Philippines - Water Districts Development Project

Document of The World Bank Report No. 16526-PH STAFF APPRAISAL REPORT REPUBLIC OF THE PHILIPPINES WATER DISTRICTS DEVELOPMENT PROJECT JULY 29, 1997 Urban Development Sector Unit East Asia and Pacific Region  CURRENCY EQUIVALENTS (as of November, 1996) Currency Unit = Peso P I = US$0.038 US$1.00 = P26.27 WEIGHTS AND MEASURES ha. = hectare I ha = 10,000 square meters MLD = Million Liters Per Day cu m or m3 = Cubic meters ABBREVIATIONS AND ACRONYMS ADB - Asian Development Bank CAS . Country Assistance Strategy CBD - Central Business District COA - Commission on Audit CPSO - Central Program Support Office for Sewerage and Sanitation, LWUA DENR - Department of Environment and Natural Resources DILG . Department of Interior and Local Government DOF - Departaent of Finance DPWH - Department of Public Works and Highways EIA - Environmental Impact Assessment EMP - Environmental Management Plan GOP G Government of the Philippines IDA - Intemational Development Agency IFC International Finance Corporation IRA - Internal Revenue Allocation LGU - Local Government Unit LBP - Land Bank of Philippines LWUA - Local Water Utilities Administration MOA - Memorandum of Agreement MWSS - Metropolitan Waterworks and Sewerage System NEDA - National Economic Development Agency NWRC - National Water Regulatory Commission OECF - Overseas Economic Cooperation Fund PMO - Project Management Office PMU - Project Management Unit (in each LGU) PPA - Public Performance Audit (component) SOE - Statement of Expenditures SSD - Sewerage, Sanitation and Drainage Development (component) USAID - United States Agency for Intemational Development WD - Water District WDDP - Water Distncts Development Project WU - Water Utility FISCAL YEAR January I to December 31 Vice President. Mr. Jean-Michel Severino, EAP Director. Mr. Vinay K. Bhargava, EACPF Division Chief: Mr. Richard Scurfield, EASUR Task Manager: Mr. Vijay Jagannathan, EASUR  i REPUBLIC OF THE PHILIPPINES WATER DISTRICTS DEVELOPMENT PROJECT LOAN AND PROJECT SUMMARY Borrower: Land Bank of the Philippines for the Sewerage, Sanitation and Drainage (SSD) loan, and Republic of the Philippines for the Public Perfornance Audit (PPA) loan Guarantor: Republic of the Philippines for SSD loan Implementing Agencies: (i) Land Bank of Philippines through Local Government Units of Davao, Cagayan de Oro, Cotabato City, Calamba, and (ii) Department of Finance through Metropolitan Waterworks and Sewerage System Beneficiaries Participating LGUs and MWSS Poverty: Not applicable Amount: US$56.8 million, of which $ 54.5 million is for the SSD loan and $2.3 million is for the PPA loan Terms: 20 years, including five years of grace, at the Bank's standard LIBOR-based interest rate for US$ Single Currency Loans Commitment Fee: 0.75 per cent on undisbursed loan balances, beginning 60 days after signing, less any waiver On-lending terms: 20 years, including five years of grace for both loans, at 14 per cent per annum for the SSD loan (between Land Bank and participating LGUs), and 1 per cent above the Bank's rate for the PPA loan (between DOF and MWSS) Net Present Value: Not applicable Financing Plan: See paragraphs 2.17, 2.18 and 2.19 Map: IBRD No. 28527 Project ID No.: 4576   PHILIPPINES WATER DISTRICTS DEVELOPMENT PROJECT Table of Contents LOAN AND PROJECT SUMMARY .........................................................i 1. THE WATER AND SANITATION SECTOR IN THE PHILIPPINES 1...... A. Background .........................................................1 B. Sector Policy Developments ......................... ................................ 3 C. Government Strategy and Programs ..........................................................4 D. Lessons learned from previous Bank operations .......................................... 6 E. Rationale for Bank involvement .........................................................6 2. THE PROJECT .........................................................8 A. Project Rationale ..........................................................8 B. Project Objectives .........................................................9 C. Project Description ......................................................... 0 D. Estimated Costs and Financing ........................................................ 12 E. Implementation Arrangements ......................................................... 14 F. Monitoring, Evaluation and Report Requirements ......................................... 15 G.Land Acquisition and Resettlement ........................................................ 15 H.Environmental Impact ........................................................ 16 I.Procurement ........................................................ 17 J. Disbursement, Accounts and Audits ........................................................ 20 3. FINANCIAL ANALYSIS OF SEWERAGE INVESTMENTS ...................... 22 A. Introduction ......................................................... 22 B. Land Bank of Philippines ......................................................... 22 C. Financial Appraisal of Subprojects ........................................................ 23 D. LGU Finance ........................................................ 23 E. Past Performance of Participating LGUs ........................................................ 24 F. Future LGU Performance ........................................................ 25 G. Financial Implications for Participating Water Districts ................. ................. 27 H. Summary of Financial Implementation Arrangements ..................................... 28 This report was prepared by Messrs./Mmes. N. Vijay Jagannathan (Sr. Water and Sanitation Specialist/Task Manager), Luiz Claudio Tavares (Sr. Urban Sanitation Specialist RWSG-EAP, Jakarta), Aldo Baietti (Sr. PSD/Finance Specialist), Cecilia Vales (Procurement Specialist), Hoi-Chan Nguyen (Legal Counsel), Shyamadas Banerji (Principal Privatization/PSP Development Specialist), Penelope Brook Cowen (PSP Development Specialist), David Wheeler (Principal Economist), Eric Haythorne (PSD Legal Counsel), Hiroyuki Hayashi (Operations Officer), Albert Wright (Consultant), Wilfrido Barreiro (Consultant), George Calderon (Consultant), and Martha Ochieng (Task Assistant) under the overall supervision of Mr. J. Shivakumar (formerly Chief, EAIIN) and Mr. Javad Khalilzadeh-Shirazi (fonnerly Director, EA 1 IN).  4. PROJECT IMPACT, BENEFITS AND RISKS ................................................ 30 A. Project Benefits .................................................... 30 B. Project Risks .................................................... 31 C. Sustainability of Sewerage Investments .................................................... 32 5. AGREEMENTS REACHED AND RECOMMENDATION ............................ 34 Annexes 1. Project Description .................................................... 37 2. Project Cost Estimates .................................................... 50 3. Project Financing Plan and Affordability Analysis .......................................... 56 4. Land Bank of the Philippines .................................................... 66 5. Implementation and Procurement Schedule .................................................... 70 6. Disbursement Schedule .................................................... 75 7. Environmental Assessment .................................................... 76 8. Project Supervision Plan .................................................... 86 9. Project Performance Monitoring and Evaluation .............................................. 93 10. Economic Analysis of Sewerage Investments ................................................. 98 1 1. Draft Memorandum of Agreement between LGUs and Water Districts ....... 107 12. Consultant Services for Project Implementation: Terms of Reference ......... 111 13. The Community Participation Process in WDDP .......................................... 123 14. Documents in Project File .................................................... 128  1. THE WATER AND SANITATION SECTOR IN THE PHILIPPINES A. Background 1.1 In the Philippines, only about 65% of the 28 million residents in large urban centers receive piped water, and most use open drains, septic tanks and pit latrines to dispose of liquid and human waste. As a result, public health is severely affected: Gastro-intestinal illnesses and typhoid are common among the urban poor, particularly children. Moreover, as untreated wastewater and septage are dumped directly into the waterways and coastal areas, the beaches and other bodies of water are polluted. 1.2 Sewerage is virtually non-existent outside the Metropolitan Manila area, found only in small sections of two or three towns. Thus, most residents rely on private solutions to dispose of human and liquid waste, and the use of open drains and poorly constructed septic tanks pollute the urban areas and surrounding water bodies. 1.3 Public water supply and sanitation services in urban areas are provided by three principal agencies. In the Metro Manila area, the Metropolitan Waterworks and Sewerage System (MWSS) supplies water and collects about 18% of the wastewater before discharging it untreated into Manila Bay. In approximately 500 other large cities and towns, water supply services are provided by autonomous local water districts, established under the Provincial Water Utilities Act of 1973.1 The Local Water Utilities Administration (LWUA) is a special lending institution established to develop water supply and sewerage services in these Water Districts, though its financing so far has been only for water supply. Elsewhere, in about 1000 small towns, water supply is provided by line departments of municipal governents or city-level Local Government Units (LGUs). 1.4 Overall, water supply and sanitation services are provided by decentralized organizations, accountable to locally elected officials. This is consistent with the national policy of vesting territorial and political subdivisions with legal and fiscal autonomy to choose between investment priorities, and to finance public investments from own- managed resources. Since the Local Government Code was passed in 1991, municipal governments have been receiving substantial block transfers each year through a formula- based Internal Revenue Allocation (IRA) that supplements their local resources. Mayors retain indirect influence because they appoint the Board of Directors of Water Districts on fLxed term appointments.  2 1.5 On the supply side, however, localized development of water supply systems has, had some adverse consequences. Political considerations appear to have been a prime force in the formation Water District boundaries -- rather than establishing water supply franchise areas that are optimal from an economic, financial or hydrological point of view. Water utility management in neighboring towns (both in Water Districts and in LGU-managed water utilities) have shown reluctance to amalgamate operations to the minimum efficient scale; failed to take advantage of the economies offered by river basin- oriented supply networks in defining their service boundaries; and ignored the possibility of developing sewerage on the grounds that recovering costs for regional systems would be impractical. 1.6 On the demand side, income levels of domestic, commercial and industrial consumers have been rising over the last five years, and with them the willingness to pay for adequate and reliable services. Despite increasing demand, most Philippine water utilities have not sufficiently risen to the challenge in terms of satisfying customer expectations. Operating in suboptimal organizational sizes, failing to take advantage of economies of scale, relying on the necessarily rationed investment funds from the public exchequer, water utilities in cities and towns have been unable to adequately either increase coverage or expand services of water supply and sanitation services.2 Current projections of investment requirements to meet demand for the next decade in the largest secondary cities like Cebu, Davao, Cagayan de Oro run into the hundreds of millions of dollars each for water supply, and into billions of dollars if sewerage were included as well. 1.7 In the past, national and local water supply agencies have absorbed large quantities of national public investmnent funds, much of which are financed by the international donor community. Currently, for example, altogether, national sectoral agencies--supported by the Asian Development Bank, Japan's Overseas Economic Cooperation Fund and other bilateral donors--are investing an estimated US$567 million for the MWSS areas and US$496 million for the LWUA areas in water supply and sewerage development.3 1.8 Private sector interest in water supply. Since private firms successfully addressed the supply problems confronting the Philippine power sector in 1994, investors' interest in water supply infrastructure have been very high. Their focus has been on the fast- growing urban areas where the demand for water has rapidly outpaced public investment. They are positive about augmenting the water supply (i.e. bulk water production) through 2The worst affected have been low income consumers, who have had to rely on water vendors, charging ten to fifteen times the official tariffs. 3The Bank currently has two on-going project in the urban water supply sector, one for Subic Bay with a substantial water supply component and another for MWSS. Both were approved by the Board in 1996  3 BOT (build-operate-transfer) contracts. Interest in taking over, expanding and managing water distribution networks -- where the inefficiencies of the public system are most pronounced -- has generally been much less. Private sector interests include Metro Manila service area, the region surrounding it, and some of the rapidly growing urban centers such as Subic Bay, Metro Cebu, Davao, Zamboanga and Cagayan de Oro. BOT proposals of over $1.3 billion for bulk water supply are currently being prepared.4 1.9 The Government's strategy is to encourage the private sector in both the production and distribution of water supply and sewerage service, so that unmet demand is efficiently covered, and service providers are made fully accountable to service users. Currently, the IFC is assisting the Government to privatize MWSS through two concession contracts, in which concessionaires are expected to invest about US$6 billion over the next 25 years for the entire water supply and sanitation production, distribution, collection and treatment system serving the metropolitan Manila area. In Subic Bay Freeport, water supply and sewerage will be provided by a joint venture, involving the private sector and local public agencies. 1.10 Public investment in sewerage and sanitation. With the exception ofthe MWSS area (which already has coverage of about 10% of its customers with sewerage), the prospects of the private sector providing sewerage infrastructure are not promising: Secondary cities have no sewerage at present; investments are lumpy, and most potential consumers have already privately invested in individual septic tanks for human waste disposal. 1.11 The necessity for sewerage has arisen because untreated wastewater has generated considerable pollution in and around these cities. These public good aspects make cost recovery of regional facilities from individual consumers difficult to enforce. Thus, national policy makers have recognized that sewerage and sanitation investments in the secondary cities will need to be publicly funded for some time to come. B. Sector Policy Developments 1.12 In 1994 a Water and Sanitation Sectoral Review was completed by NEDA, with the assistance of the Bank. The major issues identified, and strategies recommended were: (i) Recognizing that improving efficiency would increase water supply availability to consumers. The strategy recommended was to introduce water utilities to private sector management options, encouraging them to fully commercialize their operations, regrouping smaller municipal water utilities into regional service areas, and establishing an independent office to regulate all water utilities. 4 While supply bottlenecks are severe in Philippine water utilities, there is considerable room for efficiency gains by improving the management of water distribution systems through private sector involvement. Non-revenue water estimates range from around 60% in MWSS to around 30% in some of the more efficiently run Water Districts.  4 (ii) Recognizing that the resources needed to bridge the excess demand for water and sanitation services were beyond public financing capacity. The strategy recommended was to require all regulatory agencies to fix water tariffs so that they fully covered the costs of delivering service, and to undertake specific facilitative measures at the government level in order to induce private investments into both water supply production and distribution. (iii) Reorienting public sector financing arrangements so the Government need not spend its scarce resources on water utilities that had the potential of being commercially self-supporting. The strategy recommended was to encourage large, commercially viable water utilities to graduate from concessionary financing of their projects, and encourage them to seek market-based financing instead. (iv) Recognizing that the increased quantity of water supplied was generating massive quantities of untreated wastewater, and polluting cities and surrounding water bodies. The strategy recommended was to support public sector investments in sewerage and sanitation provided these were cost-effective and financially sustainable. 1.13 In 1994, the NEDA Board,5 passed resolutions Nos. 4 and 5, which laid out national policies for water supply and sanitation. Resolution No. 4 called for more efficient management of water resources. It also encouraged private sector participation, in order to share the burden of financing water supply infrastructure in high growth regions and redirect scarce public resources toward other national priorities. Resolution No. 5 addressed the growing problem of pollution from human waste, stating that sewerage and sanitation investments would be made on the basis of demand (i.e. on local preferences and willingness to pay for services) from the LGUs and residents. C. Government Strategy and Programs 1.14 The Government involved all key stakeholders before finalizing the sectoral strategy. In December 1994, the President convened a water summit in Manila attended by key members of the Congress, administration, water utilities and the public. The summit provided an opportunity for stakeholders from all levels (the Congress, Administration, Water Utilities, LGUs, NGOs and Consumer Groups) to discuss and debate the issues and strategies raised in the Water Sector Review. It endorsed the NEDA Board's broad policy recommendations to tackle the problem of rapidly deteriorating water and sanitation services in urban centers. A Water Management Cluster or Cabinet Cluster G was established, which had the mandate of promoting private sector participation, improving efficiency of public water utilities and encouraging LGUs to invest in sewerage and sanitation. The NEDA Board is the highest policy advisory committee, and is chaired by the President of the Philippines.  5 1.15 The summit endorsed the Government strategy of tackling two sets of priorities simultaneously. First, to create an enabling environment for a large and rapid infusion of private investments in water supply, so as to meet expanding demand in an economically efficient and sustainable way. Second, to invest in sanitation infrastructure outside Manila in a demand-driven, financially sustainable and technologically cost-effective manner. Addressing these challenges became the centerpiece of Government strategy and programs from 1995 onward. 1.16 In June 1995, aNational Water Crisis Act (RA 8041) was passed that gave the Executive Branch special powers to improve the overall management of water resources, and to address specific water problems in Metro Manila. The Act provided an impetus to privatize MWSS. The Joint Executive-Legislative Water Crisis Commission, which was established under the Act, also made a comprehensive set of recommendations with regard to all water utilities in the country. The Commission recommended that: * the inefficiencies in the production and distribution of publicly-funded water supply be addressed immediately since they drain funds from the financially- strapped national budget. D the institutional and regulatory framework be made consistent with the policy goal of encouraging private sector participation. The current fragmented responsibilities among regulatory agencies makes it difficult both to attract private investors and protect consumers from the monopoly power of private providers. * the Government operationalize its policy to develop sewerage infrastructure (as outlined by the NEDA Board Resolution No. 5) in a demand-driven and cost- effective manner. 1.17 These recommendations -- which are consistent with the Bank's assessment of the key sector issues -- have formed the basis of developing the Water Districts Development Project. While the project was being prepared, technical assistance was extended to the Government to clarify the basic institutional and regulatory framework consistent the Joint Commission recommendations. During project implementation financing will support (i) the piloting of a Public Performance Audit System in MWSS, with a view to extend system to other Philippine water utilities in the subsequent phase and (ii) undertake sewerage, sanitation and drainage investments in five cities, so that a cross- section of Philippine secondary cities is able to make a serious attempt at tackling local environmental priorities in a cost-effective and financially sustainable manner.  6 D. Lessons From Previous Bank Operations 1.18 The World Bank's urban water sector lending program in the Philippines over the last two decades has largely focused on the MWSS or the Metro Manila area. It has supported four loans for water supply and one for sewerage since 1978, totaling US$264 million, with the Second Manila Sewerage Project (US$56.8 million) awaiting loan effectiveness. Outside the metro area, the Bank financed the Provincial Cities Water Supply Project for US$23 million (Loan 1415-PH) to improve water supply in five towns of Luzon, and the Water Supply in Provincial Towns Project for $38 million (Loan 1710/Credit 920-PH) in 1979. The Water Supply component of the Second Subic Bay Freeport Project (Loan 3745-PH) is US$32.6 million. In rural water supply, the Rural Water Supply Project for US$35.5 million (Loan 2206-PH) and the First Water Supply, Sewerage and Sanitation Sector Project for US$85 million (Loan 3242-PH) were financed in 1982 and 1990, respectively. All the above non-MWSS projects, except for the First Water Supply, Sewerage and Sanitation Sector Project and the recently approved Second Subic Bay Freeport Project, have been completed. 1.19 Evaluations of earlier Bank or IDA-financed water supply projects outside Metro Manila were responsible for shifting Bank assistance from project lending to economic and sector work in the late 1980s and early 1990s. This work indicated that project performance was hurt by the absence of a well-articulated sectoral policy framework, the lack of transparent financing criteria, inadequate management incentives to run water utilities as commercial enterprises, and political interference in the setting of water tariffs to fully cover costs of delivering services.6 These issues are currently being addressed through both project and policy support from the Bank to the Government of the Philippines. E. Rationale for Bank Involvement 1.20 The project design is consistent with the Bank's Country Assistance Strategy (CAS) for the Philippines, a significant element of which is to strengthen infrastructure and facilitate private sector participation. In the water sector, Bank technical assistance and lending will help rationalize the management of water utilities, promote private sector participation and broaden the access of urban populations to safe and reliable water supply and sanitation services. The project, along with its companion LGU Urban Water and Sanitation Project, will also address other elements of the CAS, notably by assisting LGUs build institutional capacity to undertake decentralized decisions on local infrastructural investments. The bulk of sewerage investments in the project will be undertaken in Mindanao cities, where peace has returned recently after years of civil strife. 6The problems were most acute in the case of MWSS, which has absorbed a significant share of public investment funds.  7 1.21 Philippine water sector developments described in paragraphs 1.12 through 1.17 above are also significant from a global perspective. They mirror trends across the world in developing countries, and along with them, the evolution of Bank sectoral policies. In the 1970s and 1980s, sector policies in most countries advocated investment support to build technical, financial and institutional capacity in publicly-managed water utilities. These policies were questioned in the late 1980s and early 1990s, when the Bank's project performance evaluations and surveys of water users indicated that both on equity and efficiency grounds, sectoral investments often failed to accomplish the stated objectives. In terms of equity, the poor received the least satisfactory services, paid the highest unit prices for water, and had to rely on market-based informal vending (at very high unit costs) for their daily needs. In terms of efficiency, publicly managed water utilities had high proportions of unaccounted for water, were generally unable to recover costs for sewerage, and invariably had inadequate management incentives to operate as commercial enterprises. 1.22 The search began, in many countries --just as it did in the Philippines -- to find more sustainable solutions. This led to the recommendation to switch the role of the public agencies from providers to facilitators, to encourage management and operation on commercial principles, so as to be able to serve their customers in a responsive and accountable manner. These recommendations were summarized in the Bank's Water Resources Management Policy principles of (a) providing water and sanitation services on the basis of demand, and (b) managing the services at the lowest level. 1.23 The rationale for Bank involvement, therefore, not only reflects the Country Assistance Strategy, but also the importance of Philippine sectoral developments in the global context. The Bank has played a key supportive role in the Government's attempt to implement new sectoral policies. Efforts by MWSS to privatize its water supply and sanitation services, the attempts at actually implementing the NEDA Board resolutions, and the policies to decentralize decision-making to city and community levels are all being closely watched by sector professionals around the world. The rationale for the Bank's continued involvement is to assist the Government bring to a successful completion the far-reaching changes taking place both in regard to water supply and sanitation provision. There has as much to gain by its involvement in the Philippine water sector, in terms of distilling the lessons for other countries of the world, as it has to offer the Government of the Philippines through its technical assistance and investment support.  8 2. THE PROJECT A. Project Rationale 2.1 The challenge facing the Government is in implementing the sectoral policy changes that have been announced so far. As mentioned in the earlier section, the most significant element has already been implemented in 1995, when the Government decided to privatize MWSS through two concession contracts for water supply and sewerage infrastructure. A very high level of investor interest was expressed for these contracts, and a privatized MWSS is expected to start functioning by August 1, 1997. The question facing the Government now is how best to replicate similar institutional and organizational changes in other smaller cities and towns around the country. 2.2 The project rationale is that some key strategic investments in institutions and infrastructure, supported by Bank financing, could lay the basis for future investments in secondary cities and towns through re-designed water and sanitation policies. With regard to sewerage and sanitation -- in which the private sector is not expected to substitute for public investments -- project investments would enable the Government develop and prototype cost-effective, financially sustainable methods of improving urban sanitation. With regard to water supply, in which the private sector is expected to substitute for or provide complementary financing to public investments, the program of support is somewhat more complex, and entails a mix of institution-building (for developing an appropriate regulatory framework, encouraging all water utilities adopt commercial practices), and infrastructure investment support (in water utilities that are too small to attract private investors and operators). Thus, in both water supply and sanitation, project support is justified on the ground that it will enable the Government to lay the groundwork for a meaningful long-term investment program in line with the policy announcements, discussed in paragraphs 1.12, 1.13 and 1.16 above. The program entails two Bank-financed projects; the proposed Water Districts Development Project and the companion LGU Urban Water and Sanitation Project that will follow in 1998. 2.3 For sewerage and sanitation, the key constraint has been in developing usable rules and procedures (both technical and financial) that would lead to cost-effective and sustainable services. The project will attempt to prototype technical, financial and institutional procedures in consultation with participating LGUs of four pre-selected cities. The challenge has been to persuade city residents and LGU administrations that local environmental problems created by untreated wastewater need to be tackled on a priority basis, as well as demonstrate how these can be done within the existing municipal budgetary constraints. Local decision makers have determined whether the sewerage  9 infrastructure fits with local priorities and willingness to pay (of the LGU administration, community and individuals served). The project would accomplish its goals if, on its completion, the sewerage program is replicated in other secondary cities facing similar environmental pollution problems. 2.4 For water supply, four critical bottlenecks have been identified that could hinder the Government's strategy: (i) The fragmented regulatory arrangements in the water sector require consolidation, so that all water utilities operate under a transparent regulatory framework. This would help commercialize water utilities, while protecting the interests of low income water supply consumers. (ii) Potential investors need reliable and updated financial and technical information on water utilities that offered good prospects for private sector participation, before they can seriously consider bidding for concession and BOT contracts. (iii) The water utilities need technical assistance to: (a) evaluate private sector participation options, that best suited to the organizational interests, prepare bidding documents; (b) prepare negotiate and complete transactions that get the private sector involved in service provision. (iv) Consumers have to be assured that private sector participation would indeed expand services efficiently and equitably. 2.5 The first of the above four bottlenecks was addressed during project preparation, when the Bank, in association with the ADB and USAID, provided technical assistance to the Government in the area of regulatory reform. The Government intends introducing a Bill before the Congress in 1997 to establish a National Water Regulatory Commission, incorporating the recommendations of the technical assistance. The remaining three issues listed above will be supported by specific actions under various other technical assistance initiatives supported by the World Bank and other donor agencies. Of these, the piloting of a Public Performance Audit (PPA) system in MWSS is being financed under the proposed project. B. Project Objectives 2.6 The project objectives are: * To help participating LGUs and water districts plan and implement sewerage and sanitation investments based on their residents' wishes and willingness to pay. * To assist the Government of the Philippines in developing a transparent regulatory mechanisms in order to facilitate private sector participation in water utilities.  10 2.7 Thus, the project will deliver sustainable water and sanitation services through two types of interventions. For sewerage, sanitation and drainage, project investments are being developed collaboratively with households, communities and city councils, so that the technical staff can respond to community needs fully. For water supply, investments through a technical assistance loan will assist MWSS develop a Public Performance Audit system that provides reliable and timely feedback from service consumers on the level of satisfaction with the services. C. Project Description 2.8 The project consists of two components, to be financed by two loans. The first loan of US$2.3 million would finance the Public Performance Audit (PPA component). The PPA component comprises technical assistance designed to pilot and field-test a privatized public performance audit system. This component will enhance the regulation of water utilities by piloting and testing a public performance audit system for the privatized operations of MWSS. Independent auditors will monitor, evaluate and publicly report the performance of the two concessionaires who have been awarded the contracts to manage metro Manila's water supply and sanitation infrastructure. The lessons learned will be utilized to operationalize the system in MWSS, and extend it to other water utilities in the country. 2.9 The second loan of US$54.5 million will finance the Sewerage, Sanitation and Drainage component (the SSD component). The SSD component consists of the construction of sewerage, sanitation and drainage infrastructure in the cities of Davao, Cotabato, Calamba, and Cagayan de Oro. Sewerage feasibility reports for the initial service areas in each city were prepared between 1992-1995, and updated in 1996. The engineering design will adopt a demand-based approach, in which City Councils and residents in project areas will be presented with service options and asked to select the option that suits their preferences and willingness to pay. In order to operate and maintain the new facilities in a sustainable manner, local water districts will be closely involved in the design and implementation of the project. A memorandum of agreement will be signed between the LGU administration of each participating city and the local water district specifying the details of a management contract for operating and maintaining the sewerage systems by the latter (see Annex 11). A sewerage surcharge will be added to the water bills of all connected residents. This surcharge will be adequate to cover all routine operations and maintenance activities for the sewerage infrastructure.7 In the event any re-structuring or re-organization of operations of these water districts affects the performance of their obligations under the memoranda of agreement, the Government would consult with the Bank on how best the existing arrangements can be sustained. As water supply and sewerage will be a part of the same bill, failure to pay the sewerage surcharge will lead to the turning off of the water supply connection. However, in order to prevent hardship to low income consumers only relatively large volume water users are required to connect to the sewerage system.  11 2.10 Before investments in sewerage and sanitation are made, the project will assess stakeholder demand at both the user and community level in the detailed engineering design phase. User demand is established by consulting with beneficiaries and community demand is ascertained by consulting with LGUs at the barangay and city council levels. Their preferences were evaluated against the LGUs' capacity to borrow for sewerage investments. For this purpose, a long-term financial planning model was developed to help city councils understand the budget implications of borrowing for the project. The key consideration was that stakeholders who pay for the investments should perceive tangible net benefits. Because of this approach, substantial changes in the project scope and composition became necessary during preparation. For example: * LGUs of Dagupan, Roxas City and General Santos declined to participate, despite initial interest. * Users preferred direct connections to sewers, so as not to pass through existing septic tanks. I Davao substantially altered the Consultant's proposals to address the city council's concern that the only relatively unpolluted beach in Toril needed to be safeguarded. Desian Consideration 2.11 Considerations for technical soundness and cost-effectiveness have led to the choice of "simplified sewerage" design standards. Similar considerations led to: (a) offering users the choice between backyard and property front locations for collection sewers; (b) reducing the size and length of collection and transportation sewers; (c) minimizing the use of lift stations and force mains, and (d) minimizing dislocation of traffic during construction. 2.12 For sewage and septage treatment, design considerations sought to minimize land requirements yet ensure that investment and operating costs were low, and that the quality of effluents met national standards. The Advanced Integrated Pond System (AIPS) meets these requirements, because it is a compact up-flow system with an anaerobic zone below a facultative zone. Also, providing for recirculation leads to an algae-rich aerobic zone on the top. The AIPS is designed to prevent mixing between anaerobic and other zones in the pond; this arrangement results in improved efficiency in anaerobic digestion, and produces little odor and low rates of sludge accumulation. 2.13 Based on considerations of cost-effectiveness, reliability and simplicity of O&M, Ventilated Improved Pit (VIP) latrines and pour flush toilets were chosen for on-site sanitation for both individual and communal use. Similar considerations formed the basis of the design for project implementation, arrangements for O&M, and cost recovery.  12 2.14 Because the estimated costs for full coverage were high, it was decided the project would be introduced in the towns of Davao, Calamba, Cagayan de Oro, Cotabato City Dagupan, Roxas City and General Santos City. The LGU administrations of the last three cities, however, decided not to participate in the project at different stages of project preparation.8 D. Estimated Costs and Financing 2.15 Public Performance Audit Component (PPA). The estimated base cost is US$2.5 million (approximately 5% of total base costs). A Bank loan of US$2.3 million to Government and on lent to MWSS will be used in the first year to set up the PPA system. It was not considered necessary to include price contingencies for the PPA component, as this component will be fully disbursed in the first year of project implementation. 2.16 Sewerage, Sanitation and Drainage component (SSD). The estimated base cost is P1434.6 million or US$51.9 million (approximately 95% of total base costs) with a foreign exchange component of US$12.7 million, or P332.2 million. Physical contingencies represent about 16% of cost of civil works, while price contingencies are about 19% in the US dollar cost estimates.9 Price contingencies and interest during construction were applied on base costs bringing the total of the SSD component to an estimated US$78.26 million. Table 2.2 summarizes costs estimates and details (see Annex 2). These costs are inclusive of taxes and duties. Table 2.1: Price Contingencies Contingencies: 1997 1998 1999 2000 2001 Local Costs 7.0% 6.0% 6.0% 5.0% 5.0% Foreign Costs 2.4% 2.4% 2.4% 2.4% 2.4% After Roxas City declined to participate, the project did not have LGU representation from the Visayas. Three of the four project cities (Davao, Cotabato city and Cagayan de Oro are from Mindanao, and the remaining town of Calamba is from Luzon. However, the four towns represent a typical cross- section of Philippine secondary towns both in terms of population size and in terms of environmental problems. Annex I B provides details on the towns. 9Physical contingencies have been kept at 10 per cent, based on experience gathered implementing demand-based sewerage projects. Cost data from engineering feasibility studies tend to over-estimate costs because homeowners in residential neighborhoods may decline to participate in the project. The project design assumes that about 60 per cent of potential customers will connect to the sewer system (only high volume water consumers will be required to connect to the system).  13 Table 2.2: Project Cost Summary Components: Foreign Local . Total Foreign Local I Total % of Total Peso Million US$ Million Base Costs 1. PPA Component 60.4 5.5 65.9 2.3 0.2 . 2.5 5% 2. SSD Component Civil Works 117.4 805.5 922.9 4.5 28.3 32.8 60% Land Acquisition - 296.9 296.9 - 10.9 10.9 20% Equipment 96.3 96.3 3.7 3.7 7% Institutional Supp. 118.5 118.5 4.5 4.5 8% SSD Base Cost 332.2 1102.4 1434.6 12.7 39.2 51.9 95% 3. Total Project Costs 392.6 1107.9 1500.5 15.0 39.4 54.4 100% 4. Physical contingencies 33.2 110.2 143.4 1.3 3.9 5.2 10% 5. Price contingencies 35.7 264.2 299.9 1.3 9.3 10.6 19% 6. Interest during - 304.6 304.6 10.5 10.5 19% construction 7. Financing Required 461.5 1786.9 2248.4 176 63.1 80.7 148% 2.17 The proposed financing plan is shown in Table 2.3. The Bank will finance US$56.8 million through two loans: US$2.3 million lent to the Republic of the Philippines, and further on lent to MWSS for the PPA component, and US$54.5 million lent to LBP and further on lent to the four participating cities for the SSD component. 2.18 The loan for the PPA component will cover 92% of total costs, inclusive of 100% of foreign exchange costs, with MWSS and the GOP financing the remaining 8% of costs. The Government of the Philippines would be the borrower of this loan, and will on lend the proceeds to MWSS through a subsidiary loan agreement. 2.19 The loan for the sewerage, sanitation and drainage will cover about 70% of total costs, including 100% of foreign exchange costs and about 75% of estimated local costs. The sewerage loan provides for financing in part, interest during construction, estimated at $10.5 million, given the long construction periods and the cash flow conditions of participating LGUs. The remaining US$23.7 million or 30% of project costs would be financed by participating LGUs from their budgets, and by users of sewerage services. The borrower would be the Land Bank of Philippines, with the Republic of the Philippines as the guarantor. Funds would be on lent under subsidiary loan agreements to participating LGUs. Execution of subsidiary loan agreements between GOP and MWSS, and between LBP and at least two of the participating LGUs (one of which must be Davao), will be a condition of effectiveness of the loan to the GOP and the loan to LBP, respectively. The two proposed loans would be onlent for 20 years, inclusive of a five- year grace period, as US$ single currency loans.  14 Table 2.3: Project Financing Plan (1997-2002) (US$ million) Financing Plan % of 1997 1998 1999 2000 2001 2002 97 - 02 of Total 1. PPA Component MWSS Contribution 0.1 0.1 - - - - 0.2 0.2% IBRD - for PPA 1.8 0.5 - - - 2.3 2.9% Sub Total 1.9 0.6 - - - - 2.5 3.1% 2. SSD Component Land Bank/IBRD 0.6 2.4 23.2 18.2 6.7 3.4 54.5 67.5% City Government1t 0.3 12.8 0.3 2.2 (1.4) (2.9) 11.3 14.0% User Installation Charges - - - - 4.6 7.8 12.4 15.4% Sub Total 0.9 15.2 23.5 20.4 9.9 8.3 78.2 96.9% Total 2.8 15.8 23.5 20.4 9.9 8.3 80.7 100.0% E. Implementation Arrangements 2.20 Project implementation will be a joint effort involving the national agencies, LGUs and water utilities. The project's two components will have separate implementation arrangements. For the PPA component, the MWSS Board of Directors will supervise implementation. Day to day supervision will be exercised by the MWSS Regulatory Office, which has been established to monitor the concession contracts. The lessons learned from the piloting phase that the PPA component is financing, will be documented by November 1998, and utilized by MWSS as an instrument to improve the transparency of the regulatory system. The lessons learned from the program will also be utilized to develop a PPA program for other water utilities in the Philippines (both Water Districts and LGU-managed water utilities). Technical assistance will also be provided by the Bank through regular mission support, in order to evaluate how best the methodology developed can be replicated in the water districts and other water utilities throughout the country. 2.21 For the SSD component, the Land Bank of the Philippines (LBP), LWUA and the four cities will be responsible for overall implementation. LBP will establish a project management office (PMO) in Davao city, headed by a project manager appointed by LBP, which would be responsible for directing, supervising and coordinating all project activities under the SSD component of the project. Technical support would be provided to the PMO by the Central Sewerage and Sanitation PTogram Support Office (CPSO) of the LWUA. A team of internationally-recruited design and supervision consultants financed under the project would be retained by the PMO during project implementation to ensure that the proposed design for participation is carried out (Annexes 12 and 13). 10 The negative amounts shown in the financing from internal sources reflect a reimbursement to the LGUs for installation costs absorbed in prior years and passed on to users.  15 The establishment of the PMO by LBP and of a PMU by at least two participating LGUs, one of which must be Davao, will be conditions of effectiveness. The PMU -- consisting of the City Engineer, Director of City Planning, Director of the Budget Office, and a representative of the water district -- will supervise design and construction at the city level. Details of organization, staffing and management are described in Annex 9. 2.22 Project implementation would start in the fourth quarter of 1997, and would be completed after about five years (see Annex 5 for the implementation schedule). F. Monitoring, Evaluation and Report Requirements 2.23 The project represents an attempt to translate sector policy into actions, for which a "learning by doing" approach is critical. For the PPA component, assistance will be closely monitored by the national Government level, as a possible instrument to ensure transparency in regulatory processes. For the SSD component, lessons learned need to be fed back to improve future phases of project implementation. Participation by stakeholders in the consultations will become a critical ingredient. The monitoring and evaluation system will address the specific requirements of a participative project design. Details of the proposed monitoring and evaluation system are in Annex 9. In each of the two loans, the borrower and/or the implementing entities will covenant to monitor and evaluate the implementation of the respective components of the project in accordance with indicators acceptable to the Bank. 2.24 It is expected that the project performance indicators will monitor the traditional project milestones (measuring progress achieved against specific financial and physical targets), and process indicators will track to what extent the stakeholders (communities, private operators, LGUs, water districts and national agencies) views have been reflected in the design of the project components. At the end of each phase of the project, the lessons learned will be evaluated and used to change or modify the next phase of project design. 2.25 LBP would send the Bank (i) no later than March 31 and September 30 of each project year, beginning March 31, 1998, semi-annual project progress reports, including revised project cost estimates and implementing schedules, (ii) no later than March 31 of each project year, beginning March 31, 1998, the annual budget appropriations of participating LGUs, and (iii) no later than six months after the project is completed, the evaluation report on project implementation. G. Land Acquisition and Resettlement for the Sewerage Component 2.26 Land will need to be acquired for construction of sewage treatment facilities, pumping stations and for communal toilet facilities in the participating cities. The largest requirement of land is for construction of sewage treatment facilities. The proposed sites have been identified and visited and no resettlement is anticipated (see Annex 7, Section VII) because the lands on those sites are currently unoccupied. The sites for sewage  16 treatment plants will be purchased from private owners at negotiated market price. Relatively small parcels of land will also be required for the construction of pumping stations, and will also be acquired through negotiated market purchase. The present understanding is that these will not involve displacement or dislocation, as there is some flexibility with regard to the exact location of the pumping stations. The alignments of the sewer lines will be finalized during the detailed engineering design, and will be along public right of way (such as sidewalks, roads, public parks etc.) in order to avoid any displacement or dislocation. Communal toilet facilities will be sited on vacant lands in low-income neighborhoods. The lands will also be acquired at negotiated market purchase. The project will follow a participatory approach to planning and implementation, (see Annex 12); thus, any potential dislocation of residents and/or loss of incomes will be reported to the project implementation team. 2.27 No displacement or dislocation is anticipated during project implementation for the reasons discussed in paragraph 2.26 above. The specific alignment of sewer lines and collection networks, as well as the location of pumping stations will be known after the detailed engineering design is completed. In each case the implementing entities will carry out site-specific review of impacts. As mentioned above, there is flexibility in the location of the pumping stations, and therefore the final location will be selected to avoid displacement or dislocation. The sewer lines will be located under public rights of way. Nevertheless, construction may cause temporary dislocation or dismantling of existing structures along the rights of way. LBP will establish guidelines for compensation in the event of involuntary dislocation or dismantling of existing structures, in order to ensure that they conform with Bank policies on involuntary resettlement. Further, as a condition of disbursement of its respective subsidiary loan, the relevant LGU will have to provide evidence satisfactory to the Bank of its compliance with these guidelines. H. Environmental Impact 2.28 Project design is driven by the quest to find a sustainable solution to the many environmental problems caused by inadequate management of water resources in the country's rapidly growing secondary cities. 2.29 The PPA component would address the twin problems of poor coverage and unreliable water supply in urban areas. Through technical assistance, the project would bring in the private sector which, by operating more efficiently, is expected to improve and expand services. The SSD component will improve urban environmental conditions in the areas served by the sewerage and sanitation systems. A summary environmental assessment is presented in Annex 8. 2.30 At present, it is impossible to evaluate the downstream environmental impact of increased private sector participation in water utilities; however, the Government's commitment to establish a public performance audit system, and the National Water Regulatory Commission are strong signals that adverse environmental impacts will be closely monitored.  17 2.31 The SSD component will mitigate severe environmental problems caused by poorly operated sanitation and waste water infrastructure in the participating cities (evidence from all the cities indicates that urban land and surrounding water bodies are severely contaminated by untreated sewage). 2.32 Environmental conditions in the four cities were assessed, particularly for the sites proposed for the construction of the wastewater treatment plants: Past experience in many countries suggests that these plants are often poorly maintained, that in a number of years, they cease to operate properly and the surrounding area becomes badly contaminated. To reduce the possibility this could occur, the project will apply treatment technology that is relatively easy to maintain. 2.33 An EIA for Davao city has been reviewed by the Bank, and is serving as a model for the other participating cities. In addition, an EIA Process Guidance Summary and generic terms of reference for conducting EIAs in the remaining project cities have been prepared. EIAs for at least two participating LGUs will be completed as a condition of effectiveness, 2.34 The Davao EIA suggests that minor negative impacts will be experienced in the four cities during construction and operation of the facilities. During construction, these will include short-term air, water and noise pollution and disturbances to traffic and commercial activities. These will be mitigated by a rational planning and scheduling of construction, and by developing and enforcing strict pollution control regulations for the project sites. As conditions of loan effectiveness at least two participating LGUs - one of which being Davao - would have completed their EIAs. The remaining LGUs are required to complete EIAs as conditions of disbursement under their respective subsidiary loan agreements with LBP. 2.35 During the operational phase, negative impacts could include environmental hazards due to accidents (either man-made from design failures, spills or fires) or natural disasters (such as typhoons), water pollution and noise pollution. The project is involving the local water district to operate and maintain the facilities because these utilities have adequate technical and financial expertise. In addition, by involving communities in decision-making, the public will be more aware of any problems that may occur and can then pressure authorities to address them. Further, DENR's local offices are expected to strictly monitor water quality standards for effluents. To ensure such compliance, communities will have the information they need to voice their concerns. Moreover, because the treatment technology is odor-free and the plants will only deal with human waste (as opposed to toxic or industrial waste), city governments expect to develop the areas around the plants for recreational purposes (such as parks and golf courses).  18 I. Procurement 2.36 Procurement will follow Bank guidelines as presented in "Guidelines for Procurement under IBRD Loans and IDA Credits" (January 1995, revised January and August 1996). The Procurement Plan is described in Annex 5. Standard bidding documents and standard bid evaluation report will be used for procurement of works and goods under international competitive bidding (ICB). 2.37 For the PPA component, consultants will be hired to implement specific tasks of establishing a methodology for conducting future public performance audits. They will be recruited according to the provisions of the "Guidelines for Selection and Employment of Consultants by World Bank Borrowers" (January, 1997). The standard contract for consultants, produced in June 1995, will be used. 2.38 For the SSD component, at the national level, the PMO will be assisted by a design and supervision consultant for the length of the project, and by CPSO. At the local level, the PMU will be responsible for procuring its own goods and works. The PMU will also be assisted by a consultant to prepare the prequalification documents, contract bid packages, tender documents and specifications for goods and civil works. Bid evaluations will be performed by the PMU and reviewed by the PMO, with help from the national consultant and CPSO. According to the local government code, the Prequalification, Bids and Awards Committee (PBAC) of each LGU will ultimately be responsible for awarding the contract. PBAC will also follow the timetable set by law for each step of the bidding process, according to Administrative Order 129. Foreign bidders will be eligible to participate in national competitive bidding (NCB). 2.39 The PMUs of the participating cities will implement the Environmental Management Plan (EMP), guided by the PMO. The plan will be integrated into bidding and contract documents, and the contractor responsible for project activities will be required to monitor the environment. The PMO will be responsible for monitoring and reporting compliance, with the assistance of CPSO-LWUA and the project Consultant team (described in Annex 8). 2.40 The design and supervision consultant will be hired according to Bank guidelines. LBP, through the PMO, will be responsible for procuring consulting services for design and supervision in all four cities. Technical assistance, to short-list consultants as well as evaluate proposals, will be provided by LWUA through the CPSO. LBP and LWUA have been involved in several Bank-assisted projects, and are considered to have the experience needed to select consultants under Bank guidelines. A draft terms of reference for this consultancy is presented in Annex 12. 2.41 Project expenditure items, their estimated costs, and proposed methods of procurement, are summarized in Table 2.4 and discussed below.  19 Table 2.4: Project Procurement Arrangements (US$ Million Equivalent) PROCUREMENT TOTAL COST METHOD ICB NCB OTHER NBF 1.0 Civil Works 41.78 2.34 8.69 a - 52.81 (33.85) (1.96) (7.18) - (42.99) 2.0 Equipment 5.43 - - - 5.43 (5.43) - - - (5.43) 3.0 Implementation - - 8.86 k/ - 8.86 Support (Consultancy and - - (8.40) - (8.40) training) 4.0 Land Acquisition - - - 13.66 13.66 TOTAL 47.21 2.34 17.55 13.66 80.76 (39.28) (1.96) (15.58) - (56.82) Note: Figures in parenthesis are the respective amounts to be financed by the Bank loan. NBF : Non-Bank financed. at through Force Accounts, and b/ services to be procured in accordance to the Guidelines, Selection and Employment of Consultants by World Bank Borrowers (January 1997) 2.42 Works. Very small works, estimated to cost less than $200,000 equivalent per contract, for the construction of on-site or communal sanitation facilities will be procured, up to an aggregate amount not to exceed $6,970,000 equivalent, through force accounts by each participating LGU or by means of other government procedures acceptable to the Bank. Participation of non-governmental organizations (NGOs) would be acceptable. Works for the construction of the sewerage system, which will include providing and installing equipment, in four packages (one for each city), will be procured under international competitive bidding (ICB). In Davao, the civil works could involve two packages: one for Poblacion and one for Toril. Civil works packages for drainage in Cotabato City, estimated to cost less than $2,260,000 equivalent will be procured: (a) for contracts below $50,000, up to an aggregate amount of $300,000 equivalent, through national shopping procedures of obtaining quotations from at least 3 qualified contractors; (b) for contracts equal or above $50,000, but limited to contracts amounting to $500,000 per package through NCB following procedures acceptable to the Bank. In both instances, the standard Contract Documents for procurement of very small works and small works would be used. 2.43 Goods. Procurement of maintenance equipment and spares for all the four cities will be in bulk and through ICB which could be handled by the PMO, coordinated with II Includes physical, price contingencies and interest during construction.  20 all PMUs and with the help of the consultant and CPSO. For procurement under ICB procedures, domestic goods would be allowed a preference margin of 15% of CIF bid price or the amount of customs duties, whichever is lower for bid evaluation. 2.44 Consultant service. Consultant services, estimated at US$8.66 million, will be needed to support project implementation. Of this, $2.3 million will be for the PPA components, which will be open to qualified international and local firms. The terms of reference for evaluating bids have been by MWSS, with technical assistance from the Bank. The reimaining $6.10 million will be for the SSD component. Selection for the Consultant contracts for the SSD component will be open to groups of international and local firms including NGOs, or a combination of all of them, which will be evaluated according to the draft TOR (as presented in Annex 12). The TOR will specify four schedules, one per city, and have an accounting of the cost per city. Training will be part of the consultant's TOR. 2.45 Land Compensation. These items, estimated at US$13.66 million will be financed by LGU counterpart funds. Approximately 70 percent of this represents land acquisition costs in Davao and Cagayan de Oro for the sewage treatment plant sites. 2.46 Procurement review. Works amounting to US$5 million and over, or goods of US$1 million and over, will be subject to prior review by the Bank (approximately equal to 84% of Bank-financed cost). In addition, the first bidding packages for goods and works for each of the participating cities, regardless of value, will be subject to the Bank's prior review. The Bank will review other contracts for goods and works on a random sample basis (one out of five contracts for goods), after they have been awarded. The post reviews will be carried out by the Bank's Resident Mission in the Philippines. For procurement of goods and works through ICB, the Bank's Standard Bidding Documents would be used; for procurement through NCB, bidding documents submitted by LGU with the first bidding package for goods and works, would be reviewed and, if acceptable, the same bidding documents would be used for all subsequent NCB procurement. 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 termns of reference for such contracts, sole source procurement, assignments of critical nature, and amendments to contracts raising their value above the threshold limits. J. Disbursements, Accounts and Audits 2.47 Proceeds of the Bank loan will be disbursed against: (a) 100% of foreign expenditures for civil works; (b) 79% of local expenditures for civil works; (c) 100% of local expenditures (ex-factory) for locally manufactured equipment and materials, or 65% of local expenditures for other equipment and materials procured locally, 100% of foreign expenditures, and (d) 100% of total expenditures for consultant services, training and  21 studies. The section below discusses arrangements with respect to the sewerage component. 2.48 Disbursements would be made on the basis of statements of expenditures (SOE) for actual expenditures against (a) contracts of less than US$5 million equivalent for civil works, (b) contracts of less than US$1 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 the Land Bank of the Philippines and MWSS, made available to Bank supervision missions, and regularly audited by auditors acceptable to the Bank. 2.49 To facilitate loan disbursement for the SSD component, the Land Bank of the Philippines will open and maintain a separate special deposit account, in a commercial bank specifically authorized for this purpose by the Bangko Sentral ng Pilipinas, on terms and conditions satisfactory to the Bank, including appropriate protection against set-off, seizure and attachment. The Special Account, which would cover the Bank's share of eligible expenditures in all disbursement categories, would have an authorized allocation of US$2 million to be withdrawn from the Loan Account and deposited in the Special Account; unless the Bank agrees otherwise, the authorized allocation shall be limited to an amount equal to US$1 million until disbursements and outstanding commitments against the loan equal or exceed US$25 million. Applications to replenish the Special Account, supported by appropriate documentation, would be submitted regularly (preferably monthly, but not less than quarterly) or when the amounts withdrawn equal 50% of the initial deposit. The Land Bank of the Philippines will have the project-related records, accounts and financial statements audited by independent auditors acceptable to the bank. 2.50 Project implementation would extend over five years, starting September 1997. All major works would be substantially completed by December 31, 2002. The loan would be closed on June 30, 2003. A disbursement schedule, as well as a profile of disbursements under previous Bank-assisted water and sewerage projects, is shown in Annex 6.  22 3. FINANCIAL ANALYSIS OF SEWERAGE INVESTMENTS A. Introduction 3.1 The financial analysis of the sewerage investments involved two important elements: (a) a review of the Land Bank of the Philippines (LBP) as the primary borrower and (b) the financial appraisal of the four sewerage sub-projects to be implemented by the LGUs in conjunction with their water districts. The latter involved the design of an innovative cost-sharing scheme whereby the four LGUs would absorb the capital costs financed by sub-loans from LBP for their respective sewerage projects, while the water districts would absorb the continuing operations and maintenance activities on the basis of a management agreement or long-term concession. In addition, users would be expected to pay for the direct cost of installations and reimburse the LGUs for this component of the sewerage projects. 3.2 As such, responsibility for cost recovery will be shared between the LGUs, water districts and users by: (a) spreading the capital costs through the entire community and cost recovery through the LGUs' general property and business tax revenue base; (b) applying a user tariff as a surcharge by the water districts to cover operating and maintenance expenses; and (c) charging a one-time installation fee, payable in one or more installments that would be applied to users who connect to the new system. B. Land Bank of the Philippines 3.3 The Land Bank of the Philippines (LBP) will be the primary borrower and will on-lend the funds to the four sub-projects, which have already been separately appraised and are summarized below. Funds will be on-lent on the basis of 20 years maturity, with a 5-year grace period at an annual rate of interest of 14% per year. LBP will assume the credit risk, while the Government of the Philippines will absorb the foreign exchange risk. LBP will make its own credit appraisal and will administer and supervise the sub- projects. 3.4 Through other projects, the Bank has had considerable involvement with the LBP, the most recent being the Philippines Second Rural Finance Projects (Loans 3938-PH, 3939-PH and 3940-PH of 1996), and the Agrarian Reform Communities Development Project (Loan 37079-PH) approved by the Board in November 1996. Therefore, the financial appraisal of the Land Bank drew largely on work completed for the above projects, except for minor revisions based on the latest update of organizational and financial information provided by LBP. Land Bank's financial and institutional capacity  23 as borrower was found to be satisfactory. Annex 4 summarizes LPB's current organizational and financial status. C. Financial Appraisal of the Subprojects 3.5 The finances and debt service capacity for each of the sub-projects were analyzed, focusing on: (a) the capacity of each LGU to effectively service the debt assumed for its sub-project, and; (b) the ability of the water districts to fully recover operating and maintenance (O&M) costs through a sewerage surcharge on users' monthly water bills. These analyses were supported by two long-term dynamic financial planning models which projected financial operations for the participating LGUs and water districts. Specifically, the analyses focused on the following aspects: * LGUs' overall capacity to raise and collect taxes, invest efficiently, operate the proposed sanitation and sewerage infrastructure, and service the debt related to the project loans from LBP, as well as other financial commitments. * water districts' ability to determine the amount and level of user surcharges needed to sustain the O&M expenses in the sewerage systems in their respective districts. X households' ability and willingness to subscribe to and pay for sanitation and sewerage services offered by the project. D. LGU Finance 3.6 The Local Government Code of 1991 provides the framework for granting greater administrative and financial autonomy to the state's territorial and political subdivisions (the LGUs), and decentralizes (to these units) important functions previously handled at the national level. The Code details all aspects relating to the financial management of the LGUs, whether these are provinces, cities, municipalities, barangays, or special economic zones. The LGUs can raise revenue through property taxes, business taxes and licenses, commercial activities and other means. They also prepare annual budgets, which include provisions for financing from various sources, including block transfers from the Government and credit arrangements. 3.7 LGUs were created as corporate juridical entities with powers to govern their economic enterprises, including: (a) raising revenue through taxes; (b) acquiring and conveying real property; and (c) raising credit financing within specific limitations. Various national agencies oversee these matters, including the Departments of Finance and Interior, Bureau of Management and Budget, and the Commission on Audits. 3.8 In the past, LGUs obtained revenue mainly from internally generated sources such as taxes, licenses, fees, commercial activities, and the Internal Revenue Allotment (IRA) from the national government. Debt financing, a third possible source of finance, has been used sporadically, mostly by the larger city governments. The limits of debt  24 financing have been partly self imposed by the local governments, and restricted by specific ceilings set by the Code and the more traditional creditworthiness criteria. However, in many respects, access to debt financing has also been restricted by the LGUs' inability to fully assess their capacity to borrow for investments with longer implementation horizons. This lack of long-term financial planning has not only delayed progress in this area, but may have contributed to sub-optimal investment programs. Further, unlike local governments in other developing countries, the LGUs have obtained substantial finances through the national allotments, but have been reluctant to use or leverage the funds, instead placing them in interest-bearing accounts. 3.9 The participating LGUs have received technical assistance and training from the Department of Interior and Local Government (DILG) and from the Bank to develop and analyze long-term financial plans. This has helped them better assess their long-term investment and operating requirements and debt servicing capacity related to the proposed projects, as well as to other existing or future loans. The financial planning exercise also enabled the LGUs to assess their operating performance, particularly with regard to property and business tax levels, collections and operating efficiency. The conclusions are reviewed in the following section. E. Past Performance of the LGUs 3.10 Table 3.1 summarizes current financial operations and the overall condition of the four LGUs. It suggests that there are potentials to leverage infrastructure investments, although the current financial performances leave room for considerable improvements. Table 3.1: Summary of LGU Financial Condition (in '000 Pesos unless otherwise specified) Cagayan de Oro Calamba (1996) Cotabato (1996) Davao (1997) Total Revenues 523,077 139,974 161,020 1,168,573 Net Income (20,813) 1,456 11,031 19,133 Total Assets 794,893 155,184 254,502 2,363,843 Working Capital 127,827 12,853 18,786 258,003 Debt to Total 10.6% 0.0% 0.0% 22.4% Capitalization Debt Service 1.75 times not applicable 1.39 times 2.52 times Coverage 3.11 All four LGUs have stayed fully within the budget guidelines prescribed by the national Government. As shown in the table, only Cagayan de Oro anticipated a net operating deficit for 1996 but still retained a positive operating cash-flow. Based on estimated year-end 1996 results, all four are financially secure with excessively low debt levels to total capitalization. This financial posture, combined with expected increases in  25 their respective revenue bases, provides adequate assurance of the LGU's capacity to service the project loans without necessarily projecting operating improvements. 3.12 The financial appraisal indicated that following the regular transfers of IRA funds from the national to LGU levels, LGU administrations have considerable opportunities to leverage financing to support infrastructure investments in their jurisdictions. During project preparation, participating city governments were assisted in developing a financial planning institutional capacity. For example, besides turning to internal sources and the IRA contributions to obtain capital, few LGUs had explored options for financing cash deficits, however temporary these may be. Forward planning has also been deficient and is prompting many LGUs to hoard cash (in the deposit accounts noted above) and other liquid assets in the event of unexpected shortfalls or contingencies. Thus, while their financial conditions seem more than adequate to assume new debt (to finance sewerage investments), they could strengthen their position even more. In many respects, the LGU's conservative practices have delayed development, since they have not drawn on their available funds to finance new community projects. 3.13 During appraisal of the sub-projects, it was also found that: * assessments of real properties, now 40%-54% of market values, could be increased substantially according to the 1991 Local Government Code, so as to boost revenues for each LGU; * LGUs could take more aggressive steps to reduce business tax evasion, which, based on rough estimates made by the staff, produces only 20% compliance, and * collections of assessed taxes are also estimated to be low, from 76%-82%, although a policy exists that allows them to levy fines on delinquent accounts. 3.14 However, using the assistance provided during project preparation, LGU administrators have viewed their performance with a new long-term, dynamic perspective. While the proposed project only focuses on improving institutional capacity to plan and supervise sewerage investments, LGUs are being offered Bank assistance through other proposed projects that exclusively focus on strengthening their financial management practices (by improving their accounting, budgeting and investment planning techniques, as well as long-term financial planning). F. Future LGU Performance 3.15 Annex 3 summarizes the assumptions used to project the financial performance of the participating LGUs and assesses their capacity to service the debt assumed for financing the sub-projects. Further, Table A3.1 outlines the financing plan for each sub- project, showing sums financed by the proposed loan, internally generated LGU funds,  26 and user installation charges. Each LGU is unique, drawing on loan financing to the extent it is needed and affordable. 3.16 Table 3.2 below summarizes the LGUs' projected performance. The table covers a number of important financial management parameters which clearly demonstrate the ability of each LGU to undertake the proposed sewerage investments on financial grounds. 3.17 This is primarily reflected in the four financial ratios presented in Table 3.2. 12 The current ratios reflect the LGUs' ability to adequately handle their short-term working capital requirements. Cotabato and Davao project the lowest liquidity indicators. While these are acceptable for Davao (at its lowest point of 2.09 times), Cotabato's Current Ratio declines temporarily to 1.97 in 1999, which is marginally acceptable according to generally accepted standards for commercial enterprises. In the context of municipal finance, such working capital levels represented by the current ratio are well within an acceptable range, due generally to high liquidity positions of LGUs and lower requirements for work-in-process and finished inventories (commonly associated with private manufacturing and commercial enterprises). Concerning debt to total capitalization, Cotabato again shows the highest leveraged position, reaching 50% debt in 2000, which may be satisfactory when factoring in the other financial indicators, particularly a debt service coverage ratio of 7.24 times in the same year. All other LGUs project no greater than 40% debt in any one year and a satisfactory self-financing ratio. The Land Bank, in its subsidiary loan agreements with LGUs, will require the latter to maintain: (a) a ratio of current assets to current liabilities of not less than 1.5; (b) debt to total capitalization ratio of not more than 0.75; (c) a ratio of internal cash generation to debt service requirements of not less than 2.0, and (d) a ratio of internal cash generation to capital expenditures of not more than 0.30. Such standards may require LGUs to improve operating performance in the areas previously discussed. 12 While typically not applied in the analysis of Municipalities, the debt to total capitalization ratio is relevant in the analysis of LGUs because many hold revenue generating assets (such as, markets, bus termninals, municipal waste operations, slaughterhouses etc.) and other operations that could be financed along commercial criteria or alternatively, be privatized.  27 Table 3.2: Projected Financial Performance FINANCIAL RESULTS FINANCIAL (in '000 Pesos) RATIOS Debt to Debt Self Total Net Cash from Total Current Total Service Financing Revenues Income Operations Assets Ratio Capitaliz. Coverage Ratio Cagayan de Oro 1997 579,258 132,468 166,524 1,013,239 3.73 0.3% 7.85 132.4% 1998 678,891 181,734 224,738 1,265,680 4.59 0.8% 10.61 80.5% 1999 759,451 225,491 280,614 1,706,990 7.78 9.4% 25.86 103.1% 2000 860,367 275,684 357,588 2,226,188 10.83 14.5% 22.89 125.3% 2001 1,004,747 355,196 476,829 2,710,444 10.98 10.8% 12.53 153.5% 2002 1,132,716 446,968 578,402 3,287,923 14.62 8.0% 10.54 261.3% Calamba 1997 167,449 16,541 23,976 186,465 7.85 0.9% 5972.30 149.1% 1998 194,285 31,098 39,035 235,033 14.91 2.8% 983.14 358.5% 1999 216,426 42,027 51,518 352,751 23.49 23.8% 126.52 82.2% 2000 247,200 55,720 73,143 458,973 28.93 27.9% 11.75 107.2% 2001 302,178 91,444 118,442 572,385 21.95 19.7% 8.58 547.5% 2002 344,443 122,631 150,464 714,005 30.79 13.9% 7.55 581.0% Cotabato 1997 183,736 29,963 45,877 333,513 1.97 1.5% 7.14 67.9% 1998 228,312 53,588 73,404 445,665 3.08 7.6% 12.53 59.3% 1999 267,236 68,267 103,933 746,051 5.71 40.8% 11.76 40.6%/ 2000 318,676 90,513 147,208 1,024,663 8.19 50.1% 7.24 63.5% 2001 436,474 173,246 256,433 1,274,357 5.27 34.1% 7.12 110.6% 2002 507,572 220,427 318,528 1,564,634 10.34 23.6% 4.72 350.5% Davao 1997 1,229,150 77,666 168,190 2,418,977 2.49 19.8% 3.89 19.2% 1998 1,443,866 259,549 381,112 2,950,150 2.09 14.5% 7.98 61.0% 1999 1,809,960 477,971 629,333 3,977,506 3.10 18.1% 8.12 85.2% 2000 2,166,618 738,328 926,959 5,289,244 4.91 17.5% 11.39 129.2% 2001 2,730,079 1,199,915 1,428,438 7,118,962 7.03 14.1% 16.08 206.2%i 2002 3,334,073 1,698,850 1,967,349 9,402,689 10.42 10.0% 13.37 243.6% G. Financial Implications for Participating Water Districts 3.18 As indicated, the projected finances for each participating water district were analyzed so as to evaluate the long-term consequences of the O&M functions on user charges. Assumptions used for the financial projections are described in Annex 3.  28 3.19 The analyses indicate that a surcharge of 30%-50% on the monthly water bills of connected properties (such as large apartment and office buildings, hotels and some households in upper-income areas) would more than adequately cover the O&M of the sewerage system for each city. This will result in an increase to the existing monthly water bill from P98 to P116 (or roughly $3.5 equivalent) in the average monthly bill of users, as shown in Table 3.3. The incremental costs were compared with estimates of affordability and willingness to pay (generated during project preparation).'3 The analyses also suggest that if the LGUs offered property owners long-term financing to bridge the up-front investment costs of installing sewer connections, the impact on the monthly water bill would be affordable to consumers in the project service areas. Table 3.3: Impact of Sewer Surcharges on Consumers' Monthly Water Bills (in Pesos) Surcharge Sewer 'Affordable' Sewerage on Water Bill Connection Increase in Service Surcharge Water Rate Willingness to Pay Cagayan deOro 98 170 277 150 Davao 91 166 224 99 Calamba 113 175 135 74 Cotabato city 116 177 208 209 H. Summary of Financial Implementation Arrangements 3.20 Liabilities to be assumed by LGUs. The four LGUs will through the subsidiary loan agreements undertake to: (a) Assume liability for the Bank loan provided through the LBP and make the required local funds available to LGU administrations; (b) Through a council resolution, require water users in the project service area who consume above the average amount to connect to the sewerage system; (c) Enter into a contract with the WDs to establish the conditions for operating the systems (draft Memorandum of Agreement is in Annex 12); (d) Require households located within the sewerage service area, not connected to the system, to empty their septic tanks every four years 3 Ability to pay is defined as I per cent of household incomes. In the project context, however, the ability to pay of commercial establishments is more relevant.  29 3.21 Liabilities to be assumed by the water districts.'4 Each WD through its memorandum of agreement with the relevant LGU undertake to: (a) Operate, maintain and recover costs of the completed sewerage infrastructure; (b) Recover the costs of O&M and the initial connections through sewerage surcharges included in the water bill; and (c) Transfer the amounts collected for the sewer connections to the LGU to amortize the loans. 14 An understanding with the Government is that once subprojects are completed, the concerned water districts will be responsible for financing future sewer connections. This would create an incentive for the water districts to encourage its customers to connect during project implementation itself  30 4. PROJECT IMPACT, BENEFITS AND RISKS A. Project Benefits 4.1 The project benefits are primarily through improved sanitation in participating cities. The PPA component is a piloting exercise, but has the potential of sparking private sector interest to enter into long-term contracts with Philippine water utilities. In turn, these contracts could provide much needed additional investments, management expertise and client-oriented services through which service delivery and coverage would improve. 4.2 As for sewerage, sanitation and drainage, about 300,000 persons are expected to benefit from the SSD investments. The sewerage component will serve mainly the initial service area of each city, which involves the relatively large consumers of piped water supply (office buildings, hotels, etc.). While this number of beneficiaries is relatively limited, investments are costly and progress will have to be incremental. On-site sanitation and drainage investments will benefit the low income populations in these cities. 4.3 For its part, the SSD component will help cities strategically plan and develop sanitation and wastewater infrastructure that can be operated and maintained in a sustainable manner. The anticipated sewerage investments should substantially enhance the welfare of 20%-30% of the citizens in the four Philippine cities (Davao City, Cagayan de Oro, Cotabato and Calamba). Later, they will expand the system to other parts of the urban areas. Such investments increase the market value of property, which, in turn, raises the revenue generated from property tax. In Calamba and Cotabato, several ecologically fragile areas, such as wetlands, lake and estuarine areas, now polluted by urban wastewater, will be protected. In all the four cities, the sewerage infrastructure will reduce the pollution of low-lying residential (low income) areas downstream of the respective Central Business Districts. Populations in these areas are currently most vulnerable to diseases caused by untreated wastewater. 4.4 Investments in drainage and sanitation will benefit a much larger proportion of low-income residents because they address the problems of low-lying areas and squatter settlements. As a result, morbidity caused by gastro-intestinal disease, and medical expenses and working days lost because of illness will decline substantially. 4.5 While most of these benefits to public health, household convenience and general cleanliness of neighborhoods are well-known, they are not easily quantified. However, estimates of health and recreational benefits were computed using conservative and  31 optimistic valuation scenarios. Additional evidence on valuation of project benefits was available from household willingness-to-pay surveys. A third source of evidence was the potential increase in land values in the sewered areas, which will internalize many of the private benefits from sewerage investments. Particularly important is the potential for attracting investment in high-rise buildings such as hotels and offices. Evidence from cities such as Manila and Jakarta suggests that when sewerage is installed in central business districts, private investment in commercial properties rises substantially. If even a modest fraction of such increases takes place in the project cities, the total increase in property value will easily exceed the present discounted cost of the project (see Annex 10). In Davao city, for example, the social value of the project would exceed its costs if CBD land values increased by only 5% (as compared with estimates as high as 20% for Manila and Jakarta). 4.6 The project preparation team has also tried to assess how local communities value the investments in sewerage, sanitation and drainage. The starting point in each city was to survey residents to learn what types of sanitation services households wanted and how much they were willing to pay. Next, the project verified preferences at the community or "purok" (neighborhood) level in three barangays of Davao City to determine how they viewed the potential benefits and costs from the project. Finally, mayors, city councilors and LGU professional staff were consulted with respect to their priorities. 4.7 The surveys led to three conclusions. First, existing measurement techniques considerably underestimate the environmental and health benefits of sewerage investments because many of the relevant factors are difficult to quantify. At best, quantitative analyses of benefits and costs and survey-based measures of willingness-to- pay can only offer benchmarks for decisions that affect people's health and the quality of their lives. Second, the city councils' acceptance of the project proposal points to the groups' perception that the works will benefit their communities: The councils and communities often identified the increased land values in sewered areas, the improved neighborhood ambiance, the cities' attractiveness to investors and the protection offered to deteriorating recreational amenities (beaches, lakes and wetlands) as significant benefits. Third, the collaborative process of working out the final program of investments further validates the communities' interest in these investments. B. Project Risks 4.8 Facilitating private sector participation in the Philippines water sector requires a streamlining of the existing framework of laws and administrative procedures. The key changes in the legal and regulatory environment, therefore, require legislation by the Philippine Congress. While a bill to create a National Water Regulatory Commission is expected to be drafted within the next few months in 1997, its passage through the Congress could be delayed beyond the elections. This delay could impede the successful replication of PPA in water utilities outside the MWSS area.  32 4.9 Another potential risk could be community apathy toward utilizing the PPA information effectively. However, the project incorporates an innovative feature that could convert apathetic consumers and potential critics to active supporters of privatization. The independent auditors responsible for monitoring and evaluating whether the MWSS concessionaires are meeting their contractual targets will be developing public reporting formats that can be easily understood by the public, media and Congressional leaders. Armed with timely and reliable information, consumers, community leaders and the media will be able to monitor the actual benefits of privatization to the Metro Manila water and sanitation service consumers. Also, the system will significantly increase transparency, thereby reducing the risk that corruption will undermine the regulations. 4.10 A third risk involves the possibility that the next LGU administration (in 1998) would want to change the loan covenants connected to the sewerage and sanitation investments. For this reason, the project proposes that final engineering designs be completed only after extensive consultations with the affected stakeholders in the cities and neighborhoods. The use of participative planning methods is expected to ensure that a broad consensus exists with respect to the project design and benefits, so that newly elected Council members would have less incentive to question decisions taken by their predecessors. Further, the project's monitoring and evaluation system will provide LGUs with considerable freedom to adapt the sanitation infrastructure investments in future years, so that the lessons learned are utilized to improve design in subsequent phases of project implementation. 4.11 A fourth risk is potential implementation problems. Land acquisition by LGUs for sewage treatment plant sites, for example, is required to be completed before detailed engineering design is completed. Delays in completing the purchase of the land could put at risk the proposed construction schedule. Second, delays in establishing fully functioning Project Management Units (PMUs) in LGUs could jeopardize the project planning and construction schedules. Third, a failure to adequately involve water districts in the planning and implementation phases could reduce their incentive to implement the proposed management contracts after the facilities have been completed. Finally, in this pilot effort at implementing a demand-based sewerage project in the Philippines, the quality of supervision provided by the Project Management Office (PMO) in the Land Bank, along with the technical support provided by CPSO-LWUA will be critical. Assurances were obtained during negotiations from the Land Bank and the Government that the above risks would be adequately mitigated through the subsidiary loan agreements between Land Bank and the participating LGUs, and through the working arrangements with CPSO-LWUA. C. Sustainability of Sewerage Investments 4.12 The financing responsibilities have been divided between the investment and O&M phases in order to ensure the sewerage investments can be sustained. In the investment phase, LGUs will be the borrowers because they have the capacity to finance  33 them through the IRA mechanism, as well as the ability to raise local revenues. Moreover, the LGUs consist of democratically elected councilors who are accountable to the local communities. In the O&M stage, the water districts will be responsible. Since the LGUs lack an enforcement mechanism to ensure that users pay for services and technical expertise to operate and maintain the infrastructure efficiently, it was felt the WDs have a comparative advantage: All have computerized billing and collection systems, and staff trained to handle routine O&M problems. Thus, the project design relies on these bodies as a way to sustain the investments. 4.13 To assure sustainability, the proposed sewerage systems will finance their O&M costs through user charges levied on the monthly water bill. It is expected these charges will be supported by consumers who are convinced the services will benefit them. Collecting the charges will be facilitated if the sewerage fees are a line item in the monthly water bill: since households that do not pay their bills would face the risk of water being cut off. It is felt that this threat is sufficient to assure payment of the sewerage surcharge and loan for property connections. 4.14 For sanitation and drainage investments, the sub-projects will vary substantially in coverage, characteristics and costs, due to the different levels of income and living standards in the various communities. As much as possible, sanitation cost recovery will be the responsibility of private contractors. O&M will be the responsibility either of contractors or the entire community (say, for micro-drainage infrastructure and community sewers).  34 5. AGREEMENTS REACHED AND RECOMMENDATION Agreements 5.1 The conditions for negotiations were: (a) The participating LGUs would pass city council resolutions to participate in the project on the terms and conditions satisfactory to LBP and to the Bank; (b) An environmental impact assessment for Davao city, acceptable to the Bank, would be submitted before negotiations. Both the above conditions were fulfilled. 5.2 At negotiations, the Government assured that it will consult with the Bank prior to any action to re-structure or re-organize the operations of any participating Water District for the sewerage component of the project (paragraph 2.9). 5.3 At negotiations Land Bank of Philippines assured that: (a) LBP will on-lend the proceeds of the SSD loan to participating LGUs under subsidiary loan agreements with participating LGUs, on terms and conditions satisfactory to the Bank (paragraph 2.19); (b) LBP will establish and maintain a project management office (PMO), managed and staffed with qualified personnel selected in accordance with procedures and with functions and responsibilities acceptable to the Bank, to direct, supervise and coordinate all project activites under the SSD component (paragraph 2.21); (c) LBP will send the Bank (i) no later than March 31 and September 30 of each project year, beginning March 31, 1998, semi-annual project progress reports, including revised project cost estimates and implementing schedules, (ii) no later than March 31 of each project year, beginning March 31, 1998, the annual budget appropriations of participating LGUs, and (iii) no later than six months after the project is completed, the evaluation report on project implementation (paragraph 2.25); (d) Pursuant to the subsidiary loan agreements with the participating LGUs, LBP will require of each LGU as a condition of disbursement under subsidiary loans that:  35 (i). The LGU shall have established and shall maintain its project management unit (PMU), with representation from the City Engineer's office, City Planning Office and Local Water District (paragraph 2.21); (ii).The LGU shall have completed land acquisition required for the wastewater treatment plant (paragraph 2.26); (iii). The LGU shall have provided evidence satisfactory to the Bank that it has complied with Dislocation Guidelines (paragraph 2.27); (iv) The LGU and the local Water District shall have concluded a Memorandum of Agreement specifying how operations and management responsibilities will be assumed, including the specification of a surcharge on users' water bills sufficient to support projected costs of operations and maintenance of the sewerage infrastructure, to take effect from the date sewer connections are made (paragraph 2.21); and (v) The LGU shall have submitted an environmental assessment, including an environmental management plan, satisfactory to the Bank (paragraph 2.33). 5.4 The conditions for effectiveness of the SSD Loan are that: (a) LBP has established the PMO (paragraph 2.21); (b) At least two of the LGUs, one of which shall be Davao, have established their PMU (paragraph 2.21); (c) LBP and the participating LGUs in at least two of the four cities, one of which shall be Davao, have entered into the respective subsidiary loan agreements (paragraph 2.19); (d) At least two of the LGUs, one of which shall be Davao, have submitted Environmental Impact Assessments (paragraph 2.33); and (e) The loan for the PPA component has become effective. 5.5 Conditions for effectiveness for the loan to GOP for the PPA component are: (i) the execution of a subsidiary loan agreement between DOF and MWSS satisfactory to the Bank (paragraph 2.18), and (ii) the effectiveness of the loan to LBP for the SSD component. 5.6 During negotiations, the Government and LBP confirned (a) the proposed project financing plan (paragraphs 2.17, 2.18 and 2.19), (b) adherence to the implementation action plan that defines the scope and timing of actions (paragraphs 2.20, 2.21 and 2.22), (c) agreement with the Bank on performance indicators (paragraphs 2.23 and 2.24), and (d) the format and content of progress and project evaluation reports.  36 Recommendation 5.7 With the above agreement and assurances, the proposed project is suitable for two Bank loans of US$54.5 million to the Land Bank of Philippines, with the guarantee of the Republic of the Philippines for the SSD component, and $2.3 million to the Republic of the Philippines for the PPA component. The loans would have a term of 20 years including a five year grace period on repayment of principal, and carry the prevailing Bank's standard Libor-based variable interest rate for US$ single currency loans.  37 ANNEX 1 pHRIIPPINES WATER DISTRICTS DEVELOPMENT PROJECT Project Description I. The Public Performance Audit Component Background 1. The public performance audit (PPA) component is a part of a broad-ranging set of support being provided to the Government of Philippines by the World Bank. The objective of this support is to help Philippine water utilities to draw on the private sector both for capital to develop new works, and to achieve improvements in the efficiency of their operations. Apart from MWSS, a growing number of the larger Water Districts, in particular, have now reached a level of commercial viability that puts them in a position to deal with the private sector, rather than relying on continuing concessional finance from governmental sources. There is also increasing interest by experienced private sector companies in participating in the water and sanitation sector investments in the high-growth areas close to Metro Manila. The project preparation team has provided the Government with technical assistance to create an environment more conducive to private sector involvement, and to ensure that this involvement is to the benefit of consumers. 2. Three key barriers have been identified to successful private sector involvement in Water Districts and other water and sanitation utilities: (a) the lack of a well-targeted, consistent and transparent framework for the economic regulation of water and sanitation utilities; (b) limited availability of infornation to local politicians and consumers, as well as to potential private sector partners, on the relative performance of water and sanitation utilities, and hence the scope for performance improvements, and (c) limited capacity at the local level for developing proposals for private sector participation, and for assessing the merits of unsolicited proposals for private water and sanitation schemes. A. Regulatory Framework 3. The regulatory and institutional framework for the Philippines water sector is the product of incremental developments over many years, each in response to the particular challenges of the time. The result is a high degree of fragmentation, and laws and regulations that reflect ad hoc responses to temporal problems. Multiple institutions hold regulatory powers over the water and sanitation sectors. The jurisdictions of these  38 ANNEX 1 institutions are fragmented, overlapping and unclear. There is a profound lack of transparency in the design and application of regulatory rules, and in mechanisms for appeal of regulatory decisions. The implications of this lack of regulatory clarity and consistency are three-fold: a) a lack of clear signals to utilities about the parameters of acceptable performance; b) the lack of a systematic approach to the protection of consumers from potential monopolistic abuses by water and sanitation utilities; and c) the perception of a high degree regulatory uncertainty by prospective private sector investors in water and sanitation services, which acts as a potential disincentive to private sector involvement. 4. In the course of the preparation of the WDDP, work was undertaken, in collaboration with the Asian Development Bank and USAID, to identify how best current regulatory arrangements could be restructured, and the most appropriate design and location of a new regulatory agency for water and sanitation utilities. The recommendations were incorporated in the Report of the Joint Executive-Legislative Water Crisis Commission to the President. Following this, on the request of GOP, a study was completed to recommend the appropriate content of a national-level law on the regulation of water and sanitation utilities. 5. The Consultant's Report has now been accepted by GOP. The Report recommends the form and structure of the proposed National Water Regulatory Commission. It also provides detailed advice on the development of a new law for the economic regulation of water utilities, encompassing both those utilities where there is a degree of private sector participation and those remaining fully in the public sector. The expectation is that a bill will be introduced by the Government in the Congress in 1997. to establish a National Water Regulatory Commission. Technical Assistance in the form of training will be provided, if the need arises. At this stage no separate cost estimates are being prepared, as the likely expenditures can be financed from available technical assistance grants. B. Information Production and Dissemination (The PPA Component) 6. The PPA Component will pre-fmance investments that will pilot and test the establishment of a Public Performance Audit system for Manila's Water and Sanitation Concession'. Based on the experience gathered from this pilot exercise, similar systems are expected to be replicated in other water utilities of the country. The note prepared by IFC for MWSS, MWSS Organization and Staffing . provides the detailed recommendations on how the regulatory system will be organized in MWSS after privatization.  39 ANNEX 1 7. The proposal is a result of a broad recognition that poor delivery of water and sanitation services in Manila will not improve until provider incentives change. Privatization of the MWSS can help by harnessing the profit motive as an incentive to reduce costs and improve customer satisfaction. However, other performance-enhancing measures are also likely to be necessary. 8. Experience with regulatory reform in many countries has identified public performance audit (PPA) as an important policy option. In PPA systems, independent auditors monitor, evaluate and publicly report the performance of public utilities and private firms whose activities strongly affect the public interest. For the Manila water and sanitation concession, a PPA system will provide the following attractive features: (a) Regulation after privatization: The personnel of MWSS are poorly equipped to monitor the performance of their successors. Consistent, accurate and independent reporting of the concessionaire's performance will greatly ease the burden of the regulator. The concession agreements will be less prone to litigation if performance parameters are regularly audited, and the regulator will find it easier to sanction the concessionaire if shortfalls in service quality are clearly and publicly documented; (b) New performance incentives: Armed with timely and reliable information, community leaders will find it much easier to monitor concessionaire performance. Because PPA information is publicly available, the news media will be important allies in this effort; (c) Potential for self-financing: Techniques for monitoring of water and sanitation system performance are well-understood, and can be performed under a standard service contract by many international auditing firms. We estimate that a PPA system can be operated by a private auditing firm for a monthly cost of less than two pesos per household, once setup costs are amortized, and (d) Insurance against corruption: An auditing firm's financial survival is tied to its national or international reputation for integrity, so there is little risk that local corruption will undermine the system. 9. The MWSS Board has approved the incorporation of a PPA system into the post- privatization regulatory arrangements for the MWSS. Details on the PPA proposal discussed at the Board are available in project files. Who are the users of the PPA? 10. The PPA system for Manila water and sanitation services will be designed to satisfy the needs of several stakeholder groups:  40 ANNEX 1 (a) Consumers, the media and community leaders want a simple, credible index of performance which they can use to judge service delivery; (b) Regulators need service quality measures to set appropriate incentives for good performance; (c) Utility managers need similar information for efficient operation of the system; (d) The environmental authorities need waste water quality measures to check for compliance with regulations What type of information will the PPA system provide? 11. The PPA system will provide all of these stakeholders with appropriate, accurate and timely information about the quality and cost of the services which consumers are receiving. Reporting will cover three dimensions of service quality for end users in each billing period: (a) Water Quality: Degree of chemical, physical and bacteriological contamination (i) Chemical: Toxics, heavy metals (ii) Physical: Suspended solids, transparency (iii) Bacteriological: Total coliforms, fecal coliforms (b) Reliability: Water availability as a percent of total time in the billing period (c) Pressure: Open-tap flow pressure 12. PPA reports in each billing period will be prepared for consumers in each district or barangay. Service quality measures will cover all three dimensions (water quality, reliability, pressure), while reports for waste water discharges need to cover only the water quality measures. A system of PPA ratings will be developed, in consultation with the Concessionaires and the MWSS Regulatory Office. 13. Random sampling by the PPA contractor will be used to monitor self-reporting by the concessionaire. Misreporting of a quality parameter can be defined as statistically significant overestimation of quality. Misreporting for an area could result in automatic assignment of an unsatisfactory status, for a specified period, to service quality for that area. The key to PPA is benchmarking on accepted standards, with ratings assigned to degrees of positive or negative deviations from the benchmarks.  41 ANNEX 1 Estimated Costs of establishing a PPA System 14. The PPA system has to be based on sampling because it would be far too costly to measure service quality for every consumer. Quality measurement has approximately constant unit cost at each sampling point, so the operating cost of a PPA system will grow proportionately with the product of areas represented, end user classes, service quality dimensions, required sample sizes and the frequency of measurement. 15. Sampling cost will be minimized by focusing on key fixed points in the distribution system (e.g. pumping stations, large mains, waste water from treatment facilities). The concessionaire will be expected to provide its own measures for each billing period. The PPA contractor will randomly select and report measures for a sample of the same points. In addition, both the concessionaire and the PPA contractor will randomly samnple a significant group of households and businesses in each period to establish comparable measures of end-user service quality. Most of the variation in service quality will be accounted for by distribution-point measures, but end-user sampling will permit checking for overall system integrity. 16. Techniques for monitoring water and sanitation system performance are well- understood, and can be perfonned under a standard service contract by many international auditing firns. District- or barangay-level auditing services can be provided at low incremental cost once an appropriate system has been developed and tested. With approximately one million households in the Metro Manila Region, a PPA rating system can be operated for no more than two pesos per household per month under normal conditions. This will be recovered through water and sewerage tariffs. A summary of estimated costs is provided in Table A 1.3. For the first three years of operation, an annual cost of 56.7 million pesos is projected, which can be covered by grants and project financing. The Pilot exercise supported by the Project will be for the first year only. Based on the lessons learned through, terms of reference will be finalized to contract the PPA system to independent, private auditors who are acceptable to the Government and the two MWSS Concessionaires. By the end of the first year the transition from the pilot exercise to a full-fledged PPA system is expected to have taken place.  42 ANNEX 1 Table A 1.3 Setup and Operating Costs for PPA Rating System for Manila (P Million) Annual Cost: Three-Year Annual Cost: Cost Categories Setup Period Normal Operations Equipment 8.3 International Experts 25.0 Local Staff 12.0 12.0 Office, Supplies 4.0 4.0 Other Expenses (Maintenance, etc.) 7.4 3.7 Total 56.7 19.7 [Pesos/Household/Month] 4.7 1.6 17. The project is financing the piloting of a PPA system in MWSS, with the expectation that with the experience gathered, the Government would be in a position to decide whether (i) other water utilities (Water Districts, Subic Water, LGU-run Water Utilities) that are privatized be included in the PPA, and (ii) the audits should be extended to water districts and LGU-managed water utilities.  43 ANNEX I II. SEWERAGE, SANITATION AND DRAINAGE COMPONENT General 18. The establishment of water districts has resulted in significant expansion of investments in water supply services for secondary cities in the Philippines over the past 20 years. However, no comparable investments have been made in wastewater infrastructure to cope with the increasing quantities of wastewater from domestic, commercial and industrial sources. Only two secondary cities (Baguio and Vigan) have some sewerage systems. Most households use inadequately designed septic tanks which contribute to environmental pollution, and many industries discharge untreated wastes into the urban environment. This trend, if allowed to continue, would pose a threat not only to public health and the environment, but also to the emerging economic development in the secondary cities. 19. The sewerage, sanitation and drainage component of the Water Districts Development Project (WDDP) is aimed at addressing these problems. It seeks to do so by increasing access of communities to sustainable sewerage and sanitation facilities, thereby reducing public health risks, and reducing environmental pollution from wastewater sources. The project is designed not only to expand access to improved services, but also to pilot a learning experience for the expansion of sustainable sanitation services to such secondary cities. Accordingly, project cities have been chosen to represent a cross-section of urban sanitation issues likely to be encountered in secondary cities. The project cities are thus: Cagayan de Oro, Calamba, Cotabato, and Davao City. 20. Investment choices in the project are driven by demand; and the choice of the degree to which wastewater is to be treated is driven by considerations of cost effectiveness and environmental sustainability. This approach is based on (i) the 1994 NEDA Board Resolution No. 5, which calls for a demand-based approach in making choices in urban sanitation investments: and on (ii) the 1991 Local Government Code devolving much of municipal responsibility to the local government unit (LGU) level. These investments are operationalizing the recommendations of the National Sewerage and Sanitation Sector Strategy Study which, inter alia, call for a demand-based approach in making urban sanitation investments in secondary cities in the Philippines. Sub-Components 21. This project component will include the following sub-components: (i) on-site and communal sanitation facilities; (ii) sewerage systems; (iii) maintenance equipment, tools and spare parts for the operation and maintenance of installed sewerage infrastructures; (iv) institutional support; and (v) drainage facilities in Cotabato City.  44 ANNEX I On-Site and Communal Facilities 22. On-site sanitation facilities will be provided for individual dwellings and for communal uses. Individual dwelling sanitation facilities will include VIP latrines and pour flush toilets. They will be supplied, in response to demand, to both rented dwellings and owner occupied houses. Communal sanitation facilities to be provided under the project may be either on-site or off-site, connected to the sewerage system, depending on technical feasibility. The choice between communal and individual sanitation facilities will be driven by technical feasibility and demand by key stakeholders, and not by tenure status. However, in slum areas and squatter settlements, the demand will be ascertained not only from the tenants, but also from land owners and from local government officials representing the public interest. 23. Individual dwelling sanitation facilities will be owned by households, but they will be financed through the project. Households will be required to make their own arrangements for construction, using small scale contractors who would be paid by the PMUs upon satisfactory completion of the works. 24. Ownership of the communal sanitation facilities will rest with the LGUs. They will be constructed through local competitive bidding under the supervision of the PMUs. Operation and maintenance will be undertaken by private operators on three-year lease arrangements for an agreed monthly fee payable to the LGUs. The private operators could be individual business people, cooperatives, or registered community-based organizations. Arrangements and rules for the use of the communal sanitation facilities will as agreed during user consultations and revised from time to time. Options of arrangements to be discussed would include payment of an agreed fee per use, and access to toilet rolls, soap, and water for ablution. Consideration may also be given to an exemption fromi payment of senior citizens and children below a specified age. Sewerage Systems 25. The sewerage systems will include: (i) house connections; (ii) feeder sewers for the collection of wastewater in neighborhoods, puroks and barangays; (iii) trunk sewers and pumping systems for wastewater conveyance from barangays to treatment plants; and (iv) sewage and septage treatment plants. 26. The four sewerage systems will cover a total service area of 1,278 ha. whose combined population, at the end of the construction period (2001-2002) will be about 260,050 of which 156,550 (or 60%) will be served through the construction of 28,232 connections. In the year 2015, the population in the service areas is projected to increase to about 316,760 of which a total of about 197,960 residents will be served through 35,722 connections. The initial 28,232 connections will be included in the construction  45 ANNEX 1 of the systems while the additional 7,490 connections will be constructed, from 2001- 2002 to 2015, by the concerned Water Districts (WDs). 27. The connection of properties to sewers will be made under the project in order to ensure good workmanship and timely connection of households to installed sewer systems. Recovery of house connection costs will be spread over a period consistent with demand. Feeder sewers will consist of simplified and condominial sewers. Where condominial sewers are used, communities will be given a choice between location of the sewers in backyards and locating them in front of their properties. Simplified sewers will be used for trunk and main transportation sewers. 28. A modified lagoon system will be used for the treatment of both sewage and septage. Its principal unit is a deep vertically integrated pond with an anaerobic pond below a facultative pond system. The geometry prevents turnovers, thereby minimizing odor problems as well as sludge accumulation. Mainn nce E ent and Spares 29. The sewerage systems will, after construction, be turned over to the WDs for operation as well as construction of additional connections. Equipment will be provided to the WDs including vehicles, machinery and tools needed for proper operation and maintenance of the sewerage and pumping facilities. Spare parts for critical equipment will also be supplied. 30. The cost of new connections will be paid up-front by the users at the moment they request the connection. This would constitute a constraint and will restrain the users from being connected. To minimize this problem in the first one to two years of WDs operation, it is proposed to include in the project the procurement of stored material (pipes, fittings, etc.) necessary for the connections. This would reduce the up-front amount required from the users since the material could be charged by the WDs on the monthly water bills. Institutional Su=ort 31. The project will include: (i) consulting services to carry out the beneficiaries participation process, detailed engineering design, and construction supervision; and (ii) training of WDs' staff responsible for the operation and maintenance (O&M) of installed sewerage infrastructures. 32. The consulting services to be provided by the Project Consultant include implementation supervision and the training of staff in charge of the O&M of the sewerage systems and particularly of modified pond systems. The Consultant will have to prepare an O&M manual for each city, train operators in the basics of pond treatment of sewage and septage, and help them to become familiar with the O&M manual. The training program may include an overseas visit to a country where the adopted treatment method is already in operation.  46 ANNEX 1 33. Technical assistance will be provided, as appropriate, to government agencies (such as the Land Bank, LWUA, and LGUs) involved in project implementation. This will include capacity building for project monitoring and evaluation so that lessons learned could be fed back to improve future performance. Sub-Project Selection in Cities 34. The selection of sub-projects in participating cities will be based on assessment of demand at three levels -- LGU, barangay, and household levels. The choice of priority areas for sub-project investments within cities, and the decision on the magnitude of investments will be made by LGU councils, using as a basis the results of economic cost- benefit analysis and long-term financial projections of city revenues and expenditures. User consultations at neighborhood or purok levels will be the instrument for deciding whether qualified barangays would participate in the project, and also for choosing between options of technologies to be used in barangays. Where appropriate, household level surveys will be conducted for a rapid appraisal of demand prior to the user consultations. Davao City 35. The project will construct on-site sanitation and sewerage facilities in the Poblacion area and only sewerage facilities in the Toril area of Davao City. The sanitation component will only include the construction of 140 communal toilets which will benefit about 35,000 residents in the Poblacion area. 36. The Poblacion service area was chosen, for the sewerage component, to reduce beach pollution and the degradation of environmental conditions within the city. The Stage I sewerage scheme will have a service area of 486 ha. with a population in 2015 of 147,300 of which 88,400 (or 60%) will be served through an estimated 16,370 connections. The Stage I system proposes the construction of a sewer network that will discharge sewage to a single vertically integrated pond system designed to treat both sewage and septage. The treatment plant located at a site near Davao River is the least cost alternative and, if adopted, the treated effluent will be discharged to the Davao River. 37. The inclusion of the Toril area, in the sewerage component of Davao project, was based on projected environmental benefits to residents and on the protection of the aquifer which is the source of domestic water supply for the Davao City Water District. Only sewerage is envisaged in Toril. The Stage I sewerage scheme will have a service area of 215 ha. with a population in 2015 of 19,700 all of which (or 100%) will be served through an estimated 3,642 connections. The area is bounded on the north and west by the Lipadas River, on the east by Barangays Lubogan and Talomo, and on the south by the Davao Gulf. The Stage I system will include a sewer network system discharging sewage to a single vertically integrated pond system designed to treat sewage and limited quantities of septage. The treatment plant will be located in Daliao south of Toril. It will discharge its treated effluent into the Davao Gulf.  47 ANNEX 1 38. The two sewerage schemes will benefit a total of about 108,100 residents with a total of 20,012 connections. Cagayan de Oro City 39. The project will construct sewerage and sanitation facilities in Cagayan de Oro City to reduce the recently confirmed sewerage and fecal contamination in the Cagayan River and at various beaches. For the sanitation component, there will be a City-wide construction of 6,882 on-site facilities for individual households and 36 communal toilets over a five-year period. The on-site facilities will be made available depending on technical feasibility and demand. The communal toilets will probably be constructed in low-income areas. However, the facilities will only be constructed where, through public consultation, there is an established demand and willingness-to-pay. The on-site facilities are expected to benefit 50,300 residents while the communal toilets are expected to benefit about 9,000 low-income residents. 40. The Stage I sewerage scheme will have a service area of 192 ha. with a population in 2015 of 34,270 of which 20,570 (or 60%) will be served through an estimated 3,422 connections. The Stage I system will serve the area bounded in the north and west by the Cagayan de Oro River, on the east by the J. Pacana Street and on the south by Barangay Macasanding. The sewer network will discharge to an integrated pond system designed to treat both sewage and septage. The treatment plant is proposed to be located in Barangay Consolacion, at a site near the Cagayan River where the treated effluent will be discharged. Calamba 41. In Calamba, the project will construct 395 VIP latrines and 395 pour-flush toilet with septic tanks, as well as 17 communal toilets over a five-year period. The on-site facilities will be made available to individual households depending on technical feasibility and demand. The communal toilets will probably be constructed in low- income areas. However, the facilities will only be constructed where, through public consultation, there is an established demand and willingness-to-pay. The on-site facilities are estimated to benefit 4,150 residents while the communal toilets will benefit 4,250 low-income residents. 42. The Stage I sewerage scheme will have a service area of 102 ha. with a population in 2015 of 26,770 of which 16,060 (or 60%) will be served through an estimated 2,782 connections. The Stage I system proposes the construction of a sewer network in the Poblacion area bounded by Barangay Banadero on the north, Barangays San Juan and San Jose on the east, Barangay Lecheria on the south and Barangay Parian on the west. The sewer network will discharge sewage to an integrated pond system designed to treat both sewage and septage. The treatment plant is proposed to be located in Barangay Banadero, at a site near San Cristobal River which will receive the treated effluent.  48 ANNEX 1 Cotabato Ci 43. In Cotabato City, the Project will construct sanitation, sewerage and drainage facilities. For the sanitation component there will be city-wide construction of 2,200 VIP latrines and 734 pour-flush toilets with septic tanks, as well as 33 communal toilets over a five-year period. The on-site facilities will be made available to individual households depending on technical feasibility and demand. The communal toilets would be constructed in low-income areas. However, the facilities will only be constructed where, through public consultation, there is an established demand and willingness-to-pay. The on-site facilities are estimated to benefit 16,400 residents while the communal toilets will benefit 8,250 low-income residents. 44. The Stage I sewerage scheme will have a service area of 283 ha. with a population in 2015 of 88,720 of which 53,230 (or 60%) will be served through an estimated 9,506 connections. The Stage I system proposes the construction of a sewer network within the area bounded by the Rio Grande de Mindanao on the north, Matampay River on the east, Rosary Heights Barangays on the south and Barangay Baguan on the west. The sewer network will discharge sewage to an integrated pond system designed to treat both sewage and septage. The treatment plant is proposed to be constructed at Barangay Poblacion 1, an area near the Rio Grande de Mindanao which will receive the treated effluent. 45. The drainage component has been included in the project following a specific request by the LGU. A lump sum of P52 million has been allowed in the project cost for the construction of drainage facilities deemed to be of high priority by the City Government. Project Management and Institutional Support 46. A decentralized implementation arrangement is envisaged. There will be two separate contracts for consulting services to prepare the detailed design of the project and to supervise supply and construction contractors. There will be one such consultancy for Davao and Cotabato Cities, and another for Cagayan de Oro, and Calamba. There will be four separate supply and installation contracts, one for each city. Supply and construction contractors will be supervised by consultants who designed the works under construction. 47. LGUs, as borrowers, will assume full responsibility at the local level. Thus consultants will be accountable to LGUs both for the design and for the supervision of contractors in the LGUs concerned. 48. Technical assistance for construction supervision will be provided by the CPSO in LWUA which will also coordinate other forms of technical assistance under the project, undertake monitoring and evaluation of project activities, and bring global experience to bear on the design and construction phases. For these services, LWUA will be paid a fixed fee (see Annex 8).  49 ANNEX 1 49. In addition to its role as the funding channel for the project, the LBP will assume responsibility for overall national level coordination, monitoring, and supervision. Operation and Maintenance 50. There will be a decentralized approach to operation and maintenance. Water districts in project cities will be responsible for the operation and maintenance of the sewerage systems. This would include the sewer networks, pumping stations, and treatment works. Operation and maintenance of on-site sanitation systems will be the responsibility of the households they serve. The options for operation and maintenance of communal sanitation facilities will include management by: (a) Water Districts, (b) small private contractors, and (c) user groups in barangays. The choice between these options, along with methods for cost recovery or paying for operation and maintenance will be negotiated during the user consultation process.  50 ANNEX 2 PHILIPPINES WATER DISTRICTS DEVEI,OPMENT PROJECT Project Cost Estimates Public Performance Audit Component 1. The estimated costs of establishing the Public Performance Audit (PPA) is US$2.5 Million, of which approximately $2.3 million will be financed in the first year of project implementation. The cost will be incurred to hire consulting services to help the MWSS Chief Regulator (a) test and operationalize a PPA system, (b) finalize a terms of reference and bid out out the PPA to independent auditors by the end of the year. MWSS will provide counterpart funding of about $0.2 million. Project Cost Estimates for Sewerage, Sanitation and Drainage Component 2. An estimate of the project costs is presented in Table A 2.1 to A 2.10 below. The next section describes the project financing plan in each of the LGUs, and the third section discusses the affordability of the project to the LGUs. List of Tables Table A 2.1: Cost Structures and Annual Expenditures (1997-2002) in US$ Table A 2.2: Cost Structures and Annual Expenditures (1997-2002) in Peso Table A 2.3: Cagayan de Oro - Cost Structures and Annual Expenditures (1997-2002) in Peso Table A 2.4: Cagayan de Oro - Cost Structures and Annual Expenditures (1997-2002) in US$ Table A 2.5: Calamba - Cost Structures and Annual Expenditures (1997-2002) in Peso Table A 2.6: Calamba - Cost Structures and Annual Expenditures (1997-2002) in US$ Table A 2.7: Cotabato - Cost Structures and Annual Expenditures (1997-2002) in Peso Table A 2.8: Cotabato - Cost Structures and Annual Expenditures (1997-2002) in US$ Table A 2.9: Davao - Cost Structures and Annual Expenditures (1997-2002) in Peso Table A 2. 10: Davao - Cost Structures and Annual Expenditures (I1997-2002) in US$  51 ANNEX 2 Table A 2.1: Cost Structures and Annual Expenditures (1997-2002) in US$ Conmponents USMillion LOCAL COSTS FOREIGN COST TOTAL COST Forgn Local Total 1997 1998 1999 2000 2001 2002 Tota 1997 1998 1999 2000 2001 200 Total 1997 1998 1999 2000 2001 2002 Total Civil Works 4 47 28 32 32 79 0 00 0 44 13 69 8 94 3 73 1 52 28 32 0 00 0 00 1 92 1 58 0 79 0 i8 447 0 00 044 156i130352 4 52 1 70 32 79 Land Acquisition 0 00 10 93 10 93 0 27 10 28 0 12 0 26 000 0 00 10 93 0 00 0 00 0 00 0 00 000 0 00 000 0 27 10 28 0 12 0 26 0 00 0 00 10 93 Equiposen 3 66 000 3 66 0,00 000 000 0 00 000 0 00 0 00 0 00 0 00 0 00 3 70 0 00 1 97 3 66 0 00 000 0 00 1 70 000 1 97 3 66 Intiatitutonal support 4321 000 4 St 0 00 0000 00 000 0 0 00 0 00 050o 1 40 1 27 0 47 0 48 0 38 431t 0 50 1 40 1 27 0 47 0 48 0 38 4351 Base Cost 12 65 39 23 St89 0.27 10 72 138Si 9 20 37 3 92 2 23 07 22 1700 12 93 0 0 31899 Physical Coot. 126 3 92 3319 0 03 1 07 1 38 0 92 0 37 01is 3 92 0 03 0314 0 32 0 38 0 13 0 23 1 26 0.08 121 370 1 30 0 50 041 3 19 PrnceCot. 1 36 9 32 10 68 0 02 1358 3 07 2 66 1 34 0 63 9 32 001 0 07 0 26 0 41 018s 0 43 1 36 0 03 1 66 3 33 307 1351 1 08 10 68 Total Costs 13 27 32 49 67 76 031 13 37 18 26 12 78 344 2 32 32 49 0357 16WI 3 77 4354 1357 3 21 13 27 0898 14 99 22 03 17 3 70134 67 76 Table A 2.2: Cost Structures and Annual Expenditures (1 997-2002) in Peso Components PoMillions LOCAL COSTS FOREIGN COST TOTAL COST Forgo Local Tota 1997 1998 1999 2000 2001 2002 Tota 1997 l998 1999 2000 2001 2002 Tota 1997 1998 1999 2000 2001 2002 TOta Civil Works 117 43 803350 922 93 0 00 II182 382 92 236 02 109 32 45343 803350 0 00 0 00 30 33 41353 20890 4 77 117.43 000 11812 433 26 297335 130 12 30 20 922.93 LsA Acquisition 000 299 93 296 93 6 99 279 12 3 27 7 53 0 00 000 296 93 0 00 0 00 0 00 0 00 000 0 00 000 6.99 279 12 3.27 7 55 000 000 296 93 Equipment 9626 0.00 96 26 0 00 000 000 0 00 0 00 0 00 0 00 0 00 0 00 0 00 44357 000 31 69 96 26 000 0.00 000 44357 0 00 31 69 9626 Institutional Support 118 47 000 118 47 000 0 00 000 0 00 000 000 00 13 23 36 76 33 43 12 41 125331 10 09 138 47 13 23 36 76 33 45 1241 12 53 11009 118 47 Base Coat 332 19 1,102 42 1,43461 699 290 94 386 19 2633P6 -109-32 433 1,102 42 13 23 36 76 83890 983 33 33 6633 332 19 20 22 327 70 46999 362 07 142 65 III98 1,4346I Phtysical Cont. 33 22 11024 143 46 0 70 29 09 38 62 26 36 10.93 4354 110.24 1 32 3 68 8 38 9835 3 33 6 66 33 22 202 32 77 47.00 36 21 14 26 I1120 143 46 Price Cont. 33 70 264 IS 299899 0354 42 95 8392 76 06 39 14 19358 264.18 03 35 96 680 07 4 62 11 19 35 70 0 89 44 91 92,72 86895 43 73 30 77 299 89 TOtalCoats 40I111 1.477683 1,877 96 8.23 362 98 330 73 3659 1-5939 6933 6 85 14 91 42.40 9897 119713 41.28 84.40 401 11 23.13 403 38 609 70 483 13 200 66 153393 11,8779t  52 ANNEX 2 ________ Table A 2.3: Cagayan de Oro - Cost Structures and Annual Expenditures (1997-2002) in Peso Components Peso Million LO0C AL CO0S TS (n Million Pesos) FOREIGN COST(IMillionPesos TOTAL COST(Qn"MllionPesos) Forgn Local Tota 1997 1998 199_ 2000 2001 2002 1Total 1997 199 1999 2000 2001 2002 Tota 1997 1998 1999 2000 2001 2002 Total 1. Sanitatton ___ Civil Works 63.17 63.17 31 59 31 58 63.17 0.00 0.00 0.00 31.59 31.58 0.00 0.00 63.17 Land Acquisition 3.27 3.27 3.27 3.27 0.00 0.00 0.00 3127 0.00 0.00 0.00 3.27 Equipment 0.00 0.00 0 00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Subtotal 0.00 66.45 66.45 0.00 0.00 34.86 31.58 0.00 0.00 66.45 0.00 0.00 0.00 0.00 0.00 0 00 0.00 0.00 0.00 34.86 31.58 0.00 0.00 66.45 HI. Sewerage Civil Works 14.43 82 01 96.44 45.11 36.90 82.01 7.94 6.49 14.43 0.00 0.00 53.04 43.40 0.00 0.00 96.44 Land Acquisition 0 00 109.31 109.31 109.31 109.31 0.00 0.00 109.31 0.00 0 00 0.00 0.00 109.31 Equipment 9.93 0.00 9.93 0.00 9.93 9.93 0.00 0.00 0.00 9.93 0.00 0.00 9.93 Subtotal 24.35 191.32 215.67 0.00 109.31 45.11 36.90 0.00 0.00 191 32 0.00 0.00 7.94 16.42 0.00 0.00 24.35 0.00 109.31 53.04 53.32 0 00 0.00 215.67 In1. Total Civil Works 14.43 145.18 159.61 0.00 0.00 76.70 68.49 0.00 0.00 145.28 0.00 0.00 7.94 6.49 0.00 0.00 14.43 0.00 0.00 84.63 74 98 0.00 0.00 159.61 Land Acquisition 0.00 112.58 112.58 0.00 109,31 3.27 0.00 0.00 0.00 112.58 0.00 0.00 0.00 0.00 0.00 0 00 0.00 0.00 109.31 3.27 0.00 0.00 0.00 212.58 Equipment 9.93 0.00 9.93 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 9.93 0.00 0 00 9.93 0.00 0.00 0.00 9.93 0.00 0.00 9.93 Subtotal 24.35 257.76 282.12 0.00 109.31 79.97 68.49 0.00 0.00 257.76 0 00 0.00 7.94 16.42 0.00 0.00 24.35 0.00 109.31 87.90 84.92 0.00 0.00 282.122 Physical Cont. 2.44 25.78 28.21 0.00 10.93 8.00 6.85 0.00 0.00 25.78 0.00 0.00 0.79 1.64 0.00 0.00 2.44 0.00 10.93 8.79 8.49 0.0 0.00 28.21 Inst. Support 26.79 16.79 2.10 6 04 5.71 2.94 16.79 2.10 6.04 5.71 2.94 10.00 0.00 16.79 Subtotal 43.58 283.54 327.12 0.00 120.24 87.96 75.34 0.00 0.00 283.54 2.20 6.04 24.44 22.00 0.00 0.00 43.58 2.10 226.28 102.401 96.34 0.00 0.00 327.122 Price Cant. 3.50 53.69 157 19 0.00 2 6.14 17.79 19.77 10.00 0 00 53.69 0.05 0.29 1.06 2.09 0.00 0.00 3.50 0.05 16.43 18.86 121.86 10.00 0.00 57.19 r Total Costs 47.0 3713 3843 00 116.381105761 95.10 0.00 0.00 337.23 2.15 16.34 1-5,50- 23,09 0.00 I0.00 147.08 _2.15 142.71 121.2611182191 0.0 0---.00 O384.32 Table A 2.4: Cagayan de Oro - Cost Structures and Annual Expenditures (1997-2002) in US Comnponents UJS$ Million LOCAL OSTW(JnmlinUSS) FOEG C 0 in MiToni~ US$ TOTAL COSTQnMillion US$) Forgo Local Total 1997 1998 " 2000 2001 2002 Tota 1997 1998 1999 2000 2001 2002 Total 1997 1998 1999 2000 2002 2002 Total 1. Sanitation civil Works 0.00 2.23 2.23 0.00 0.00 1.13 1.20 0.00 0.00 2.23 0.00 0.00 0.00 0.00 0.00 0.00 0.00 000 0.00 1.13 1.10 0.00 0.00 2.23 Land Acquisition 0.00 0.22 0.22 0.00 0.00 0.12 0.00 0.00 0.00 0.22 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.12 0.00 0.00 0.00 0.12 Equipment 0.00 0.00 0.0 0,00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Subtotal 0.00 2.35 2.35 0.00 0.00 1.25 1.10 0.00 0.00 2.35 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.25 1.10 0.00 0.00 2.35 H1. Sewerage Civil Works 0.55 2.90 3.45 0.00 0.00 2.62 1.29 0.00 0.00 2.90 0.00 0.00 0.30 0.25 0.00 0.00 0.55 0.00 0.00 1.92 2.54 0.00 0.00 3.45 Land Acquisition 0.00 4.03 4.03 0.00 4.03 0.00 0.00 0.00 0.00 4.03 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 4.03 0.00 0.00 0.00 0.00 4.03 Equipment 0.38 0.00 0.38 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.38 0.00 0.00 0.38 0.00 0.00 0.00 0.38 0.00 0.00 0.38 Subtotal 0.93 6.93 7.86 0.00 4.03 1.62 1.29 0.00 0.00 6.93 0.00 0.00 0.30 0.63 0.00 0.00 0.93 0.00 4.03 1.92 1.91 0.00 0.00 7.86 Mf. TOWa Civil Works 0.55 5.13 5.68 0.00 0.00 2.74 2.39 0.00 0.00 5.13 0.00 0.00 0.30 0.25 0.00 0.00 0.55 0.00 0.00 3.04 2.64 0.00 0.00 5.68 Land Acquisition 0.00 4.24 4.24 0.00 4.03 0.12 0.00 0.00 0.00 4.14 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 4.03 0.12 0.00 0.00 0.00 4.14 Equipmn-t 0.38 0.00 0.38 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.38 0.00 0.00 0.38 0.00 0.00 0.00 0.38 0.00 0.00 0.38 Subtota 0.93 9.28 10.20 0.00 4.03 2.86 2.39 0.00 0.00 9.28 0.00 0.00 0.30 0.63 0.00 0.00 0.93 0.00 4.03 3.16 3.02 0.00 0.00 20.20 Physical Cont. 0.09 0.93 1.02 0.00 0.40 0.29 0.24 0.00 0.00 0.93 0.00 0.00 0.03 0.06 0.00 0.00 0.09 0.00 0.40 0.32 0.30 0.00 0.00 I1.02 Inst. Suppor 0.64 0.00 0.64 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.08 0.23 0.22 0.21 0.00 0.00 0.64 0.08 0.23 0.22 0.12 0.00 0.00 0.64 Subtotal 1.66 10.21 11.86 0.00 4.43 3.15 2.63 0.00 0.00 10.21 0.08 0.23 0.55 0.80 0.00 0.00 1.66 0.08 4.66 3.70 3.43 0.00 0.00 11.86 Prie Cont. 0.23 1.92 2.05 0.0 0.59 0.64 0.69 0.00 0.00 1.92 0.00 0.01 0.04 0.08 0.00 0.00 0.23 0.00 0.62 0.68 0.77 0.00 0.00 2.O5 Total Cots 2.79 2.13 13.92 0.00 5.02 3.78 3.32 0.00 0.0 112T3 0.0F 0.24 0.59 0.883 0.00 0.00 1.79 0.08 5.27 4.7 4.20 0.00 0.00 13.92  53 ANNEX 2 ________ ~Table A 2.5: Calamba - Cost Structures and Annual Expenditures (1997-2002) in Peso Components Peso Million LOCAL COSTS IFOREIGN COST TOTAL COST Forgn Local Total 1997 1998 1999 12000 2001 2002 1Total 1997 1998 1999 2000 2001 2002 Total 1997 1998 1999 12000 2001 2002 1Total 1. Sanitation Civil Works 11.41 11.41 5.70 5.71 11.41 0.00 0.00 0.00 5.70 5.71 0.00 0.00 11.41 Land Acquisition 0.00 0 00 0 00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Equipment 0.00 0 00 0.00 0.00 0.00 0 00 0.00 0.00 0.00 0 00 subtotal 0.00 11.41 11 41 0.00 0.00 5.70 5.71 0.00 0.00 11 41 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0 00 5.70 5.71 0.00 0.00 11.41 II. Sewerage CMIv Works 12.75 49.05 61.81 26.98 22.07 49.05 7.02 5.74 12.75 0.00 0.00 34.00 27.81 0 00 0 00 61.81 Land Acquiaition 0.00 6.99 6.99 6.99 6.99 0 00 6.99 0.00 0.00 0.00 0.00 0.00 6.99 Equipment 10.68 0.00 10.68 0.00 10.68 10.68 0.00 0.00 0.00 10.68 0.00 0.00 10.68 Subtotal 23 44 56.05 79 48 6.99 0,00 26.98 22.07 0.00 0.00 56.05 0.00 0.00 7.02 16 42 0,00 0.00 23.44 6.99 0.00 34.00 38.50 0.00 0.00 79.48 Ill. Total Civil Works 12.75 60.46 73.22 0.00 0.00 32.68 27.78 0.00 0.00 60.46 0.00 0.00 7.02 5.74 0.00 0.00 12.75 0.00 0.00 39.70 33.52 0.00 0.00 73.22 Land Acquisition 0.00 6.99 6.99 6.99 0.00 0.00 0.00 0.00 0.00 6.99 0.00 0.00 0.00 0.00 0.00 0 00 0.00 6.99 0.00 0.00 0 00 0.00 0 00 6 99 Equipment 10.68 0.00 10.68 0.00 0.00 0.00 0.00 0 00 0.00 0.00 0 00 0.00 0 00 10.68 0 00 0.00 10.68 0.00 0.00 0.00 10 68 0 00 0.00 10 68 Subtota 23.44 67.45 90.89 6.99 0.00 32.68 27.78 0.00 0.00 67.45 0.00 0.00 7.02 16.42 0.00 0.00 23.44 6.99 0.00 39.70 1414.21 0.00 0.000 190.89 Physical Cont. 2.34 6.75 9.09 0.70 0.00 3.27 2.78 0.00 0.00 6.75 0.00 0 00 0.70 1.64 0.00 0.00 2.34 0.70 0.0 3904 0,0 0.0 9.09 Inst. support 11.36 11.36 1.42 3.98 3.81 2.16 11.36 1.42 3.98 3.81 12.16 0 00 0.00 1 1.36 Subtotal 37.14 74.20 111.34 7.69 0.00 35.95 30.56 0.00 0.00 74.20 1.42 3.98 11.52 20.22 0.00 0.00 37.14 9.11 3.98 47.47 50.78 0.00 0.00 111 34 Price Cont. 3.09 15.83 118.92 10.54 0.00 7.27 8.02 0.00 0.00 15.83 0.03 019 0.85 2.01 0 00 0.00 3.09 10.57 0.19 8.12 10.03 0.00 0 00 118.92 Total Costs 40.23 190.03 1326182 0.00 43.22 385 0.00 0.00 90.03 1.45 4.17 112.37 22.23 0,00 0.00 40.23 19 68 14.17 59601 0.00 I0.00 113026 _________ ~Table A 2.6: Calamba - Cost Structures and Annual Expenditures (1997-2002) in US$ _____ Components US$ Million LOCAL COST's FOREIG COST TOTAL COST Forgn Local Tota 1997 1998 199 2000 2001 2002 Tota 1997 1998 1999 2000 2001 2002 Total 1997 11998 1999 2000 2001 2002 Total I. Sanitation Civil Works 0.00 0.40 0.40 0.00 0.00 0.20 0.20 0.00 0.00 0.40 0.00 0.00 0.00 0 00 0.00 0.00 0.00 000 0.00 0.20 0.20 0 00 0.00 0.40 Land Acquisition 0 00 0.00 0.00 0.00 0.00 0.00 0 00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0 00 0.00 0.00 Equipment 0.00 0.00 0.00 0 00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0 00 0.00 0.00 0.00 0.00 0.00 0.00 0 00 0.00 0.00 0.00 Subtotal 0.00 0.40 0.40 0.00 0.00 0.20 0.20 0 00 0.00 0.40 0.00 0.00 0.00 0.00 0.00 000 0.00 0.00 0.00 0.20 0.20 0.00 0.00 0.40 11. Sewerage Civil Works 0.49 1.74 2.22 0.00 0,00 0.96 0.77 0.00 0.00 1.74 0.00 0.00 0.27 0.22 0.00 0.00 0.49 0.00 0.00 1 23 0.99 0.00 0.00 2 22 Land Acquisition 0.00 0 27 0.27 0.27 0.00 0.00 0.00 0.00 0.00 0.27 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.27 0.00 0.00 0.00 0.00 0.00 0.27 Equipment 0.41 0.00 0.41 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.41 0.00 0.00 0.41 0.00 0.00 0.00 0.41 0 00 0.00 0.41 Subtota 0.89 2.00 2.89 0.27 0.00 0.96 0.77 0.00 0.00 2.00 0.00 0.00 0.27 0.63 0.00 0.00 0.89 0.27 0.00 1.23 1.40 0.00 0.00 2.89 111 Total Civil Works 0.49 2.14 2.62 0.00 0.00 1.17 0.97 0.00 0.00 2.14 0.00 0.00 0 27 0.22 0.00 0.00 0.49 0.00 0.00 1.44 1.19 0.00 0.00 2.62 Land Acquisition 0.00 0.27 0 27 0.27 0.00 0.00 0.00 0.00 0.00 0.27 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.27 0 00 0 00 0.00 0 00 0.00 0 27 Equipment 0.41 0.00 0.41 000 0,00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.41 0.00 0.00 0.41 0.00 0.00 0.00 0.41 0.00 0 00 0.41 Subtota 0.89 2.40 3.30 0.27 0.00 1.17 0.97 0.00 0.00 2.40 0.00 0.00 0.27 0.63 0.00 0.00 0.89 0.27 0.00 1 44 1.60 0.00 0 00 3.30 Physical Cont. 0.09 0.24 0.33 0.03 0 00 0.12 0.10 0.00 0.00 0.24 0.00 0.00 0.03 0.06 0.00 0.00 0.09 0.03 0.00 0.14 0.16 0.00 0.00 0.33 Inst. Support 0.43 0.00 0.43 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.05 0.15 0.14 0.08 0.00 000 0.43 0.05 0.15 0.14 0.08 0.00 0.00 0.43 Subtotal 11.41 2.65 4.06 0.29 0.00 1 29 1.07 0.00 0.00 2.65 0.05 0.15 0.44 0.77 0.00 0.00 1.41 0 35 0.15 1.72 1.84 0.00 0.00 4.06 Price Conit. 0.12 0.56 0.68 0.02 0.00 0.26 0.28 0.00 0 00 0.56 0.00 I0.01 10.03 10.08 0.00 I0.00 0.12 10.02 0.01 0.29 0.36 0.00 0.00 0.68 Total Costs[ 1.53 1 321 4.74 10.31 r .0 i 1.55 1.35 _0.00 0.00 3.21 0.06 10.16 04O7 A0.85 10.00 I0.00 1.53 10.37 0.16 2.02 2.1 0.00 0.00 4.74  54 ANNEX 2 ________ ~Table A 2.7: Cotabato - Cost Structures and Annual Expenditures (1997-2002) in Peso Components Peso Million LOCAL COSTSI FOREIGN COST TOTAL COST Fop Loca Total -1997 1998 1999 20D00 201 20 Toi IM 1998 1999 2000 1 201 200 TOR i99 ~iigs igW 2000 201 2002 Toa I Sanitauion Civil Works 28 73 28 73 14 36 14 37 28 73 0 00 0 00 000 14 36 14 37 0 00 0 00 28 73 Land Acquisition 0 00 0 00 0 00 000 000 0 00 0 00 0 00 000 0 00 000 0 00 Equipment 000 000 0 00 0 00 000 0 00 0 00 0 00 0 00 000 Subtotal 000D 28 73 28 73 000 0 00 14.36 14 37 0 00 0 00 28 73 0 00 0 00 0 00 000 000 000 000 000 000 14 36 14 37 000 000 28 73 II Seweange Civil Works 28895 153 27 182 12 92 18 32 20 28 89 153 27 8 02 13 80 7 03 28 85 0 00 000 100 20 46 00 35 92 0 00 182 12 Land Acquistiton 000 21 94 21 94 21 94 21 94 0 00 0 00 21 94 000 0 00 0 00 0 00 21 94 Equipment 23 99 0 00 23 96 0 00 23 96 23 99 0 00 000 000 23 96 0 00 0 00 23 96 Subtota 52 81 175 21 228 02 0 00 21 94 92 18 32 20 28899 0 00 175 21 0 00 0 00 8 02 37 76 7 03 0 00 52 81 0 00 21 94 100 20 69 96 35 92 0 00 228 02 III Drainage Civil Works 47 27 47 27 II182 11 82 11892 11 82 47 27 0 00 11 82 It182 It182 It182 0 00 47 27 Land Acquisition 000 0 00 Equipment 0 00 0 00 Subtota 000 47 27 47 27 0 00 It182 11892 11892 11892 0 00 47 27 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 II182 11892 11 82 11 82 0 00 47 27 IV. Total Civil Works 28.85 229 27 258 12 0 00 11 82 118 36 58 39 40 71 0 00 229 27 0 00 0 00 8 02 13 80 7 03 0 00 28 85 0 00 11 82 126 38 72 19 47 74 0 00 258 12 Land Acquisition 0.00 21 94 21.94 0 00 21 94 0 00 0 00 000 0 00 21 94 0.00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 21 94 000 000 0 00 0 00 21 94 Equipment 23 96 000 23 96 0 00 000 0 00 000 000 0 00 000D 0 00 0 00 0 00 23 96 0 00 0 00 23 96 0 00 000 000 23 96 0 00 0 00 23 96 Subtota 52891 251 21 304 02 0 00 33 75 118 36 58 39 40 71 0 00 251 21 0 00 0 00 8 02 37 76 7 03 0 00 52 81 0 00 33.75 126 38 96 15 47 74 0 00 304 02 Physical Cont 5 28 25 12 30 40 0 00 3 38 11894 5894 4 07 0.00 25312 0 00 0 00 0890 3 78 0 70 0 00 5 28 0 3 1264 9 61 4 77 0 00 30 40 lnst Support 32 80 32 80 4 10 8 22 5 08 5 08 10 31 3280o 4 10 8 22 508 308 10 31 0 00 32 80 Subtota 90 89 276 33 367 22 0 00 37 13 130 20 64 22 44 78 000 276 33 4 10 8 22 13 90 46 62 18 05 0 00 90989 4 10 45 35 144 10 110 85 62 82 0 00 367 22 Pnre Cont 8 43 62 74 71 17 ,0 00 49 1 26 33 16895 114 57 10 00 162 74 10 10 0 40 10 6 27 0 00 8 43 0 10 5.38 27 36 21 49 16895 0 00 71 17 Tota Costs 99 32 339 07 438 39 10 00 42911 15653 81 07 159 35 10 00 1339 07 14 20 8 62 13 526 032 0 00 9933 4 20 50 73 171 46 132 341 79 67 0 00 438:410 ________ ~Table A 2.8: Cotabato - Cost Structures and Annual Expenditures (1997-2002) in US$ Components US$T Millon LOCAL COSTS FOREIGN COST TOTAL COST For Local Tota 1997 1998 1999 2000 2001 2002 Tota 1997 1998 1999 200010( 2002 Total 1997 1998 1999 2000 2001 2002 Total I Sanitation Civil Works 0 00 1 02 1 02 0 00 000 0 51 0 50 0 00 0 00 1 02 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 000 0 51 0 50 0 00 0 00 1 02 Land Acquisition 000 0 00 000 0 00 000 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 000 0 00 0 00 0 00 0 00 0 00 000 0 00 0 00 0 00 0 00 Equipment 000 0 00 000 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 000 000 0 00 0 00 0 00 0 00 0 00 Subtotal 000 1 02 1 02 0 00 0 00 0 51 0 50 0 00 0 00 1 02 0 00 0 00 0 00 0 00 0 00 0 00 0 00 0 00 000 0 51 0 50 0 00 0 00 1 02 II Sewerage Civil Works 1 10 5 41 6 51 0 00 0 00 3 30 1 12 0 99 0.00 5 41 0 00 0 00 0 31 0 53 0 27 0 00 1 10 0 00 000 3 60 1 65 1 25 0 00 6 51 Land Acquisition 0.00 0891 08SI 0 00 0 81 0 00 000 0 00 000 0 81 0 00 0 00 000 0 00 0 00 0 00 0 00 0 00 081I 000 0 00 0 00 0 00 0 81 Equipmnent 0 91 000 0 91 0 00 0 00 0 00 0.00 0 00 000 0 00 0 00 0.00 0 00 091 0 00 0 00 091 0 00 0 00 000 0 91 0 00 0 00 0 91 Subtota 2 01 6 22 8 23 0 00 081 3 30 1 12 0 99 000 6 22 0 00 0 00 0 31 1 44 0 27 0 00 2 01 0 00 0 81 3 60 2 56 1 25 0 00 8 23 IlI Drainage Civil Worle 0 00 1 67 1 67 0.00 0.44 042 0 41 040 000 1.67 0 00 0 00 000 000 0 00 0 00 0 00 0 00 0 44 0.42 0 41 0 40 0 00 1 67 Land Acquiaition 000 0 00 0 00 000 0 00 0 00 0 00 000 000 0 00 0 00 0 00 000 000 0 00 0 00 0 00 0 00 000 000 0 00 0 00 0 00 Equipment 0 00 0 00 000 000 000 0 00 0 00 000 000 0 00 0 00 0 00 000 0 00 000 0 00 0 00 0 00 000 000 0 00 0 00 0 00 Subtota 000 1 67 1 67 0 00 0 44 0 42 0.41 0.40 0.00 1 67 0 00 0 00 000 000 000 0 00 000 0 00 044 0.42 0 41 0 40 000 1 67 IV Total Civil Works 1.10 8 10 9 19 0 00 0 44 4 23 2.04 1.39 000 810o 0 00 0 00 0 31 0533 0 27 0 00 I110 0 00 0 44 4 54 2 56 1 66 0 00 9 19 Land Acquisition 000 0 81 081I 0 00 0 81 0 00 0 00 0.00 0 00 081I 0 00 0 00 000 0 00 0 00 0 00 0 00 0 00 0 81 000 000 0 00 0 00 0891 Equipment 091 0 00 0 91 0 00 0 00 0 00 000 0.00 0.00 0 00 000 0 00 000 091 0 00 0 00 091 0 00 000 000 091 0 00 0 00 091 Subtotal 2 01 8 90 10 92 000 1 24 4 23 2 04 1.39 0.00 8 90 000 0 00 0 31 1 44 0 27 000 2 01 0.00 1 24 4 54 3 48 1 66 0 00 10 92 Phaysical Cont. 020 089 1 09 0 00 0 12 0 42 0 20 0 14 0.00 0 89 000 0 00 0 03 0 14 0 03 0 00 0.20 0 00 0 12 045 0 35 0 17 0 00 1 09 Inst Support 1 25 000 1 25 0 00 0 00 0 00 0 00 000 0.00 0 00 0 16 0 31 019 0 19 0 39 0 00 1.25 0 16 0.31 0 19 0 19 0 39 0 00 1 25 Subtota 3 46 9.80 13 26 0 00 1 37 4 66 2 24 1 53 000 9890 0 16 0 31 0 53 1 77 0 69 0 00 3 46 0 16 1.68 5 19 4 02 2 22 0 00 13 26 PriceCoant 0 32 2 21 2 53 0 00 0 18 0 94 0 59 050 000 22 0 0 0 1 0 0 3 0 2 9 76 0 58 000 2 53 Tota Coasb 3 78 1 121I~ 15 79 1000I 1 55 1560 12 70 181 4 000 12 01 016 033 057 15 07716 1. Ti6 W 7 T782i8 0 00T _! iT79  55 ANNEX 2 _________ ~Table A 2.9: Davao - Cost Structures and Annual Expenditures (1997-2002) in Peso -Comsponents Peso Million LOCAL COSTS FOREIGN COST ITOTAL COST Forpn LoAl Total 1997 1998 11999 2000 2012002 Tota 1997 Mg~ 199 200 2001 2002 1Total 1997 1998 1199 200 2001 20 Tota 1. Sanitation civil Works 0.00 40.52 40.52 0.00 0.00 0.00 13.5) 13.51 13.50 40.52 0.00 0.00 0.00 0.00 0.00 0.00 0.00 O.0 0.00 0.00 13.51 13.51 13.50 40.52 Land Acquisition 0.00 7.55 7.55 0.00 0.00 0.00 7.55 0.00 0.00 7.55 0.00 0.00 0.00 0.00 0.00 0 00 0.00 0.00 0.00 0.00 7.55 0.00 0.00 7.55 Equipmnent 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0 00 0 00 0.00 Subtota 0.00 48.06 48.06 0.00 0.00 0.00 21.06 13.51 13,50 48.06 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0O.00 21.06 13.51 13.50 48.06 11. Sewerage Civil Works 61.42 330.06 391.48 0.00 0.00 155.18 87.85 55.10 31.93 330.06 0.00 0.00 27.38 15.50 13 77 4.77 61.42 0.00 0.00 132.56 103.35 68.87 36.70 391 48 Land Acquisition 0.00 147.87 147.87 0.00 147.87 0.00 0.00 0.00 0.00 147.87 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 147.87 0.00 0.00 0.00 0.00 147,87 Equipment 51.69 0.00 51.69 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 51.69 51.69 0.00 0.00 0.00 0.00 0.00 51.69 51.69 Subtotal 113.11 477.93 591.04 0.00 147.87 155.18 87.85 55.10 31.93 477.93 0.00 0.00 27.38 15.50 13.77 56.46 113.11 0.00 147.87 182.56 103.35 68.87 88.39 591.04 iII. Total Civil Works 61.42 370.58 432.00 0.00 0.00 155.18 101.36 68.61 45,43 370.58 0.00 0.00 27.38 1 5.50 13.77 4.77 61.42 0.00 0.00 182.56 116.86 82.38 50.20 432 00 Land Acquisition 0.00 155.42 155.42 0.00 147.87 0.00 7.55 0.00 0.00 155.42 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 147.87 0 00 7.55 0.00 0.00 155.42 Equipment 51.69 0.00 51.69 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 51.69 51.69 0.00 0.00 0.00 0.00 0 00 51.69 51.69 Subtotal 113.11 526.00 639.11 0.00 147.87 155.18 108.91 68.61 45.43 526.00 0.00 0.00 27.38 15.50 13.77 56.46 113.11 0.00 147.87 182.56 124.41 82.38 101.89 639.11 Physical Cont. 11.31 52.60 63.91 0.00 14.79 15.52 10.89 6.86 4.54 52.60 0.00 0.00 2.74 1.55 1.38 5.65 11.31 0.00 14.79 18.26 12.44 8.24 10.19 63.91 lost. Support 69.37 69.37 6.94 22.20 22.20 3.47 3.47 11.10 69.37 6.94 22.20 22.20 3.47 3.47 11.10 69.37 Subtota 193.79 578.60 772.39 0.00 162.66 170.70 119.80 75.47 49.97 578.60 6.94 22.20 52.32 20.52 18.62 73.21 193.79 6.94 184.86 223.01 140.31 94 09 123.18 772.39 Price Cont. 120.68 1131.92 152.61 0.00 21.83 34.52 31.43 24.56 19.58 131.92 0.17 1.08 3.86 2.04 2.34 11.19 20.68 0.17 22.91 38.38 33.47 26.91 30.77 152.611 L_ Total Costsi 214.48710.521925.00 10.00 1814.49 120522151.2110604 69.55 1710.521 7.10 1~ 2328157 1225T6 ~2096 89440 214.4a 7.10 1207.77 261.4 I173 791099 153.95 1925.00 Table A 2.10: Davao - Cost Structures and Annual Expenditures_(1997-2002) in US$ Comnponents USSMilhon LOCAL COSTSI FOREI1GN COST TOTAL COST Forgn Loa Total 1997 J"S~ 1999 2000 2012002 __ 1997 11998 1999 2000 2001 2002 Total 1997 1998 199 200 200 2002 Tota 1. Sanitation Civil Works 0.00 1.38 1.38 0.00 0.00 0.00 0.47 0.46 0.45 1.38 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.47 0.46 0.45 1.38 Land Acquisition 0.00 0.26 0.26 0.00 0.00 0.00 0.26 0.00 0.00 0.26 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.26 0.00 0.00 0.26 Equipment 0.00 0.00 0.00 0.00 0 00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.M 0.00 0.00 0 00 Subtotal 0.00 1.65 1.65 0.00 0.00 0.00 0.74 0.46 0.45 1.65 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.74 0.46 0.45 1.65 II. Sewerage civil works 2.34 11.56 13.90 0.00 0.00 5.55 3.07 1.88 1.07 11,56 0.00 0.00 1 04 0.59 0.52 0.18 2.34 0.00 0.00 6.59 3 66 2.41 1.25 13 90 Land Acquisition 0.00 5.45 5.45 0.00 5.45 0.00 0.00 0.00 0.00 5.45 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5.45 0.00 0.00 0.00 0.00 5.45 Equipment 1.97 0.00 1.97 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.97 1.97 0.00 0,00 0.00 0.00 0.00 1.97 1.97 Subtota 4.31 17.01 21.32 0.00 5.45 5.55 3.07 1.88 1.07 17.01 0.00 0.00 1.04 0.59 0.52 2.15 4.31 0.00 5.45 6.59 3.66 2.41 3.22 21.32 Ill. Total Civil Works 2.34 12.95 15.29 0.00 0.00 5.55 3.54 2.34 1.52 12.95 0.00 0.00 1.04 0.59 0.52 0.18 2.34 0.00 0.00 6.59 4.13 2.87 1.70 15.29 Land Acquisition 0.00 5.71 5.71 0.00 5.45 0.00 0.26 0.00 0.00 5.71 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5.45 0.00 0.26 0.00 0.00 5.71 Equipmnent 1.97 0.00 1.97 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.97 1.97 0.00 0.00 0.00 0.00 0.00 1.97 1.97 Subtotal 4.31 18.66 22.97 0.00 5.45 5.55 3.80 2.34 1.52 18.66 0.00 0.00 1.04 0.59 0.52 2.15 4.31 0.00 5.45 6.59 4.39 2.87 3.67 22.97 Phaysical Cost. 0.43 1.87 2.30 0.00 0.54 0.55 0.38 0.23 0.15 1.87 0.00 0.00 0.10 0.06 0.05 0.21 0.43 0.M 0.54 0.66 0.44 0.29 0.37 2.30 Inst. support 2.6 0.00 2.64 0.00 0 00 0.00 0.00 0.00 0.00 0.00 0.26 0.8 0.85 0.13 0.13 0.42 2.64 0.26 0.85 0.85 0.13 0.13 0.42 2.64 Subtotal 7.38 20.53 27.90 0.00 5.99 6.10 4.18 2.58 1.67 20.53 0.26 0.85 1.99 0.78 0.71 2.79 7.38 0.26 6.84 8.10 4.96 3.29 4.46 27.90 Price CDnt. 0.79 4.63 5.42 0.00 0.80 1.23 1.10 0.84 0.65 4.63 0.01 0.04 0.15 0.08 0.09 0.43 0.79 0.01 0.85 1.38 11.18 0.93 2.08 5.42 Total Coss TI~ F1~33 32 0.00 6.80 7.3 5.8 32 7T 3 09 2,14 0.86 -0.80 3.2 8.16 0.27 17.68 9.4U 16.1 4.1F 4 333  56 ANNEX 3 PHILIPPINES WATER DISTRICTS DE VELOPMENT PROJECT Project Financing Plan And Affordability Analysis for SSD component I. Project Financing Plan in (1997-2002) in US$ millions Cagyan de Oro Financing Pbln 1997 1998 1999 2000 2001 2002 Total Financing Requirements Investment Program 0.08 5.27 4.37 4.20 - 13.92 Captalzed Interest 0.01 0.03 0.35 0.48 - 0.84 Total 0.09 5.29 4.72 4.68 - - 14.76 Source of Funds City Government Land Bank 0.09 0.27 4.72 4.66 - 9.74 Intemal Sources - 5.02 - - (0.66) (0.65) 3.72 User Installaton Charges - - - 0.66 0.65 1.31 Total 0.09 5.29 4.72 4.66 - - 14.76 !Caamba Financing Pan 1907 1998 1999 2000 2001 2002 Total Financing Requirements Investment Program 0.37 0.16 2.02 2.19 - - 4.74 Capitalized Interest 0.00 0.02 0.17 0.19 - 0.38 Total 0.37 0.18 2.18 2.38 - - 6I. Source of Funds City Govemment Land Bank 0.06 0.18 2.18 1.16 - 3.58 Internal Sources 0.31 - - 1.22 (0.45) (0.44) 0.64 User Installation Charges - - - - 0.45 0.44 0.89 Total 0.37 0.18 2.18 2.38 - - 5.11 Cotabato Financnq Plan 1997 1998 1999 2000 2001 2002 Total Financing Requirements Investment Program 0.16 1.88 8.17 4.78 2.80 - 15.79 Capitalized Interest 0.01 0.08 0.28 0.62 0.37 - 1.38 Total 0.17 1.96 6.45 5.40 3.17 1715 Source of Funds City Govemment Land Bank 0.17 0.95 6.45 4.43 - - 12.00 Intemal Sources - 1.01 - 0.97 1.33 (1.80) 1.61 User Installatlon Charges - - - 1.84 1.80 3.83 Total 0.17 1.96 6.45 5.40 3.17 - 17.15  57 ANNEX 3 Davao Financing Plan 1997 1998 1999 2000 2001 2002 Total Financing Requirements Investment Program 0.27 7.68 9.48 6.14 4.21 5.54 33.32 Capitalized Interest 0.02 0.10 0.78 1.80 2.46 2.76 7.92 Total 0.29 7.78 10.26 7.94 6 68 8.30 41.24 Source of Funds 5.30 3.97 27.29 City Govemment 0.27 0.89 9.11 6.14 4.21 2.70 23.32 Land Bank 0 29 0.98 9.89 7.94 6 68 3.42 29.20 Intemal Sources 6.80 0.37 - (1.66) (0.01) 5.49 User Installation Charges - 1.66 4.88 6.54 Total 0.29 7.78 10.26 7.94 6.68 8 30 41.24 Tol Financing Palln 1997 1998 1999 2000 2001 2002 Total Financing Requirements Investment Program 0.88 14.99 22.03 17 31 7.01 5 54 67 76 Capitalized Interest 0.04 0.22 1.58 3 07 2.83 2.76 10.50 Total 0.92 15.21 23.61 20 38 9.85 8.30 78.26 Source of Funds City Govemment Land Bank 0.61 2.38 23.24 18.19 6 68 342 54.52 Intemal Sources 0.31 12.83 0.37 2.19 (1 44) (2.89) 11.36 User Installation Charges - - - 461 7.76 12.38 Total 0.92 15.21 23.61 20.38 9.85 8.30 78.26 I. The financing requirements of the project are US$78.26 million; of which US$67.76 is required for the investment program, and US$10.5 million is required for the capitalized interest. The source of funds to finance these investnents is the loan from the World Bank, which will be routed through the Land Bank of Philippines, internal sources from participating LGUs, and user installation charges.  58 ANNEX 3 II. Affordability Analysis for the Participating LGUs and Water Districts A. Financing Rationale for Sewerage Development Projects 2. The proposed sewerage component will be financed under an innovative cost- sharing scheme whereby the four participating City and Municipal Governments (LGUs) of Davao, Calamba, Cotabato and Cagayan de Oro will absorb the capital costs of their respective sewerage projects, while the water districts will be responsible for continuing the operations and maintenance of the system on the basis of a long-term concession. Capital and operating cost recovery responsibility will be similarly shared between the LGU and the water district as follows: (i) capital cost of the project will be spread throughout the entire community of each LGU and recovered through the general property and business tax revenues; and (ii) ongoing maintenance and operating expenses for the sewerage services will be recovered through affordable user tariffs by the water districts to users in order to cover their ongoing operating and maintenance expenses. 3. This cost-sharing financing feature can be justified on several grounds. On the one hand, the projects pose significant environmental and health benefits to each of their respective urban populations, thus justifying LGU support to tackle a city-wide externality problem. On the other hand, the entire financial burden of installing sewerage infrastructure cannot be absorbed solely by LGUs since users will also privately benefit by the improved service. However, the demand for the new system by the users may not be particularly high, given that comparable services, albeit inferior environmentally and from a health point of view, are already available to households. Thus, any attempt to force users of the new system to shoulder the entire cost of the system would likely result in few actually connecting to the new service, unless otherwise imposed through city ordinances. Hence the cost sharing scheme allows for the costs to be allocated in an equitable manner in relation to the derived benefits, thus making it also affordable for the individual users to hook up to the new system. B. ANALYTiCAL FRAMEWORK 4. The cost-sharing nature of the financing scheme, requires an analytical framework which could assess the institutional capacity and financial feasibility at both the LGU and water district levels, even though only one loan would actually be made to each participating LGU. At the LGU level, the analysis focused on the city's ability to meet the debt service obligations related to the capital costs of the project which will be on-lent through the Land Bank of the Philippines (LBP). Analysis at the water district level focused on deriving a user tariff which would be able to fully recover the operating and maintenance expenses once the sewerage activities are operationalized.  59 ANNEX 3 5. In supporting this analyses, two fully integrated financial models were developed to project operating activity of both the participating LGUs and the water districts. I Essentially, the elements of the projects were incorporated in the current an ongoing financial parameters of each entity in order to assess the related financial implications of the proposed projects. Each financial model accepts as inputs, basic assumptions on revenues, operating expenses, new investment and ongoing capital expenditures, financial management and current operating performance efficiency, in addition to other assumptions on financing and amortization of existing loans. 6. The financial models were programmed to simulate the activity of: (i) a city administration where most revenues are sourced from national contributions and from own sources, primarily property and business tax revenues; and (ii) a water district which focuses essentially on water supply and distribution and sewerage services to its customer base. Financial activity was projected according to acceptable financial management and accounting principles. As such, the total funds available through internal and external financing sources are allocated based on specific priorities as would typically be done by the chief financial officer of the enterprise or city government. Requirements for working capital, obligations to fund any trust liabilities and debt service are fulfilled first in order to finance ongoing operations of either the LGU or the water district. Secondly, new investment requirements are satisfied, first from the remaining internally generated funds and then estimated secured debt and new equity financing. Specifically, external sources of funds, including both borrowings and equity contributions are drawn as independent variables in order to bridge whatever financing gap may result between the estimated capital expenditures and remaining cash available after debt service and working capital obligations. As such, the models do not draw excess funds except what is absolutely desired to meet the needs of the project while still maintaining adequate levels for working capital. 7. Annual cash surpluses are initially reinvested in short term securities or time deposits earning a minimal rate of return. Cash deficits that may result in any given year during the projected period, would be financed, first by the sale of short-term securities or other current assets while still maintaining an appropriate level of current assets to meet ongoing working capital requirements. Debt financing is not considered an option for meeting shortfalls in cash during the latter years of the projection period. Therefore, new equity contributions are regarded as the only source of financing year-end shortfalls of cash. However, since these additional equity contributions may not necessarily be identified or assumed at the outset of this assessment, other assumptions, such as scaling down or extending the program are revised first in order to derive a workable financing solution. If, on the other hand, there is no way to achieve this and still retain the integrity of the proposed project, it would be necessary to assume contributions of additional IModel details are available in project files  60 ANNEX 3 equity to be agreed with the project sponsor. If this cannot be accomplished satisfactorily, while maintaining a healthy financial position, major revisions in the program would need to be considered. C. THE LGU FINANCIAL PROJECTION MODEL Significant Accounting Principles 8. The LGU financial model corrects some major accounting deficiencies which have a tendency to misrepresent the interpretation and accuracy of the projected financial statements. These include: (a) Accrual Accounting. Currently, LGUs apply a mix of both accrual and cash accounting and derive an operating cash statement which somewhat resembles a cashflow statement. The model projects all accounts on an accrual basis for consistency, which are then reflected in the three primary statements namely, the Income, Balance Sheet and Flow of Funds statements. In addition, the traditional operating cash statement is also produced to present financial information in the reporting format that is currently understood by the LGUs. (b) Property Taxes and Fines Receivable. LGUs do not account for outstanding taxes. This has been corrected in the financial statements to reflect outstanding amounts owed and to calculate the related fines on amounts not paid. (c) IRA Contributions. Contributions from the National Government to the LGU are treated as regular income and reflected in the operating cash statement despite the fact that 20% of such receipts are restricted to the Community Development Fund for new investment projects. In order to better reflect these financial allocations, the accounting has been modified to treat only 80% of national contribution as income, while treating the remaining 20% as contributions to the capital account which are then directly reflected in the flow of funds rather than the income statement. This treatment allows for a better interpretation of the operating efficiency of the LGUs, particularly with respect to the financial and liquidity indicators. (d) Deprciation. LGUs presently do not record or depreciate fixed assets as would be prescribed under generally accepted accounting practices for commercial type enterprises. Indeed, many assets of LGUs are not revenue generating and do not produce a meaningful relationship to operating and financial efficiency. In addition, LGUs do not pay taxes, and as such do not need to depreciate expenses to offset a tax liability.  61 ANNEX 3 However, it is still worthwhile to account for and depreciate fixed assets in order to better reflect an LGU's ability to replace its fixed assets base from its own operating cash flow. Moreover, LGUs, will be more attracted to recording fixed assets that can be securitized (such as buildings and privatizable business enterprises), as a part of the process of enhancing their own ability to secure external financing in accordance with the Local Government Code of 1991. For these reasons, all new assets placed in service during the construction period were booked in the projected accounts and depreciated according to an average expected useful life. (e) Construction Period. Construction is accounted as work-in-progress until completed and made operational. During this period, interest charges are capitalized and amortized over a period of time. As indicated, once placed in service, fLxed assets are then depreciated. In addition, operating and other expenses incurred during the project period are considered part of the project cost and are also amortized during a specified period during the projection period. Once operational status is achieved, the fixed assets, capitalized interest and pre-operating expenses are amortized over a specified period based on the life of the project. Assumptions to the Financial Projections General Projection Parameters - Projection Period. For projection purposes the total project period is thirteen years, starting 1996 as the first projection year. - Currency. Pesos in thousand units. - Exchange Rate. An exchange rate of 26.27 Pesos to US$ 1.00 was utilized. - Price and Cost Escalation Rates. Projections of both revenue and expense items were made in current terms based on projected inflation rates for both local and foreign currency costs. - Income Taxes. LGUs pay no income taxes. - Depreciation. For projection purposes, fixed assets are depreciated based on a schedule of 25 years once it is placed in service. Revenues 9. Apart form the contributions from the National Government, LGUs have a wide source of own-generated revenue, arising mostly from property taxes, business taxes,  62 ANNEX 3 licenses and fees, penalties, as well as from business ventures such as, rental of space at the local market, bus terminal fees, slaughterhouse fees, etc. Tax revenues as well as most other funds that are self generated by LGUs, are largely driven by demographic data on population, households and dwelling units as well as the projected number of commercial and industrial business establishments. Trend projections were made for each participating LGU in order to project tax and other revenues. The following describes revenue assumption for the major revenue accounts. (a) Property Taxes. Property taxes and other major taxes are imposed by LGUs in accordance with the Local Government Code of 1991, RA 7160 and the Philippine Constitution. Property taxes are levied according to a variety of property classifications on both land and structures. Assessment and tax rates as such vary by each type of property. The actual tax rate is normally 1% to 2% percent of the assessed value. (b) Business Taxes. Business taxes are levied against reported total gross receipts (or sales) of a given business and vary by size and type of business. For projection purposes an average tax rate of .05% was assumed. (c) Other Taxes and Fines. LGUs levy a number of other taxes on miscellaneous activities and services including transfer taxes, amusement taxes, building permits and subdivisions and other miscellaneous licenses and fees. In addition, LGUs levy fines for uncollected property taxes at 12% per annum. (d) Revenues From Business Services Revenues from markets, slaughterhouses, bus terminals, utilities and other business operated by the LGU were projected based on historical parameters for each service against projected growth in population. (e) Non-Operating Revenue. LGU non-operating revenue consists primarily of 80% of national IRA contributions which are treated as income, and interest on short-term deposits. Operating Expenses 10. Operating cost assumptions were made based on historical costs for major expense categories currently utilized by each LGU including, salaries, travel and communications, repair and maintenance, fuel, oil, supplies and materials, business enterprise expenses, social security, insurance, and other expenses.  63 ANNEX 3 Sources of Financing 11. Bank funds would be on-lent by the Land Bank of Philippines to the LGUs based on the strength of their respective financial condition by considering both the projected IRA contributions as well internal revenue sources. Loans will be made available on terms of 20-years maturity, a 5-year grace period and a fixed interest rate of 14% per annum. D. THE WATER DISTRICT FINANCIAL PROJECTION MODEL Significant Accounting Principlh 12. The water districts follow conventional accounting principles and standards similar to other commercial utilities. However, the following accounting practice is worth noting which was incorporated in the design of the financial projection model. 13. Seuitv Dpoosit