Philippines - Local Government Units Urban Water and Sanitation Project

Report No. PID5897 Project Name Philippines-Local Government Units (@+) ... Urban Water and Sanitation Project Region East Asia and Pacific Region Sector Water Sector Project ID PHPA39022 Borrower Government of Philippines through the Development Bank of the Philippines Implementing Agency Development Bank of the Philippines, DBP Building, Sen. Gil Puyat Avenue, Makati City Tel: (632) 815-9511 Fax: (632) 815-1517 Date PID Prepared September 24, 1997 Date Initial PID Updated November 30, 1998 Project Appraisal July 1998 Projected Board Date December 15, 1998 1. Country and Sector Background Significant policy changes have occurred in the Philippine water sector, and in decentralizing infrastructural responsibilities in the last few years. The highest policy making body in the country, the NEDA Board, chaired by the President of Philippines, passed three Resolutions, Nos. 4, 5 and 6 that have laid out the national policies toward water supply and sanitation provisioning in the country within a decentralized framework of service provision. On the water supply side, a Water Management Cluster or Cabinet Cluster G has been established, with the specific mandate of implementing the policy recommendations. In June 1995, a National Water Crisis Act (RA 8041) was enacted. Under this legislation, the Executive Branch was vested with special powers in order to improve the management of water resources in general, and addressing the specific water crisis faced by the Metro Manila area. On the decentralization side, the Local Government Code of 1991 has devolved urban civic responsibilities to the LGU administrations. NEDA Board Resolution No. 6 of 1996, has further clarified that planning and implementation responsibilities for infrastructure programs/projects will be with LGUs, with the Department of Interior and Local Government (DILG) functioning as the national agency responsible for building capacity in LGUs. The two main objectives of the Philippine national water sector policies are also emphasized in the World Bank's Country Assistance Strategy. These are to: - undertake institutional changes that would encourage the private sector to finance and manage water supply services in water utilities in which unmet demand from consumers is significant, and - strengthen capacity in water sector institutions to plan and implement water supply and sanitation infrastructure investments based on local priorities and demand. Translating these objectives into actual action in municipal-managed water supply systems is aim of the LGU Urban Water and Sanitation Program (LGUUWSP).  Project preparation has been undertaken at a time of significant alterations in the institutional structure and financing of water supply investments in large water utilities of the Philippines. The Metropolitan Waterworks and Sewerage System (MWSS) has been privatized through two Concession Contracts on August 1, 1997. In the water districts, and areas of urban centers there has been active interest shown by the private sector in various types of outsourcing arrangements, ranging from BOT contracts to service contracts. A significant challenge for the Government is how best to plan and implement investments that lead to sustainable water supply and sanitation services in approximately 1000 small towns (usually below 100,000 population), in which water supply systems are managed by municipal agencies. Among these towns, the project's particular focus will be on providing access to clean water and sanitation in Class V and Class VI towns, in which service access and reliability are considered extremely unsatisfactory. 2. Objectives The central objectives of this project, which will be the first of three loans utilizing the adaptable program loan instrument, are the sustainable improvement of water and sanitation services in the small (i.e. class V and class VI) towns of the Philippines, and providing phased, but sustained support for the implementation of a long term development plan in the 1000 LGU-managed water utilities in the country. The project concept is to achieve these objectives through the practical demonstration in LGU projects that, with appropriate design and institutional incentives, these relatively small water supply systems can be made both viable and sustainable. 3. Project Benefits By current estimates approximately one million residents of the poorest urban areas in the Philippines will benefit by project investments. These benefits would depend on the degree to which the project is able to assist GOP translate national policy statements into easily understood procedures and rules by which communities, town councils and Mayors are able to access financing of water supply infrastructure. The project's focus is to develop services, according to consumer wishes and willingness to pay. Preliminary evidence indicates that residents of these towns perceive substantial benefits if services are provided according to local demand. The extent of benefits, therefore, depends on the efficiency with which a demand-based approach is actually implemented. The flexible design adopted, and the utilization of the adaptable program loan instrument will enable the Government, at both the national and LGU level, to identify and discuss issues and problems as and when they arise. In other words, the project implementation experience enables the Government assess what is working and what is not working when the national policies are translated into operational programs designed at water and sanitation improvements in the Philippine cities and towns. 4. Project Risks The principal project risk is that despite the LGU Governments and communities in the project towns could be unwilling or unable to borrow funds to finance the investments, as envisaged. As a means of mitigating this risk, the - 2-  following process has been followed: 1. The project concept was discussed at a National LGU Water seminar in Manila in June this year. About 40 LGUs were represented at the Seminar, and there was broad agreement on project design; 2. The borrowing capacity of the fourteen towns participating in the first phase has been estimated, utilizing a long-term financial planning model developed for this purpose. The choice between technical options was developed on the basis of the available budget envelopes, and through a process on intensive community consultations, in which at least 60 per cent of communities signified their agreement with project rules with regard to water tariffs and service levels. As a further reconfirmation, the Sangunniang Bayan (Municipal Councils) endorsed the project concepts through formal resolutions. 3. The detailed engineering designs is being currently completed in close consultation with all stakeholders (beneficiaries, town councils and Mayors). By the time the Subsidiary Loan Agreements are signed by participating town Mayors, full ownership of the process and the product is anticipated. 4. Based on the experience of what worked and what did not work in these towns the investment program in the remaining towns will be developed. 5. Description The proposed project will provide approximately thirty five LGU-managed water utilities with sustainable provision of water and sanitation services. The project design does not envisage fixed "blueprints" or prescribed solutions. Instead, the project preparation phase, which is on-going, is finalizing detailed engineering designs for a set of about fourteen towns using a participative, "bottom-up" planning process. Once the financing, institutional and organizational rules have been validated in this phase, the project will lead to two successor loans, which will expand the program to a total of about 250 towns, or 25 per cent of all LGU-run water utilities in terms of: (a) A Water Supply Investment component, through which investments in system expansion and system rehabilitation will be undertaken on the basis of consumer demand. (b) A Sanitation component, through which town residents will be provided incentives to upgrade their sanitation infrastructure at the household and neighborhood levels. (c) An Urban drainage component, through which micro-drainage infrastructure investments will be financed, if communities express a demand for such services. (d) An Institutional Capacity Building Program Component, through which operation and management (O&M) of facilities constructed will be outsourced, wherever feasible, through different contracting arrangements involving the private sector. In addition training will provided to existing utility staff for better O&M of existing facilities. - 3-  Adaptable Program Loan Description: The three loans under the adaptable program loan instrument are expected to achieve steady progress over an agreed seven year program through the following projects: Project I (APL1): Testing and operationalizing the demand-based framework, as supported by GOP policy pronouncements, in approximately 35 LGUs. In this phase satisfactory water supply services will be extended to about 34,000 service connection in 13 towns at an investment cost of $27 million. All the towns have opted to outsource operations and maintenance of the constructed facilities through affermage (i.e. lease) contracts between the municipal governments and private sector operators. Sanitation investments by households will be financed through a special facility created for this purpose in the loan. Project II (APL2, from 2000 to 2003): Scaling up, on the basis of APL1, to a significant number of additional towns (about 80 more towns) that demonstrate sufficient demand to warrant inclusion and completion of contractual arrangements for private sector participation as developed in Phase I systems. Project III (APL3, from 2002 to 2005): Changing the role of Government Financing Institutions from retailers to wholesalers of loans, inducing private sector banks to invest in LGU-based water supply and sewerage systems. Improved financial management in LGUs and improved management of water systems through private sector participation are also expected. Triggers for subsequent loans: Likely conditions to proceed to APL2: To be met before commitment of APL2: - Devolution of operation, management, and revenue collection responsibilities under long-term commercial arrangements in 12 LGUs; Project-funded system improvements fully operational in 10 LGUs Likely conditions to Proceed for APL3: - Devolution of operation, management and revenue collection responsibilities under long-term management contracts and leasing arrangements in 40 additional LGUs - Achievement of a working ratio less than 0.50 in at least 80 LGU water utilities receiving financing from APLs 1 and 2 - Achievement of at least 16 hours of water per day to 60 per cent of households in participating urban areas with completed systems through APLs 1 and 2 investments - Average of 80t of consumers satisfied with service performance in participating LGUs - At least 60t of households in a barangay connected to the water supply system 6. Financing The total project cost is estimated to be US$31.9 million (including contingencies), of which IBRD is expected to finance US$23.3 million (about 73 per cent). The loan will be channeled through the Development Bank of the Philippines. For the technical assistance for building institutional capacity in LGUs and in DILG, bilateral funding is being currently finalized by the Government with the Nordic Development Fund and the European Union. -4 -  7. Project Implementation Project preparation began in December 1995, after funding was received from the Danish Trust Funds. These resources were utilized to test out the project concepts in four small towns of the Philippines. Based on the lessons learned, the project design was developed between January and August 1997. An additional grant of $400,000 from the Japan Government PHRD funds was utilized to complete project preparation. Project appraisal was completed in July 1998. 8. Sustainability The project will be testing out how best national policies to target relatively poor urban centers with water and sanitation services are to be operationalized. In order to accomplish this objective the project design has moved away from any "blue print" solution to a flexible program of investments and technical assistance geared towards validating what works and what doesn't work in the Philippine institutional context. Sustainability will be accomplished during project implementation through a free and frank dialogue between the project team and various stakeholders (beneficiaries, national agencies, LGU officials, contractors etc.) on project performance, and agreeing on measures to remedy any problems that may arise. 9. Lessons learned from past operations in the country/sector The Bank's lending program in the Philippines has been largely focused on MWSS or the Metro Manila area. Four loans for water supply and one for sewerage have been supported. The Manila Second Sewerage Project (MSSP) and the Water Districts Development Project (WDDP) have been approved by the Board; the MSSP is effective, while the WDDP is not yet effective. Outside the metro area, the Provincial Cities Water Supply Project (Loan 1415-PH, US$23 million) to improve water supply in five provincial towns of Luzon, Water Supply in Provincial Towns Project (loan 1710/Credit 920-PH for US$38 million in 1979, Rural Water Supply Project (Loan 2206-PH, for US$35.5 million in 1982), and the First Water Supply, Sewerage and Sanitation Sector Project (loan 3242-PH, for US$85 million in 1990) were supported. All of the above non-MWSS projects, with the exception of the First Water Supply, Sewerage and Sanitation Sector Project, have been completed. The lessons learned from the earlier experiences were largely responsible for the shift from project lending to economic and sector work in the late 1980s and early 1990s, and explains the long hiatus in processing water supply and sanitation projects outside the Metro Manila area over the past few years. Evaluations of World Bank or IDA-financed water supply projects outside Metro Manila indicate that project design problems and institutional problems led to poor cost recovery and unsatisfactory operations and maintenance problems. The most common problems encountered during implementation were: - difficulties honoring institutional and financial covenants in loan agreements; - poor coordination between implementing agencies - lack of ownership among communities of constructed facilities, and - inability in many communities/agencies to operate and maintain constructed water and sanitation facilities in a sustainable manner. - 5 -  10. Poverty Category The project aims at improving access of residents of small towns, whose income levels are relatively low, to safe water and sanitation. The bulk of project investments will be targeted to ensure that health and economic benefits from project investments reach low income households adequately. 11. Environmental Aspects The project investments address the common problems of poor coverage and unreliable access of residents in small Philippine towns to water supply and sanitation facilities. By investing in water supply, sanitation, drainage and solid waste infrastructure facilities the project will ensure that health and economic benefits reach low income households adequately. Environmental Assessments have been prepared in each of the participating towns, in order to ensure that adverse impacts, if any are managed adequately. An Operational Manual has been prepared to ensure that future subprojects meet the GOP and World Bank environmental guidelines. 12. Program Objectives Categories The project is aimed at launching a program promoting sustainable development of urban water resources in small towns located in the poorest regions of the country. It will thus address a vital component of the Government's overall plan to improve the management of water resources. 13. Contact Point The InfoShop The World Bank 1818 H Street, N.W. Washington, D.C. 20433 Telephone No. (202)458 5454 Fax No. (202) 522 1500 Note: This is information on an evolving project. Certain activities and/or components may not be included in the final project. Processed by the InfoShop week ending November 27, 1998. - 6 -  Annex Because this is a Category B project, it may be required that the borrower prepare a separate EA report. If a separate EA report is required, once it is prepared and submitted to the Bank, in accordance with OP 4.01, Environmental Assessment, it will be filed as an annex to the Public Information Document (PID) . If no separate EA report is required, the PID will not contain an EA annex; the findings and recommendations of the EA will be reflected in the body of the PID. -7-