Philippines - Second Municipal Development Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 16741 IMPLEMENTATION COMPLETION REPORT PHILIPPINES SECOND MUNICIPAL DEVELOPMIENT PROJECT (Lii. 3146-PHI) JUNE 9, 1997 Infrastructure Operations Division Counltry Department I East Asia and Pacific Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EOUIVALENTS (annlual averages) Currency Unit = Philippines Peso.s (P) 1984 US$1.00 P16.7 1991 US$1.00 P27.5 1985 US$1.00 P18.6 1992 US$1.00 P25.5 1986 US$1.00 P20.4 1993 US$1.00 P27.0 1987 US$1.00 P20.6 1994 US$1.00 P27.7 1988 US$1.00 P21.0 1995 US$1.00 P25.7 1989 US$1.00 P21.7 1996 US$1.00 P26.2 1990 US$1.00 P24.3 MEASURES AND EOUIVALENTS I meter (m) = 3.28 feet (ft) I kilometer (km)= 0.62 miles (mi) I hectare (ha)= 10,000 square meters (sq.m.) or 2.47 acres (Ac) 1 linear meter (1m)= I meter (in) FISCAL YEAR OF BORROX\i ER January 1 - December 31 ABBREVIATIONS AND ACRC)NYMS BLGF Bureau of Local Governenit Finanice CPO Central Project Office DOF Department of 1Finance DPWH Department of Public \X orks and Highways GFI Government Finanicial Institution IDF Institutional Development Fund ICR Implementation Completion Report IRA Internal Revenue Allotmenit LGA Local Government Ageiicv LGC Local Govermenit Codc LGU Local Governmeit UJnit LOGOFIND LGU Finance and Development Project MDF Municipal Development Fund MDP Municipal Developmenit Project MMINUTE The Metro Manila Infrastructure and Engineering Program MTP Municipal Training Pro rram OED Operations Eval uationi I)epartment ODA Official Developmienit Aid PMO Project Management Olftice PSC Project Steering Coin ni ittee RCDP Regional Cities Devclopment Project RPTA Real Property Tax Adminiistration RPTU Real Property Tax L.1n it SAR Staff Appraisal Report Vice President: Jean-Micliel Severino, EAP Acting Director: Walter Schwerilmer, EAI Acting Division Clief: Mohamiliad larhandi, EAIIN Task Manager: To-u LHasliimoto, EAI IN  FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT PHILIPPINES SECOND MUNICIPAL DEVELOPMENT PROJECT (Loan No. 3146-PH) Table of Contents Page No PREFACE .................... (i) EVALUATION SUMMARY................... . (ii) PART I: PROJECT IMPLEMENTATION ASSESSMEN T A. Evaluation of Objectives . B. Achievement of Objectives .2 C. Major Factors Affecting the Project .3 D. Project Sustainability .4 E. Bank Performance .5 F. Borrower Performance .7 G. Assessment of Outcome .8 H. Future Operations .8 1. Key Lessons Leared .9 J. Evaluation of Programme Objective Categories .10 PART II: STATISTICAL TABLES Table 1: Summary of Assessment Table 2: Related Bank Loans and Credits Table 3: Project Timetable Table 4: Loan Disbursement: Cumulative, Estimated and Actual Table 5: Key Indicators for Project Implementation Table 6: Key Indicators for Project Operations Table 7: Studies Included in Project Table 8a: Summary of Project Costs Table 8b: Summary of Project Financing Table 9a: Direct Benefits Table 9b: Summary of Economic and Financial Impact of Selected Sub-Projects Table 10: Status of Legal Covenants Table 11: Compliance with Operation Manual Statements Table 12: Bank Resources: Staff Input Table 13: Bank Resources: Missions APPENDICES A. Mission's Aide-Memoire B. Borrower's Evaluation MAP This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.   IMPLEMENTATION COMPLETION REPORT PHILIPPINES SECOND MUNICIPAL DEVELOPMENT PROJECT (Ln. 3146-PH) PREFACE This is the Implementation Completion Report (ICR) for the Second Municipal Development Project in the Philippines, for which Loan 3146-PH in the amount of US$ 40 million equivalent was approved on December 14, 1989 and made effective on March 2, 1990. The loan was closed on December 31, 1996. As of June 9, 1997, about 98.1 % of the loan was disbursed. A final withdrawal application of peso 4,226,800.13 is pending and will be disbursed in June, 1997. The unutilized balance of US$ 758,793.85 will be canceled. The ICR was prepared by Toru Hashimoto (Urban Planner) and Carol Gabyzon (Consultant) of EAlIN and reviewed by J. Shivakumar, Chief, EAIIN and Walter Schwermer, Project Advisor, EAIDR. The borrower provided comments that are included as appendixes to the ICR. Preparation of the ICR was begun during the Bank's supervision mission in January to February, 1997 and finalized during the completion mission in May, 1997. It is based on material in the project file, discussions with implementing agency officials, and comments received from former task managers for the project. The borrower contributed to the preparation of the ICR by preparing its own evaluation of the project's execution, providing statistical data, and conducting ex-post impact analysis in several sample local governments.   - (ii) - IMPLEMENTATION COMPLETION REPORT PHILIPPINES SECOND MUNICIPAL DEVELOPMENT PROJECT (Ln. 3146-PH) EVALUATION SUMMARY Introduction 1. The Second Municipal Development Project (MDI' 11) belongs to a series of Bank- funded Municipal Development projects in the Philippines. The MDP II was approved in December, 1989 and completed in December, 1996 as scheduled. Subsequent projects include the ongoing Third Municipal Development Project (Ln. 3455-PH), which was approved in 1992, and the proposed Local Government Finance and Development Project. Those projects support the Government's emphasis on promoting local government autonomy by providing LGUs with access to long-term credits for priority municipal investments. Project Objectives 2. The principal objectives of the loan were to: (a) assist local government units (LGUs) in Metro Manila and the surrounding provinces to provide basic infrastructure, services, and facilities, especially to the lower income communities; (b) improve the LGUs' investment planning, financing, and implementation capabilities; and (c) expand the coverage of the Municipal Development Fund (MDF) to include all LGUs in the Philippines. 3. The objectives were clearly defined and generally consistent with the Bank's evolving strategy for the urban/municipal sector in the Philippines. The project design incorporated key lessons learnt in the previous urban sector projects. The project, as designed, was generally responsive to the borrower's circumstances and priorities. The approach was consistent with the national policy on decentralization which aimed at enhancing autonomy and institutional capabilities of LGUs. Implementation Experiences and Results 4. The overall outcome of the project was satisfactory. The project successfully achieved its physical objectives of assisting LGUs in Metro Manila and the surrounding provinces to provide basic municipal infrastructure, services, and facilities. Based on a sample calculation of economic rates of return, the project has an acceptable ERR at final development. The project also achieved its institutional development objectives. It successfully established national support mechanisms for financial and technical assistance to LGUs. The institutional development impact on the participating LGUs was also substantial. For the first time in the Philippines, those LGUs had "hands-on" experiences of capital investment planning, procurement, contract supervisions, and operations of basic municipal services, which can be applied to their future capital investment and municipal service operations. The project achieved its financial objectives. The real property tax component provided a substantial expansion of the tax bases in rapidly urbanizing LGUs in and around Metro Manila and will provide a solid basis for future own-generated fiscal resources.  - (iii) - 5. The project was completed on schedule. The final project cost of the IBRD-financed portion at Peso 1,019 million (US$ 39.2 million) compared with the appraisal estinate of Peso 982 million (US$ 40.0 million). The discrepancy in Peso termns can be totally attributed to the exchange rate fluctuation. Even though the MDP 11 suffered initial implementation delays in sub-loan disbursement and cash releases to the contractors, the implementing agencies were able to complete the project on schedule. During project implemenitation the Bank agreed to increase the portion of loan proceeds for civil works that were carried out by the DPWH from 60% to 80% in order to mitigate the negative impact of the tight budgetary situation after the Gulf crisis. As a result, the local counterpart contribution was decreased to Peso 400 million (US$ 15.1 million) from the appraisal estimate of Peso 423 million (lJS$ 17.2 million). Even though the project cost remained at the same level, the executing agencies were not able to achieve fully the physical output level at the appraisal estimate due to price escalation and adoption of higher engineering standards. 6. MDP II suffered initial disbursement delays mainly due to slow cash releases to the participating LGUs. Initially, the implementing agency encountered some difficulties in ensuring compliance by LGUs of the sub-project conditionalities such as the provision of required local equity, enactment of ordinances specifying tariff rates, setting up separate trust fund accounts, etc. While the above factor adversely affected the overall pace and coverage of project implementation, the project benefited from the experiences gailed and the solid institutional framework developed under the MDP I and other previous Bank-financed urban projects. The staff of the Central Project Office (CPO) were transferred from the Project Management Office (PMO) of the Metro Manila Infrastructure and Engineering Program (MMINUTE) under the Third Urban Project (Ln. 1821-PH) and were, therefore, trained and qualified. Most of the participating LGUs cited timely and appropriate technical support from the CPO as the single most important reason for timely sub-project completion. 7. Sustainability of the sub-projects is likely. All the participating LGUs maintain local ordinances to impose appropriate public market and slaughterhouse fees, and the newly created municipal facilities are generating sufficient revenues for operation and maintenance. However, lack of adequate maintenance for other non-revenue generating infrastructure has been a recurring problem. This reflects the underlying endemic problems of inadequate financing and limited technical capacities in the LGUs. LGUs' performance enhancement in maintenance and revenue mobilization including real property tax administration (RPTA) will be one of the main focuses under the proposed LGU Finance and Development Project (LOGOFIND). Sustainability of the MDP institutions, namely the MDF and the CPO is likely. The GOP envisages undertaking further strengthening of MDP institutions under the LOGOFIND. The GOP is planning to expand and strengthen the training, technical assistance, out-reaching programs to LGUs, improve its own capacity to monitor and evaluate LGU performance, and revise the MDP national grant component to better target grants on the basis of clear criteria like equity, efficiency, and externalities. 8. The Bank's performance during each phase of the project was satisfactory. The concept and design of the MDP II effectively incorporated the innovative institutional framework devised in the MDP I, and the lessons learnt from the previous urban sector projects. During the project implementation, the Bank adequately reported and monitored issues and concerns, and recommended actions to be taken by the borrower to solve problems. Even though each Bank supervision mission spent sufficient time in Manila, it had limited time to visit various LGUs to  - (iv) - conduct physical investigations. The Bank, the GOP and the executing agencies worked well together. Regular formal and informal exclhanges took place throughout project implementation. This close interaction helped develop a collaborative working relationship which ensured the completion of the project on schedule, and with most of the stated objectives achieved. 9. The borrower's project preparation was satisfactorv. The Government took initiatives to combine elements from the MMINUTE component of the rhird Urban Project and from the institutional framework developed under the MDP 1. In the MDP II, the design of the MMINUTE was modified to allow LGUs to play a direct role in planninig, implementing and financing municipal infrastructure and services. Despite a stringent budgetary situation and delays in sub-loan disbursement, which caused initial implemenitationi delays, the borrower made every effort to complete the project on schedule. The Borrower complied with all legal covenants in a timely fashion except for recurrent delays in submitting project audit reports and the separate audits on SOEs and special accounts. As a parallel effort to the ongoing MDP Ill, the Bank started to provide assistance to the Government to assist the Commission of Audit (COA) in strengthening its capacity to perform its constitutiolal mandate. Summary of Findings. Future Operations. and Key Lessons Learned 10. Municipal development projects distinguish themselves from the previous Bank-assisted projects in the urban sector in the Philippines by relying on a "bottom up" demand-driven approach that promotes competition among a large number of participating LGUs for scarce long-term credit funds. The positive results of the MDP 11 confirmed the earlier findings in the MDP I regarding the efficiency and effectiveness of the bottom-up approach. The participating LGUs had a greater sense of ownership and showed a greater commitnent to achieve the higher performance by assuming responsibilities for project identification, preparation, financing and implementation. 11. The participating LGUs started the operation and mainitenanice of the assets created in the project according to the respective sub-loan agreements. The main conditionalities of the sub-loan agreements which have direct implication on the future operations are: (a) full repayment of the sub-loan; (b) maintaining local ordinance on market and slaughterhouse fee structures; and (c) sustaining the LGU Maintenance Trust Funld. Key indicators for adequate operation and maintenance of the assets created in the project need to be compiled by the LGUs and to be monitored by the Bureau of Local Government I inance of the Department of Finance during the follow-up projects. 12. The key lessons for future urban projects in the Philippines include: (a) Local political commitment is essential. National support mechanisms in technical and financial assistance are also important; (b) Size and complexity of sub-projects should match the capacities of LGUs. This leads to a future capacity building need for inter-municipal coordination to provide large- scale trunk infrastructure; (c) Capital investments of the LGUs need to be based on appropriate strategic planning and network analysis to maximize their impact; (d) Fiscal incentives, such as national specific matching grants, should be provided for LGUs to engage in social and environment related projects; and (e) Given the relativelv low share of real property tax in municipal finance, more comprehensive assistance should be provided to LGUs for their revenue enhancement and mobilization in addition to real property tax administration.   IMPLEMENTATION COMPLETION REPORT PHILIPPINES SECOND MUNICIPAL DEVELOPMENT PROJECT (Ln. 3146-PH) A. STATEMENT/EVALUATION OF OBJECTIVES 1.1 The principal objectives of the loan were to: a) assist local government units (LGUs) in Metro Manila and the surrounding provinces to provide basic infrastructure, services, and facilities, especially to the lower income communities; b) improve the LGUs investment planning, financing, and implementation capabilities; and c) expand the coverage of the Municipal Development Fund (MDF) to include all LGUs in the Philippines. 1.2 These objectives were to be achieved through a series of physical investment interventions by Department of Public Works (DPWH) and LGUs, local resource mobilization efforts for Real Property Tax Administration (RPTA), and technical assistance to the main national implementing agencies such as DPWH, and Department of Finance (DOF). Based on the demonstrated success of the First Municipal Development Project (MDP I, Ln 2435-PH), the Second Municipal Development Project (MDP II) adopted a "bottom up" demand-driven approach that encourages competition among a large number of participating LGUs by presenting an extensive menu of sub-projects. Sub-projects included: a) Basic infrastructure: installation of communal faucets; construction of wells; construction of communal sanitation facilities; construction and rehabilitation of drainage canals and pipes; and improvement of existing alleys, footpaths and local roads. b) Public facilities: construction and rehabilitation of public markets, slaughterhouses and motorpools. c) Equipment: provision of road and drainage maintenance equipment, utility vehicles and computers for record management. Eligible LGUs had to initiate and prepare investment proposals and agree to make the necessary fiscal, administrative and managerial improvements in order to receive financing through the project. 1.3 The objectives were clearly defined and generally consistent with the Bank's evolving strategy for the urban/municipal sector in the Philippines. The project design incorporated key lessons learnt in the previous urban sector projects in the Philippines. More specifically, it aimed at: (i) introducing low-cost designs and approaches to optimize use of limited local resources and enhancing affordability by the urban poor; (ii) strengthening LGUs to plan investments, implement projects, operate and maintain services, ard institute proper pricing for cost recovery; and (iii) providing LGUs essential access to financial and technical resources for basic municipal services. The third project objective to extend the coverage of MDF, however, was too ambitious to be tackled only through this project. Although the project initially included some technical assistance to DOF and DPWH on supervision and monitoring capabilities and  - 2 - streamlining MDF disbursement procedures, development of MDF's capacity to enable its coverage extension was too substantial to be achieved in the project. Eventually the proposed TA support component was dropped from the project, and financed with modified focuses by other grants such as PHRD grant of the Japanese Government and Institutional Development Fund (IDF). 1.4 The project, as designed, was generally responsive to the borrower's circumstances and priorities. The project recognized and attempted to address basic physical, institutional, and financial constraints to growth and productivity in the LGUs in Metro Manila and surrounding provinces, with emphasis on the needs of the poor. The approach was consistent with the national policy on decentralization which aimed at enhancing the autonomy and institutional capabilities of LGUs. B. ACHIEVEMENTS OF OBJECTIVES 2.1 The project substantially achieved and, in some participating LGUs, exceeded its physical objectives related to the provision of basic infrastructure, services, and facilities. Thirty five LGUs participated in the MDP II. The participating LGUs selected priority infrastructure from the sub-project menu. As in the MDP 1, the majority of the sub-projects were revenue- generating facilities, such as public markets (30 LGUs) and slaughterhouses (4 LGUs). Other sub-projects includes roads, drainage, bridges, motorpool building, and maintenance equipment. The MDP II public markets provided more sanitary and hygienic facilities, better circulation and ventilation, increased market capacity to meet demand for nmore permanent stalls, improved accessibility, and reduced congestion on adjacent streets. Revenue derived from market operations have also significantly increased the total revenue of LGUs. A more detailed description of direct benefits is contained in Table 9a. 2.2 Sample Economic Rates of Return (ERR) for 7 public markets are calculated. For the new markets, market rental values are used as the measurement of benefits, and for the market rehabilitation, incremental values and maintenance savings are used. Six out of the seven sample public markets showed ERRs, ranging between 13 to 29%, which are higher than the 12% opportunity cost of capital in the Philippines, and therefore acceptable. Due to the low occupancy rates of the vendors, one public market had an ERR below 12%. Table 9b shows the sample ERR calculation for sub-projects in different cities. 2.3 The institutional development impact was substantial. The MDP II effectively promoted local government autonomy by providing the needed financial access and technical assistance to eligible LGUs. The MDF was successfully established as a mechanism to provide local govemment with direct access to long-term development finance. The Central Project Office of the DPWH established itself as a capable project implementation agency at the national level and acted as a technical intermediary to assist LGUs in sub-project formulation and implementation. The Bureau of Local Government Finance (BLGF) effectively supervised the tax mapping program of 87 municipalities which participated under the RPTA program in the MDP II. Institutional development impact on the participating LGUs were also substantial. The LGUs had "hands-on" experiences of capital investment planning, procurement, contract supervision, and operation of basic municipal services. Although the Municipal Training Program (MTP) was not a component of the MDP II, local government officials were able to join the training organized under the MDP I and the MDP III. The Local Government Academy (LGA) of the Department of Interior and Local Government organized training sessions which are linked to  - 3 - specific aspects of the sub-project implementation and operations such as municipal finance and revenue administration, construction supervision, contract management and procurement, public market administration, etc. This linkage further enhanced the "on-the-job" training aspects of the sub-projects, and enhanced the demand for and relevance of the training. 2.4 The achievement of the project's financial objectives was substantial. As in the case of the MDP I, the demand for MDP 11 funding was also over-subscribed. An excess of 7 eligible LGU applications had to be referred to the MDP 111. High demand for the MDF resulted in a large number of LGUs receiving sub-loans, with a consequent substantial increase in MDF's accumulated repayments of interests and principals. The MDF also had relative success in collecting sub-loan repayments. As of December 1996. sub-loan collection rate was 100 percent: 93 percent through normal LGU sub-loan repayments of principal and interest due, and the remaining 7 percent through the Internal Revenue Allotment (IRA) intercept application. The Real Property Tax component provided a substantial expansion of the tax bases in rapidly urbanizing 87 LGUs in and around Metro Manila. According to the preliminary data in the BLGF, assessed Real Property Tax Units (RPTUs) in the participating LGUs increased 30.4% from 1991 (before the RPTA) to 1995 (after the RPTA). Total assessed RPT value increased 2.4 times. Actual RPT collection also indicates the following increases: 234% in the National Capital Region; j37% in the Region Ill; and 162% in the Region IV. The RPTA component provided solid institutional bases for the participating LGt Is to tap the buoyant fiscal bases in their jurisdictions. 2.5 The project only partially achieved its sector policy objectives and public sector management objectives. The project design provided little incentive for LGUs to extend coverage of non-revenue generating infrastructure in social and environmental sectors to the lower income communities. Due to the perceived potential cost recovery risks only few public- goods type infrastructure were financed in the MDP II: roads (6 LGUs), drainage (4 LGUs), and sanitation (2 LGUs). The MDP II did not completely achieve the objective of evolving the MDF as a self-sustaining financial intermediary as envisaged in the SAR. The MDF is starting to operate as a revolving fund under the subsequent MDP Ill. The macroeconomic policy objectives were not applicable to the project. C. MAJOR FACTORS AFFECTING THE PROJECT 3.1 The project was completed as scheduled even though the MDP II suffered initial implementation delays in sub-loan disbursement. In 1990 and 1991 mainly due to delays in cash releases to the participating LGUs. During the project start-up period, the implementing agency encountered some difficulties in ensuring compliance by l GUs to the sub-project conditionalities such as the provision of required local equity, enactment of ordinance specifying the tariff rates, setting up separate trust fund accounts, etc. 3.2 While the above factor adversely affected the overall pace of project implementation, the following factors facilitated the executing agencies to complete the project as scheduled. The project benefited from the experiences gained and the solid institutional framework developed under the MDP I and the other previous Bank-financed urban projects. The staff of the Central Project Office (CPO) were transferred from the Project Management Office (PMO) of the Metro Manila Infrastructure and Engineering Program (MMINtUTE) under the Third Urban Project (Ln. 1821-PH) and were, therefore, trained and qualified. Project supervision was relatively easier than in the MDP 1, because the areas covered by the project were more easily accessible than the  -4- remote areas covered by the MDP I. Most of the participating LGUs cited timely and appropriate technical support from the CPO as the single most important reason for timely sub- project completion. As the project framework was replicated from the MDP 1, the staff of the CPO and the BLGF were able to further deepen their understanding of the Bank's Procurement Guidelines and disbursement procedures. 3.3 Other factors adversely affecting project implementation included: a) Factors beyond government control, such as: change of mayors and city council members after the local elections in 1992 and loss of support for and/or political interference in the sub-project implementation; overall shortage of construction materials and skilled labors in some local areas; and other natural constraints such as the Mt. Pinatubo eruption, and bad weather conditions due to severe typhoons and floodings; b) Factors subject to government control, such as: passage of the Local Government Code (LGC) in 1991, which substantially increased the national grant (IRA) to LGUs and raised the minimum threshold for all residential properties tax exemption to 175,000 pesos. The LGC downgraded the significance of RPTA in the municipal finance system and provided disincentive for RPTA component expansion; and c) Factors subject to implementation agency control, such as: weak technical capabilities at the LGU level to manage and supervise civil work contracts; unfamiliarity of LGU officials with the Bank Procurement Guidelines; delays related to land acquisition; and inappropriate feasibility studies and detail engineering designs by consultants. 3.4 Other factors facilitating project implementation included: a) Factors subject to government control, such as: given the demand-driven, bottom-up approach, LGUs had positive incentives to select priority sub-projects, and to manage their implementation effectively. The project had built-in public consultation mechanisms to secure positive support by affected vendors and consumer patronage for most of the new facilities; and b) Factors subject to implementation agency control, such as: simple project execution arrangements for the national component (i.e. the CPO, instead of DPWH District Offices as in the MDP I, executed this component); and selection of small-scale municipal infrastructures which were manageable even with LGUs' limited capacities. D. PROJECT SUSTAINABILITY 4.1 Overall project sustainability and sustainability of the sub-projects are likely. All the participating LGUs maintain local ordinances to impose appropriate public market and slaughterhouse fees. The newly created municipal facilities are generating sufficient revenues for operations and maintenance. However, the BLGF needs to monitor whether LGUs will set up and maintain the Maintenance Trust Fund with appropriate appropriations as condition of the sub-loan agreements, since most of the LGUs have not set up this trust fund to date. The performance of LGUs in maintaining other non-revenue generating infrastructure has been poor and could pose a constraint to future sustainability. Lack of adequate maintenance has been a recurring problem in the MDP I and the MDP II as well as in the previous urban sector projects  - 5 - in the Philippines. This reflects the underlying endemic problems of inadequate financing and limited technical capacity in the LGUs. The MDP III tries to address this issue by implementing a pilot program for maintenance activities in some LGUs. This pilot program focuses on formulations of infrastructure inventories in participating LGUs and unit costs for maintenance. The methodology adopted in the pilot program should be replicated to other LGUs in the future. The BLGF will also monitor the LGUs' maintenance of updated real property tax bases. LGU's performance enhancement in maintenance and revenue mobilization including RPTA will be one of the main focuses under the proposed LGU Finance and Development Project (LOGOFIND). 4.2 Sustainability of the MDP institutions, namely the MDF and the CPO is likely. The GOP's commitment to overall decentralization and national out-reach support programs remains high. High demand for MDF financing has resulted in a large number of LGUs receiving sub- loans, with a consequent substantial increase in MDF's accumulated repayments of interests and principals (second generation fund). The MDF started to function as a revolving fund under the MDP III with 30% of the sub-loans coming from this second generation fund. The MDF has also experienced relative success as a long-term municipal finance mechanism. As of December 1996, the MDF sub-loan collection rate was 100 percent. Of this total, 93 percent of collections came through normal LGU sub-loan repayments of principal and interest due. The remaining 7 percent of collections have been obtained through the application of the Internal Revenue Allotment (IRA) intercept. 4.3 The CPO has continuously upgraded the skills of its staff and established itself as a capable technical intermediary for LGU capital investment planning and execution. Under the MDP III, the CPO and BLGF staff in charge of the MDF have begun to work more closely. The BLGF staff are involving themselves more with the CPO's appraisal activities, and both the BLGF and the CPO staff are cooperating to determine loanable amounts for sub-projects and to monitor the financial performance of LGUs. A key question remaining to be answered is how to retain the qualified staff in the public sector. The MDP II project staff of the CPO were hired as co-terminus bases with the project and less than half of the MDP II staff are currently retained in the CPO. 4.4 The GOP envisages undertaking further strengthening of MDP institutions under the LOGOFIND. To improve the efficiency and effectiveness of the MDF operations, the GOP plans to consolidate its financial and technical functions into a separate, more autonomous unit in the DOF. The GOP also intends to strengthen the policies and institutional capacity of the MDF over time to carry out its new responsibilities. The GOP is also planning to expand and strengthen the training, technical assistance, out-reaching programs to LGUs, improve its own capacity to monitor and evaluate LGU performance, and revise the MDP national grant components to better target them on the basis of clear criteria like equity, efficiency, and externalities. In the future, the MDF will focus its attention more on the resource-poor LGUs and encourage the social and environmental projects of LGUs, while allowing the Government Financial Institutions (GFIs) and the private sector to meet the financing needs of the more credit-worthy LGUs. The GOP has recently issued a new policy framework for LGU financing which articulates this intention. E. BANK PERFORMANCE 5.1 The Bank's performance during each phase of the project (identification, preparation, appraisal and supervision) was satisfactory. The concept and design of the MDP 11 effectively  - 6 - incorporated the innovative institutional framework devised in the MDP I, and the lessons learnt from the previous urban sector projects. As in the MDP 1, the Bank designed a simple and focused project with a limited number of components unlike the early urban sector projects. It relied on the innovative "bottom-up" demand-driven approach which induced strong local participation and project ownership. The design of the project was consistent with the Government and the Bank strategies to strengthen the financial autonomy of LGUs and to improve their capacity for managing urban growth. The Bank's performance in project preparation and appraisal was also satisfactory. 5.2 In general, the Bank performed satisfactorily in supervising the project, which included three distinct components: the national capital investment, the sub-projects, and the RPTA. Formal supervision was performed regularly once or twice a year. The Bank adequately reported and monitored issues and concerns, and recommended actions to be taken by the borrower to solve problems. Some noteworthy interventions and guidance included: a) at the early stage of the project implementation, the Bank mission clarified and provided appropriate guidance on the procedures to be followed for procurement of civil works; b) the Bank was flexible in increasing the portion of loan proceeds for civil works that were carried out by the DPWH from 60% to 80% in order to mitigate the negative impact of the tight budgetary situation (cf part C. Major Factors); c) the Bank closely monitored and provided extensive comments on the quality and contents of Sub-Project Appraisal Reports (SPARs) in order to accelerate the sub- project approval process and to enhance the sub-project substances. Through close dialogue the Bank helped the CPO to improve staff skills and to streamline the sub- project preparation process; d) the Bank recommended a more "impact-oriented" approach to the RPTA component. Subsequently, the BLGF started monitoring progress in terms of actual revenue yield materialized through the RPTA and revised the LGU selection criteria so that more urbanized LGUs which have larger revenue increment potential through RPTA assistance would receive premiums; and e) a Bank long-term consultant based in Manila continuously assisted the CPO and the BLGF staff in reviewing project implementation progress and addressing issues in advance to avoid problems in project implementation. 5.3 Even though each Bank mission spent sufficient time in Manila, it had limited time to visit various LGUs to conduct physical investigations. The Bank mission could not closely monitor the engineering quality of the civil works performed in the various LGUs. In some cases, civil works have been found to be inadequate during the construction. 5.4 The compliance with loan covenants was regularly monitored. However, the Bank had difficulty in ensuring compliance with financial covenants. This is mainly due to lack of appropriate municipal accounting and national monitoring systems. This issue is being addressed under the preparation of the LOGOFIND. 5.5 The Bank, the GOP and the executing agencies worked well together. Although the task manager changed four times from the time of project identification to the time of completion, the Bank continued to provide effective supervision with smooth transitions. Regular formal and informal exchanges took place throughout the project implementation. This close interaction  - 7 - helped develop a collaborative working relationship which ensured the completion of the project on schedule and achieving most of the stated objectives. F. BORROWER PERFORMANCE. 6.1 The overall performance of the borrower was satisfactory. Project preparation by the borrower was satisfactory. The Government took initiatives to combine elements from the MMINUTE component of the Third Urban Project and the institutional framework developed under the MDP I. In the MDP II, the design of the MMINUTE was modified to allow LGUs to play a direct role in planning, implementing and financing municipal infrastructure and services. The project scope was also adequately expanded from providing non-revenue generating infrastructure such as roads, drainage, and communal sanitation facilities to include revenue- generating projects such as public markets and slaughterhouses for which LGUs had expressed interest in borrowing sub-loans. 6.2 The GOP was able to maintain an appropriate multi-agency institutional framework for project implementation. The DPWH was the lead agency for the project, and chaired the Project Steering Committee (PSC). The PSC provided policy guidance and coordination among the various agencies involved in the project. The CPO, under the DPWH, appraised and evaluated sub-projects for financing, provided technical assistance, monitored project implementation, and acted as liaison with the Bank. The MDF was set up under the DOF, as a principal mechanism responsible for channeling long-term credit to LGUs, and is supervised by the DOF's Bureau of Local Government Finance (BLGF). The BLGF also successfully supervised and administered the RPTA component. LGUs were the executing agencies and were responsible for the identification, preparation and implementation of the sub-projects. This ensured that LGUs would select projects they considered to be a priority. However, this often led LGUs to select revenue-generating sub-projects instead of maintenance and non-revenue generating infrastructure projects. 6.3 Despite delays in sub-loan disbursement, which caused the initial implementation delays, the borrower completed the project on schedule. Some noteworthy actions included: a) in 1994, the Government reprogrammed US$ 6.7 million of budgetary authority to disburse funds from the completed Regional Cities Development Project (Ln. 2257- PH) to alleviate budget constraints for that year and to be utilized for the MDP II; b) upon the Bank mission's suggestion, the GOP reviewed issues related to budgetary appropriation procedures for the MDF sub-loans. In 1995, the GOP moved MDF sub-loans off the budget lines of the DOF and put them in line of the unprogrammed fund, thereby removing the DOF budgetary ceiling constraints; and c) by 1995, the CPO and the BLGF started working closely in identifying and appraising sub-projects for financing, with the two units carrying out joint sub- project appraisal missions. This arrangement streamlined the sub-project formulation procedures and allowed the GOP to appraise LGUs' financial capabilities well before the substantial preparation work would be done on a specific sub-project. 6.4 The Borrower complied with all legal covenants in a timely fashion except for the recurrent delays in submitting project audit reports and the separate audit on SOEs and special accounts. As a parallel effort to the MDP III, the Bank started to provide assistance to the  - 8 - Government that will assist the Commission of Audit (COA) to strengthen its capability to perform its constitutional mandate. G. ASSESSMENT OF OUTCOME 7.1 In view of the principal objectives of the project, the overall outcome of the project was satisfactory. 7.2 The project successfully achieved its physical objectives of assisting LGUs in Metro Manila and the surrounding provinces to provide basic municipal infrastructure, services, and facilities. Based on sample calculation of ERR, the project has an acceptable ERR. 7.3 The project achieved its institutional development objectives. The project successfully established national support mechanisms for financial and technical assistance to LGUs. The MDF has established itself as a long-term credit window for eligible LGUs. The CPO became a capable technical agency to support LGUs in municipal infrastructure planning and provisions. 7.4 The institutional development impact on the participating LGUs was also substantial. For the first time in the Philippines, the participating LGUs had "hands-on" experiences in capital investment planning, procurement, contract supervisions, and operations of basic municipal services to be applied to future capital investment and municipal service operations. 7.5 The project achieved its financial objectives. The project substantially achieved the national fiscal objective to shift gradually from grant financing to loan financing for capital investment projects undertaken by LGUs. The real property tax component provided a substantial expansion of the tax bases in rapidly urbanizing LGUs in and around Metro Manila and will provide a solid basis for future own-generated fiscal resources. 7.6 The project partially achieved its sector policy objectives and public sector management objectives. However, under the MDP 1, the MDF continued to function merely as an accounting and disbursement mechanism for various ODA funds to LGUs and did not evolve into a revolving fund as the SAR envisaged. The separation of national support functions between the two agencies, namely the CPO (technical/appraisal) and the BiLGF (financial/sub-loan disbursement), created some inefficiencies in the overall project implementation. The project design of the MDP 1I provided little incentive for LGUs to extend coverage of non-revenue generating infrastructure in social and environmental sectors, especially to the lower income communities. H. FUTURE OPERATIONS 8.1 The participating LGUs started the operation and maintenance of the assets created in the project according to the respective sub-loan agreements. The main conditionalities of the sub-loan agreements which have direct implication on future operations are: (a) full repayment of the sub-loan; (b) maintaining local ordinance on market and slaughterhouse fee structures; and (c) sustaining the LGU Maintenance Trust Fund. Most of the LGUs had some experience in operating and maintaining similar assets in the past. The basic institutional framework already exists, staff are mostly on board and generally familiar with their roles and functions. 8.2 Key indicators to monitor sub-project operations are described in Table 6 of the Part II. In the absence of performance indicators in the SAR, and in view of the nature of some of the  -9- assets created (roads, drainage, etc.), it is difficult to develop comprehensive monitorable criteria. Key indicators for future project operations would focus only the quantitatively monitorable aspects of the sub-projects and the RPTA components. The BLGF will start monitoring these indicators for which the LGUs will compile the basic data. 8.3 Adequate operation and maintenance of the assets created in the project need to be monitored during the follow-up projects with the MDF. 1. KEY LESSONS LEARNED 9.1 The key lessons learnt from this project relevant for other urban sector projects in the Philippines are discussed below. 9.2 Demand driven "bottom-up" project structure Municipal development projects distinguish themselves from the previous Bank-assisted projects in the urban sector in the Philippines by relying on a "bottom up" demand- driven approach that promotes competition among a large number of participating LGUs for a scarce long-term credit fund. The positive results of the MDP 11 confirmed the earlier findings in the MDP I regarding the efficiency and effectiveness of the bottom-up approach. The participating LGUs had a greater sense of ownership and showed a greater commitment to achieve the higher performance by assuming responsibilities for project identification, preparation, financing and implementation. 9.3 Ownership and commitment by LGUs and national support mechanisms The substantial impact of the MDP 11 was largely based on strong local commitments. For future Bank projects in the Philippines. it is essential to secure local commitments before proceeding with project preparation activities. LGUs must show their commitment and capacitv by adhering to their obligations, and imposing required institutional and fiscal reforms as a pre-requisite. Ideally, LGUs should assume responsibility for project identification. preparation, financing and implementation, since it increases their commitment to a project and enhances sustainability. National support mechanisms for technical and financial assistance, such as the CPO's and BLGF's (on RPTA) technical intermediary roles were proven to be very important for project success. 9.4 Size and complexity of capital investments and matching LGU capacities Capital investment packages should address the most basic needs first, which are considered a pr.ority by LGUs, and should be compatible with the technical capacity and financial resources of the implementing LGUs. Smaller sub-projects and shorter time frames (2 to 3 years) for project implementation reduce the financial burden on the LGUs and the risk that LGUs will not meet their revenue targets. However, this leads to a future capacity building need for inter-governmental and inter-municipal coordination to provide large-scale trunk infrastructure. 9.5 Need for appropriate strategic planning and network analysis The lack of strategic planning and network analysis of infrastructure at the local level was identified as one of the weakness of the MDP approach. This is especially problematic for the national component in which supplementary investment by the DPWH in roads and drainage were delivered to the participating LGUs on an ad-hoc basis and without appropriate considerations of alternatives. The impact of the DPWH's  - 10- investments could have been maximized if they had been based on appropriate network analysis. Appropriate prioritization of local capital investment needs is also essential. DPWH is proposing to address this issue under the proposed Integrated Urban Infrastructure Program (IUINPRO). 9.6 Limited demand for credit financing of non-revenue generating "public goods" type infrastructure provision The experience of the MDP II indicates that the LGtJs have little incentive to borrow for non-revenue generating infrastructure in social and environmental sectors. Provision of those infrastructure and services tend to be sub-optimal from an economic point of view as there exists a disparity between costs to individuals and costs to the society as a whole. Experiences in other countries prove that specific matching grant systems are quite effective to change incentive structures and local government's behaviors. In the future urban projects, the national grant component should be provided based on more explicit and clear rules such as mitigation of externalities, achieving efficiency gains through service regionalization, and achieving geographical and/or social equity. 9.7 Need for comprehensive revenue enhancement and mobilization for LGUs The MDP II focused exclusively on RPTA for LGUs revenue enhancement. While RPTA components succeeded in providing buoyant own-generated tax bases for the participating LGUs, the relative share of RPTA was downgraded in municipal finance after the passage of LGC. More comprehensive assistance should be provided to LGUs for their revenue enhancement and mobilization. The future Bank projects should assist LGUs in exploring a wider range of revenue enhancement and mobilization of funds through user charges, business licensing, and private sector participation through exaction, development impact fees, management contracts, franchises, concessions (including BTO, BOT, and BOO, etc.). The national government needs to monitor the LGUs' financial improvements as an integral part of its assistance to LGUs. J. EVALUATION OF PROGRAM OBJECTIVE CATEGORIES 10.1 Poverty reduction objectives aimed at providing basic municipal infrastructure and services to the lower income communities were only partially achieved. Due to the demand- driven structure of the project, most of the LGUs applied to revenue-generating projects, such as public markets and slaughterhouses, which presented minimum risks for cost recovery. Only two sanitation sub-projects were completed, and no application were received for communal water supply and other sub-projects that directly focus on poverty alleviation. 10.2 The environmental objectives were only indirectly programmed into the project. They were addressed in the national and local components concerned with drainage and flood control, and sanitation facilities. 10.3 Private sector development objectives were not directly built into the project. Still, the project had substantial impacts on enhancing commercial activities in participating LGUs through the provision of high quality public markets. The project had a limited impact on developing local contractors and consultants in the private sector.  PART-II STATISTICAL TABLES   Table 1. Summary of Assessment A. Achievements of objectives Substantial Partial Negligible Not applicable Macro policies x Sector policies X Financial objectives X Institutional development X Physical objectives X Poverty reduction X Gender issues x Other social objectives X Environmental objectives x Public sector management X Private sector development X Other (specify) B. Project Sustainability Likely Unlikely Uncertain x C. Bank Performance Highly satisfactory Satisfactory Deficient Identification X Preparation assistance X Appraisal X Supervision X D. Borrower Performance Highly satisfactory Satisfactory Deficient Not applicable Preparation X Implementation x Covenant compliance X Operation (if applicable) x E. Assessment of Outcome Highly satisfactory Satisfactory Unsatisfactory Highly unsatisfactory x  Table 2. Related Bank Loans and Credits Loan/Credit Name Purpose Year of approval Status Comments Manila Urban Upgrade Tondo Foreshore 27-May-76 Complete PCR issued; PPAR Development Project & Phase I of Dagat- no. 7092 dated (1282-PH) Dagatan site and service January, 1988 project Second Urban Extend service sites and 21-Dec-78 Complete PCR issued; PPAR Development Project (Ln. upgrading to regional no.7092 dated 1647-PH) cities. January, 1988 Third Urban Development Expand slum upgrading in 5-Mar-80 Complete PCR no. 7897 Project (Ln.1821-PH) Metro Manila. issued July 14, 1986 Urban Engineering Assist in preparation of the 8-Dec-81 Complete PCR no. 7009 Project (Ln. 2067-PH) Regional Cities issued November Development and Second 16, 1987 Central Visayas Regional Project. Regional Cities Stimulate economic 31-Mar-83 Complete PCR no. 14330 Development Project decentralization by issued Apr. 13, (Ln.2257-PH) improving basic social 1995. PPAR no. infrastructure, and 14780 issued on strengthening municipal June 30, 1995. institutions to manage urban facilities. Municipal Development Provide financing to local 14-Dec-89 Complete PCR no. 15100 Project (Ln. 2435-PH) governments for issued November infrastructure, improving 3, 1995. PPAR municipal services, and under preparation. increasing local technical and administrative capacity. Housing Sector Project Improve institutional and 24-Jun-88 Partially PCR no. 15810 (Ln. 2974-PH) policy framework to canceled issued June 25, promote efficiency and 1996. redirect new housing to lower income. Third Municipal Continue municipal 31-Mar-92 Active Closing Date is Development Project (Ln. development program June 30, 1999. 3455-PH) begun under MDP and MDP II  Table 3. Project limetable Steps in Project Cycle Date Planned Date actual/latest estimate Identification May, 1988 Preparation November 16, 1988 Appraisal Mission February, 1989 March 11, 1989 Loan Negotiations June, 1989 November 3, 1989 Board Approval July, 1989 December 14, 1989 Loan Signing August, 1989 January 19, 1990 Loan Effectiveness October, 1989 March 2, 1990 Project Completion June, 1996 November 30, 1996 Loan Closing December 31, 1996 December 31, 1996  Table 4. Loan Disbursements: Cumulative. Estimated and Actual (Us$ Million) Stage of Project Cycle 1990 1991 1992 1993 1994 1995 1996 1997 Total Appraisal Estimate 3.2 3.4 5.8 7.2 7.4 7.1 5.9 40.0 Actual 2.5 1.2 6.5 8.9 9.3 2.6 5.1 3.1 39.2 Actual as % of estimate 78.1 35.3 112.1 123.6 125.7 36.6 86.4 98.0 Cummulative Total Estimate 3.2 6.6 12.4 19.6 27.0 34.1 40.0 40.0 Actual 2.5 3.7 10.2 19.1 28.4 31.0 36.1 39.2 39.2 a/ Date of Final Disbursement: June, 1997 a/ Final disbursement figures will be provided after the approval of pending withdrawal application No. 31 with 4,226,800.13 pesos Table 5. Key Indicators for Project Implementation (Indicators are not available)  Table 6. Key Indicators for Project Operations I. Key operating indicators in SAR/President's Report Estimated Actual N/A II. Modified indicators (if applicable) N/A III. Modified indicators for future operation (if applicable) 1. Full recovery of subloan repayment 100% 93% 2. Maintaining local ordinance (regarding market and slaughterhouse fees & others) 100% of LGUs 100% 3. Sustain LGU Maintenance Trust Fund with appropriate appropriation 100% of LGUs to be monitored 4. RPTA Maintenance with positive increase on assessed value and actual collections. 95% of LGUs to be monitored 5. Achieve physical target: 100% occupancy rate for public markets and number of 95% of LGUs to be monitored livestock to be slaughtered at slaughterhouse. Table 7. Studies Included in Project (No study conducted)  Table 8.a. Summary of Project Costs Appraisal Estimate Actual Pesos (Million) US$ (Million) Pesos (Million) US$ (Million) Local Foreign Total Local Foreign Total Local Foreign Total Local Foreign Total 1. Local Component 278.4 198.4 476.8 12.9 9.2 22.1 79.9 431.3 511.2 3.1 16.7 19.8 2. National Component 174.0 115.3 289.3 8.1 5.4 13.5 107.3 320.4 427.8 4.2 12.4 16.6 3. RPTA 114.0 76.0 190.0 5.3 3.5 8.8 91.4 139.8 231.3 3.5 5.4 8.9 4. Technical Assistance/ 14.2 10.6 24.8 0.7 0.4 1.1 89.4 0.0 89.4 3.5 0.0 3.5 Advisory Service Base Cost 580.6 400.2 980.9 27.0 18.6 45.6 368.1 891.6 1259.7 14.2 34.5 48.8 Contingencies Physical 51.4 26.6 78.1 2.4 1.2 3.6 9.9 39.1 49.1 0.4 1.5 1.9 Price 206.3 140.1 346.4 4.7 3.2 8.0 22.3 88.5 110.8 0.9 3.4 4.3 Total Cost 838.4 567.0 1405.4 34.1 23.1 57.2 400.3 1019.2 1419.6 15.5 39.2 54.9 Note: Conversion Rate Average: $1.00 = P24.56 Average: US $1.00 = P25.86 May not add up due to rounding  Table 8.b. Summary of Project Financing (in P Million) Appraisal Plan Component Total LGU DPWH DOF Bank Loan Loan Share 1. Local Component 677.7 109.3 568.4 84% 2. National Component 424.0 175.3 248.7 59% 3. RPTA 272.9 107.6 165.3 61% 4. Technical Assistance/ 30.8 24.5 6.3 0% Advisory Service Total Financing 1,405.4 216.9 199.8 6.3 982.4 70% Actual Component Total LGU DPWH DOF Bank Loan Loan Share 1. Local Component 595.0 93.0 502.0 84% 2. National Component 503.9 126.5 377.5 75% 3. RPTA 231.3 80.4 11.1 139.8 60% 4. Technical Assistance/ 89.4 89.4 0% Advisory Service Total Financing 1,419.6 173.4 215.9 11.1 1,019.2 72%  Table 9a. Direct Benefits Project Component Physical Target Projected Benefits Actual Accomplishments Appraisal Actual I Local Projects Market rehabilitation 40 units 31 units * Hasten the development of * Structurally sound and and construction (3 units LGUs as commercial trading convenient facilities rehab) center. established in the markets * Improve general hygiene and * Congestion and traffic sanitation for occupants and problems within the shoppers. market vicinity is satis- factorily reduced * Improve mobility, comfort and convenience for vehicles' * Ambulant/transient vendors loading/unloading goods and given permanent stalls. pedestrian a Shortage in number of units * Increase market capacity to but still improved general meet demand for stalls hygiene and sanitation for occupants and shoppers. * Increase local revenues brought by the improvement introduced * Proper stall sectioning. under the new market facilities and its operational system. Motorpool buildings 9 units o units * Decrease deterioration of vehicles * Improved maintenance tor and equipment and 8 equipt. and maintenance and construction construction equipment and construction equipment vehicles. * Improve maintenance capacity. * Regular maintenance for street and drainage brought ________________________ _____________ by equipm ent. Slaughterhouse const. 9 units 4 units * Improve slaughterhouse capacity * Increased slaughterhouse and acquisition of capabilitv due to acquisition equipment * Improve slaughterhouse adminis- of equipment, tration and revenue collection * Unhygienic and illegal * Minimize illegal and unhygienic backyard slaughtering backyard slaughtering were minimized. * Reduce diseases resulting from * hicreased local revenues improper handling and processing due to improved adminis- of meat. tration and revenue  Project Component Physical Target Projected Benefits Actual Accomplishments | Appraisal Actual l l Local Projects, continued Sanitation 6 units 2 units * Improved health and sanitation 0 Shortage in the number condition of project sites of units due to presence of MWSS pipe water * Reduced morbidity and mortality supply for individual rates due to improved sanitation house connections. condition * Market vendors and * Lower economic losses due to consumers were able reduced incidence of sanitation- to avail of clean and related diseases like diarrhea, sanitary bathhouse parasitism, skin disease and and toilet. the like. Drainage 6.610 kms. 25.049 kms. * Elimination of flooding and stag- * Improved health and nant water in the project sites sanitation condition of project sites due to * Reduced flood damages to life elimination of flooding and property and limited public and stagnant water. contact to foul sewer * Increase in land value * Contribution to sanitation related projects. Street 42.339 kns. 22.043 kms. * Improved access and traffic * Improved access and mobility traffic mobliity brought by widened and paved * Shorter travel time road. * Lower running and maintenance * Increase in local revenues cost for vehicles due to increase in land value. * Increase in land value. ________________________ _____________ ______________ ~~~~~~~~~* Shorter travel time, lower  Project Component Physical Target Projected Benefits | Actual Accomplishments Appraisal Actual I I __________________ __________ ___________ National Projects Bridge Construction 418.0 im 127.0 Im * hmprove accessibility to bridges * Improved access and traffic mobility. * Reduce maintenance and repair cost. * Shorter travel time. Drainage 145.503 km. 50.268 kms. * Elimination of flooding and stag- * Shortage in target due to minor drainage minor drainage nant water in the project sites Price Escalation. 2.695 kms. 0.932 kms. major drainage major drainage * Reduced flood damages to life * Change in design from open and property and limited public canal to covered canal that contact to foul sewer serve as sidewalk for improved pedestrian mobility. * Increase in land value * Eliminate of flooding and * Contribution to sanitation related stagnant water in the project projects. sites. * Reduced flood damages to life and property and limited public contact to foul sewer. * Increase in local revenues due to increase in land value. Street 181.391 kms. 120.493 kms. * Improved access and traffic * Shortage in target due to Price mobility Escalation. * Shorter travel time * Increase in width and thickness of pavement that increased * Lower running and maintenance traffic mobility and durability of cost for vehicles project. * Increase in land value. a lncrease in local revenues brought by increase in land value.  Table 9.b. Summary of Economic and Financial Impact of Selected Subprojects Appraisal Actual Increase/ Decrease Actual vs. Appraisal Project Center FIRR ERR FIRR ERR Marikina, Metro Manila 14.56 15.48 19.07 22.07 increase High collection efficiency. Increase the market rate in special stalls. Taytay, Rizal 17.06 18.01 13.67 14.53 decrease Stalls not fully occupied in the first two years of operations. Tanza Cavite 12.92 13.8 14.75 16.09 increase Collect "goodwill money" (guarantee deposit) from permanent stallholders which increase the financial status of the municipality. High collection efficiency. Sta. Rosa, Laguna 14.92 15.78 12.50 13.20 decrease The market rate in the appraisal were not fully implemented. Pulilan, Bulacan 19.64 20.76 26.83 29.01 increase Collect "goodwill money" (guarantee deposit) from permanent stallholders which increase the financial status of the municipality. High collection efficiency. San Rafael, Bulacan 13.23 14.22 12.45 13.23 decrease Stalls not fully occupied in the first two years of operation. Cardona, Rizal 12.29 13.2 4.12 4.67 decrease Stalls not fully occupied in the fist two years of operation.  Table 10. Status of Legal Covenants Agreement Section Covenant type Present status Description of Covenant Comments Loan 3146-PH 4.01 Accounts/Audits soon to be complied with Project Audit to be submitted by FY 95 project audit was 9/30 each year. submitted at the end of February, 1997. The separate audit on special account to be submitted soon. 3.01 (b) & Institutional complied with Project Management Office None Sch.5 satisfactory to Bank 3.01 (b) & Financial complied with Municipal Development Fund None Sch.5 satisfactory to Bank 3.01 (b) & Sub-project/sub-loan complied with PMO to submit subloan Bank approved these Sch.5 criteria and procedures applications to Bank for review documents in 1993, 1994, and acceptance. 1995, and 1996. Table 11. Compliance with Operational Mon-ial Statements No issues of non-compliance. Table 12. Bank Resources: Staff Inputs Preappraisal Appraisal Negotiations Supervision ICR Total StaffWeeks 31.7 18.3 6.3 72.2 9 137.5 US$ 000 68.1 38.1 15.1 156.4 18.8 296.5  Table 13. Bank Resources: Missions Mission Data Date No. of Specialization Types of problems (month/year) persons represented Identification May-88 I A N/A Preparation Nov-88 3 A,A,E Project preparation work slowed down because budget releases are delayed due to lack of final Investment Co- ordinating Committee (ICC) project clearance. Appraisal Mar-89 3 A,A,E Delay in obtaining final Investment Co-ordinating Committee (ICC) approval for the project. Supervision I Jan-90 N/A N/A N/A Supervision II Apr-90 1 A No major problems. Supervision III Dec-90 2 A, B No major problems. Some confusion over the procedures to be followed for procurement of civil works contract. Supervision IV Aug-91 N/A N/A Contract bidding rescheduled because of delay in approving the 1991 budget. Supervision V Aug-92 2 A, B Delays in cash releases for subproject expenditures due to potential unavailability of funds and untimely release of approved budgets. This resulted in some contractors suspending construction. Supervision VI Jan-93 3 A,B,C Delays in cash releases and budget ceilings for sub-loan releases to local governments. Progress is already being aftfected in a number of cases, with contractors reducing the pace of work or suspending work. Supervision VII Aug-93 3 A,B,C Contract award in the project centers for local components is being delayed by the limited annual budgetary allocations for on-lending through the MDF. Supervision VIII May-94 (File missing) (File missing) Supervision IX Aug-94 2 C,D Despite repeated requests from DOF and the Bank, the Department of Management and Budget has been reluctant to apply the full IRA intercept against delinquent sub-borrowers. Supervision X Mar-95 2 G,E Potential institutional bottlenecks due to budgetary mismatch between national components (DPWH) and sub-loans (DOF). Supervision Xl Jul-95 3 D,G,E Potential institutional bottlenecks due to budgetary mismatch between national components (DPWH) and sub-loans (DOF). Supervision XIl Jan-96 2 G, E No major problems. Supervision XIII Jun-96 3 E,F,G No major problems. Supervision XIV Jan-97 2 G, E No major problems. Completion May-97 2 G, E Key to specializations: A-Economist E-Consultant B- Engineer F-Operations Officer C-Financial Analyst G-Urban Planner D-Urban Financial Specialist   APPENDICES A. Mission's Aide memoire B. Borrower's Evaluation   THE WORLD BANKJIFC/M.I.G.A. Appendix A Aide Memoire DATE: May 22, 1997 TO: Mr. Danilo Trajano Project Director, DPWH-PREMIUMED/MMINUTE COPY TO: Ms. Lorinda Carlos Director, MDF-BLGF/DOF SUBJECT: Philippines: Second Municipal Development Project (Ln. 3146-PH) Completion Mission: May 1997 INTRODUCTION 1. A World Bank mission comprising of Mr. Toru Hashimoto (Urban Planner) visited Manila between May 13 to 24, 1997 to conduct ICR mission of the Second Municipal Development Project. The local expert, Mr. Jose League (Urban Expert) provided extensive support for the mission. The main objective of the mission was to discuss with CPO, BLGF, and LGA on the content of the draft ICR Mr. Hashimoto have prepared, and record the view of the Bank, borrower, implementing agencies on project implementation and operation. This mission was a follow-up to the last supervision mission in which the mission have collected preliminary statistical data of the project and conducted site visits to inspect sub-project performance financed under the project. The mission's main findings were discussed during the Technical Sub-Committee Meeting on May 21, 1997, which was chaired by Assistant Secretary Bonoan of DPWH, and attended by officials of NEDA, DILG, DOF-BLGF, CPO, and LGA. 2. The mission would like to express their appreciation for the extensive and ready support given by all agencies. This aide memoire summarized the mission's findings which are subject to confirmation by the Bank's management. STATEMENT OF THE PROJECT OBJECTIVES 3. The MDP II was approved in December, 1989 and completed in December, 1996 as scheduled. The principal objectives of the loan were to: (a) assist local government units (LGUs) in Metro Manila and the surrounding provinces to provide basic infrastructure, services, and facilities, especially to the lower income communities; (b) improve the LGUs investment planning, financing, and implementation capabilities; and (c) expand the coverage of the Municipal Development Fund (MDF) to include all LGUs in the Philippines. 4. The objectives were clearly defined and generally consistent with the Bank's evolving strategy for the urban/municipal sector in the Philippines. The project design incorporated key lessons learnt in the previous urban sector projects. The project, as  - 2 - May 22, 1997 designed, was generally responsive to the borrower's circumstances and priorities. The approach was consistent with the national policy on decentralization which aimed at enhancing autonomy and institutional capabilities of LGUs. IMPLEMENTATION EXPERIENCES AND RESULTS 5. In view of the principal objectives of the project, the overall outcome of the project was satisfactory. The project substantially achieved and, in some participating LGUs, exceeded its physical objectives related to the provision of basic infrastructure, services, and facilities. The participating LGUs selected priority infrastructure from the sub-project menu. As in the MDP I, majority of the sub-projects were revenue- generating facilities, such as public market (31 LGUs) and slaughterhouse (4 LGUs). Other sub-projects includes roads, drainage, bridge, motorpool building, and maintenance equipment. The MDP II public market provided more sanitary and hygienic facilities, better circulation and ventilation, increased market capacity to meet demand for more permanent stalls, improved accessibility, and reduced congestion on adjacent streets. Revenue derived from market operations have also significantly increased the total revenue of LGUs. CPO calculated sample Economic Rate of Return (ERR) for 7 public markets. 6 out of the 7 sample public markets showed the ERRs which are higher than the opportunity cost of capital, and therefore acceptable. Due to the low occupancy rates of the vendors, one public market has an ERR below 12%. 6. Institutional development impact was substantial. The MDP II effectively promoted local government autonomy by providing the needed financial access and technical assistance to the resource-poor LGUs. The MDF was successfully established as a mechanism to provide local government with direct access to long-term development finance. The Central Project Office of the DPWH established itself as a capable project implementation agency at the national level and acted as a technical intermediary to assist LGUs in sub-project formulation and implementation. The Bureau of Local Governmn.t Finance (BLGF) effectively supervised the tax mapping program of 87 municipalities which participated under the RPTA program in the MDP II. Institutional development impact on the participating LGUs were also substantial. The LGUs had "hands-on" experiences for capital investment planning, procurement, contract supervisions, and operations of basic municipal services. Although the Municipal Training Program (MTP) was not a component of the MDP II, local government officials were able to join the training organized under the MDP I and the MDP III. The Local Government Academy (LGA) organized training sessions which are tied up to specific aspects of the project implementation and operations such as municipal finance and revenue administration, construction supervision, contract management and procurement, public market administration, etc. This unique structure further enhanced the "on-the-job" training aspects of the sub-projects. 7. The achievement of the project's financial objectives was substantial. As in the case of the MDP I, the MDP II was also over-subscribed. An excess of 7 eligible  -3 May 22, 1997 applications had to be turned over to the MDP III. High demand for the MDF resulted in a large number of LGUs receiving sub-loans, with a consequent substantial increase in MDF's accumulated repayments of interests and principals. The MDF also had relative success in collecting sub-loan repayments. As of December 1996, sub-loan collection rate was 100 percent: 93 percent through normal LGU sub-loan repayments of princip.1i and interest due and the remaining 7 percent through the Internal Revenue Allotment (IRA) intercept application. The Real Property Tax component provided a substantial expansion of the tax bases in rapidly urbanizing 87 LGUs in and around Metro Manila. According to the preliminary data in the BLGF, assessed Real Property Tax Units (RPTUs) in the participating LGUs increased 30.4% from 1991 (before the RPTA) to 1995 (after the RPTA). Total assessed RPT value increased 2.4 times. Actual RPT collection also indicates the following increases: 234% in the National Capital Region; 337% in the Region III; and 162% in the Region IV. The RPTA component provided solid institutional bases for the participating LGUs to tap the buoyant fiscal bases in their jurisdictions. 8. The project only partially achieved its sector policy objectives and public sector management objectives. Under the MDP II, the MDF continued to function merely as an accounting and disbursement mechanism for various ODA funds to LGUs and did not evolve into a revolving fund as the SAR envisaged. The separation of national support functions between the two agencies, namely the CPO (technical/appraisal) and the BLGF (financial/sub-loan disbursement), created some inefficiencies in the overall project implementation. The project design of the MDP II provided little incentive for LGUs to extend coverage of non-revenue generating infrastructure in social and environmental sectors, especially to the lower income communities. Due to the perceived potential cost recovery risks only few public-goods type infrastructure were financed in the MDP II: roads (6 LGUs), drainage (4 LGUs), and sanitation (2 LGUs). 9. Sustainability of the sub-projects is likely. All the participating LGUs maintains local ordinances to impose appropriate public market and slaughterhouse fees and the newly created municipal facilities are generating sufficient revenues for operations and maintenance. Lack of adequate maintenance for other non-revenue generating infrastructure has been a recurring problem. This reflects the underlying endemic problems of inadequate financing and limited technical capacities in the LGUs. LGU's performance enhancement in maintenance and revenue mobilization including RPTA will be one of the main focus under the proposed LGU Finance and Development Project (LOGOFIND). Sustainability of the MDP institutions, namely the MDF and the CPO is likely. The GOP is planning to expand and strengthen the training, technical assistance, out-reaching programs to LGUs, improve its own capacity to monitor and evaluate LGU performance, and revise the MDP national grant components to better target them on the basis of clear criteria like equity, efficiency, and externalities. 10. The Bank's performance during each phase of the project was satisfactory. The concept and design of the MDP II effectively incorporated the innovative institutional  -4- May 22,1997 framework devised in the MDP I, and the lessons learnt from the previous urban sector projects. During the project implementation, the Bank adequately reported and monitored issues and concerns, and recommended actions to be taken by the borrower to solve problems. The Bank, the GOP and the executing agencies worked well together. Regular formal and informal exchanges took place throughout the project implementation. This close interaction helped develop a friendly working relationship which ensured the completion of the project on schedule and achieving most of the stated objectives. 11. The project preparation by the borrower was satisfactory. The Government took initiatives to combine elements from the Metro Manila Infrastructure and Engineering Program (MMINUTE) under the Third Urban Project (Ln. 1821-PH) and the institutional framework developed under the MDP I. In the MDP II, the design of the MMINUTE was modified to allow LGUs to play a direct role in planning, implementing and financing municipal infrastructure and services. Despite a stringent budgetary situation and delays in sub-loan disbursement, which caused the initial implementation delays, the borrower made every effort to complete the project on schedule. The Borrower complied with all legal covenants in a timely fashion except for the recurrent delays in submitting project audit reports and the separate audit on SOEs and special accounts. The project benefited from the experiences gained and the solid institutional framework developed under the MDP I and other previous Bank-financed urban projects. The staff of the CPO was transferred from the MMINUTE Project Management Office (PMO) and were, therefore, trained and qualified. Most of the participating LGUs cited timely and appropriate technical support from the CPO as the single most important reason for timely sub-project completion. FUTURE OPERATIONS 12. The participating LGUs started the operation and maintenance of the assets created in the project according to the respective sub-loan agreements. Main conditionalities of the sub-loan agreements which have direct implication on the operations would be: (a) full repayment of the sub-loan; (b) maintaining local ordinance on market and slaughterhouse fee structures; and (c) sustaining LGU Maintenance Trust Fund. Most of the LGUs had experiences to operate and maintain similar assets in the past. Basic institutional framework already exists, staff are mostly on board and generally familiar with their roles and functions. 13. Key indicators to monitor sub-project operations are agreed as follows: (a) Full recovery of sub-loan repayment; (b) Maintaining local ordinance regarding market and slaughterhouse fees; (c) Sustain LGU Maintenance Trust Fund with appropriate appropriation; (d) RPTA maintenance with positive increase on assessed value and actual collections; and  May 22, 1997 (c) Continue to achieve physical target: I 00%) OCCLIpancy rate lor pLiblic markelts and numbiiiler ol oliveslock to he slallughtCred aIt slaughterhouse. 'h hIc B(LGF will start mlloilitol-ilig tlhese indicators lfr which the l G lis will comiipilc the basic data. AdeatLeLC operltaion and imaintcnance ol' tlhc assets cr-cated ini the project lced to be monitilored tidring tlle I`Ilow-up proiccts witli tIhe MDF)l. KEY LESSONS LEAIRNEI) 14. 'Ihle kcy lessons lcarint Iroii thilis project relevant for othier urbail sector pro jects in tllc P'hilippines arc discussed below. 15. DLetmiaid driven "bottom-up" projcct structure Municipal Development projects distinguishl themselves from the previous Bank- assisted projects in the urban sector in the Philippines by relying on a "bottom up" demand-driven approach that induces competition among a large number of participating LGUs for a scarce long-term credit fund. The positive results of the MDP 11 confirmed the earlier findings in the MDP I regarding the efficiency and effectiveness of the bottom-up approach. The participating LGUs had greater sense of ownership and showed greater commitment to achieve the higher performance by assuming responsibilities for project identification, preparation, financing and implementation. 16. Qwnership and commitment by LGUs and national support mechanisms The substantial impact of the MDP II was largely based on strong local commitments. For future Bank projects in the Philippines, it is essential to secure local commitments before proceeding with project preparation activities. LGUs must show their commitment and capacity by adhering to their obligations, and imposing required institutional and fiscal reforms as a pre-requisite. Ideally, LGUs should assume responsibility for project identification, preparation, financing and implementation, since it increases their commitment to a project and enhances sustainability. National support mechanisms for technical and financial assistance, such as the CPO's technical intermediary role was proven to be very important for project success. 17. Size and complexity of capital investments and matching LGU capacities Capital investment packages should address the most basic needs first, which are considered a priority by LGUs, and should be compatible with the technical capacity and financial resources of the implementing LGUs. Smaller sub-projects and shorter time frames (2 to 3 years) for project implementation reduce the financial burden on the LGUs and the risk that LGUs will not meet their revenue targets. However, this leads to a future capacity building need for inter- governmental and inter-municipal coordination to provide large-scale trunk infrastructure.  - 6 - May 22, 1997 1 8. Need lor appropriate strategic planning and network analysis The lack of'strategic planning and network analysis of inl'rastructure at the local level was ideentified as onc of the weakness of the MDP approach. Tlhis is especially problematic for the national component in which supplementary investmiienit by the DPWHI in road and drainage were delivered to the participating LGUs oil an ad-hoc basis and without appropriate considerations of alternatives. The impact ol' the D'WIl's investments could have been maximized if they had been based on appropriate network analysis. Appropriate prioritization of local capital investment needs is also essential. 19. Need for incentive scheme for non-revenue generating "public goods" tYvpe infrastructure provision Thle experience of the MDP II indicates that the LGUs have little incentive to provide non-revenue generating infrastructure in social and environmental sectors by borrowing. Provision of those infrastructure and services tend to be sub- optimal from an economic point of view as there exists a disparity between costs to individuals and costs to the society as a whole. Experiences in other countries prove that specific matching grant systems are quite effective to change incentive structures and local government's behaviors. In the future urban projects, national grant component should be provided based on more explicit and clear rules such as mitigation of externalities, achieving efficiency gains tlb.ough service regionalization, and achieving geographical and/or social equity. 20. Need for comprehensive revenue enhancement and mobilization for LGUs The MDP II focused exclusively on RPTA for LGUs revenue enhancement. While RPTA components succeeded in providing a buoyant own-generated tax bases for the participating LGUs, the relative share of RPTA was downgraded in the municipal finance after the passage of LGC. More comprehensive assistance should be provided to LGUs for their revenue enhancement and mobilization. The future Bank projects should assist LGUs in exploring a wider range of revenue enhancement and mobilization of funds through user charge, business licensing, and private sector participation through exaction, development impact fee, management contract, franchise, concession (including BTO, BOT, and BOO, etc.). AGREED ACTIONS 21. The mission obtained the Borrower's evaluation of the Project. The CPO will submit the comments on the draft ICR before June 4, 1997 with inputs from the BLGF and the LGA.  Appendix B THE BORROWERS IMPLEMENTATION COMPLETION REPORT FOR WORLD BANK LOAN NO. 3146-PH SECOND MUNICIPAL DEVELOPMENT PROJECT DEPARTMENT OF PUBLIC WORKS AND HIGHWAYS DEPARTMENT OF FINANCE DEPARTMENT OF INTERIOR AND LOCAL GOVERNMENT   IMPLEMENTATION COMPLETION REPORT PHILIPPINES SECOND MUNICIPAL DEVELOPMENT PROJECT (LN. 3146-PH) A. STATEMENT/EVALUATION OF OBJECTIVES 1.1 The Second Municipal Development Project (MDP II) was the combination of two (2) previous Bank financed projects in the Philippines. The first was the Metro Manila Infrastructure, Utilities and Engineering Program (MMINUTE) which was considered to be a successful component of the Third Urban Project and had been noted to have developed a methodology for identifying and prioritizing infrastructure investments and expertise in community organization. 'The second was the First Municipal Development Project (MDP 1) otherwise known as the Program for Essential, Municipal Infrastructure, Utilities Maintenance and Engineering Development (PREMIUMED) which provided sub-loan funds to Local Government Units (LGUs) outside Metro Manila through the Municipal Development Fund (MDF)2 and which enabled the LGUs to meet the growing needs of their fast growing urban population. Under MDP II, the MMINUTE project area was expanded from the LGUs in Metro Manila to the LGUs in the surrounding fringe provinces of Cavite, Laguna, Rizal and Cavite. The project was renamed MMINUTE II-FRINGE. 1.2 The government's major objectives for the MDP II were two-fold: meeting the needs of the urban poor and strengthening the financial, technical and managerial capabilities of LGUs. The specific objectives of MDP II were aimed at: a) assisting the LGUs in Metro Manila and the surrounding provinces to provide basic municipal infrastructure, services and facilities, especially to the lower income communities; b) improving the LGUs investment planning, financing and implementation capabilities and; c) expanding the coverage of the MDF to include all LGUs in the Philippines. 1.3 The project included: (i) basic infrastructure, public facilities, maintenance equipment, and consultant services for project preparation and construction supervision at the local level; (ii) Real Property Tax Administration Program; (iii) technical assistance to DPWH and DOF. 1.4 The project was very timely and proved to be successful with all its project objectives fully achieved because actual execution coincided with the government's implementation of the 1991 Local Government Code promoting full local government WB Staff Appraisal Report, MDP 2, p.6, November 17, 1989. 2 MDF was created under P.D. 1914 as a Special Revolving Fund I  autonomy. Under the project, a total of 35 project centers/LGUs were provided with funds to finance their priority investment projects located at low income areas. These LGUs have also indicated improvement in their planning, financing and implementation capabilities through the technical assistance and capability building programs provided for in the project. 1.5 A total of P501.963 million sub-loan funds from the MDF were re-lent to the 35 LGUs. As of March 31, 1997, collection efficiency for MDP II project centers was reported at 90.0%. At appraisal, the total project cost, excluding taxes and duties was estimated at about P1,405 Million (US$57.2 Million). The foreign exchange component was planned to finance about P567.0 Million (US$23.1 Million) or 40% of the total project cost while the local costs involved about P838.4 Million (US$34.1 Million) representing 60% of the total project cost. B. ACHIEVEMENT OF OBJECTIVES 2.1 Poverty alleviation and local government autonomy are two of government's major goals for sustainable development. The project objectives were in full support of these two (2) major goals. About 3 Million people located in low income communities of the 35 LGUs benefitted from the various infrastructure and facilities completed under MDP II. Project design which put emphasis in meeting the needs of the urban poor was appropriate in achieving the said objectives. Sixty nine percent (69%) or 24 LGUs of the 35 LGU beneficiaries belonged to the 3rd to 5th class low income LGUs. The total 35 LGUs exceeded the number of 33 LGUs targetted during appraisal stage. The improvement of sanitation and health, especially in low income conmmunities was one of the major benefits of the project. PMO survey results on the impact of market projects indicated that 72% of the 18 LGUs surveyed responded that the project provided sanitary and hygienic facilities in the market site. Physical Objectives 2.2 Physical objectives were substantially met. A total of 329 subprojects were implemented in the 35 LGUs while 87 LGUs participated under the RPTA component. 2.3 The solid waste study (DPWH) and the MDF Management system study (DOF) under the technical assistance component were deferred and subsequently cancelled under MDP II. It was informed that financing for these studies were taken up in subsequent Bank financed projects. 2.4 Project design was appropriate in fully achieving the objectives. Key physical indicators were provided at appraisal making it easy to quantify the variance of project outputs at completion time. Variances in physical works were primarily due to the demand driven approach of the project which resulted to the realignment of projects based on LGU priorities and consequently, the reallocation of loan funds within the subprojects. 2  2.5 Market projects ranked first in terms of the subprojects prioritized by MDP II LGUs. A total of 31 units of market subprojects were constructed in 30 LGUs3. Of these 31 market projects, 20 were new construction at the same sites while 11 were new construction at new sites. 2.6 Other subprojects consisted of slaughterhouse (4 units), sanitation (2 units), roads (142.536 km.), drainage (76.249 km.), bridge (127.00 LM), motorpool building (6 units) and maintenance equipment (8 units). 2.7 The Economic Internal Rate of Returns (EIIR) of market projects calculated for selected market projects in 7 project centers after the project completion showed a high positive rate of return (4 LGUs) although some were lower than the target (3 LGUs). Pulilan market project indicated the highest EIRR from appraisal (20.76%) to project completion (29.01%).4 Cardona Public Market indicated the lowest at appraisal (13.20%) and also at project completion (4.67%). The high EIRR for Pulilan was due to the 1 00% stall occupancy rate, collection of substantial goodwill money including the full implementation of the market ordinance tariff structure. The Cardona Public Market, on the other hand, had problems in low stall occupancy rate especially in the fish (21.88%), meat (50%), fruits and vegetables (53.85%) and dry goods (66.67%) sections. Interview with the Cardona Mayor, however, indicated a positive view on his part that there will soon be 100% stall occupancy rate in the Cardona Public Market. Similarly, with regards to the calculation of the Financial Internal Rates of Return (FIRR) for the same centers, Pulilan also had the highest FIRR from appraisal (19.64%) to project completion (26.83%) while Cardona also indicated the lowest (12.29% at appraisal and 4.12% at completion time. 2.8 The FIRR and EIRR calculations for the 7 selected market projects are shown in Table 1. Financial Objectives 2.9 As of April 30, 1997, actual loan availment was placed at US$39.425 million out of the US$40.0 million loan. About US$0.287 million allocated to subloans in 12 LGUs were not released due to their failure to submit necessary project requirements for final fund releases. These are allocations for the 10% retention for equipment, civil works and consultancies. About US$0.192 million for the National Component were likewise not disbursed. About US$0.096 million remained undisbursed for the RPTA component. 2.10 In general, however, the achievement of financial objectives was substantial. Actual total project cost reached Pl,419.557 million inclusive of local taxes as against P1,405.4 million appraisal estimate. There was substantial decrease in local cost (peso terms) from P828.4 million at appraisal to P400.315 million at loan closing date which was due to a lower application of percentage to contingencies. The increase in foreign cost from P567.0 million at appraisal to P1,019.242 million at loan closing date was primarily due to the 3 Two (2) units of public markets were implemented in Valenzuela. 4 FIRRs and ERRs were calculated for the 7 selected markets which had at the least 2 years operations from project completion. 3  increase in the percentage grant of the national component (150% of local cost) for lower income LGUs and the increase in the loan share from 60% to 80%. TABLE I Summary of Economic and Financial Impact of Selected Subprojects Center/Project Appraisal Actual FIRR EIRR FIRR EIRRE Marikina, Metro Manila 14.56% 15.48% 19.07% 22.07% Market Taytay, Rizal 17.06% 18.01% 13.67% 14.53% Market Tanza, Cavite 12.94% 13.80% 14.75% 16.09% Market Sta. Rosa, Laguna 14.92% 15.78% 12.50% 13.20% Market Pulilan, Bulacan 19.64% 20.76% 26.83% 29.01% Market San Rafael, Bulacan 14.22% 13.23% 12.45% 13.23% Market Cardona, Rizal 12.29% 13.20% 4.12% 4.67% Market C. MAJOR FACTORS AFFECTING THE PROJECT 3.1 The MDP 11 loan of US$40.0 million was signed in January 19, 1990 but only became effective in March 2, 1990. The project had an original physical completion date of December 31, 1995 and a loan closing date of December 31, 1996. While the actual project completion date was extended up to November 30, 1996, the loan closing date of December 31, 1996 remained the same. 3.2 During project implementation, there were also a number of factors that affected achievement of project objectives. Factors Not Generally Subject to Government Control. a) The Qoup D Etat, Gulf War Crisis and the major earthquake which all happened in 1990 and the 1991 Mt. Pinatubo eruption had created major setbacks in project execution of MDP II. This has resulted to major economic crisis in the country. In 1990, US $1.00 was P23.58. In 1994, US$1.00 was highest at P34.00. b) Due to the 1990 Gulf war, Bank loan share for the National component civil works was increased from 60% to 80%. This necessitated the realignment of loan allocation for the national component which also resulted to increased loan share 4  from US$10. I million at appraisal to US$14.662 million at loan closing date. Loan share for local component decreased from US$23.2 million to US$19.358 million at loan closing date. c) The Bank's guidelines of awarding bid out contracts to the lowest evaluated responsive and complying bids had significant increase in project costs resulting to increased LGU equity. Average LGU equity contribution was placed at 15%. Paombong, registered the highest with about 28% equity. d) Others such as inefficient consultants, political problems, weather disturbances, right of way problems, lack of support from vendors, change in local leadership, weak political will, political grandstanding/credit grabbbing, delay in delivery of construction materials and lack of skilled labor to perform masonry works, among others, also affected project implementation.. Factors Generally Subject to Government Control a. Interdependence of project components where local components could not be started without completion first of national components. Sample cases were construction of access roads leading to market and slaughterhouse projects in Kawit, Morong, Cardona and Los Baflos. b. Change of project priorities due to change in local leadership (1992 elections) specifically in Marikina, San Juan, Pasig, Malabon and San Miguel. c. Land acquisition took longer than originally estimated as in the cases of Paranaque (total sub-loan cancelled), Los Banos, Tagig, San Miguel and Bacoor. d. Expiration of sub-loan closing dates which could no longer be further extended beyond loan closing date which resulted to the cancellation of sub-loan balances amounting to about P58.724 million in 19 LGUs and grant funds (national component) amounting to P8.000 million in 5 LGUs. e. Failure to provide remaining equity requirement in some LGUs. Factors generally subject to Implementing Agency control a. Revisions of plans b. Red tape in project approval e. Delays in review of plans d. Delays in approval of plans by DPWH e. Cancellation of grant 5  1). PXR(OJIECT StJSTAINAIBILITY Sustainability of Suh-projects 4.1 Susta1inability ol' subprojects is likely. 13oth the I]WRs and lRRs ol'f market projects in selected project ceilters ([able I ) indicate highi positive rates ol' returin althougIl some are lower than the targets but are neverthieless still positive. Increase in market fees as a result of' the Ml)l' ll projects thlOulgh loca; COuIlCil ordinanice were all complied by the LGUs since this was a conditioin b'(.r suLb-loani fund releases. I-lowever, five (5) 1,GlJs were not able to implemiienit the recoiimmenlded increase on a one tine basis but preferred to collect goodwill mioniey (advance payment) or impleinenit the increase in a staggered basis. E. BANK PERFORMANCE 5.1 rlhe Borrower takes cognizance of the satisfactory performance of the Bank in all aspects from identificationi, appraisal, supervision phases. 5.2 Identification. At the onset, right after completion of MMINUTE I in 1987, Bank Mission was already very supportive to the continuation of MMINUTE under a modified project design. Such positive support enabled the Borrower to pursue the next phase under a collaborative partnership with the Bank's staff mission consistent with the overall governmenit's policy on poverty alleviation and promotion of local government autonomy. 5.3 Project Preparation. Bank's assistance to the project was noteworthy, especially with the assignment of well capable financial specialist and engineers to guide the PMO in packaging the project. In this aspect, the Borrower notes the technology transfer from Bank staff to PMO staff most especially in financial and economic analysis. 5.4 Appraisal, Bank mission's constructive comments to Appraisal Reports prepared/submitted by PMO had substantially improved the quality of subsequent appraisal reports incorporating such important concerns like project acceptability both on the political and social aspects. The Bank had flexibility in appraising proposed projects and in most cases advised PMO to put more emphasis in monitoring compliance on the mitigating measures to minimize project risks. 5.5 Supervision. The borrower notes the diligence of Bank staff mission in monitoring progress of implementation especially in reporting as well as LGUs' compliance of the conditionalities of their sub-loans. Although there was a turnover in the Bank's supervision mission at midpoint of project implementation (1993), there was smooth transition, continuity and flexibility in supervision. Quantity and quality of Bank staff consultants were adequate and supervision missions were timely with sufficient time durations. F. BORROWER PERFORMANCE 6.1 In general, the borrower notes the satisfactory performance of PMO and BLGF in acting as technical intermediaries to LGU sub-project formulation and implementation. 6  PMO staff had wide implementation experience considering that previous staff involvement included direct exposures in planning, design preparation, procurement and construction supervision including community development under MMINUTE I (URBAN III) as well as project preparation skills under earlier Bank financed projects (Urban I and 11). Under MDP 11, PMO extended technical assistance to LGUs in detailed design preparation and construction supervision of local subprojects while at the same time served as the implementing agency for the national subprojects. At appraisal, national subprojects were to be implemented by the DPWH District/Regional Engineering Offices. At implementation stage, DPWH Central Office gave authority to PMO to directly implement the national subprojects in cognizance of its technical capability and readiness to supervise construction works. Procurement for both local and national subprojects were, however, delegated to the respective LGU-PBACs under close guidance and assistance from PMO. In 1990 alone, PMO processed 15 On-lending Agreements (OLAs ); 1991, 5 OLAs; in 1992, 12 OLAs and in 1994, 3 OLAs. Another 7 project centers were also processed by PMO as early as 1993 and 1994 but their package investment amounting to P147.750 million were only politically cleared after the 1995 local elections and subsequently approved by the PSC and PGB in 1995. It was noted however, that their project execution and funding were no longer realistic under MDP II project implementation timetable so they were approved instead, for financing under the MDP III. 6.2 While the performance of most sub-borrower LGUs was satisfactory, it was deficient in few LGUs especially in term of delays in project execution which led to the expiration of their sub-loan closing dates and resulted to the cancellation of their unutilized sub-loans. This was the case of Paranaque (P29.034 Million) whose local project had to be cancelled because of unresolved ownership of the market site. Tagig (P10.649 Million) and Hagonoy (P5.352 Million) also incurred delays in complying with sub-loan conditionalities resulting to the expiration of their subloan closing dates which could no longer be further extended. The separate category for subloan allocated to finance consultancies for subproject preparation was not realized because all project LGUJs had set out separate LGU funds for such purposes. All LGU subloans v.ere fully utilized for detailed engineering plans and supervision as well as civil works. 6.3 The setting up of a Special Account amounting to US$2.5 million during the third quarter of 1990 (Application No. 1) helped so much in keeping up with disbursement targets. Although actual disursements to contractors/LGUs started only in early 1991, the US$2.5 million special account advanced in 1990 was already retlected as actual loan availment for year 1990. By end of 1994 which was two years before loan closing date, actual cumulative total loan availment (US$28.40 M) was 3% higher than the appraisal estimate (US$27.0 M) and was already advanced at 71% over the total loan of US$40.0 million. As early as April of 1996 (Application No. 18), government started to replenish the Special Account and by March 14, 1997 (Application No. 23), the full US$2.5 million special account had been replenished. 6.4 Although project completion was extended by almost one year from December 3 1. 1995 to November 30, 1996, loan closing date was on schedule in December 31, 1996. As of April 30, 1997, actual loan availment was placed at (JS$39.425 million. 7  G. ASSESSMENT OF OUTCOME Development Impact 7.1 Project outcome is highly satisfactory primarily because of the substantial development results. This has been fully documented from the results of the PMO survey of 1 8 LGUs on their perceived impact of public market projects: improved market facilities (78%); provided convenience and safety (78%); provided sanitary and hygienic facilities (72%); increased land values (67%); reduction in traffic (61%); improved accessibility (56%). Other positive impact cited were: increased number of establishments within the market area; increase in economic activities; upsurge of commercial activities at surrounding areas; establishments of banks; construction of subdivisions; brisk business transactions; low prices on commodities; employment generation; increase in municipal revenues; greater opportunities for farmers to sell products at competitive prices; center of trade; center of people's interaction. 7.2 Preliminary analysis of Slaughterhouse project (Malolos) indicated improved public health through the provision of good quality of meat, increased capacity for meat production for local consumption and provision of additional income to the municipality. 7.3 Likewise,for roads drainage and bridge projects, it was noted that there were increased land values, improved accessibility, increased development/business establishments and reduced travel time and vehicle operating costs. 7.4 After the project, 60% (21 LGUs) of the 35 LGUs moved from lower income class status to higher income class category. The impact of MDP projects especially the market projects is overwhelming in many MDP II project centers. For example, Pulilan before the project (1990) had only about P30,000 market income. After the project (1995), Pulilan market had income of P2.8 million. Binan market had greater results: market income before the project (1990) was only P1.741 million; after the project (1995) market income was P10.856 million. Income from business taxes and real property taxes likewise had substantial increases. Table 2 shows a comparative financial profile of 14 MDP 11 project centers before and after the project. Training Impact 7.5 MDP II centers availed of trainings funded out of MDP III at midstream of project implementation (late 1993). Not all the thirty five (35) LGUs attended the trainings provided for the MMINUTE Centers. Also, since the MMINUTE Centers were already in its implementation stage, training programs conducted for these Centers only include modules on Detailed Engineering, Construction Supervision, Financial Accounting and Monitoring Control, Municipal Enterprises (Market/Slaughterhouse) Administration and Management, Municipal Finance and Revenue Administration and the workshop on the preparation of the Project Completion Report. 8  TABLE 2 MMINUTE 11- FRINGE PROGRAM COMPARATIVE FINANCIAL PROFILE OF SELECTED PROJECT CENTERS May 1997 Before the Project After the Project Percent Increase CENTER Total Market % to RPT X to [ Busmess % to | Total Market r%to RPT % to FesmenS % to Total Market RPT usmness Y-ear In-ome (PM) In ome (PM) Total Income Total Taxes Total Year Income (PM) Income (PM) Total Income Total Tases Total Inrome Income Income Taxes Marikina, Metro Manila 1990 66.477 3.902 5.9% 12.454 18.7% 13.588 20.4% 1995 234.182 7.598 3.2% 86.758 37.0% 72.479 30.9% 252.3% 94.7% 596.6% 433.4% Malolos, Bulacan 1990 12.706 3.307 26.0% 2.317 18.2% 1.713 13.5% 1995 51.874 8.430 16.3% 4.920 9.5% 7.580 14.6% 308.3% 154.9% 112.3% 342.5% Sta. Rosa, Laguna 1990 12.263 0.315 2.6% 4.782 39.0% 2.252 18.4% 1995 101.856 1.385 1.4% 36.705 36.0% 25.975 25.5% 730.6% 339.7% 667.6% 1053.4% Kawit, Cavite 1990 6.519 1.247 19.1% 1.028 1 5.8% 0.643 9.9% 1995 24.422 1.484 6.1% 1.754 7.2% 2.585 10.6% 274.6% 19.0% 70.6% 302.0% Plaridel, Bulacan 1990 6.651 2.069 31.1% 0.925 13.9% 0.723 10.9% 1995 29.577 4.421 14.9% 3.980 13.5% 5.609 19.0% 344.7% 113.7% 330.3% 675.8% Pulilan, Bulacan 1990 3.627 0.030 0.8% 0.755 20.8% 0.459 12.7% 1995 25.249 2.880 11.4% 1.634 6.5% 4.024 15.9% 596.1% 9500.0% 116.4% 776.7% Calumpit, Bulacan 1990 4.770 0.223 4.7% 1.298 27.2% 0.361 7.6% 1995 27.543 1.989 7.2% 2.562 9.3% 2.393 8.7% 477.4% 791.9% 97.4% 562.9% San Rafael, Bulacan 1991 7.041 0.330 4.7% 0.439 6.2% 0.540 7.7% 1995 21.121 0.550 2.6% 0.774 3.7% 0.829 3.9% 200.0% 66.7% 76.3% 53.5% Tanza, Cavite 1991 5.963 0.555 9 3% 1 228 20.6% 0 645 10.8% 1995 32.347 2.204 6.8% 5.862 18.1% 3.427 10.6% 442.5% 297.1% 377.4% 431.3% Cardona, Rizal 1991 3.919 0.037 0.9% 0.370 9.4% 0.271 6.9% 1995 12.476 0.168 1.3% 0.235 1.9% 0.364 2.9% 218.3% 354.1% -36.5% 34.3% Binan, Laguna 1991 21.615 1.741 8.1% 1.404 6.5% 2.837 13.1% 1995 76.326 10.856 14.2%0 3.885 5.1% 6.963 9.1% 253.1% 523.5% 176.7% 145.4% Morong Rizal 1991 4.931 0.168 3 4%/ 0.866 17.6% 0.563 11.4% 1995 14.358 1.045 7.3% 2.296 16.0% 0.934 6.5% 191.2% 522.0% 165.1% 65.9% Taytay, Rizal 1991 24.969 1.757 7.0% 8.863 35.5% 4.221 16.9% 1995 62.661 2.298 3.7% 4.674 7.5% 15.924 25.4% 151.0% 30.8% -47.3% 277.3% Paombong, Bulacan 1991 12.150 0.009 0.1% 0.715 5.9% 0.199 1.6% 1995 20.877 0.283 1.4% 0.909 4.4% 0.648 3.1% 71.8% 3044.4% 27.1% 225.6% j TOTAL j j 193.601 j 15.690 j 8.1%j 37.444 j 19.3%j 29.015 15.0% j69 45'591i 62%1 156.948 21.4%1 149.734 4 20.4% 27 190.6% 319.2% 41 ol23r4woarnplelPro2  7.6 An Impact Assessment of trainings conducted for MMINUTE Centers was made based on the actual participation of the LGUs and on training modules they have attended. Said Impact Assessment conducted yielded satisfactorily results such as Improved Performance of Individual Skills: improved/new skills acquired, improved skills in revenue generations, improved general supervision, improved project management and Improved Performance of the LGU: Enhanced revenue generation capacity (revised tax structures, improved skills and strategies in revenue generation), better general supervision/management, improved management of assets, improved project implementation capacity; improved bidding procedures, improved construction supervision skills and detailed engineering know how, better project management; better fiscal management; increased participation of People's Organizations (Pos) and Non-Government Organizations (NGOs) in local development and improved profitability of public markets and slaughterhouses. H. FUTURE OPERATION 8.1 Regular monitoring of LGU performance after project completion must be undertaken to ensure documentation and the sustainability of full development impact. MDP II project staff were hired as co-terminus with the project. As of closing date, only 42% of the 76 PMO staff were retained. BLGF-DOF is mandated to take on the monitoring responsibility. PMO, however, has developed key monitoring indicators which can be used as baseline data for future monitoring. Future monitoring should also take into account the setting up of separate maintenance trust funds/accounts, a key issue in MDP 1. 8.2 Project replicability is likely sustainable as MDP 3 proceeded shortly in 1993 and its loan closing date is on June 30, 1999 As of April 30, 1997, a total of 600 LGUs applied for MDP III financing but only about 60 LGUs could be accomodated. A follow through project called the LGU Finance and Development Project (LOGOFIND) is now in the pipeline which could consider unserviced MDP III applicants. While LOGOFIND is DOF initiated, DPWH has been requested by DOF to assist in project preparation. Another project called the Integrated Urban Infrastructure Project (IUINPRO) is now being developed by DPWH aimed at formulating area-wide development plans for each of the priority urban conurbations to provide a common development framework for national agencies, local governments and the private sector-identifying their respective roles and contributions to the development process. 8.3 Highly important is the resolution of the key issue on the continuity of service of PMO staff. Majority of the selected staff retained up to December 31, 1997 have been with the Bank projects since 1976 (Urban 1). Government has to take cognizance of the need to maintain selected high quality staff to continue the instititutional learning process. At the moment, project staff are now being involved in MDP 3 project preparation and project supervision and others will also be tapped for the LOGOFIND and IUINPRO project preparationas well as the Metro Manila Urban Transport lmprovement Project (MMURTRIP). 10  I. KEY LESSONS LEARNED 9.1 MDP 2 project results confirmed earlier findings in MDP I regarding the efficiency and effectiveness of a "bottom-up" demand-driven program approach to project financing than the "top-down", pre-selected, project specific approach. LGU beneficiaries had greater sense of ownership and showed greater commitment resulting to better performance given the active and direct role In planning, financing, and implementation activities. 9.2 Under a modified project design approach, a shorter project duration for each LGU specific investment package (up to 2 to 3 years duration) with strong monitoring system is more achievable than a inulti-sectoral program mix ol longer project duration (usually 5 years). 9.3 Political and social acceptability of projects, political will of Local leadership and good team work of both the LGU and the PMO ensure a most likely smooth project implementation results minimizing possible delays and occurrence of cost overruns associated with the project. 9.4 Training assessment also indicated that training tied up to the implementation of the project could yield more tangible results at a shorter period of time than regular staff development courses. Strong technical assistance especially to lower income LGUs in project preparation and project management is still necessary to guide them in the complex procedural requirements of foreign-assisted projects like the MDP . 9.5 Strong monitoring system is needed to ensure project sustainability after project completion, most especially in areas of provision of maintenance funds under separate Maintenance Trust Account for completed MDP projects and the revenue enhancement programs of project LGUs. 9.6 The setting up of a Special Account (US$2.5 million under MDP 11) proved very helpful in expediting disbursements of funds due to the availability of ready cash. For future projects, special accounts should be maintained. 11   IBRD 21292R . k ~~~~~NUEVA ECIJA_ J'HILIPPINES t t \ { %4w ila~~~~~~~~~~~~~~nila DNA. R. TRINIDAD -EA PAMPANGA | N~~~~~~~~ SLI SE-A l B U LACAN /\ X Xt~~~214>\ quu^>~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Ao ,.o o9 fo' .,*o. o' BATANGASNAGARAY ),UIGI~lONT: TAS 9 RIA SECOND MUNICIPAL DEVELOPMENT~ PROECTN METRO MANILA A~~~~~~ND FRNGTAEA IAW Icptig G=Us8M ~~~~~~~~ Prvic Boundarie w L L A N : F ~~~~~~~~~~~~~~~~~~~~~~T AN AYLO) ALF~~~~~~~~ONZ MARI BATANGAS V / {~~~~~~~~~~~~~~~~BT ASPHILIPNEN City and Municipality Boundaries J _ SA~~~~JNE19    IMAGING Report No. 16741 Type: ICR