, pumping station, lift stations and wastewater treatment plant, with additions of plant and equipment when new assets are placed in service, and are revalued at annual projected inflation rates. Accounts receivable Based on past experience and new measures already in hand, it is assumed that accounts receivable will reduce from an average of 110 days to 90 days sales by 2002. Accounts payable Historical figures have been projected to  69 ANNEX 10 increase in line with operational costs. Government equity Assumed no government equity for MSSP. Source and application of funds 5. Loans - IBRD The US$57.0 million (Peso 1425 million) Bank loan for MSSP would be on-lent by the government over 20 years including 5-year grace, at the Bank interest rate assumed at 7.1 %. The yet to be identified loans for the Third and Fourth sewerage projects are assumed to be with the same conditions and on the same terms as the IBRD loan. 6. Interest during construction Capitalized interest charged at 7.1% per annum on the IBRD loan from 1995 through 1999, a yet-to-be identified loan for the Third sewerage project from 1998 through 2001, and a yet-to-be identified loan for the Fourth sewerage project starting in 1999: Million Peso 1996 1997 1998 1999 2000 2001 2002 2nd Sewerage Pr. 17.8 53.2 84.3 99.4 0.0 0.0 0.0 3rd Sewerage Pr. 0.0 0.0 20.1 60.4 100.6 140.9 0.0 4th SeweragePr. 0.0 0.0 0.0 0.0 43.8 131.2 218.8 Total 17.8 53.2 104.4 159.8 144.4 272.1 218.8  70 ANNEX 11 PHILIPPINES MANILA SECOND SEWERAGE PROJECT Project Performance Monitoring The Manila Second Sewerage Project Monitoring and Evaluation (M&E) system - which will be confirmed at negotiations - is designed to provide project managers with information on progress toward project objectives, impact on beneficiaries, and information on institutional, technical and financial aspects that could be useflul in developing a long-term sewerage and septage management plan for MWSS. It has two basic components: * On-the-ground monitoring of septage collection and conveyance in consultation with stakeholders; * More traditional tracking of project milestones in terms of measuring progress achieved against specific targets proposed in the project implementation action plan (Annex 5); Monitoring Septage Management and Disposal One measure of project success will be the extent to which neighborhood residents and the larger environmental community find the cleaning of septic tanks and removal/disposal of septage beneficial to the urban environment. A possible model for involving beneficiaries and other stakehoiders in project monitoring could be the December 1995 round table meeting organized by DENR and MWSS with Philippine NGOs. The meeting discussed project design and its possible environmental impact and debated the issues until a consensus on the benefits from the project emerged. At the neighborhood (barangay) level, the consultative role is equally significant as a means of monitoring the performance of the private contractors who will collect and remove septage from neighborhoods and secondary drainage systems. Service quality in terms of reliability and speed, absence of short-dumping in neighborhood drains, etc. need to be periodically checked with community groups. Socio-economic data on the residents of the project area will also be collected, so that indicators of residents' access to, use of, and payment for water and septage removal services are available. These indicators could be evaluated with reference to baseline social and economic conditions of the community (such as tenurial status, income levels, occupational data, health information etc.) so that the question of whether equitable distribution of benefits is taking place is closely monitored. Monitoring performance on the septage management components will include: * Close monitoring of performance under the Environmental Management Plan (see Annex 7);  71 ANNEX 11 * MWSS establishmnent of a Technical Review Panel to evaluate septage data generated by the project; * Annual roundtable meetings with NGO groups on the format of the first meeting held in December 1995; and * Semi-annual consultations with beneficiaries at the neighborhood level; Monitoring Physical and Financial Progress Table 1 describes performance indicators for monitoring financial and physical progress, Table 2 shows the monitoring responsibilities of various stakeholders, Table 3 shows numerical targets for project performance indicators and Table 4 shows the key performance indicators agreed during project negotiations. The indicators, which can be either numeric or qualitative, are classified in the following categories: (a) Input or process indicators describe how and when resources provided through the project are translated into investment activities. (b) Output indicators describe the measured results in terms of improved sewerage and septage disposal services Table 1 lists these indicators for the Project. (c) Outcome indicators assess how far actual project performance compares against project targets. Table 3 lists the project target indicators against which these outcomes can be evaluated. The outcome indicators, which will be partly quantitative and partly qualitative, would evaluate success and failure in relation to the target indicators. (d) Impact indicators evaluate how far the development objectives were accomplished. These evaluations, which are generally qualitative in nature, will analyze causes of successes and failures as indicated by the outcome indicators, and explain impacts in terms of what worked and what did not work in the project. This exercise will involve all the key stakeholders reporting on their respective areas of M&E responsibility (see Table 2). Project supervision and review meetings will provide an opportunity to assess impacts during the project implementation cycle, so that the project design could be altered or modified in case some project rules appear to be unworkable.  72 ANNEX 11 Table 1. Proiect Performance Indicators INPUT OR PROCESS INDICATORS OUTPUT INDICATORS Source: Standard MWSS Physical/Financial Source: Water and Sanitation data from MWSS Reports (see Annex 5) Collected by: MWSS and World Bank Collected by: Project Consultants; Contractors; MWSS; World Bank Funding: Sewer network . Sources of funds; budgets; legal documentation; Total water capacity Mm3/y . Authorization for release of funds; Water produced Mm3/y . Workplans; Physical works report; . No. of sewerage conns.'000 . Fund mobilization by contractors; Population w/sewer connection '000 Procurement: . Sewage billed MPesos/y Dates when . Sewage billed per conn. Pesos/month . Contracts proposed; Number of sewer connections rehabilitated . Company registrations; long list; . Execution of investment (%) . Decree for bidding committee; Septic Tanks . TOR; . Number of septic tanks desludged p.a. . Notice to Proceed; . Septage disposed at sea m3/d . Completion certificates received; Septage disposed at treatment plant m3/d . Physical works document; Wastewater/septage treatment Technical Assistance: Performance of Ayala STP M3/D . CVs received; Biochemical oxygen demand - outlet mg/l . TORs completed; Suspended solids - outlet mg/l . Work plans; Performance of septage treatment plant at Dagat- . Contracts; Dagatan . Reports on consultant performance. . De-watered sludge '000 m3 p.a. . Biochemical oxygen demand - outlet mg/l . Suspended solids - outlet mg/l Operational . Number of sewer connections (000) . Permanent SSD Employees/1000 connections . SSD Permanent and Temporary Employees/1000 connections . SSD Personnel Cost/Operating Cost Financial . No. of days accounts receivable Average contribution to investment . Rate of return . Working ratio . Average sewerage charge (Peso/m3) . Average environmental charge (Peso/m3) . Debt Service ratio (times) . Debt Equity ratio (times) . Internal Cash Generation/Investment (%)  73 ANNEX 11 SUMMARY OF M&E RESPONSIBILITIES Table 2 below shows how M&E responsibilities can be shared among the different stakeholders at the national, project and community levels. This division of responsibilities provides a useful basis to organize stakeholder meetings during the project cycle, particularly during the outcome and impact evaluation stages. The first row represents how information could flow to the policy level on an annual basis. This could be based on annual reports on project performance, Bank supervision missions and annual roundtable meetings with NGOs. The second row represents the responsibilities of the project's primary stakeholders; the project management team in MWSS and the beneficiaries in the project areas at the neighborhood levels. Beneficiaries will provide feedback to not only ensure local ownership, but also to ensure that the interests of different social g-oups (such as squatter households, women's groups etc.) are adequately represented. The third row indicates the responsibilities of other agencies and individuals who could also provide useful feedback on specific aspects of project performance and impacts. Implementation details of the feedback mechanisms will be discussed and finalized at negotiations. Table 2. M&E Resionsibilities National/Project Management Level Community/Stakeholder Level NEDA/DPWH/DENR NGO Roundtables -Policy and overall guidance - Annual feedback on project performance, particularly with reference to environmental risks (see Annex 7) - Discussions on future options for septage management MWSS Barangay/neighborhood meetings - Operational management of project, - Semi-annual consultations and feedback on ensuring project implementation in accordance contractor performance with Loan Agreements - Consultations on future septage disposal and - Administration of Monitoring and sewerage development plans Evaluation system l Other Agencies (Coast Guard. MMDA. Consultants/contractors LGUs) - Semi-annual feedback on project experiences - Feedback on project performance in terms of - Findings from project-specific studies monitoring "short-dumping" by contractors, - Assistance in implementing participative monitoring health impacts etc. planning exercises  74 ANNEX 11 Table 3. Proiect Tareet Indicators 1994-2000 Actual (-----------------------Forecast----------------------- Year ended December 31 1994 1995 1996 1997 1998 1999 2000 The following indicators will be included in progress reports sent to the Bank 1. Physical Indicators Total water production capacity Mm3/y 1213 1308 1385 1440 1550 1732 1732 Water produced Mm3/y 1009 957 991 1020 1055 1098 1232 Population w/sewer connection '000 731 741 751 772 792 812 822 No. of sewerage conns. '000 90.5 92.5 93.8 96.3 98.8 101.3 103.8 Sewage billed 'OOOm3/y 71.1 81.0 82.6 84.3 86.5 88.7 90.9 Sewage billed per conn. m3/p.m 9.4 10.5 10.5 10.5 10.5 10.5 10.5 2. Management Efficiency No. of days accounts receivable 318 237 176 164 148 137 125 No. of SSD employees 468 469 470 470 477 477 478 SSD Employees/lOO sewer connections 5 5 5 5 5 5 5 3. Financial Parameters Ave. Contribution to Investment (%) 108 62 47 41 29 25 23 Rate of return (%) 5.6 5.5 22.7 18.5 14.0 9.0 6.9 Working ratio 24.5 31.5 35.6 41.4 44.4 51.4 47.9 Average sewerage charge Peso/m3 3.78 4.23 5.63 6.03 6.42 6.88 7.11 Average environmental chargePeso/m3 0.76 0.85 1.13 1.21 1.28 1.38 1.42 Debt service ratio 1.5 1.2 3.2 2.9 2.5 3.1 2.2 Debt/equity ratio (%) 44.6 31.8 38.5 42.3 59.1 61.9 87.1 4. Septic Tanks Number septic tanks desludged p.a. 3000 3000 20000 60830 60830 103420 103420 Septage disposed at sea m3/d 0 0 1000 1000 800 1500 1500 Septage disposed at treatment plant m3/d 0 0 0 0 200 200 200 5. Performance of existing waste water Treatment plant Ayala m3/d 40000 40000 40000 40000 40000 40000 40000 Biochemical oxygen demand--outlet mg/l 62 62 62 62 62 60 60 Suspended solids--outlet mg/l 50 50 50 50 50 50 50 6. Performance of septage treatment plant at Dagat Dagatan Module 200 m3/d De-watered sludge '000 m3 p.a. Biochemical oxygen demand--outlet mg/ - - - - - 40 40 Suspended solids--outlet mg/l - - - - - 35 35  75 ANNEX 11 Table 4. Key Performance Indicators Project Key Baseline Mid-term ICR Year Full Impact Objective Performance Year Year Year Indicators 1996 1998 2001 2003 Expand 1. No. of Nil 150,000 400,000 750,000 septage septic tanks management emptied program 2. Amount of Nil 1,000 1,700 2,000 septage disposed m3/d 3. Progress Nil Start of pilot Designs Construction towards operations at ready for completed of completion of Dagat- start of Quezon and development Dagatan construction Taguig STPs program Septage of Quezon Treatment and Taguig Plant (STP) STPs  76 ANNEX 12 PHILIPPINES MANILA SECOND SEWERAGE PROJECT Rate of return Economic rate of return 1. The three project components (septage management program, sewer system rehabilitation and new sewer connections) yield benefits in terms of information required for future system design and improvements in public health and urban environmental and living conditions. The majority of these benefits cannot be adequately quantified in physical or monetary terms. As such, an economic rate of return based on a full cost-benefit analysis cannot be calculated for the project and the investment is justified based on a least-cost analysis. 2. However, stylized analysis can be carried out to yield order-of-magnitude estimates of economic rate of return based on simplifying assumptions. The key assumption pertains to the monetary value of economic benefits. It is assumed that (a) existing charges levied by MWSS for sewer service and septic tank maintenance (sewerage and environmental surcharges on the water bill) reflect consumer willingness to pay and are a measure of total economic benefits (private and public) to households; and (b) that without adequate maintenance and proper operation (to be ensured through project investments), full economic benefits from existing assets are not realized even though the surcharges are paid in full. The first assumption is a conservative one because households may be expected to undervalue public benefits. Nor will household willingness to pay include the value of the information obtained to design the sewerage system in the future. Therefore, the computed economic rates of returns would be under-estimated. Separate analyses are carried out for the three project components. 3. For purposes of the stylized analysis, it is not necessary to be overly precise. Table A. 12.1 shows the rounded base values used in the analysis. Latest full year (without project) costs and revenues for SSD are taken from 1994 accounts. O&M costs total P 150 million; budget data are used to allocate P 100 million to sewer services (col. a) and P 50 million to septic tank maintenance services (col. b). Revenues total P 600 million of which P 300 million come from 100,000 sewer connections (col. c) and P 300 million from environment charges paid for by households with 1 million water connections (col. d). The Table also shows the capital and recurring costs related to investments in the proposed project. Capital costs of the new sewer connections and the sewer system rehabilitation are indicated in columns e and f Columns g through j represent the costs associated with the septage management component: Column g shows the recurring costs due to septage collection and haulage; column h shows the recurring costs of barging which terminates in year 7 (2003); column i shows the capital costs of the pilot STP and the other STPs to be constructed later to replace sea disposal; and column j shows the recurring costs of operating the STPs. Capital investments required for treatment plant capacity, in addition to the pilot plant to be constructed as part of the proposed project, are assumed to be made one year before the capacity is scheduled, i.e, in 2001, 2002, 2003 2005 and 2007. Both capital and recurring costs are extrapolated from cost estimates used for the pilot treatment plant included in the proposed project, allowing for reasonable economies of scale.  77 ANNEX 12 4. All rates of return are computed using the with and without project costs shown in Table A. 12.1. The economic rate of return for the 10,000 new sewer connections is simple to compute since both costs and revenues (additional revenue from sewer surcharge is prorated based on the existing average revenue per sewer connection) are well defined. It is assumed that incremental revenues start to accrue after all investment is complete. Two alternative assumptions are made regarding O&M costs. If costs are assumed not to increase (because MWSS is over-staffed), the IRR is 10%; if costs are assumed to increase in proportion to the number of new connections, i.e., by 10%, the IRR falls to 4%. 5. For the sewer rehabilitation component, alternative scenarios are based on assumptions pertaining to percentage of economic benefits realized without the project (i.e., percentage of column c) and increase in O&M costs required to maintain the full benefit stream after the project. Incremental revenues are assumed to start accruing after completion of investment. If costs increase by 25%, the IRR is 19%, 16% or 12% depending upon whether 40%, 50% or 60%, respectively, of the full economic benefits were being realized without the project. The corresponding values for the IRR in the scenario where costs are assumed to increase by 50% are 12%, 8% and 4%. The rate of return is fairly sensitive to the extent of inefficiency caused by lack of adequate maintenance. 6. For the septic tank maintenance component, the economic rate of return is computed for the case where sea dumping is used as the disposal method on a permanent basis. Since approximately one-tenth of existing septic tanks are to be desludged annually, the full benefits are restored linearly over a ten year period. Depending upon whether existing septic tanks are assumed to be yielding 10%, 20% or 30% of full benefits (i.e. percentage of column d), restoration of full benefits after the project yields an economic rate of return of 12%, 9% or 5%, respectively. The rate of return becomes negative if septic tanks are assumed to be yielding 40% of full benefits without the project. 7. Cessation of sea dumping in 2003 and recourse to septage treatment plants causes costs to exceed benefits as measured by existing household payments. If consumers agree with the cessation of sea disposal, the excess cost could be interpreted as the cost society is prepared to pay to avoid the any risk of marine pollution. The steady state O&M costs would be of the order of US$3 .0 per household per month compared to existing payments of approximately US$1.0 per household per year. 8. For both the sewer rehabilitation and septic tank maintenance components, it would be reasonable to assume that the life of the existing assets, and therefore the length of the benefit stream, would be prolonged after the project investments. However, the economic rate of returns were not much affected by assumptions regarding such changes. Financial break-even analysis 9. The assumptions and data supporting the financial analysis are presented in Table A 12.2. The computation of the financial break-even analysis is shown in Table A 12.3. The calculation shows that an increase of 35% in the water tariff (and of indexed sewerage tariff and  78 ANNEX 12 environmental charge), results in sufficient incremental revenue for the SSD, in addition to the revenue from the 10,000 new sewer connections, to fully cover the costs of the project. Sea disposal of septage is assumed to continue throughout the period of analysis in order to compute the tariff increase necessary to recover the costs due to the proposed project. Further tariff increase would be required when sea disposal is fully replaced by treatment and disposal in sanitary landfills in the second phase of the septic tank maintenance program.  79 ANNEX 12 PHILIPPINES MANILA SECOND SEWERAGE PROJECT Table A 12.1: DATA FOR CALCULATION OF ECONOMIC RATE OF RETURN (Million Peso) NEW SSD SSD SEWER SEWER COSTS W/O I'COME W/O CONN. REHAB SEPTIC TANK COMPONENT PROJECT PROJECT COSTS COSTS COSTS a b c d e f g h i coll+ stp stp Year Sewer Septic Sewer Septic capt'l capt'l haul b'ing capt'l recur 0 150 50 300 300 60 100 100 50 175 0 1 150 50 300 300 60 100 100 50 175 0 2 150 50 300 300 60 100 100 50 0 75 3 150 50 300 300 60 100 100 50 0 75 4 150 50 300 300 0 0 100 50 0 75 5 150 50 300 300 0 0 100 50 350 75 5 150 50 300 300 0 0 100 50 750 150 7 150 50 300 300 0 0 100 50 750 300 8 150 50 300 300 0 0 100 0 0 450 9 150 50 300 300 0 0 100 0 500 450 10 150 50 300 300 0 0 100 0 0 550 11 150 50 300 300 0 0 100 0 1300 550 12 150 50 300 300 0 0 100 0 0 750 13 150 50 300 300 0 0 100 0 0 750 14 150 50 300 300 0 0 100 0 0 750 15 150 50 300 300 0 0 100 0 0 750 16 150 50 300 300 0 0 100 0 0 750 17 150 50 300 300 0 0 100 0 0 750 18 150 50 300 300 0 0 100 0 0 750 19 150 50 300 300 0 0 100 0 0 750 20 150 50 300 300 0 0 100 0 0 750 21 150 50 300 300 0 0 100 0 0 750 22 150 50 300 300 0 0 100 0 0 750 23 150 50 300 300 0 0 100 0 0 750 24 150 50 300 300 0 0 100 0 0 750 25 150 50 300 300 0 0 100 0 0 750 26 150 50 300 300 0 0 100 0 0 750 27 150 50 300 300 0 0 100 0 0 750 28 150 50 300 300 0 0 100 0 0 750 29 150 50 300 300 0 0 100 0 0 750 30 150 50 300 300 0 0 100 0 0 750  80 ANNEX 12 PHILIPPINES MANILA SECOND SEWERAGE PROJECT Table A 12.2 DATA FOR CALCULATION OF FINANCIAL RATE OF RETURN Investment Cost Excluding Price Contingencies and Taxes Million Peso Septage management Civil Works 173 Equipment 186 Central system Civil Works 367 Equipment 116 Ayala Civil Works 151 Equipment 88 Maint.equip.labor Equipment 168 Project Support Studies 124 Construction Supervision 119 Land Acquasition Compensation 56 Lease 71 Total Investment 1550 Phasing of Annual Investment: % Year I 0 2 29 3 40 4 20 5 11 Total 100 Operational Costs Million Peso per annum Additional SSD Operational Costs 16.89 Collection & Haulage 1000 m3/d 83.74 Collection & Haulage 800 m3/d 67.00 Barging & Sea Dumping 1000 m3/d 51.77 Barging & Sea Dumping 800 m3/d 41.42 Pilot Septage Treatment 200 m3/d 68.00 Income (i) incremental revenue from 10,000 new house sewer connections (ii) 35% increase in sewerage charge and environmental charge Notes to financial rate of return calculation Income and costs are expressed in constant 1995 prices. The project life is assumed to be 30 years.  81 ANNEX 12 PHILIPPINES MANILA SECOND SEWERAGE PROJECT Table A 12.3: FINANCIAL BREAK-EVEN ANALYSIS* (Million Peso) < ------- ----OUTFLOWS--------------------------> <---INFLOWS-----> YEAR INVEST <----------------O&M----------------------------- > NEW TARIFF NET SSD COLLECT B'GNG T'MENT CONN +35% FLOW -4 0.00 0.00 -3 495.03 15.81 41.87 25.89 0.00 0.00 0.00 -578.60 -2 682.80 15.81 83.74 51.77 0.00 4.01 232.72 -597.39 -1 341.40 16.89 83.74 41.42 68.00 12.02 232.72 -306.71 1 187.77 16.89 83.74 41.42 68.00 20.00 232.72 -145.10 2 0.00 16.89 83.74 41.42 68.00 27.98 232.72 50.65 3 16.89 83.74 41.42 68.00 31.99 232.72 54.66 4 16.89 83.74 41.42 68.00 31.99 232.72 54.66 5 16.89 83.74 41.42 68.00 31.99 232.72 54.66 6 16.89 83.74 41.42 68.00 31.99 232.72 54.66 7 16.89 83.74 41.42 68.00 31.99 232.72 54.66 8 16.89 83.74 41.42 68.00 31.99 232.72 54.66 9 16.89 83.74 41.42 68.00 31.99 232.72 54.66 10 16.89 83.74 41.42 68.00 31.99 232.72 54.66 11 16.89 83.74 41.42 68.00 31.99 232.72 54.66 12 16.89 83.74 41.42 68.00 31.99 232.72 54.66. 13 16.89 83.74 41.42 68.00 31.99 232.72 54.66 14 16.89 83.74 41.42 68.00 31.99 232.72 54.66 15 16.89 83.74 41.42 68.00 31.99 232.72 54.66 16 16.89 83.74 41.42 68.00 31.99 232.72 54.66 17 16.89 83.74 41.42 68.00 31.99 232.72 54.66 18 16.89 83.74 41.42 68.00 31.99 232.72 54.66 19 16.89 83.74 41.42 68.00 31.99 232.72 54.66 20 16.89 83.74 41.42 68.00 31.99 232.72 54.66 21 16.89 83.74 41.42 68.00 31.99 232.72 54.66 22 16.89 83.74 41.42 68.00 31.99 232.72 54.66 23 16.89 83.74 41.42 68.00 31.99 232.72 54.66 24 16.89 83.74 41.42 68.00 31.99 232.72 54.66 25 16.89 83.74 41.42 68.00 31.99 232.72 54.66 26 16.89 83.74 41.42 68.00 31.99 232.72 54.66 27 16.89 83.74 41.42 68.00 31.99 232.72 54.66 28 16.89 83.74 41.42 68.00 31.99 232.72 54.66 29 16.89 83.74 41.42 68.00 31.99 232.72 54.66 30 16.89 83.74 41.42 68.00 31.99 232.72 54.66 Financial rate of return = 0.00 * Showing that a 35% increase in water tariff yields sufficient SSD revenues for the project to break-even financially.  82 ANNEX 13 PHILIPPINES MANILA SECOND SEWERAGE PROJECT Documents and data available in the project file No Name of the document Prepared Prepared date l ~~~~~~~~~~~~~~~by AOI Project implementation action plan MWSS 07/10/95 A 02 Manila second sewerage project-preliminary reports OEC 07/01/94 Volume 1-Project synopsis Volume 2-Septage management l_____ Volume 3-Upgrading Ayala and central systems Volume 5-Laboratory and equipment support Institutional framework and financial studies _ _______ Environmental impact assessment (draft) A 03 Manila second sewerage project-final reports OEC 11/01/94 _______ Project environmental impact assessment Environmental impact statements: Dagat Dagatan septage treatment plant Sea dumping of septage Project description Institutional framework Financial studies Laboratory strengthening Street drainage improvement (prel. designs) Project summary A 04 Design reports 12/01/94 Barge loading stations Dagat Dagatan septage treatment plant - Ayala sewage treatment plant rehabilitation l Manila central sewerage system rehabilitation - - Fort Santiago pumping station (basic design) l A 05 Supplementary report to environmental assessment MWSS 07/30/95 A 06 Expert's report on ocean disposal of septage Fenviron 12/15/95 B 01 Annual budget guidelines for 1995 MWSS 06/21/94 B 02 Consolidated financial statements 1990-1994 MWSS l B 03 Financial statement 1990-1994 MWSS l B 04 MWSS financial status study Deloitte 11/01/94 Touche MWSS= Metropolitan waterworks and sewerage system OEC = Original engineering consultants  PHILIPPINES MANILA SECOND SEWERAGE PROJECT CHART 1: MWSS ORGANIZATION BOARD OF TRUSTEES I I BOARD SECR-ETARIAT| ADMINISTRATOR SR. DEPUTY ADMINISTRATOR | PUHLl( ' INE ORMAllON l | GROUP l L ~~~~~MIS GROUP |MONITORING & EVALUATION D PLJI5'ALAILNIS'lIKA!TOR AEPU>' STRATOR DEPUTY ADUSTRAPDR ADMINI STR/bR DElT ADNSTRATFOR DPr TAO ENGINEERING CONSTRUCTION OPERATIONS CUSTOMER SERVICE FINANCE _ADMlNISTRATION PLANNING & PROJECT l |WATER RESOURCE NORTH FINANCIAL CONTROL RSONNEL H PR(xiRAMMlNG l 1 AWSOP III l & TR-EATMENT & BUD)GET l AAGENENT l PROJECT WATERDISTRIMELTION NORTHWEST ACCONGSOURCE H | H ~~~~~~UATP MAINTENANCE 1 |DEVELOPMENT |PLEDRSARH|PROJEC'' |CENTRAL MECHANICAL CENTRALTH & H QUALITY ONTROL | H MWSRP II NlAMNI-'ENANCE | SAFETY PROJECT | MMW.DP PROJECT l AT l2GNRAL SERVICES| I MSW DP PR()JECl S TXRRI: