Philippines - Municipal Development Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 5027-PH STAFF APPRAISAL REPORT PHILIPPINES MUNICIPAL DEVEIDPMENT PROJECT May 10, 1984 East Asia and Pacific Projects Department Urban and Water Supply Division 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 EQUIVALENTS Currency Unit = Peso (P) US$1 P 14.0 Pesos 1 - US$ 0.0714 WEIGHTS AND MEASURES 1 Meter (m) = 3.28 feet (ft) I square meter (sq m) = 10.76 square feet (sq ft) 1 kilometer (km) = 0.62 mile (mi) 1 hectare = 10,000 square meters (sq m) or 2.47 acres (ac) FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS CEO - City Engineer's Office COA - Commission on Audit CPDO - Municipal Planning and Development Officer CPDS - City Planning and Development Staff CPO - Central Project Office GOP - Government of Philippines LPO - Local Project Officer LWUA - Local Water Utilities Administration MDF - Municipal Development Fund MRS - Ministry of Human Settlements MLG - Ministry of Local Government MOF - Ministry of Finance MPWH - Ministry of Public Works and Highways NEDA - National Economic Development Authority OBM - Office of Budget and Management RCDP - Regional Cities Development Project Sangguniang Panglunsod - Local elected council FOR OFFICIAL USE ONLY PHILIPPINES: MUNICIPAL DEVELOPMENT PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. I. THE URBAN SECTOR A. Urban Development in the Philippines .................. 1 B. Bank Sector Lending Strategy, Rationale for Bank Involvement and Past Experience...................... 3 II. THE MUNICIPAL DEVELOPMENT PROGRAM A. Genesis and Objectives ........... ... ................. 4 B. Institutional Structure and Procedures .......... 5 C. Institutional Functions and Organization............... 11 III. THE PROJECT A. Project Components..................................... 17 B. Cost Estimates.............................. ........... 20 C. Financing Plan......................................... 21 D. Project Implementation.................................. 22 E. Procurement............. ..................... ..... 22 F. Disbursements........................ ..... ..... 24 G. Accounts and Audit.......... ....................... 25 H. Supervision and Project Reporting.....o......o......... 25 IV. FINANCIAL ASPECTS A. Financial Condition of Project Cities.................. 26 B. Cost Recovery.. ................. ................. 26 C. Municipal Finances. .. ............ ....... . ...... 27 V. PROJECT JUSTIFICATION AND RISKS A. Project Benefits... .... .............................. 29 B. Urban Poverty Impact.......................... ...... 30 C. Environmental Impact .................................. 31 D. Risks. ....... ................... 31 VI. AGREEMENTS REACHED AND RECOMMENDATIONS.......o............. 32 This report is based on findings of the preappraisal and appraisal missions which visited the Philippines in March 1983 and September 1983 respectively. The missions consisted of Messrs. Stuart Whitehead, (Mission Chief), David G. Williams, Yoshine Uchimura (AEPUW), John Comings and Marcos Mendonca (Consultants). Elisabeth Hellman and Rose Paratore assisted in the prepara- tion of this report. 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. - 11 - Annexes 1. The Project cities appraised by the Bank 2. Detailed cost estimates by city and component for cities appraised by the Bank 3. Municipal Financial Analysis for Cities Appraised by the Bank 4. MDF Fund Flows 5. Training Program 6. Monitoring Indicators 7. Implementation and Disbursements Table 1 - Project Implementation Schedule Table 2 - Estimated Schedule of Disbursements of Bank Loan 8. CPO Staffing Schedule 9. Summary of Economic Analysis Table I - Summary of Economic Evaluation Table 2 - Summary of Economic Rates of Return 10. Urban Poverty Impact 11. Technical Assistance. Brief Terms of Reference 12. List of Documents on Project File. Supporting Charts and Tables Chart 1: General Project Organization Structure Chart 2: Central Program Office Chart 3: City-level Organization MAPS Location of project cities - iii - PHILIPPINES MUNICIPAL DEVELOPMENT PROJECT Loan and Project Summary Borrower: Republic of the Philippines Beneficiaries: Municipalities and cities in the Philippines Amount: $40.0 million equivalent (including the capitalized front- end fee) Terms: 20 years, inzluding 5 years of grace, at the standard variable interest rate. Onlending Terms: The equivalent of $28.2 million of the loan proceeds would be relent by the Government through the Municipal Develop- ment Fund (MDF) to the project cities, at 14% for 20 years, including 5 years grace. These terms would be reviewed annually and any adjustments would be applicable only to the new cities applying for subloans from the MDF. The loan balance (excluding the capitilized front-end fee of $0.1 million) would be provided to various Government agencies as budgetary allocations. The Government will absorb all the standard financed charges and fees on the entire Bank loan in addition to the interest rate variations and the foreign exchange risk. Project Description: The proposed project would assist local governments provide infrastructure and municipal services to a growing urban population by: (a) establishing a revolving fund, the MDF, to provide local governments with direct access to long- term development finance; (b) establishing a national-level technical intermediary to assist local governments identify investment priorities, evaluate project proposals for financing through the MDF and act as a liaison with natio- nal and external funding agencies; and (c) strengthening the local technical and financial capacity for project implementation and service management through a training program and organizational and fiscal reform. The project includes financing for: (i) basic infrastructure including improvements to sanitation, drainage, slum areas, solid wastes management, roads, traffic management and bus terminals, and construction and upgrading of markets and slaughterhouses; (ii) infrastructure maintenance opera- tions; (iii) natior. wide tax mapping; (iv) training program; and (v) technical assistance for project implemen- tation and structural reform studies. The project's main - iv - risks are related to timely availability of central govern- ment counterpart funds, fiscal weaknesses at the city level, and staffing and management in the technical inter- mediary. The Government's commitment to the project and the flexibility in the project to reduce investment pro- grams in individual cities in line with financial constraints, provision of technical assistance, commitment to fiscal reform by the local governments and sanctions to be applied to nonperforming cities by the Ministry of Finance are, however, expected to minimize these risks. -v - Estimated Cost:. Local Foreign ' Total -------$ million---- (a) Urban infrastructure 19.7 12.8 32.5 (b) Maintenance 1.4 3.2 4.6 (c) Tax Mapping 1.4 2.1 3.5 (d) Training 1.4 2.0 3.4 (e) Technical Assistance 1.6 2.4 4.0 Base cost 25.5 22.5 48.0 Physical contingencies 1.0 0.8 1.8 Price contingencies 10.0 8.9 18.9 Total Project Cost 'a 36.5 32.2 68.7 Front-end fee on Bank loan - 0.1 0.1 Total Financing Required 36.5 32.3 68.8 Financing Plan: Bank loan 7.7 32.3 40.0 Government 23.1 - 23.1 Project cities 5.7 - 5.7 Total 36.5 32.3 68.8 Estimated Disbursements Bank FY 1985 1986 1987 1988 1989 1990 1991 Annual 4.2 5.2 6.8 8.0 8.4 6.0 1.4 Cumulative 4.2 9.4 16.2 24.2 32.6 38.6 40.0 Rate of Return: 18-24% weighted ERR for the six project cities appraised.lb Staff Appraisal - Report: No. 5027-PH, dated May 10, 1984 IBRD-17775 /a Includes taxes and duties amounting to $2.0 million. Tb- All project components would have an ERR-above the opportunity cost of capital except those with a significant health factor where a slightly lower ERR would be acceptable. I. THE URBAN SECTOR A. Urban Development in the Philippines Urbanization Trends 1.01 The Philippines is one of the rapidly urbanizing countries in East Asia. From 1960 to 1980 the urban population more than doubled to reach 15.3 million or about 31% of the total population. If the current demographic trends continue, almost nalf of population growth within the next 20 years will take place in or move to the nation's cities. By the year 2000, Metro Manila is projected to grow to over 13 million people and by its sheer size will continue to dominate the urban sector. However, medium sized regional cities are growing rapidly, some with growth rate of over 10%, and will comprise an increasing portion of the urban population. These cities, most with population between 10,000 and 100,000, function as market, service and transportation centers to their hinterlands and are often provincial capitals with government and education facilities. Around 32% of the urban population have incomes below the absolute poverty threshold, estimated at P 3,431 ($245) per capita in 1983. While the poor comprise a significant portion of the population in all urban areas, including Metro-Manila, urban poverty is especially pronounced in the Visayas, northeastern Luzon and eastern Mindanao. 1.02 The Government has invested in major inter-urban infrastructure, such as roads, sea and airports, which have spurred economic development in the regional centers, but investments in infrastructure and services within the cities have lagged mainly due to lack of funds. In many towns and cities only half the population has access to safe water supplies, and only a quarter to sanitary toilets. Lack of adequate drainage systems is so extensive that severe flooding occurs regularly in most cities causing economic disruption, accelerating the deterioration of infrastructure and compounding the problems of poor sanitation. Systems for solid wastes management are either non- existent or seriously deficient in coverage. Even public service facilities which do exist are inefficiently managed and poorly maintained, particularly public markets and slaughterhouses. These regional cities appear to be good candidates as the generators of economic growth if their basic services could be improved to levels adequate to attract and retain industry, trade and a more skilled population. Sector Organization 1.03 The government structure in the Philippines is centralized with national government selectively delegating power to lower levels - provinces, cities, municipalities and barangays (neighborhoods). At the local government level, provinces historically have not been strong political or administrative entities and most local administration has come from the 1,484 municipalities into which the provinces are fully subdivided. All areas in the Philippines are incorporated, and municipalities contain both urban and rural areas. There are, in addition, 60 chartered cities which are more highly urbanized than municipalities though also containing rural areas. The local governments (both city and municipalities) are headed by Mayors who are elected officials - 2 - (except in Metro-Manila) and who are responsible to locally elected councils (Sangguniang Panlungsod). All local governments have authority to set and collect charges and taxes, prepare budgets, hire staff and invest in and manage local services and enterprises. While all local government officials report to the Mayor, the Treasurer and Assessor are appointed and directed by the Ministry of Finance (MOF). Local governments employ city engineers to implement their locally financed programs, although in many larger cities and municipalities the Ministry of Public Works and Highways (MPWH) also has its engineers located at the local level to implement infrastructure financed from the MPWH budget. In addition to the construction, operation and maintenance of local roads, bridges, drainage and solid wastes management, local govern- ments are responsible for the provision of education and health facilities for which they receive some central government finance. Economic enterprises run by local governments include public markets and slaughterhouses with fees and rents being charged to lessees. Water supply is administered by autonomous local Water Districts which charge user fees to cover operation and mainte- nance costs and debt service. Local governments hire and pay for their own staff except for teachers' salaries which are paid by the central government's allocation for education. 1.04 In the central government, the Ministry of Local Government (MLG) is concerned with the jurisdictions and changes in status of local governments and their political relations with the national government. The MOF, through its Bureau of Local Government Finance, oversees the distribution of central government support grants and the financial management and revenue operations of local governments. The Office of Budget and Management (OBM) reviews local budgets to ensure they are in accordance with statutory requirements, while the Commission on Audit (COA) is responsible for auditing the financial records of local governments. The Ministry of Human Settlements (MHS) is responsible for reviewing the land use plans prepared by local governments. Loan funds are available from the Local Water Utilities Administration (LWUA) for projects requested by the autonomous Water Districts set up at the local level. The MPWH prepares and executes the larger urban road, drainage and flood control projects which are designated as 'national' infrastructure. Finally, local governments also prepare capital investment plans for review by the National Economic and Development Authority (NEDA), and these plans are now beginning to be incorporated into the Regional Development Investment Programs. Local Government Finance 1.05 Although local governments are expected to rrovide a variety of urban services, their finances are generally weak a?! inadequate. During 1978-82, local government expenditures increased at 15% p.a. while inflation averaged 14% and population growth 3.6% implying a decrease in expenditures per capita in real terms. Recurrent costs account for around 90% of these expenditures, so that capital investments, especially major works, were deferred as funds were used to meet day-to-day needs. Furthermore, local government's reliance on central government grants increased from 32% of expenditures in 1978 to 40% in 1982. However, it is unlikely that local governments would in the future receive the same degree of Central Government support, given severe domestic resource constraints. The Government - 3 - recognizes that local governments would in future have to generate considerably more resources if they are to provide adequate ser'ices to their growing populations. 1.06 There is considerable potential to increase revenues from local tax and non-tax sources. Property and business taxes together with fees and charges on markets and slaughterhouses constitute the principal local revenue base, and have potential for substantial increases. Gross sales for business tax purposes are under-reported and collection is weak while fees and rents on municipal markets and slaughterhouses are well below the economic rent. Pro- perty tax records in most of the cities have not been systematically up-dated so that many properties are not properly drawn, classified and assessed nor their current owner identified. Maintenance of records, filing and other administrative tasks for the most part are done manually. MOF has embarked upon a national program to increase city revenues by updating tax records through tax mapping and modernization of records management and administrative procedures. Where fiscal cadasters have been completed and computerized accounts established, as in several cities in Metro Manila, revenues have increased by around 50%. The Bank is supporting MOF's efforts through techni- cal assistance for improving records management under the Regional Cities Development Project (Loan 2257-PH) ard financing for tax mapping under the proposed project. B. Bank Sector Lending Strategy, Rationale for Bank Involvement and Past Experience 1.07 Since 1976 the Bank has assisted Government to develop policies and programs in the sector emphasizing low-cost solutions, with a focus on the urban poor. To date, nine projects have been approved for a total of $451 million. In Metro Manila the chief focus has been to upgrade unserved areas, and expand the supply of serviced land. More recently, the emphasis has broadened to include provision of economic infrastructure and services in regional cities. Within the sector, Bank investments have been concentrated in the following areas: (i) providing shelter to low income households both through upgrading slum areas and building new sites and services; (ii) improving the supply and distribution of city-wide water systems to affordable standards with full cost recovery to enable the water enterprises to become financially viable, and providing low-cost human waste and waste-water dis- posal systems to unserved areas; and (iii) improving municipal infrastructure to strengthen the economic potential and performance of key regional cities. 1.08 In addition to financing these basic service programs, the Bank has emphasized the need for institutional and management improvements in four key areas: (i) strengthening metropolitan management in Metro-Manila through the development of intersectoral planning and capital budgeting and efficient financial management; (ii) establishing intermediaries for urban development; (iii) building the capabilities of local governments to implement and manage basic service programs, strengthen local enterprises, and improve collection and management of local revenues; and (iv) emphasizing coordination among central agencies especially on the area of shelter policy, budgeting, finance and regional development policy. 1.09 Experience to date of the projects under implementation has shown that, while start-up has been slow, they have generally achieved both physical and institutional objectives, and are providing a sound basis upon which to expand the Government's urban program. Favorable features of the shelter portion of the first three projects to date include: (a) positive beneficiary response to the programs; and (b) the willingness of families to invest large sums in upgrading their dwellings (especially after tenure is assured). The provision of secondary and tertiary infrastructure to provide basic urban services to the urban poor in Metro Manila under the third urban project is off to a good start. While there is a clear demand for these programs, dis- bursements actual implementation and have been slow. The principal difficulties with the urban projects to date have been: (a) slow start-up, mainly due to land acquisition problems; (b) less than satisfactory contractor performance and construction supervision by implementing agencies on some components, in the first two projects resulting in cost overruns and delayed completion; and (c) lagging collections from shelter beneficiaries due to uncompleted works and absence of appropriate mechanisms and enforcement. 1.10 Future Bank lending in the sector will continue to build on the basic approach developed under the first four urban projects to provide basic urban services and shelter at affordable costs. However, greater emphasis will be placed on improving urban management, institution building, increased resource mobilization, and on supporting cost recovery measures. The develop- ment of national level intermediaries to channel funds and technical assist- ance to local governments for planning, management and finance would need to be pursued. It is also recognized that design and implementation of local service projects by central agencies had often proved slow and led to lack of interest at the local level. In accordance with the government strategy for decentralization, an increased proportion of lending would be devoted to assisting cities and regions outside of Metro Manila. The proposed project address the difficulties experienced under ongoing urban projects through measures aimed at strengthening the management and staffing of the project cities, and supporting the establishment of a central intermediary for municipal development. II. THE MUNICIPAL DEVELOPMENT PROGRAM A. Genesis and Objectives 2.01 From 1981, the Government and Bank missions have discussed expanding urban services among various towns and cities outside Metro-Manila. It was recognized that design and implementation of local service projects by central agencies had often proved slow and led to lack of interest at the local level, and there was a need to make local governments more responsible for planning, financing and implementing their local services. Experience in earlier urban projects had defined the range of services which were broadly needed, and it was felt that by using simple low-cost design standards, most local govern- ments were capable of implementing their own infrastructure projects. A lCentral Project Office (CPO) under MPWR was organized in 1981 to mobilize and assist local governments as they prepared their project proposals, and - 5 - subsequently to evaluate their investment programs and prepare an initial package for Bank assistance. The CPO organized several workshops for a broad range of central and local officials. At the workshops local needs and priorities were discussed and the project concepts evolved. Local officials were all eager for an opportunity to expand their operations and were willing to take active steps to raise local revenues if financing could be made available. It was clear that a competitive environment for funds and techni- cal advice would avoid complacency arising from a mechanistic selection process independent of local commitment and that clear criteria were needed for local officials to formulate their development programs. This process resulted in a programatic approach to municipal development embodied in the proposed project. 2.02 The proposed project would support the Government's effort to develop an institutional framework to finance local government-sponsored investment programs. The objective of the project is to assist the local governments provide infrastructure and improved municipal services by: (a) establishing a mechanism to provide local governments with direct access to long-term development finance on reasonable terms; (b) establishing a permanent national-level technical intermediary to (i) assist local governments in identifying infrastructure invest- ment priorities; (ii) evaluate project proposals for financing; (iii) monitor and control the program; (iv) act as a principal liaison with the Bank and other external funding agencies in promo- ting urban service improvements throughout the urban hierarchy; and (c) strengthening local technical and financial capacity for project implementation and service management through implementation of a broad based municipal training program and through organizational and fiscal reforms. B. Institutional Structure and Procedures General Structure (see Chart 1) 2.03 The main elements consist of the Central Project Office (CPO), established by MPWH, which provides technical assistance to local governments to prepare investment programs, and the Municipal Development Fund (MDF), a - 6 - loan account administered by the Treasury Bureau, MOF.-- The CPO appraises the local governments' investment proposals and monitors implementation under the guidance of a Steering Committee composed of27 inisterial-level representa- tives from key national Ministries. Subprojects- approved by the Steering Committee would be eligible for financing from the MDF and from project grant funds through the MPWH. The organization and functions of the CPO, Steering Committee and MDF are presented in detail in Section C. Once the development program has been approved by the Steering Committee, a subproject agreement would be signed between the city and the Steering Committee outlining the obligations of the city, MPWH, CPO and other implementing agencies, and a subloan agreement signed between the city and the MOF outlining both parties' obligations with respect to the MDF loan. At the city level subprojects are proposed to the CPO by the Mayor and Sangguniang Panglunsod which also establishes a local Advisory Committee of key council members prior to project implementation. The mayor designates the Local Project Officer (LPO), who, with staff of the existing city departments, is responsible for developing feasible investment proposals for consideration by the Mayor and Advisory Committee, and general management of the subproject which is implemented by the various city departments. No new departments or units are established at the city level. City Eligibility and Selection 2.04 If a city or municipality wishes to obtain funds through the MDF, it must prepare an investment program, and if necessary, hire staff and undertake fiscal reforms. It must demonstrate continued performance to targets agreed with the CPO through the preparation and appraisal stages (para. 2.05) before its selection is confirmed. If performance lags, its place is taken by another, more committed local government. A pool of 160 urban centers which are eligible were identified by the CPO based on criteria approved by the Steering Committee. All towns with populations below 10,000 and those which were not actively growing were excluded from the program as being not suffi- ciently urban. The 17 local governments of Metro-Manila were excluded from the first phase of the program in view of its regional development thrust. 1/ Alternative institutional arrangements considered were (a) establishment of a new financial institution; and (b) utilizing an existing development bank. However, these alternatives were not considered appropriate. The Government was rightly reluctant at this time to establish a new separate institution. Moreover, a development bank could not provide the close coordination required among central government ministries which are involved in implementation in the cities and to which the cities have legal responsibilities for reporting. 2/ The following terminology will be used in the report. Individual invest- ments in a city, such as markets, roads, etc., will be referred to as (project) components. Subproject will be used to describe a group of components in an individual city to be financed through the proposed Bank project. - 7 - Finally, in order to initiate discussions with a manageable group of cities from the pool, they were prioritized on the basis of (i) low per capita incomes and extent of bad environmental conditions; (ii) surveyed service deficiencies; (iii) having a significant economic function in their region; and (iv) capability and willingness to prepare, finance, implement and main- tain an investment program within the guidelines established by the CPO. Following successful project implementation by a city, it is eligible to return to the pool to seek further assistance. Confirmation was obtained- during negotiations on these criteria for city eligibility. The Local Project Cycle 2.05 With an increasing number of cities expected to apply for loans, a major concera of the CPO is to manage the timing and stages of preparation so that they are capable and ready to undertake their activities, and for the CPO to be in a position to provide the appropriate assistance and review. The process of development is therefore organized into clear phases of activity, each phase ending with a milestone commitment by the city and the CPO. The guidelines and criteria for preparation of individual project components have been developed in particular detail to relate to each of these main phases. The training activities will also use and relate to these phases and guidelines. (a) Prequalification. Following orientation, towns and cities are pre- qualified by (i) endorsement of the project by resolution of the Mayor and Sangguniang; (ii) deployment of a project preparation staff together with an operating budget; and (iii) approval of a package of fiscal and management reforms which is acceptable to the CPO as being required for effective project executio. and to support debt to be incurred. (b) Prefeasibility. With technical assistance from CPO, the city staff undertakes an assessment of needs and constraints and prepares a structure plan with defined sectoral priorities. Following review by the CPO, the city prepares project concept plans with rough costs, formulates a revenue strategy, determines staffing and organizational arrangements and an operational budget. (c) Preparation and Appraisal. Following approval by CPO of structure and concept plans, local and MPWH staff undertake physical survey work and preliminary designs, economic justification and financial feasibility analysis. Cities initiate steps to implement the reve- nue strategy and establish subproject accounts and a municipal financial monitoring system. The CPO then appraises the subproject using the criteria established (para. 2.06) and recommends its findings in an appraisal report to the Steering Committee. The CPO then prepares a Subproject Agreement (para. 2.08) which is endorsed by the Steering Committee and the city, and a Subloan Agreement (para. 2.10) which is signed by the MOF and the city. Until its Subproject Agreement is signed by the Steering Committee, any city which is not performing according to its agreement with the CPO is liable to be substituted by another from the pool which is perform- -8- ing better. The CPO's appraisal report for each city and draft Subproject and Subloan Agreements will be sent to the Bank for review and comment before final approval by the Steering Committee. This was agreed during negotiations. (d) Implementation. Following signature of the Subproject Agreement by the Steering Committee, local government and MPWH staff jointly prepare detailed engineering designs and tender documents. Imple- mentation is divided into two parts: national components and local components. Those areas, such as trunk roads and major drainage, which have traditionally been the responsibility of the central government would be implemented by the 11M using central government budget funds, while the remaining areas which have been the respon- sibility of the local governments would be implemented by the cities with their own funds and MDF loan. Pre/post-qualification, Bid and Award Committees are established and contracts are let and super- vised directly by local governments for local components and by MPWR for national components. ICB procurement of equipment needed for several cities will be managed on behalf of the cities by CPO. The CPO monitors the physical and financial performance of the project, submits regular reports to the Steering Committee and, where neces- sary, advises remedial action by the central ministries. To date 15 cities have undertaken the process through steps (a) and (b) and six cities through step (c). However it will be critical that the CPO and the MOF insist on and monitor the revenue action program to which the cities have committed themselves (para. 2.11). If the revenue increases are not realised, the city project components will have to be cut back, or rescheduled (para. 5.09). Appraisal Criteria 2.06 The CPO, with Bank assistance, has developed criteria which form a common basis for a city to develop its investment programs, the CPO to conduct its appraisal, and the Steering Committee to approve financial assistance for the city. A city's request for financing is evaluated on its consistency with the project's objectives and technical, economic, financial and administrative feasibility. Details on the financial and economic evaluation criteria are discussed in Chapters IV and V. The key features of the criteria are as follows: (a) Program Content. The city's investment program should emerge from a needs and resources assessment and should also emphasize (i) addressing basic needs in environmental sanitation, particularly those of the low income groups, (ii) improving city efficiency with economic infrastructure and management actions, (iii) strengthening economic enterprises under the city's control, and (iv) dealing with the worst deficiencies in the existing urban area first through rehabilitation, management and maintenance programs, before consi- dering infrastructure for city expansion. Individual components should be evaluated to determine whether proposed investments were the most efficient use of funds based on economic rates of return - 9 - (Annex 9, Table 1). Revenue-generating municipal enterprises should at least be self-financing so that revenues cover operating costs and debt-service obligations; (b) Program Scale and Phasing should be guided by (i) the city's techni- cal and administrative capacity including assistance which the district or city offices of the MPWH is willing to commit, to imple- ment and maintain the investments; (ii) the city should contribute at least 10% of the cost of local components from its own funds; (iii) the city's revenue net of operating, and maintenance expenditures should not fall below 1.2 times the city's debt service obligations; and (iv) the proportion of nationj components should not exceed 40% of a city's investment program.- 2.07 In order to meet the above criteria, the cities will need to under- take specific measures, such as the preparation tcgether with the local MPWR office, of a satisfactory implementation and monitoring plan, including provision of suitably qualified staff. Furthermore, the city will need to undertake fiscal measures to increase revenues and reduce expenditures to satisfy municipal enterprise financial performance, the counterpart fund and debt service criteria. The Subproject and Subloan Agreements (paras. 2.08- 2.11) will clearly specify the necessary measures to be taken by the cities. Confirmation was obtained during negotiations on the criteria for appraising the cities' programs. Subproject Agreements and Subloan Agreements 2.08 The Subproject Agreement between each city and the Steering Committee is required (i) to define the content, timing and conditions of the subprojects for which the city is requesting financial assistance, and as a basis to define the MPWH national components and formulate the Subloan Agreement with the MDF; and (ii) as a monitoring device to record project performance in physical implementation and financial and fiscal management, for use by the city, HPWH, MOF and MLG. These parties would endorse the Subproject Agreement and agree to confer to adjust timetables when slippage occurs. 2.09 The Subproject Agreement is the principal item resulting from the CPO appraisal of a city's investment program. It would comprise standard tables of key information, supplemented by a location plan showing each compo- nent, a brief project description, and a list of conditions for project imple- mentation. Each table is filled at appraisal, indicating physical and financial amounts and identifying target points or decision reviews. Blank 3/ This limit is imposed (a) to ensure that central government funds are used efficiently, (b) no one city obtains a disproportionate amount of central grant finance, and (c) the necessary balance of government coun- terpart funds is maintained in proportion to the Bank loan. - 10 - lines are left below each item for the cities to fill in the actual perform- ance. Copies of these tables would be re-submitted regularly by the cities to the CPO to monitor performance. The tables include: (i) implementation bar chart and schedule, showing phasing of preparation, construction, and imple- mentation of each phase of each component, with expected physical volumes; (ii) disbursement schedule indicating project disbursements for each component (national and local), and financing source; (iii) cumulative list of contracts showing expenditures, time and extent of variations authorized, by quarter; (iv) schedule indicating projected city revenues from each source; (v) rolling 4-year city budget indicating capital, maintenance, administration expendi- tures, debt-service commitments, and projected income, subdivided by source; (vi) staffing schedule for implementation of the development program and staff assignment to task forces and activities; and, (vii) procedures for procure- ment and contract bidding, award and payment. 2.10 The Subproject Agreements contain a number of specific requirements relating to the conditions in each city. These may include: (i) requirements for land acquisition before funds are released for physical works; (ii) veri- fication of survey by MPH before drainage and flood protection components are implemented; (iii) establishment of tenure and payment agreements regarding area improvements between residents, landowners and city; (iv) linkages and conditions in timing between different infrastructure components, and between the implementing agencies; (v) a maintenance operations plan and establishment of an equipment renewal fund; and (vi) requirements for technical assistance and training. A draft model Subproject Agreement was reviewed during negotiations. 2.11 A Subloan Agreement would be prepared by the CPO and signed between each city and the M:OF to define the terms and conditions of a subloan from the MDF. In addition to specifying the amount and terms of subloan to each local government, with breakdown into (a) civil works, (b) equipment, and (c) tech- nical assistance, plus schedules for draw-down and repayments, the Subloan Agreements would contain a number of standard clauses. First, the city will commit to a schedule of repayments to the MDF for funds withdrawn with no penalty for early repayment. Repayments to the MDF will take priority over payments related to any agreements the city enters into following the signing of the Subloan Agreement. The city must refer any proposed new agreements to the CPO, for their information and provide evidence that sufficient income is available to meet any new commitments. The Bank will be informed of any new loans by the local Governments exceeding 25% of existing loan commitments. Second, the local government will limit its borrowing from all sources during the subproject period so that total net yearly revenues from all sources (including local taxes, rents, fees, charges and central government grants) less operating costs and maintenance expenditures, will not fall below 1.2 times yearly debt service liabilities to all creditors. In the case of non-compliance with subloan conditions, MOF reserves the right to review future subloan availments from the MDF and to attach central government grants to the city to recover any outstanding debts. Third, the city will commit to a program and timetable for improvements in revenue yields from property and business taxes identifying specific tax rates, and disbursements from the MDF will be linked to an action program. Fourth, the city will establish, imple- ment and maintain a service costing system and pricing policy to ensure that - 11 - municipal enterprises are operated as financially viable undertakings. The local governments will review annually the rents, fees and charges under this pricing policy to recover the costs of operations and maintenance, administra- tive costs, and the amortization of capital costs. Fifth, the city will main- tain separate subproject accounts and operate an escrow account which would hold the city's financial contributions and subloan repayments for the project. Sufficient payments would be made into the account over the grace period to accommodate the capital repayment requirements when they become due. Separate accounts also to be established for each revenue-earning enter- prise. All subproject accounts will be audited annually. During negotiations, the above points were confirmed and a draft model Subloan Agreement reviewed. C. Institutional Functions and Organization The Steering Committee 2.12 The Steering Committee, which was established in 1980 (i) provides policy guidance to the CPO Director and assistance for any matters requiring high level intervention; (ii) reviews the selection of cities proposed for financing through the MDF; (iii) reviews CPO appraisals, signs Subproject Agreements with the cities, approves draft Subloan Agreements between MOF and the cities; and (iv) endorses the consolidated annual program budget to Government for inclusion of the cities' national components in the MPWH infrastructure budget. The Steering Committee is composed of representatives, at deputy or assistant ministerial level, of MLG (Chairman), MPWH, MOF, OBM and N§VA. Central Project Office 2.13 The main functions of the CPO are to: (i) pre-qualify cities to receive funds and assistance; (ii) assist cities to develop their overall investment programs and the fiscal measures required to meet their development proposals; (iii) appraise subprojects proposed by cities for approval of the Steering Committee; (iv) advise cities on problems of implementation, facilitate links with national agencies and monitor cities' physical and financial performance; (v) organize training programs for city staff; (vi) prepare annual budget and cash flow requirements including those for the MDF and monitor flow of funds; and (vii) evaluate impact of programs. 2.14 The CPO was organized in 1981 and was designated as an MPWH Project Office on August 18, 1983. It has worked in a positive and collaborative style with the cities but has also been firm where city programs or perform- ance were inadequate. Most cities have modified their initial programs and two cities have been dropped for non-performance, and replaced by three others. The CPO has developed technical and financial guidelines and provided the necessary assistance to the cities. The internal organization of the CPO at present consists of three groups of staff which report to the Director. These are (i) the technical staff (engineers, planners and financial analysts, who assess and evaluate the cities' development activities); (ii) city coordi- nators seconded from the MLG who research information on the cities and - 12 - perform a liaison function between the technical staff and the city officials; and (iii) training staff who have established the training requirements and are now running training courses for city officials. These y4rious technical and management activities have been assisted by consultants.- So far these arrangements have worked well to bring the cities through the appraisal phase. However, the work-load will expand to include the supervision of the implementation and monitoring phase of the cities already approved, assisting new cities entering the program, implementing the training program and scheduling, programming and budgeting and liaison with the MDF. This expan- sion of activities will require an evolution in the internal organization of the CPO and greater emphasis on internal coordination and programming. 2.15 There will be several area team divisions, the number increasing as the portfolio of cities increases, an administrative division, a training division, and a program and finance staff, reporting to the Executive Director (Chart 2). An important feature of the management approach is the regular meetings of all the divisions and offices, chaired by the Director. Progress, common problems, review of the area divisions' city appraisals, and selection of future cities would be undertaken in these meetings. These arrangements were discussed during appraisal and confirmed during negotiations and would be put in place as new functions and workload buildup. They are expected to be in full operation by end-1984. (a) The Program Staff will assist in executing operational policies; maintaining liaison with key central Ministries and international agencies; monitoring overall program schedules, budgets and project - disbursements, programming loan advances from the MDF, and arranging legal documentation. (b) The Financial Evaluation section will be staffed by experienced persons in municipal finance seconded from the Bureau of Local Government Finance, MOF. They would guide the financial analysts in the area divisions, evaluate the cities' proposed financial pro- grams, and perform their regular MOF functions by evaluating city financial management and advising MOF on sanctions in the cases of non-performance. (c) The Area Divisions will be organized around geographic regions and would each be responsible for a portfolio of 4-6 cities. They will (i) provide the central information needed by the cities, (ii) pro- vide assistance to the cities in each stage of developing their investment programs from planning and concept development through implementation, to maintenance and operations including fiscal and financial management as well as engineering aspects, (iii) appraise the cities' investment proposals and prepare appraisal reports and 4/ Consultants Cowi-Consult (Denmark) and Gilmore, Hankey, Kirke and Partners (UK) are financed under technical assistance in the Third Urban Development Project (Loan 1821-PH). - 13 - draft Subproject and Subloan Agreements, (iv) consolidate and evaluate the monitoring reports prepared by the cities, and (v) pro- vide consolidated information on existing and future project expenditures and on fiscal performance to the Program Staff. Each division will consist of a group of technical specialists, the core individuals being area engineers and area coordinator/liaison, each pair being responsible for 2-3 cities. Additional staff with skills in planning, finance and maintenance engineering will also be iccluded in each division. (d) The Training Division will manage programs for training city staff, concentrating on those cities which need to strengthen their capa- bilities to undertake physical improvement programs. Each training module has its own training coordinator and technical staff respons- ible for analyzing the needs of the target group; defining institu- tional objectives; scheduling training courses and monitoring the impact in terms of improved operational performance. The programs will draw on the existing capabilities of trainers and resource persons of other institutions including national agencies such as MLG, MPWH, NEDA, the Development Academy of the Philippines, etc., and local governments, and to a lesser extent from the CPO operational staff, to provide courses and training materials. (e) The Administrative and Operational Support Division will provide the services for the internal administration of the CPO. 2.16 Local and expatriate consultants who will assist the CPO will work with the staff of the relevant divisions and report to the division heads. Consultants assisting in the executive staff will report to the Executive Director. 2.17 At appraisal the CPO had 19 professional/technical and 17 adminis- trative support staff, plus expatriate consultant assistance. There is an immediate need to expand technical staff to cope with the projected work- load. To date 6 cities have been fully appraised and a further 9 cities are due for appraisal during 1984 and 1985. Before the MDF becomes operational, the financial management and monitoring systems in the CPO must be established and the Program staff put in place. A total of 45 technical staff is esti- mated to be needed by end 1984 (Annex 8). The schedule for staffing of the CPO was confirmed during negotiations. The immediate staffing requirements of CPO were discussed at appraisal and subsequently the Government (i) hired three additional infrastructure engineers, two municipal financial analysts and two project financial analysts, (ii) arranged for a senior municipal financial analyst to be seconded to the CPO from the MOF, and (iii) negotiated consultant contracts for a financial economist, a sanitary engineer, a maintenance engineer and an infrastructure/drainage engineer. Hiring of these staff and consultants were a condition of negotiations. The MPWH formal designation of the CPO (para. 2.14) will assist in offering higher pay for staff; but if suitably qualified staff can still not be obtained, the Govern- ment will hire local staff as consultants to allow higher pay to attract qualified staff and ensure an adequate capability. It was agreed at negotia- tions that the CPO would be adequately staffed and funded and confirmation was obtained during negotiations of structure and staffing. - 14 - Municipal Development Fund 2.18 The principles and procedures concerning the MDF were discussed extensively between the Government and the Bank at pre-appraisal and appraisal. It was felt that it should become the principal mechanism for long-term loan finance available for urban services to all eligible local governments. To enable the fund to grow, become self-sustaining, and minimize pressure on the budget, it should revolve, so that repayments from local governments would be re-invested to expand the overall program. The proposed Bank loan and later possibly government and other foreign funds would be invested as seed grants, and the Government would be responsible for payment of all finance charges and principal on the Bank loan. In the long-term the MDF might intermediate in the domestic capital market, although prospects for this in the current environment are not clear. The viability of the fund has not, therefore, been based on these assumptions. 2.19 The MDF was considered to be best located in the MOF which is responsible for policy and review of local government finances and appointment of local financial officers. However, the MDF staff in MOF will be primarily responsible for disbursement and administration of the subloan accounts and the responsibility of project evaluation and monitoring of implementation will be with CPO. Coordination between CPO and MOF will be assured through MOF representation on the Steering Committee that oversees CPO operations (para. 2.12). Furthermore, the Financial Evaluation Section in CPO which evaluates the cities' financial capabilities and recommends sanctions in cases of non-compliance with sub-loan agreements would be staffed by municipal finance specialists seconded from the Special Projects Unit recently estab- lished in the Bureau of Local Government Finance, MOF (see Chart 1). This unit, which has 25 positions currently under recruitment, will strengthen the supervision and monitoring capability of MOF for all local governments, particularly in relation to revenue administration in cities involved in major investment program. The structure, procedures and staffing for the MDF have been reviewed and are satisfactory to the Bank. On March 29, 1984, the Government formally established the MDF in the Treasury Bureau, MOF, under Presidential Decree 1914 fulfilling a condition of negotiations. 2.20 The terms of the MDF subloans to the cities are interest rate of 14Z p.a. on withdrawals from their balance, maturities up to 20 years, including 5 years grace. The lending rate was derived on the basis of the cities' financial ability and the Bank's interest rate, with a margin to reflect the front-end fee, commitment charge and foreign exchange risk, and is in keeping with the emerging policy for cities to bear increasing financial responsibil- ity for their programs. In contrast, past investments of this type included in the project were to a large extent financed from central government grants. The interest rate is projected to be positive in real terms and would be reviewed annually in light of changing economic and financial environment and adjusted for future subloans to cities to be appraised, though once approved, the rate would be kept constant for the life of the subloan. Thcse re-lending arrangements are justified in view of the need to avoid administra- tive complications and facilitate the cities financial planning efforts. Other subloan conditions relating to subloan accounts, future borrowing limitations, etc., will be reflected in clauses in the Subloan Agreements and - 15 - are presented in para. 2.11. Detailed procedures to transfer the proceeds of the Bank loan to the fund and the operating procedures for the fund will be contained in a Memorandum of Agreement, among MOF, OBM, MLG, MPWH and NEDA. Draft implementing guidelines for MDF were reviewed during negotiations and the signing of the Memorandum of Agreement is a condition of effectiveness. 2.21 The initial capital for the MDF provided under the proposed Bank loan would amount to P 395 million ($28.2 million) through the project implementation period. Annex 4 indicates the fund flow for the MDF based on the projected activity under the project whereby funds will be committed over 1984-86. The projections assume that in 1987 the MDF will commit F 100 million which will be disbursed over a four-year period at the current loan terms. These annual com- mitments are assumed to increase by 15% per annum after 1988. Under this scenario, additional loans of around P 150 million will be required by 1994. Payment of interest and repayments of subloans by the cities are estimated to increase their share in total sources of funds from 44% of total sources in 1988 to 70% in 1994. This level of assistance is based on an assumed capability of CPO to appraise five cities per year on average. On this basis about 50 cities would be assisted between 1985 and 1994, affecting roughly four million people. Organization and Management at the Local Level 2.22 The CPO has discussed and agreed with each local government its overall infrastructure development priorities and the need for the major share of city development funds to be earmarked for this project. Since about 80% of each city's infrastructure development and maintenance program will come under the project, the existing local government organizational structure will be used to the maximum extent possible rather than superimposing a separate project office at the city level, although some adjustments are proposed to improve internal communication and a more active development orientation. In general, the cities have demonstrated good engineering design capability, many having quickly prepared full working drawings, although investment program conceptu- alization needed strengthening through advice from the CPO. The staffing of the six appraised cities was reviewed and considered adequate for project prepara- tion, and supervision of implementation except for survey teams who will be hired locally as required. Where municipal engineering capability is weak, arrangements have been made for secondment of MPWH district engineers to work with the local engineer. There is, in general, some overstaffing in administra- tive and clerical positions, and each city is reviewing the potential for redeploying staff after they undergo training. However, management and profes- sional skills are still needed, and a program of recruitment is being devised by MLG which would fit with the training program to be established under the project (see Annex 5). 2.23 The structure of the key local government offices for the project in each city is shown in Chart 3. This structure is already in place in the six appraised cities. The Local Project Officer (LPO) is the key local official who would be responsible for the overall management of the subproject in each city. He will report to the Mayor and receive policy guidance from the local Advisory Board, and be the principal link with the CPO. If the project is to provide a vehicle to improve development planning and coordination of opera- tional activities, the City Planning and Development Staff (CPDS) needs to be - 16 - strengthened and should be prominently involved in the overall management of the project. Whenever possible the City Planning Development Officer (CPDO) will therefore be designated as the LPO. In some cases, it is preferable to designate the City Engineer with this responsibility. In the few instances where the need for a large long-term development program does not exist, and the CPDO and City/Municipal Engineer lack adequate experience, the district engineer (MPWH) would be designated as LPQ. All local governments appear agreeable to these arrangements. 2.24 The existing functions of the CPDS would be strengthened to focus on: (a) Policy development, analysis of needs, priorities, location of development, concept plans. Development of project feasibility studies with assistance of the City Engineer's Office, and prepara- tion of the city investment programs and studies with advice from the City Treasurer's office, for submission to the LPO; (b) Programming and Budgeting. Scheduling and coordination of indi- vidual project components (with inputs from the Treasurer's and Engineer's offices); identification of staff requirements, projec- tions of expenditures; and advice to City Treasurer's Office of contract disbursements and funding required from the MDF; and (c) Monitoring, Evaluation and Information. Supervision of physical and financial progress reported by implementing officers, evaluation of corrective actions and limited evaluation of the impact of project components, and development of a management information system for planning land development and infrastructure projects. 2.25 The City Engineer's Office (CEO) will have the primary responsibil- ity for implementing physical infrastructure works from preliminary design, survey, and detailed design, through contracting and supervision. Generally, the City Engineer is appointed by MPWH and supervises assistant city engineers responsible for national components, local components, and maintenance. In larger cities, however, there are often two separate offices dealing with national and local components respectively. To avoid duplication of activi- ties, and to ensure adequate synchronization of implementation, the staff will be combined into task forces to work on functional areas - (i) roads and drains, (ii) buildings, and (iii) maintenance and solid wastes - which will continue after the major physical works are completed. Each task force would be headed by a divisional engineer reporting to the City Engineer. For national components the District/Regional Officer of MPWH will provide technical oversight of implementation. The task force for area improvement is under the city's Community Development Office since the key work involves establishing agreements on tenure and payments between the landowners and the community, and the residents' lease payments to the city for infrastructure. Assistance on engineering designs and implementation will be provided by the CEO. 2.26 The generally poor management of markets and slaughterhouses will be improved by taking these functions from the Treasurer's Office to form a new - 17 - professionally managed Department for Local Enterprises. This is a require- ment under the revised Local Government Code. Collection of rents and charges would, however, remain under the Treasurer's Department which would establish separate accounts for each enterprise. III. THE PROJECT A. Project Components 3.01 Following the preparation process for city investment programs (para. 2.05), some 15 cities are now in the course of project preparation, and further groups will be reviewed by the CPO during 1984 and 1985. The proposed project is expected to finance this first group of about 15 cities, depending on their progress and commitment. During September 1983, the Bank and the CPO jointly appraised all components in six cities which were in the most advanced stage of preparation (see Annexes 1 and 2). In total, components in these cities constitute over 50% of the physical works to be financed under the proposed project. Based on this appraisal, criteria for subproject eligi- bility and evaluation of the technical, financial and administrative feasibil- ity and economic justification were finalized (para. 2.06) and will be used to evaluate all components in other project cities. The composition of the investment programs in all project cities as outlined in paras. 3.03 and 3.04 is based on the programs in the six cities appraised. The final composition of the project will therefore vary as the remaining cities are appraised. The urban infrastructure and maintenance components comprise both national and local components. Subproject and Subloan Agreements are expected to be signed for the first s4x cities following confirmation of the draft of these agreements with the Bank at negotiations (paras. 2.08 through 2.11). During negotiations, it was agreed that the signing of Subproject and Subloan Agreements satisfactory to the Bank for at least four project cities, is a condition of effectiveness 3f the loan. 3.02 The proposed project consists of (a) Urban Infrastructure, (b) Infrastructure and equipment maintenance, (c) Tax mapping, (d) Training, and (e) Technical Assistance. 3.03 Urban Infrastructure. In accordance with the emphasis on basic services, the greater part of the municipal investments would be directed at improvements in urban services such as sanitation, including provision of secondary and tertiary drainage systems and rehabilitation of primary drainage systems together with shoreline protection and other flood control measures, and provision of sanitation facilities in dense residential areas and equip- ment to provide improved septic tank emptying service. Dump sites would be improved and equipment procured to expand solid wastes management. In several cities, area improvements to squatter and slum communities would be undertaken by the local government and communities to provide a low level of essential services (para. 4.04). While water supply forms an important part of each city's investment program, it would be largely financed through LWUA which has this responsibility and is the beneficiary to two Bank loans. Municipal enterprises such as markets and slaughterhouses represent important economic - 18 - facilities for project cities and their hinterlands. The project would rehabilitate and/or construct facilities to meet effective demand from these growing communities. Almost all cities require rehabilitation of their road systems which, through lack of maintenance, have seriously deteriorated. Principal road links would be constructed, widened and/or resurfaced. In addition traffic engineering measures would be implemented in some cities to improve traffic flows particularly in the central business districts. To further relieve congestion and improve intercity passenger transport, bus terminal facilities are to be provided in about five cities. 3.04 Infrastructure and Equipment Maintenance. Maintenance depots would be upgraded and equipped in all project cities to ensure adequate servicing of .the pool of vehicles and infrastructure maintenance equipment for the whole city. The maintenance operation would be significantly expanded by equipment to be procured under the project for solid wastes management, septic tank emptying and infrastructure maintenance particularly for roads and drains. 3.05 Tax Mapping. The proposed tax mapping component would support MOF's ongoing national program to strengthen municipal finances (para. 1.06) and would include equipment and preparation costs for updating cadasters, apprais- ing properties, improving records management and increasing actual collections. The tax mapping would focus on the urban areas of the local governments first, and is expected to cover about 180,000 parcels per year over a four-year implementation period. 3.06 Training. The project would strengthen and expand training programs managed through the CPO and designed to equip local officials and technical staff with skills and techniques in the operational aspects of their espec- tive jobs. Performance based training programs have been designed around identified skills requirements in (a) municipal finance and revenue admini- stration; (b) municipal enterprise management; (c) planning and budgeting, project development and contract management; and (d) municipal engineering maintenance. Each of these programs addresses day to day operational activi- ties. They would provide training initially for about 780 staff in the project cities, together with other regional cities including Bacolod, Cebu, Cagayan de Oro, Ilo-Ilo and Davao, and local governments in Metro Manila wg7re large-scale development programs are being initiated with Bank assistance- The training programs would eventually extend to the remaining 140 or so economically important towns and cities. Total throughput of trainees during the project implementation period is estimated at about 4,300, including retraining of which about 40% would be managers and supervisors, 40% would be technical staff and about 20% would be local executives and elected represen- tatives. The component would include equipment, and consultant and personnel costs to develop training materials and the costs of running the training programs. Annex 5 discusses the training in detail. 5/ Third Urban Development Project (Loan 1821-PH) and Regional Cities Development Project (Loan 2257-PH). - 19 - 3.07 Technical Assistance. Technical assistance would include consultant advisory services to assist project implementation and training, and studies directed principally at structural reforms to allow improvements in local governments' budgeting and fiscal administration. It would total 516 man- months of assistance (200 foreign and 316 local) and comprise: (a) Project Development: to the CPO through MPWH1 and MOF to (i) assist in monitoring project implementation; (ii) continue project prepara- tion, review and approval of the second tranche of cities; (i.ii) provide assistance to the CPO training division; (iv) give assis- tance to the cities and CPO to implement low-cost sanitation solutions and city specific technical studies; and (v) review, monitor and evaluate cities' financial performance and revenue improvement programs. (b) Review of the local government grants system, and local budgeting procedures: Local governments have become increasingly dependent on financial transfers from central government. The MOF therefore wishes to review its central grants policy, and identify feasible improvements in the allocation procedures to encourage local governments to increase local revenue generation and rationalize service and investment planning at the local level. Recently, the responsibilities for defining the policies and procedures and reviewing the local governments' budgets, has been transferred from MOF to OBM. It is an opportune time to review the feasibility of improving internal financial management at the local level to (i) distinguish between recurrent operational outlays and capital outlays in the budget and the viability of an equipment renewals fund; (ii) introduce a service-based costing system; and (iii) develop a system for multi-year rolling programs and bud- gets. The study overall would be handled by MOF and OBM, the consultants reporting to a steering committee comprising MOF, OBM and MLG. (c) Study of Training Needs, Resources, and Development of a National Training Program. The Government wishes to see the training activities initiated under the project become a permanent feature. At present, training for local government officials among existing organizations is fragmented and not operationally focused. The Government proposes to work towards the establishment of a national program to coordinate and guide these training efforts. The study would review the skill levels of local staff, analyse training needs and the resources available for delivering training. Following the review, the study would identify the appropriate functional role of the program in relation to other training agencies, operational policies, procedures, cost and financing, and the timing of its establishment. The study would be directed by MLG and report to a committee composed of the relevant government and academic institu- tions (Annex 5). Terms of Reference and costs of technical assistance are outlined in Annex 11. - 20 - B. Cost Estimates 3.08 The total project cost, including contingencies and taxes and duties is estimated at about US$68.7 million (Table 3.1). The foreign exchange component is about 47% of project cost or about $32.2 million. The identifi- able taxes and duties are estimated at $2.0 million. Cost estimates for the six cities appraised by the Bank are based on preliminary engineering designs and on final engineering designs for the components which are to be imple- mented in 1984 and 1985. Final engineerin- designs for the components scheduled for implementation later in each city, will be completed by end 1985. For the remaining cities which are expected to comprise the subsequent phases and are yet to be appraised, the costs were estimated based on target investment levels and and preliminary engineering completed to date. The costs for tax mapping at P 62 per parcel and an expected output of 180,000 parcels per year are based on the cost incurred to date under the ongoing MOF program. Physical contingencies of 10% have been allowed on civil works in the six appraised cities. Price contingencies are included at 20% for 1984, 12% for 1985, 10% for 1986 and 7% thereafter on local costs and at 3.5% in 1984, 8% in 1985, 9% in 1986-88, 7.5% in 1989 and 6% in 1990 on foreign costs. Base costs are expressed in April 1984 prices. Detailed cost estimates for the six cities appraised are given in Annex 2. Table 3.1: SUMMARY OF PROJECT COSTS a/ Foreign P million $ million exchange as Local Foreign Total Local Foreign Total % of total Urban Infrastructure Urban services 165.6 119.9 285.5 11.8 8.6 20.4 42 Markets and public facilities 59.9 30.8 90.7 4.3 2.2 6.5 34 Traffic and transport 42.8 28.6 71.4 3.1 2.0 5.1 40 Land 7.4 - 7.4 0.5 - 0.5 0 Maintenance 19.6 45.8 65.4 1.4 3.2 4.6 70 Tax mapping 19.6 29.4 49.u 1.4 2.1 3.5 60 Training 19.0 28.6 47.6 1.4 2.0 3.4 60 Technical assistance 22.2 33.2 55.4 1.6 2.4 4.0 60 Base Cost 356.1 316.3 672.4 25.5 22.5 48.0 47 Physical contingencies b/ 13.4 11.8 25.2 1.0 0.8 1.8 47 Price contingencies b/ 140.1 124.2 264.3 10.0 8.9 18.9 47 Total Project Cost c/ 509.6 452.3 961.9 36.5 32.2 68.7 47 Front-end fee on Bank loan - 1.4 1.4 - 0.1 0.1 Total Financing Required 509.6 453.7 963.3 36.5 32.3 68.8 a/ Detailed costs are available in Annex 2. b/ Physical contingencies are about 4% and price contingencies about 38% of total base costs plus physical contingencies. c/ Costs include taxes and duties amounting to $2 million. - 21 - C. Financing Plan 3.09 The proposed Bank loan of $40.0 million would finance the total for- eign exchange requirements ($32.3 million) including the front-end fee ($0.1 million) and about 21% of local costs ($7.7 million). Local cost financing is justified because of severe domestic revenue constraints. The Bank loan would be made to the Government of the Philippines (GOP) for a period of 20 years including five years grace at the standard variable inter- est rate. Part ($11.8 million) of the total loan proceeds would be retained by central government for financing tax mapping, training and consultant assistance proposed under the project and the capitalized front-end fee. The remaining Bank loan ($28.2 million) would be passed on to the MDF to finance projects implemented by local governments. The loan repayment by the local governments would be held by the MDF for making further loans to local govern- ments (para. 2.18). Confirmation was obtained during negotiations that the GOP will be responsible for payment of the commitment fee, interest and repay- ment of the total Bank loan, including funds passed on to the cities through the MDF. 3.10 Counterpart funds would be provided (a) by Central Government to finance national infrastructure components ($22.8 million) to be implemented by MPWH, and for training activities and technical assistance requirements ($0.1 million) through the CPO and for part of the tax mapping ($0.2 million) through the MOF; and (b) by local government ($5.7 million) for local compon- ents, training and tax mapping. As an incentive for good performance for good performance, part of the local contribution for tax mapping would be reim- bursed by MOP, to those local governments which completed their tax mapping and collections to agreed quality and quantity targets. Table 3.2: FINANCING PLAN ($ million) Total Counterpart funds Components cost Bank loan Central Local National 22.8 - 22.8 - Local 33.4 28.2 - 5.2 Tax mapping 4.1 3.6 0.2 0.3 Training 3.6 3.3 0.1 0.2 Technical assistance 4.8 4.8 - - Front-end fee 0.1 0.1 - - Total 68.8 40.0 23.1 5.7 3.11 This financing plan reflects Government's proposal that the Bank loan be used primarily to finance the 4DF together with the tax mapping, training and technical assistance components. This arrangement is expected to facilitate the provision of counterpart funds since MPWH's contribution can be - 22 - consolidated into a single account in MPWR's National Infrastructure Fund. On this basis no disbursement would be made out of the Bank loan against national infrastructure components. This raises the question of whether implementation of these national components, particularly for flood protection, drainage and road improvements, would be well synchronized with local road and drainage works proposed. To address this, the scope, location and timing of these components would form part of the Subproject Agreement between each city and the Steering Committee which includes a representative of MPWR, the ministry responsible for implementing the national components. The full requirement for 1984 has been allocated for national components within the MPWH's 1984 budget and necessary allocations for the 1985 budget were reviewed during negotiations. Confirmation was obtained at negotiations that adequate provision will be made for national components in a timely manner. D. Project Implementation 3.12 The project would be implemented over a span of approximately six years from July 1984 through June 1990. Since there is adequate engineering capability at the city level and very little land would be acquired, this estimate is considered conservative. The CPO expects implementation to be faster than assumed here. The initial group of 6 cities appraised by the Bank will commence implementation first. Detailed engineering for the first two years construction is completed in these cities. The remaining cities will start implementation as their respective subprojects receive approval from the Steering Committee. Given the integrated nature of the project and the need for close working relationships between local staff and MPWH district staff, and for work programs of local and CPO staff to be synchronized, implementa- tion activities have been specified for each element of the project cycle in each city appraised. The physical works will be implemented by the cities and MPWH, the tax mapping by MOF, the training by the CPO and the studies by the MOF, OBM and MLG. The CPO will coordinate all these activities and provide consolidated monitoring reports for the Steering Committee and the Bank (para. 3.20). A workshop for participating project cities and central agencies' staff will be organized by the CPO at the start of each city's project. Annex 7 illustrates the consolidated implementation schedule by city groups. E. Procurement 3.13 Procurement arrangements for the project are summarized in the table below: - 23 - Table 3.3: PROCUREMENT OVERVIEW ($ millions) Type of Procurement Project ICB LCB Other N.A. Total cost Civil works - 47.6 2.0 1.1 50.7 (21.8) (1.0) (22.8) Vehicles and Equipment 5.6 1.1 0.5 - 7.2 (5.6) (0.8) (0.4) (6.8) Tax mapping - - 2.6 - 2.6 (2.4) (2.4) Training - - 3.4 - 3.4 (3.1) (3.1) Technical assistance - - 4.8 - 4.8 - (4.8) (4.8) Total 68.7 (39.9) Note: Figures in parentheses are the respective amounts financed by the Bank loan. Land acquisition ($1.1 million) is included under N.A. 3.14 The overall project is estimated to require about $50.7 million in civil works and about $7.2 million in equipment and vehicles. For civil works, over 100 separate subprojects would be spread around 15 cities over a four to five year period and would represent many small contracts, the largest of which is estimated at $0.9 million. Past experience has indicated that foreign firms have not been interested in bidding for these types of works because of the scattered project sites, the large number of contracts of short duration, and competition from the relatively well-established local contract- ing industry. These works will therefore be procured from prequalified con- tractors through LCB procedures acceptable to the Bank which would allow participation by foreign contractors. The only exceptions will be rehabilita- tion of markets and minor traffic engineering improvements (totalling about $2 million and each costing less than $50,000) which would be undertaken by force account because of the need to work around existing operations. Equipment and vehicles for maintenance, solid wastes management and tax mapping totalling about $5.6 million would be procured through ICB in accordance with Bank guidelines on behalf of the cities and MOF by the CPO grouping them into suitable packages of $200,000 or more. In bid evaluation, a margin equal to 15% of the c.i.f. bid price of imported goods, or the actual customs duties and taxes, whichever is less, will be allowed for domestic manufacturers. Contracts of less than $200,000 for maintenance tools and small miscellaneous equipment for training and tax mapping (about $1.1 million) would be purchased - 24 - through LCB procedures acceptable to the Bank. For equipment of less than $50,000 per contract, prudent shopping up to $0.5 million would be permitted. Consultants' services for training and technical assistance would be obtained in accordance with Bank guidelines for use of consultants. For tax mapping, the MOF would enter into a service contract with each local government and pay the city according to performance on each stage of the z)ut- put specified in the contract. The MOF will also contract with the Bureau of Lands to provide adapted surveys where necessary. 3.15 All bidding packages for civil works estimated to cost over P10 mil- lion ($0.7 million) and all equipment contracts under ICB will be subject to the Bank's prior review of procurement documentation. Based on the six cities appraised by the Bank, it is estimated that 20% of the total value of civil works contracts and over 75% of equipment contracts would be covered. On that basis, between 15 to 20 contracts amounting to about $15 million would be sub- ject to Bank's prior review. This is considered reasonable based on experience with another MPWR project office under the Third Urban Project (Loan 1821-PH). Bank supervision mission will conduct random post review of the remaining contracts. F. Disbursements 3.16 Bank funds would be disbursed against civil works and equipment con- tracts on project components implemented by local governments and financed from the NDF and against Tax Mapping, Training and Technical Assistance carried out by the central government. During negotiations, it was agreed that a special account ($3 million) will be established to expedite disburse- ments as a condition of effectiveness. Initially, subloan advances for each city's two quarters' disbursement requirements will be advanced from the MDF to a local subproject account to be established in each project city. Addi- tional funds would then be advanced to meet the third quarter's disbursement requirements on the basis of certification by the CPO of expenditures in the first quarter, and so on. As subloan advances are made from the MDF to the city, quarterly reimbursements would be sought from the Bank, based on the consolidated statements of expenditures from the local governments for earlier quarters' disbursements. Detailed documentation supporting the statements of expenses, including supervision reports by CPO and certification of works and disbursements by MPWH, would be retained by CPO for review by Bank supervision missions. 3.17 Disburpqments would be made against: (a) 100% for subloans funded through the M r DF,- (b) for equipment for tax mapping and training - 100% of foreign costs (CIF) if directly imported; 100% of ex-factory costs if locally manufactured but procured under ICB; and 65% if locally procured; (c) for consultants' services - 100% of total costs; and (d) 90% of expenditures for training and tax mapping based on contracts with implementing institutions or 6/ MDF will finance up to a maximum of 90% of local project costs (para. 2.06). - 25 - agencies for training and with cities for tax mapping. Disbursements regards (a) and (d) would be supported by statements of expenditure. The estimated schedule of disbursements from the Bank loan is shown in Annex 7, Table 2. The disbursement profile, which is generally in line with the country sector profile, is considered conservative in view of the facts that virtually no land acquisition is required, the project is not dependent on the performance of a sole implementing agency, the individual cities have budgeted from their own funds to start their projects in 1984, and the Bank loan would be dis- bursed to the MDF in advance of contract payment, thereby reducing reimburse- ment delays and OBM authorization would not be required for release of MDF funds to the cities. The proposed loan would be disbursed over a six and a half period, July 1984 to December 1990 with a closing date of June 30, 1991. No disbursements will be made retroactively. G. Accounts and Audits 3.18 Each project city will be responsible for maintaining detailed pro- ject accounts for both local and national components. For revenue-generating components including markets, slaughterhouses, bus terminals, and area impro- vements, satisfactory capital and operating accounting systems have been approved by the Commission on Audit (COA) for operation in each city. The CPO will maintain accounts for the equipment procured on behalf of the cities, and accounts for the training and technical assistance for which it is respons- ible. The MOF will account for the tax mapping and technical assistance for which it is responsible, and the MLG for the accounts of the training study. The CPO will consolidate all accounts annually in a single project account for monitoring and audit purposes. These arrangements were confirmed during negotiations. 3.19 Audits. As the Government auditor, COA undertakes audits of all public agencies including the project accounts in both the national and city levels. Confirmation was obtained during negotiations on these arrangements and that a separate opinion on expenditures made against statements of expen- ditures will be furnished to the Bank annually which confirms that claimed expenditures were used for the purposes for which they were provided. These arrangements are satisfactory to the Bank. H. Supervision and Project Reporting 3.20 With a broad multicomponent project such as this, effective monitor- ing is essential if implementation problems are to be identified ep.rly and corrective action taken on a timely basis. The CPO will be the key entity to which all reports from the implementing agencies will be channelled. The Bank will deal with the CPO and not directly with the project cities. The basis of the CPO monitoring will be the individual city's Subproject and Subloan Agree- ments which include schedules and tables showing projected physical progress and financial expenditures, revenue projections by source, key financial ratios and staffing scheme (see paras 2.08 through 2.11 and Annex 6). Actual performance will then be measured regularly at both the city level by the LPO in conjunction with the CPDS, and for the program overall by the field staff - 26 - in the Area Divisions and Program staff of the CPO. Reports will be sent from all implementing entities to the CPO on a quarterly basis. The CPO will sub- mit consolidated quarterly progress reports to the Bank and a yearly report which analyzes and evaluates the whole project. These arrangements were confirmed during negotiations. The CPO will prepare the project completion report. IV. FINANCIAL ASPECTS A. Financial Condition of Project Cities 4.01 The criteria guiding the CPO appraisal and the expected financial performance of each city in relation to its proposed investment program, are set out in Chapter II. Financial conditions of the six cities in the first phase were reviewed by the Bank and the CPO during appraisal and their financial data is presented in Annex 3. The project cities show a similar trend compared to the national picture outlined in Chapter I. Generally, central government transfers and local expenditures have increased while growth in local revenue generation has lagged. Between 1979 and 1982, the ratio of locally generated revenues to recurrent expenditures dropped in all cities, except in Bisilig where it has remained around 80% and Cabanatuan where the ratio actually increased. At the same time the share of central governmcnt grants in total revenues increased in all cities except Cabanatuan. During the present period of national budgetary constraints, continuing rapid increases in central government grants are clearly not sus- tainable. On the other hand, the project will result in a significant increase in the project cities' investment programs. For example, in Butuan, investments during the project period (1985-88) are projected to be about double that during 1980-84, in Naga 5 times and in Bislig 20 times. In order to generate the necessary counterpart funds and meet future debt service requirements, the project cities will need to: (i) easure cost recovery on revenue generating components, and (ii) increase local revenue and reduce unnecessary expenditures through improved administration and maintenance. F. Cost Recovery 4.02 Municipal Enterprises. Rents and fees for markets and slaughter- houses and bus terminals will be set to cover at least recurrent costs of operation and maintenance and debt service requirements. For markets, this policy will apply to the market system as a whole in each city. In the cities, appraised by the Bank, rents have increased on average 14% p.a. over the last four years. However, many registered stallholders sublet their stalls illegally at considerably higher rents which are more in line with other retail space. Local executives therefore feel that significant increases are feasible, and haire agreed to the principle that rents will be increased to the required level by the time market improvements under the pro- ject are completed and will be kept under review and revised as necessary. Where these increases are expected to be significant (up to 100% increase in some cases), the cities have started to gradually raise rents. For slaughter- houses, local governments would continue to minimize operating costs by the - 27 - use of private butchers employed directly by owners of cattle and poultry. Local administrators in the cities appraised by the Bank have agreed to set fees to cover and operation, maintenance and debt service costs. For bus terminals, which are proposed in two of the cities appraised, leases will be negotiated with consortia of bus operators. The terminals serve primarily a traffic management function and except in one city, consist only of hardstanding space. Leases are therefore low and an approximately 2% increase in the average ticket price for intercity passengers would cover debt service on capital outlays and recurrent administrative expenses. 4.03 With regard to area improvement works, investment will be recovered through charges levied on beneficiary communities. Where regularization of tenure is required, this will be arranged directly between the communities and landowners as a precondition to physical improvements. The agreement would be either outright purchase of the land by the communities or long-term leases where payments would be set close to existing levels prior to improvement. Once an agreement is reached, the community group and city will discuss details of the improvement works including fees which would be based primarily on affordability and charged to beneficiaries. The community would designate persons responsible for fee collection. This system has been in use in other area improvement schemes in the Philippines and relieves the local government of the financial burden of land acquisition. Satisfactory arrangements have been agreed in the cities appraised by the Bank and similar arrangements will be made in area improvements undertaken in subsequent phases. 4.04 For solid wastes management, each project city currently levies a fee on commercial and industrial establishments as part of the annual business licensing process, which will be continued under the project. The cost of residential services will be collected from cross-subsidies from commercial and industrial charges and from general revenues since it would be adminis- tratively inefficient to levy small direct charges. For sanitation services, which will consist principally of septic tank cleanout upon request of the user, a service charge will be applied. Since the principal objective of these components will be to improve environmental conditions it will be unrea- listic to expect fees to cover more than half the costs. For the limited water supply components, the capital costs would be recovered by the local water district. 4.05 The costs of municipal roads, municipal drainage and maintenance would be recovered by city from general tax revenue. The national road, major drainage and flood protection would be financed through the MPWH budget (para. 3.16). For the six cities appraised by the Bank, approximately 48% of local components would be recovered directly from beneficiaries and the re- maining 52% from general revenues. C. Municipal Finances 4.06 Considerable potential exists to implement sufficient increases in local taxes and charges, together with savings in operation and staff costs to support a significant increase in local development programs. For property taxes, revenues could be increased through more effective collection from the - 28 - existing tax base. In most project cities, fiscal cadasters are incomplete and arrears average between 40% to 55% each year. In order to enhance city resources, the mayors have agreed to take measures to update cadasters and modernize tax records management as part of MOF's nationwide program to strengthen municipal finances (para. 1.06). These measures would also include enforcement of collection such as linking renewal of business licenses to payment of municipal taxes. The action to be taken and revenue targets will be incorporated in the Subloan Agreement between the city and the MOF (para. 2.11). Tax mappug contracts between MOF and the local governments would allow for part of the local contributions to be reimbursed by MOF upon successful completion by the cities of the mapping and subsequent collections to agreed quality and targets. 4.07 During project preparation, a review was undertaken of the cost- effectiveness of maintenance operations of project cities. In most cases it was found that high yearly costs are incurred due to (i) poor condition of existing infrastructure, (ii) lack of a preventive repair program which results in extensive periodic rehabilitation, (iii) inadequate equipment and repair facilities, (iv) inefficient use of staff and equipment and lack of an overall maintenance inventory, schedule and budget, and (v) lack of suitably trained staff or an appropriate training program. Under the project, invest- ments in maintenance equipment and repair facilities will be made and mainte- nance planning, management and training will be improved. Improvements in infrastructure operations and maintenance following the project is expected to result in savings of 12-15%. These are reflected in the city revenue projec- tions set out in Annex 3. Project cities will be required to develop a main- tenance operations plan which would: (a) ensure that facilities developed under the project are adequately maintained; (b) upgrade maintenance of exist- ing infrastructure; and (c) make adequate provision for repair and replacement of road maintenance, solid wastes and sanitation equipment. 4.08 Success of the projected revenue performance of project cities will depend largely on improved administrative performance by respective city Treasury and Assessment staff. In each city, task forces have been estab- lished to set revenue targets and monitor performance in rationalizing business classifications; improving records management; collecting delinquent taxes; and, as a cost control measure, reviewing staffing needs overall. In order to strengthen the review power of the local governments over financial performance, the task forces will be chaired by the respective city Mayors. Representation by the MOF Regional Director will formalize the status of these task forces and maintain the supervisory involvement of MOF. 4.09 The city financial projections for the six cities appraised by the Bank (Annex 3) indicate that, with the possible exception of Butuan, implemen- tation of the revenue reforms and expenditure reductions will be essential if the project cities are to "afford" the proposed program, i.e., come up with the necessary counterpart funds during construction and meet debt service. The incremental revenues from reform are estimated to range from about 17% of local revenues between 1984-92 in Naga to 52% in Cabanatuan. Given the cur- rent uncertain economic situation, the cities financial performance will need to be monitored closely and adjustments (both in terms of revenue reforms and program reductions) made where necessary. The revenue reforms and maintenance - 29 - program will be specified in Sub-project and Subloan Agreements. The finan- cial staff in CPO together with MOF staff will monitor city performance through the quarterly progress reports, city audits and visits and in cases of gross non-compliance will take punitive action such as suspension of disbursements of loan funds or reductions in central government transfers. V. PROJECT JUSTIFICATION AND RISKS A. Project Benefits 5.01 The project would have a positive economic and social impact on the project cities and the surrounding rural areas by alleviating infrastructure deficiencies and strengthening the cities as regional commerce, administration and transportation centers. The project would also have a significant insti- tutional impact on the urban sector in the Philippines by establishing a mechanism to assist cities plan sound investment programs and provide the necessary financing to implement them. 5.02 With the growth of the rural economies and the development of inter- urban transportation linkages, the importance of the regional cities as commerce and administration centers have increased (para. 1.03). In most cities, provision of municipal infrastructure and services could not keep up with increased demand which constrained growth and led to deteriorating living standards in these cities. For example, the lack of drainage facilities have prevented city development and/or resulted in residents (mainly low income families) living in areas subject to flooding during the rainy season. The drainage and flood protection components would result in a reduction in damage to private property and municipal infrastructure and open up areas for further development. In slum areas, water for drinking and washing is inadequate, toilets generally unsanitary, and drainage for waste water practically nonexistent. Access is usually through small alleys, narrow footpaths and footbridges. The area improvement and sanitation component would provide communal water standpipes, communal toilets (or individual pour-flush toilets) and working facilities and would improve drainage and access, which would lead to better living standards and reduced health risks for the residents in these slums. 5.03 The markets and slaughterhouses in the project cities are generally old and in poor condition, lacking adequate space, equipment and proper drainage and sanitation facilities. The renovation of markets and slaughter- houses would not only increase capacity but also have significant health impact through hygienic handling of meat and other foodstuffs. Since the markets serve people from adjacent rural communities (who both sell their agricultural products and purchase goods), the benefits are not restricted solely to the urban residents. 5.04 The number of vehicles has been increasing with the growth of these cities and together with the lack of adequate maintenance in the past has led to deteriorating road conditions and worsening traffic flows, especially in the central business district. The widening of roads, surfacing and other - 30 - improvements carried out through the transportation components are expected to relieve congestion and improve traffic flows within the project cities. The bus terminals would provide more convenient transfer facilities for passenger and, in some cities, relieve traffic congestion where existing terminals are inadequate resulting in buses and jeepneys clogging nearby streets. Market renovations are also expected to have traffic benefits since at present stalls overflow from the markets into the surrounding streets, worsening the conges- tion around the markets. 5.05 A significant institutional benefit of the project is the establish- ment of a mechanism to provide long-term financing of city initiated develop- ment projects. Furthermore, by making these funds available, the project would be able to introduce a more systematic and rational method of planning investments at the city level. Uncertainty over the availability of funds had made planning over a multi-year period difficult, and many investment deci- sions were made on an ad hoc basis. However, in this project the components were identified and selected after a thorough review of the cities deficien- cies and projected needs, technical alternatives to determine the least cost solution, availability of funds and the cost and benefits of individual investment proposals (para. 2.05). In most cities, some components, espe- cially major road construction and drainage works, were dropped or reduced in scale and redesigned as a result of these reviews. 5.06 The CPO, in its appraisal of each city program will obtain the economic rate of return (ERR) to determine the feasibility of individual investment proposals. Where the individual components are inter-related, these would be combined into a single investment for economic evaluation. The ERR would not be calculated for those components where the benefits are primarily health related and difficult to quantify, such as solid wastes management and sanitation. Furthermore, the ERR would not be obtained for minor works below a predetermined cut-off point. The opportunity cost of capital in the Philippines is currently estimated to be around 13%. Those investments with an ERR of below 13% would be rejected, except those with a significant health factor, such as the slaughterhouse, where the minimum ERR was set at 10%. The method of benefit measurement, evaluation cut-off points and the minimum ERR by type of investment and ERR are presented in Annex 9. For the cities appraised by the Bank, the weighted average ERR for each city as a whole (covering 52% to 83% of a city's f7vestment program) ranged from 18% in Butuan to 24% in Cabanatuan and Naga.- B. Urban Poverty Impact 5.07 The project is expected to hive a significant urban poverty impact since the incidence of poverty is higher in the smaller regional cities. The urban poor with incomes below the poverty threshold of P 3,431 ($245) per capita per annum in 1983 are estimated to account from about 35% of the population in Cabanatuan to around 60% in Bislig and Butuan. The area 7/ Based on CPO appraisal reports and reviewed by the Bank. - 31 - improvement and sanitation components are designed specifically to meet the needs of the urban poverty group, and it is estimated that an average 75% of the beneficiaries are the urban poor. While the remaining components are not specifically designed to meet the needs of the urban poor but designed to improve overall municipal infrastructure and service deficiencies, the urban poor are expected to benefit since they tend to dwell in areas where urban services are inadequate (e.g., areas prone to flooding). The poverty impact of the remaining components was assumed to be the city average. The poverty impact by city is presented in Annex 10. Of the six cities reviewed during appraisal, approximately P 225 million ($16 million) or 51% of project cost is estimated to benefit the urban poverty group. C. Environmental Impact 5.08 The project is expected to have a substantial positive environmental impact. Nine project components - water supply, sanitation, drainage, area improvement, markets, slaughterhouses, solid wastes management, and city wide maintenance are designed principally to improve environmental conditons, especially water quality, and reduce disease risks in the project cities. Flood control will reduce incidence of flooding and shore protection will reduce erosion. The city street, road maintenance and traffic management components should collectively contribute to improving traffic flow, reducing accidents and result in a positive though limited improvement in air quality through reduced vehicle emissions. D. Risks 5.09 There are three risks, two of which concern financial matters. The first relates to the ability of the central government to maintain its counterpart share of the project in a period of national economic and finan- cial constraint. GOP's counterpart would be primarily used to finance the national components of the cities' infrastructure programs. A schedule of disbursements by MPWR for these components in each city would be included in the Subproject Agreements (para. 2.09) and budget requirements for each year reported to and endorsed by the Steering Committee (para. 2.12). The require- ments for 1984 have been allocated by MPWH in their budget (para. 3.11). If these disbursements could not be maintained, the program could continue, either at a smaller scale by omitting somE of the components, or by extending the period of implementation. This would not necessarily jeopardize the econ- omic justification since a city's investment program typically would consist of discreet components where a postponement in implementation in one would not delay completion of other. 5.10 The second risk is the failure of the local governments to carry out the necessary financial reforms so that they would not be able to generate counterpart funds during implementation or maintain payments to the MDF after completion. Furthermore the commitment to raise revenues must be a continuing one, to transcend possible changes in municipal administrations. To minimize this risk: (i) local governments are required to formulate a financial plan, - 32 - agreed with the Steering Committee, and to demonstrate improvements in revenues before a loan is made from the MDF, (para. 2.05(c)); (ii) city task forces on fiscal and administrative performance, chaired by the Mayor, will be supervised by the Financial Evaluation Unit in the CPO and the new Special Projects Unit in the MOF created to promote and supervise local financial performance (para. 2.15(b)); (iii) local enterprise departments will be established in all the project cities prior to loan availment to improve financial management (para. 2.26); (iv) tax mapping will be accelerated, and the tax rolls completed (para. 4.06); and (v) the MOF is committed to apply financial sanctions against defaulting project cities through cessation of disbursements on their loan and attachment of central government grants (paras. 2.11 and 2.19). The cities will also be required to maintain an escrow account where funds required for loan repayment would be built up and held (para. 2.11). In the case where cities face a shortfall in resources during implementation due to the uncertain economic situation, the program can be cutback to a smaller scale in line with the availability of funds as discussed above for central government fund shortfalls. 5.11 The management capability of the CPO constitutes the third risk. The unit, headed by an experienced Director has performed well over the past two years in preparing this project. However, the management complexity will increase as the cities commence implementation and as a further set of cities are identified and brought into the stream. Substantial strengthening of the CPO is required at middle management levels as the organization grows. The recent designation of the CPO as a Central Project Office of the MPWH will assist in offering improved levels of pay and benefits. In addition, some key positions will be offered on a local consultancy basis to attract a suitable level of staff. The improvements in CPO's internal organization arrangements, hiring of key professional staff and assistance from consultants agreed during negotiations will help to minimize this risk (para. 2.17). VI. AGREEMENTS REACHED AND RECOMMENDATIONS 6.01 The following conditions for negotiations were satisfied: (a) hiring of additional staff and consultant assistance for the CPO: (para. 2.17); and (b) establishment of the MDF (para. 2.19). 6.02 Confirmation was obtaine- from the Government during loan negotiations regarding: (a) the criteria for city eligibility and the appraisal of project cities by the CPO (paris. 2.04, 2.06 and 2.07); (b) schedule for reorganization and staffing of CPO (paras. 2.15 and 2.17); - 33 - (c) payment of the commitment fee, interest and repayment of the total Bank loan by GOP including funds passed on to the cities through the MDF (para. 3.09); (d) timely provision of counterpart funds for national components of the project (para. 3.11); (e) maintenance of detailed project accounts by project cities and central government agencies and consolidation of these accounts annually by CPO (para. 3.18); (f) annual financial audit of project accounts by COA including a separate opinion on expenditures made against statements of expenditures, confirming that claimed expenditures were used for the purposes for which they were provided (para. 3.19); and (g) submission of quarterly and yearly progress reports by CPO (para. 3.20). 6.03 Agreement was reached at negotiations: (a) that the CPO's appraisal report for each city and draft Subproject and Subloan Agreements be sent to the Bank for review and comment before final approval by the Steering Committee (para. 2.05(c)); and (b) on draft model Subproject and Subloan Agreements (paras. 2.10 and 2.11). 6.04 The following will be conditions of effectiveness: (a) signing of a Memorandum of Agreement among MOF, MLG, OBM, MPWH and NEDA on MDF operating procedures (para. 2.20); (b) signing of Subproject and Subloan Agreements satisfactory to the Bank, for at least four project cities (para. 3.01); and (c) establishing a special account (para. 3.16). 6.05 Subject to the above conditions, the proposed project is suitable for a Bank loan of $40.0 million to the Republic of the Philippines for 20 years, including 5 years of grace at standard variable interest rate. - 34 - ANNEX 1 Page 1 PHILIPPINES MUNICIPAL DEVELOPMENT Description Of Project Cities AppraiseL By The Bank 1. Cabanatuan The city is located in Nueva Ecija Province, in Region III, 116 km north of Manila, with an urban population of 76,000 in 1980 grow- ing at 4% p.a. It is the prime economic, industrial and institutional center of the province, providing regional service, processing, and transport func- tions for its rich agricultural hinterland. It is bordered by two large rivers, and its priorities are to reduce flooding, improve the sanitation/ drainage system, area upgrading in publicly-owned lands, improvements to solid wastes management, roads and infrastructure maintenance, and rehabilitation and extension of the public market and slaughterhouse. 2. Naga The city lies in Region V in the central part of Camarines Sur Province, and in 1980 had an urban population of about 90,000, growing at 4% p.a. It is the main commercial, trading, transport and education center for the province and portions of adjacent provinces which are based mainly on farming. It is a flat, inland city bisected by two major rivers - the Naga and the Bicol, which, together with poor local drainage, give rise to exten- sive flooding including the central business district and major market. The rivers are the subject of extensive upstream irrigation and flood-control projects which, however, tend to increase periodic flooding in the city. There are several high-density barangays with severe environmental problems. The city priorities are to improve flood control and drainage, solid wastes management, area upgrading, and city-wide maintenance. The most effective direct economic benefit would be to build the new slaughterhouse in order to process the large number of animals presently transported to Manila for lack of adequate local facilities. 3. Bislig The municipality is located in Surigao del Sur Province in Region XI beside Bislig Bay. The 1980 census indicated an urban population of 68,000 growing at 12% p.a. The town is situated in a remote mountainous aad forested area and grew principally to house the workforce of PICOP, the large papermiil adjacent to the town, and related logging activities. Urban growth has slackened recently but is expected to pick up on completion of a nearby power station. The town also has an active local market which is constrained through lack of space and facilities, and a small fishing industry. Nearly 90% of the town's infrastructure is of earth roads, and the lack of local drainage gives rise to schistosomiasis. There is an extensive squatter population on land reclaimed from the sea by deposition of the paper mill wastes. Apart from water supply, every urban service is badly needed, including local roads and drainage, sanitation, solid wastes management, maintenance and area upgrading. Direct economic improvements include rehabil- itation and expansion of the market and slaughterhouses. 4. Butuan The city is situated in Agusan del Norte Province, Region X. It has a local airport and a small river port and lies on flat land - 35 - ANNEX 1 Page 2 beside the Agusan river. It has a vibrant local economy being the center of trade, commerce and transport for the neighboring municipalities and pro- vinces, and a processing center for forest and agricultural products. The urban population in 1980 was 66,000 and growing at 5% p.a. The city is affected periodically with flooding from the Agusan River, which may increase through upstream flood control and irrigation projects presently being planned which also affect the port and adjacent industries. The Bank has requested the Government to review the project with a view to precisely determine the impact and cost to the city and to propose solutions to ameliorate the potential flooding of the city. Priorities for urban services include improvements in drainage, sanitation facilities, solid wastes management and maintenance, and extensions to the bus terminal, market and slaughterhouse. 5. Tacloban The city is the capital of Leyte Province in Region VIII. Its urban population in 1980 was 92,000 growing at 7.5% p.a. It is the principal seaport of the eastern Visayas and also has a local airport. It is the main center for services to the agricultural hinterland and also for communications, commerce, and tourism in the region. Local roads and public buildings have been improved in recent years, but the city's growth is constrained by an encircling ridge of hills which are creating high density slum and squatter areas between the sea and the hills. This can be relieved by improvements to these areas and by a new road to cross the ridge to the plain beyond. Priorities for improvement include the road link noted above, drainage and flood control, upgrading of slum areas, solid wastes and infra- structure maintenance, expansion of the market and slaughterhouse and relocation of the bus terminal. 6. Tuguegarao The municipality is located in the south of Cagayan Province in Region II. The 1980 urban population was 64,000 growing at 3.3% p.a. It is the provincial capital and educational, commercial and institu- tional center with agriculture providing the economic base in the surrounding region. The city center is threatened by erosion from the Cagayan River. In addition to flood control, improvements are needed to local roads and drain- age, sanitation to slum areas, solid wastes management, and maintenance, and expansion of the slaughterhouse. 7. The location and population characteristics of all the project cities are shown on Table 1, Annex 1 and on Map IBRD 17775. - 36 - ANNEX 1 Table 1 PHILIPPINES MUNICIPAL DEVELOPMENT PROJECT Project Cities 1980 Growth urban rate Center Province Region population % P.a. Luzon Dagupan Pangasinan I 95,900 4.3 Enrile /a Cagayan II 4,300 4.0 * Tuguegarao Cagayan II 64,000 3.3 * Cabanatuan Nueva Ecija III 76,000 4.0 Masinloc Zambales III 10,000 3.1 * Naga Camarines Sur V 86,400 4.0 Daet Camarines Norte V 28,900 3.2 Visayas Pulupandan Negros Occidental VI 14,300 3.1 * Tacloban Leyte VIII 91,800 7.5 Mindanao Dipolog Zamboanga del Norte IX B 30,000 5.0 * Bislig Surigao del Sur XI 68,000 12.0 * Butuan Agusan del Norte X 65,400 5.0 Gen. Santos South Cotabato XI 94,200 8.5 Cotabato Maguindanao XII 75,200 11.2 Palawan Puerto Princesa Palawan IV A 24,300 6.2 Total in 1980 828,700 Total by 1989 1,234,900 4.5 * Cities appraised by the Bank. /a Although population is below the minimum criteria, city included being adjacent to and economically part of Tuguegarao. PHILIPPINES MUNICIPAL DEVELOPMENT PROJECT DETAILED COST ESTIMATES-CITY OF BISLIG (P MILLION) COST BY CATEGORY COST BY AGENCY BISLIG H125 CIVIL EQUIP- BASE DSN I SUB- LAND CONTINGENCIES TOTAL CITY MPWH COMPONENT WORKS MENT COST SPUN TOTAL PHYS PRICE COST A.URBAN SERVICES 16.85 1.72 18.57 1.40 19.97 0.00 1.69 6.22 27,87 15.28 12,59 WATER SUPPLY 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 SEWERAGE/SANITATION 2.51 0.00 2.51 0.20 2,71 0.00 0.25 0,91 3,88 3,88 FLOOD CONTROL 6.37 0.00 6.37 0.51 6.88 0.00 0.64 1.53 9.05 9.05 NATIONAL DRAINAGE 2.38 0.00 2.38 0.19 2.57 0.00 0.24 0.74 3.54 3.N4 LOCAL DRAINAGE 3o24 0.00 3,24 0.26 3.50 0.00 0.32 1.28 5.10 5.10 AREA IMPROVEMENT 1.39 0.00 1,39 0.11 1.50 0.00 0.14 0.71 2.35 2.35 SOLID WASTES 0.96 1.72 2.68 0.13 2,81 0.00 0.10 1,05 3.95 3.95 FIRE SERVICES 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0,00 0.00 0.00 B.PUBLIC FACILITIES 9.73 0.14 9,87 0,78 10,65 0.00 0#97 2.02 13,64 13,64 0.00 MARKETS-NEW 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 MARKETS-REHAB 8.19 0.00 8.19 0.66 8.85 0.00 0.82 1,64 11.31 11.31 SLAUGHTERHOUSE 1.54 0.14 1.68 0.13 1.81 0.00 0.15 0.37 2.34 2.34 Co TRAFFIC I TRANSPORT 8.51 0.00 8.51 0.68 9.19 0.00 0.85 2.91 12.95 8.85 4.11 NATIONAL ROADS 2.85 0,00 2.85 0.23 3.08 0.00 0.29 0.74 4.11 4.11 LOCAL ROADS 4.40 0.00 4.40 0.35 4.75 0.00 0.44 1.62 6.81 6.81 TRAFFIC MANAGEMENT 0.00 0.00 0.00 0,00 0.00 0.00 0.00 0.00 0.00 0,00 BUS TERMINALS 1.26 0.00 1.26 0,10 1.36 0.00 0.13 0.55 2.04 2.04 DiNAINTENANCE 2.60 6,P1 9.41 0.41 9.82 0.11 0.26 2163 12t82 12#82 0.00 TOTAL 37.69 8.67 46.36 3.28 49.64 0.11 3.77 13.77 67.29 50.59 16.70 -4----- 6 9 6----- ------ ----- ------ - ------ ---------- 46,3S 49,64 67.29 67,29 ----------------------------------------------------------------------------------------------------------------- PHILIPPINES MUNICIPAL DEVELOPKENT PROJECT DETAILED COST ESTIMATES-CITY OF BUTUAN (P MILLION) COST BY CATEGORY COST BY AGENCY --------------------------------------------------------------------------- ---------------- BUTUAN M125 CIVIL EGUIP- BASE DSN I SUB- LAND CONTINGENCIES TOTAL CITY MPUH COMPONENT WORKS MENT COST SPUN TOTAL PHYS PRICE COST ------------f ------------------------------------------------------------ -------------- A.URBAN SERVICES 13.18 1.61 14.79 1.10 15.89 0.09 1#32 5.57 22.87 15.97 6.90 WATER SUPPLY 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 SEWERAGE/SANITATION 4.01 0.00 4.01 0.32 4.33 0.05 0,40 2.02 6.80 6.80 FLOOD CONTROL 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 NATIONAL DRAINAGE 4,45 0.00 4.45 0.36 4.81 0.00 0.45 1.65 6.90 6,90 LOCAL DRAINAGE 370 0.00 3.70 0.30 4.00 0.00 0.37 1.36 5.72 5.72 AREA IMPROVEMENT 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 SOLID WASTES 1.02 1.61 2.63 0.13 2.76 0.04 0.10 0.55 3.45 3.45 FIRE SERVICES 0.00 0.00 0.00 0,00 0.00 0.00 0.00 0.00 0.00 0.00 B.PUBLIC FACILITIES 10.89 0.50 11,39 0,89 12.28 0.00 1,09 2.80 16.17 16.17 0.00 MARKETS-NEW 0.00 0.00 0.00 0.00 0,00 0.00 0.00 0l00 0,00 0l00 MARKETS-REHAB 9.06 0.00 9.06 0.72 9.78 0.00 0,91 2,38 13.07 13.07 SLAUGHTERHOUSE 1.83 0.50 2.33 0.16 2.49 0,00 0.18 0.43 3,10 3.10 C. TRAFFIC I TRANSPORT 3.46 0.00 3.46 0.28 3.74 0.00 0.35 1.03 5011 5.11 0.00 NATIONAL ROADS 0100 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 LOCAL ROADS 0100 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 TRAFFIC MANAGEMENT 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 BUS TERMINALS 3.46 0.00 3.46 0.28 3.74 0.00 0.35 1.03 5,11 5.11 D.MAINTENANCE 2.19 3.64 5,83 0.28 6.11 0.00 0.22 1.04 7.38 7.38 0.00 ------------- ----- ----------- ----- ----- --------------- ----- ----- TOTAL 29.72 5.75 35.47 2,55 38,02 0.09 2.97 10.45 51.53 44.63 6.90 ----------- --- --------- ------- --- --------------- ------ - 35.47 38.02 51.53 51,53 mmemmmmmmmme-- emmmmmememmemmmmmmemmememm------------------------------m m m-m--------m----- m-------------------- PHILIPPINES MUNICIPAL DEVELOPMENT PROJECT DETAILED COST ESTIMATES-CITY OF CABANATUAN (P KILLION) COST BY CATEGORY COST BY AGENCY ---------------------------------------------------------------------------- ---------------- CABANATUAN M125 * CIVIL EQUIP- BASE DSN & SUB- LAND CONTINGENCIES TOTAL CITY MPVH COMPONENT WORKS KENT COST SPYN TOTAL PHYS PRICE COST memm mmmmmemmmmm mmm mmmmm mm--------------------------------------------------------------------- AiURBAN SERVICES 50.97 0.86 51.83 4.10 55#93 3.20 5,10 23.52 B7.75 29.13 58.62 ------ --- ---------------- ----- ------------ ------- ----..----- ----- WATER SUPPLY 0.00 0.00 0.00 0*00 0.00 0.00 0,00 0*00 0.00 0l00 SEWERAGE/SANITATION 1,13 0.00 1.13 0.09 1.22 0.00 0.11 0.26 1,60 1,60 FLOOD CONTROL 31.96 0.00 31.96 2.56 34.52 2.77 3.20 14.93 55,42 55.42 NATIONAL DRAINAGE 2.09 0.00 2.09 0.17 2.26 0.00 0o21 0.74 3.20 3.20 LOCAL DRAINAGE 9.?7 0.00 9.97 0.80 10,77 0.43 1.00 4,89 17,09 17.09 AREA IMPROVEMENT 4.83 0.00 4,83 0,39 5.22 0.00 0,48 2.31 8.01 8.01 SOLID WASTES 0#99 0.86 1,85 0.11 1.96 0,00 0#10 0o38 2o43 2.43 FIRE SERVICES 6.00 0.00 0,00 000 0400 0.00 0.00 0.00 0*00 0*00 B.PUBLIC FACILITIES 8,35 0.00 8.35 0.67 9.02 0,00 0.84 1.86 11.71 11.71 0.00 ----------- ----- ------- ----- ----- ----- ------ -------- MARKETS-NEW 0l00 0.00 0.00 0.00 0.00 0l00 0,00 0,00 0,00 0.00 MARKETS-REHAB 7.95 0.00 7.95 0.64 8.59 0.00 0.80 1.80 11o18 11t18 SLAUGHTERHOUSE 0.40 0.00 0.40 0.03 0.43 0.00 0.04 0.06 0,54 0.54 C. TRAFFIC I TRANSPORT 4,80 0.00 4.80 0.38 518 0.10 0.48 1.21 6$98 0.89 6.09 .----- ---- --t----------------------- ----------- ------ ------ NATIONAL ROADS 4.23 0.00 4.23 0.34 4.57 0.00 0.42 1.10 609 6.09 LOCAL ROADS 0.57 0.00 0.57 0.05 0o62 0.10 0.06 0.11 0.89 0.89 TRAFFIC MANAGEMENT 0.00 0.00 0.00 0.00 0.00 0.00 0*00 000 0.0 0*00 BUS TERMINALS 0l00 0.00 0.00 0,00 0.00 0.00 0.00 0.00 0.00 0.00 D.HAINTENANCE 2,38 7,66 10.04 0.42 10.46 0.00 0.24 2.49 13.19 13.19 0.00 ------- ----- ----------- ----- ------------ ------- ----..----- ----- TOTAL 66,50 8.52 75,02 5s58 80.60 3.30 6.65 29.08 119,63 54.91 64.71 ------ -------------- ----- ----- ----- ----------- ------ ------ 75.02 80.60 119.63 119.63 mmmmemmmmmm-mm-mm--m-memmmmemmmmmmmmmmmmemmmmmem------------------------------------------------------------------------ PHILIPPINES HUNICIPAL DEリELOPMEHT PROJECT DETAILE[I COST ESTIHATES幹CITY OF N白0白 (P HILLION) CDSTBYCATE00RY COSTBYAOENCY 日日園■昭■■日■自国園■■■■■園■日■■曲■■日■日■園日園日日国→■月■りqり咽月り■卼田咽明価国り国日■園国咽国価■園国園国■■日園咽国国■国■園卼自日自日国園国園申口自園日昭日■昭■1日日■園国国日－－日国－園自昭自園■－国■－自■国■園■園■園国国日国国日国■■自■園園自■国■園■園■馴園日日園■咽国日■月■園』咽曲由田曲」園山■曲■叩－■園昭■日■■■■園国■月国咽国■国国園国 NAOA H125 ClりIL Ea0IP-BASE DSN呂SUB-LAND CONTINOENCIES TOTAL CITY HPUH COHPONENT りORrs HENT COST SPリN TOてAL PHYS PRICE COST 明日国国国国国国咽国咽国国国国日園日国日園園園園国血園国日国日国園国国国園■■■日山図国価国国日図d日d白喝→ddldl吻日dl■卼■田昭■昭■国■国■国■■■■■■■昭■■■日国国国■国国園国国国■図■国国国国■国■日■国国■国■■■価国叩国図国咽国国園園国■園図国園園月園咽国日国国日日日日日日国日国咽国国国国国園国園国価田日国園国日日園日園日国日田国日国■園■自園日■■園■園■■甲甲り月 A.URBANSERVICES 38.33 0.11 38.A4 3.07 41.51 0.00 3.83 14.52 59.87 39.19 20.68 NATERSUf&PLY 0.000.000.000.000.000.000.000.000.00 0.00 SEりERAGE/SANITAT10N 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 FL00DCONTROL 0.000.000.000,000.000.000.000.000.00 0.00 NATIONALDRAINAGE 13.45 0.0013．叱5 1.0914.53 0.00 1.35 4.81 20.60 20.60 LOCALDRAINAGE 21.08 0.0021.08 1.6922.77 0.00 2.11 B.34 33.22 33,22 AREAIHPROVEHENT 1.90 0.00 1.90 0.15 2.05 0.00 0.19 0.90 3.22 3.22 SOLIDWASTEg 1.900.112.010.162.170.000.190.392.75 2.75 FIRESERリICES 0.000.000.000,000.000.000.000.000.00 0.00 B.PUBLICFACILITIES 3.87 0.49 4.36 0.32 4.60 0.00 0.39 0.63 5.70 5.70 0.00 H白BKEIS-UEり0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 HARKETS-REH白B 0.000.000.000.000.000.000.000.000.00 0.06 & SLAUOHTERHOUSE 3.07 0.49 4,36 0.32 4.69 0.00 0.39 0.63 5.70 5.70 か O C,TRAFFIC佐TR白NSPORT 0.000.000.000.000.000.000.000.000.00 0.000.00 1 NAT10NALROA[I5 0.000.000.000.000.000.000.000.000.00 0.00 LOCALROADS 0.000.000.000.000.000.000.000.000.00 0.00 TRAFFICHANAGEHENT 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0,00 0.00 BUS[ERHINALS 0.000.000.000.000.000.000.000.000.00 0.00 0.HAINTENANCE 4.02 6.1110.93 0.5711.50 0.00 0.AB 2.6014.58 14,58 0.00 TOTAL 47.02 6.7153.73 3.9657.69 0.00 4.7017.7580.14 59.4720.68 53.7357.69 80.!4 80.14 ■■園■■■－------－■－■■－-－申園－利－,--..--－■－－■－■国－－価園－－日国■－■■－-－■－--－田D--－■－-------－国－日－田田－-------－園山－国■－－■－-----------－』歯－---------------－■自■ 】01 PHILIPPINES MUNICIPAL DEVELOPMENT PROJECT DETAILED COST ESTIMATES-CITY OF TACLOBAN (P MILLION) COST BY CATEGORY COST BY AGENCY ------------------------------------------------------------------------------------------------ ---------------- TACLOBAN M125 CIVIL EOUIP- BASE DSN I SUB- LAND CONTINGENCIES TOTAL CITY MPWH COMPONENT WORKS MENT COST SPYN TOTAL PHYS PRICE COST ---- -------------- ------------------------------------------------------------------- ---------------- A,URBAN SERVICES 21.21 0,73 21,94 1,72 23.66 0.52 2,12 7,84 34ol4 17,89 l6t24 ----- ----- ----- ----- ----- ----- ----- ----- ----- WATER SUPPLY oloo oloo otoo oloo oloo oloo oloo oloo 0,00 oloo SEWERAGE/SANITATION oloo oloo oloo oloo 0,00 oloo 0,00 0,00 oloo otoo FLOOD CONTROL 7t13 0.00 7,13 0,57 7,70 0,00 0,71 2o42 10,84 10,84 NATIONAL DRAINAGE 3,50 0,00 3,50 0,28 3.78 040 0,35 1,28 5t4l 5,41 LOCAL DRAINAGE 2,35 oloo 2#35 0ol9 2,54 0,00 0,24 0188 3066 3,66 AREA IMPROVEMENT 6,70 0100 6,70 0,54 7,24 0,00 0,67 2,92 10,83 10,83 SOLID WASTES 1,53 0*73 2,26 0,14 2,40 0,52 0,15 Ot33 3,41 3,41 FIRE SERVICES 0,00 oloo oloo oloo oloo 0,00 oloo oloo 0.00 0,00 B,PUBLIC FACILITIES 3t37 0,31 3t68 0,28 3t96 040 0,34 0,76 5,06 5,06 0,00 ----- ----- ----- ----- ----- ----- ----- MARKETS-NEW 0,00 oloo oloo 0,00 oloo oloo oloo 0,00 oloo otoo MARKETS-REHAB 2,63 0,00 2,63 0,21 2#84 OtOO 0#26 0,60 3,70 3,70 SLAUGHTERHOUSE 0,74 0,31 1,05 0,07 1,12 0,00 0,07 0,17 1,36 lt36 Co TRAFFIC I TRANSPORT 15,10 0#00 15#10 ,21 16,31 1.07 It5l 6.04 24.93 4,97 19,?6 - --- ----- ----- ----- ----- NATIONAL ROADS 11,97 0#00 lIt97 0,96 12t93 1,07 1,20 407 19,96 l9i96 LOCAL ROADS oloo 0,00 oloo 0,00 oloo 0,00 0,00 0,00 oloo 0,00 TRAFFIC MANAGEMENT Oloo Oloo oloo oloo 0.00 Oloo 0.00 Oloo Oloo oloo BUS TERMINALS 3s13 0,00 3,13 0,25 3,38 0,00 0,31 1,27 4,97 4,97 DoMAINTENANCE 1,46 3-16 4,62 0#21 4,83 0,22 0115 049 6,09 6,09 0,00 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- TOTAL 41o14 4120 45,34 3142 48,76 1,81 4,11 15,53 70,21 34,01 36,21 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- 45t34 4806 70,21 70,21 ------------------------------------------------------------------------------------------------------------------------ FA PHILIPPINES MUNICIPAL DEVELOPMENT PROJECT DETAILED COST ESTIMATES-CITY OF TUGUEGARAO (P MILLION) COST BY CATEGORY COST BY AGENCY TUGUEGARAO 125 CIVIL EQUIP- BASE DSN I SUB- LAND CONTINGENCIES TOTAL CITY MPWH COMPONENT WORKS MENT COST SPVN TOTAL PHYS PRICE COST A.URBAN SERVICES 20.43 0,86 21.29 1.66 22.95 0.01 2.04 8,64 33.65 5.21 28.44 WATER SUPPLY 0.00 0.00 0.00 0.00 0.00 0.00 0100 0100 0.00 0.00 SEWERAGE/SANITATION 0.00 0l00 0l00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 FLOOD CONTROL 17.66 0,00 17.66 1.41 19.07 0.00 1.77 7.60 28,44 28.44 NATIONAL DRAINAGE 0.00 0.00 0.00 0.00 0l00 0.00 0.00 0.00 0.00 0l00 LOCAL DRAINAGE 0.00 0.00 0.00 0.00 0.00 0100 0.00 0.00 0.00 0l00 AREA IMPROVEMENT 1.62 0.00 1.62 0,13 1.75 0.00 0.16 0.60 2.52 2,52 SOLID WASTES 1,00 0.86 1.86 0,11 1.97 0.01 0.10 0.41 2.49 2.49 FIRE SERVICES 0.15 0.00 0,15 0.01 0.16 0.00 0.02 0,02 0.20 0.20 B.PUBLIC FACILITIES 1,86 0.08 1,94 0.15 2.09 j.18 0.19 0.52 2.98 2.98 0,00 MARKETS-NEW 0.00 0l00 0l00 0,00 0.00 0.00 0.00 0l00 0,00 0.00 MARKETS-REHAB 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 SLAUGHTERHOUSE 1,86 0.08 1.94 0.15 2.09 0.18 0.19 052 2.98 2.98 C. TRAFFIC I TRANSPORT 4.95 0.00 4.95 0.40 5.35 0.00 0.50 1.99 7.83 7.83 0.00 NATIONAL ROADS 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 LOCAL ROADS 4.08 0.00 4.08 0.33 4.41 0.00 0.41 1.74 6.55 6,55 TRAFFIC MANAGEMENT 0.42 0.00 0.42 0.03 0.45 0.00 0.04 0.18 0.67 0.67 BUS TERMINALS 0.45 0.00 0.45 0.04 0.49 0.00 0.05 0.07 0.61 0.61 DoMAINTENANCE 2.24 2.01 5.05 0.26 5.31 0.23 0.22 0.97 6.74 6.74 0.00 TOTAL 29.48 3.75 33.23 2.47 35.70 0.42 2.95 12.12 51119 22#75 28s44 33.23 35.70 51.19 51,19 - - -- -- - - -- - - - -- - - - - -- - -- - - - - - -- - -- - - -- - - - -- - -- -- - -- - -- -- - - -- -- - - - - -- - - - -- -- - - - -- - -- - - -- - -- - 43 - ANNEX 3 PHILIPPINES Municipal Finance Projections Basic Assumptions 1. Local revenue projections (before revenue reforms) were based on the assumption of continued past trends. However, for property taxes which showed a marked increase between 1979-82 (e.g., 53% p.a. in Cabanatuan, 39% p.a. in Tuguegarao, etc.), the national average for 1979-82, 15%, was used. 2. The CPO and city officials conducted a review of each city's finances, discussed the specific measures to be taken to increase local revenues (i.e., tax mapping, improved registration and information management, rent and fee increases, etc.) and estimated the total local revenue (including the impact of the reform measures) for the city for each year. The incremental amount attributable to the revenue reforms were obtained by subtracting the projected trend of local revenues (discussed in Section 1 above) from the total projected local revenues. 3. The growth in Government grants were assumed to drop compared to past growth rates which averaged from 22% to 34% between 1979 and 82. For the projections, it is assumed that annual growth rates would not exceed 14% for municipalities (Bislig and Tuguegarao) and 10% for cities for 1983- 88, dropping to 10% and 5% for 1988-92, based in discussions with MOF officials. This distinction has been made in light of the cities' stronger revenue base and the Government requirement that municipalities share their revenues with the province. 4. Operational costs were assumed to increase at 13% p.a., the national average for 1979-82. While the rate is lower than that experienced in most of the project cities during the same period, the assumption is considered reasonable since the project cities expenditures increased significantly during this period in line with increasing Government grants and a drop in expenditure growth can be expected with the slow growth of government grants. 5. Operation and maintenance cost savings are based on engineer's estimates of savings from the maintenance component. The incremental maintenance cost of the newly constructed project components were subtracted to obtain net cost savings. PHILIPPINES MUNICIPAL DEVELOPMENT PROJECT REVENUE PROJECTIONSCITY OF BISLIG '.PESOS MILLION) --------------------------------------kEG-ILO)---------------------------------------------------------------------- ACTUAL PROJECTED 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 AtREVENUES LOCAL REVENUES 2.45 3.21 3.44 4,19 4.73 5.33 5.96 6167 7.46 8.36 9.48 10,77 12.23 13t89 REVENUE REFORMS (1) 0.92 1.97 3.56 374 3.75 4.83 5.32 5.85 6.43 GOVERNMENT GRANTS 0.88 0.96 1.04 1.99 2.24 2.55 2.91 3.32 3#78 4.31 4.74 5.21 5,74 6.31 B#EXPENDITURES 3.33 4.17 4.48 6,18 6.97 8.80 10.84 13.55 14.98 16.42 19.06 21o30 23.81 26.63 OPERATIONAL COSTS 3#07 3.48 4.28 5.31 5,44 6.15 6.95 7.85 8.87 10.03 11.33 12,80 14.47 16.35 (LESS) NET DI COST SAVINGS (2) 0.41 0.00 -0.64 -0,71 -0.78 -0.86 -0.94 -1.03 -1#14 DEBT SERVICE: EXISTING LOANS 0.06 0.03 0.03 0.03 0.03 0.03 0,03 0.00 0.00 0.00 0.00 0.00 0.00 0.00 MDF LOAN 0.14 0.90 2.39 3.70 4.89 6.56 6,56 6,56 6,56 3.13 3.51 4.30 5.34 5,47 6.73 7.88 9.60 11.86 14.14 17.03 18.42 19.99 21.77 RECURRENT SURPLUS (DEFICIT) 0.19 0.66 0.17 0.84 1.50 2.07 2.96 3.95 3.12 2.28 2.03 2.88 3.82 4.87 C.CAPITAL OUTLAYS ONGOING 1.24 0.44 0.54 0.74 0.49 0.32 0.35 0.38 0.41 0.44 1.62 2.30 3.06 3.89 PROJECT 3.50 10.94 15.41 8.56 12.18 0.00 1.24 0.44 0.54 0.74 0.49 3.82 11.29 15.79 8.97 12.62 1.62 2.30 3.06 3.89 D.8ORROWINGS ONGOING 0.00 0.00 0.00 0.00 0.00 0l00 0.00 0.00 0.00 0.00 0.00 0.00 000 0.00 MDF 2.07 8.77 12.43 6.32 10.68 0.00 0.00 0.00 0.00 0,00 0.00 2.07 8.77 12.43 6.32 10.68 0.00 0.00 0.00 0.00 SURPLUS (DEFICIT) -1,05 0.22 -0.37 0.10 1.01 0.31 0.44 0.59 0.47 0.34 0.41 0.58 0,76 0.97 BALANCE CARRIED FORWARD -1.05 -0.83 -1.20 -1.10 -0.09 0.22 0.66 1.25 1.72 2.06 2.47 3.04 3.81 4.78 RATIOS! LOCAL/TOTAL REVENUES 0.74 0.77 0.77 0.68 0.68 0.71 0.73 0.76 0.75 0.74 0.75 0.76 0.76 0.76 LOCAL REVENUES/RECURRENT EXPENDITURES 0.78 0.91 0,80 0.78 0.86 0.93 1.01 1,07 0.94 0.86 0.84 0.87 0.90 0,93 ' " NET REVENUE/DEBT SERVICE (3) 4.22 26.46 7.58 28.97 50.93 12,84 4.17 2*65 1.84 1.47 1,31 1o44 1.58 1.74 -- -------------------------------------------------------------------------------------------------- --------------- NOTES!I.ADDITIONAL REVENUES FROM IMPROVED TAX COLLECTION AND OTHER REVENUE REFORMS. 2.ADDITIONAL OPERATION AND MAINTENANCE REQUIREMENTS OF THE MDF FINANCED INVESTMENTS LESS CITY-WIDE SAVINGS IN MAINTENANCE COSTS RESULTING FROM THE PROJECT'S MAINTENANCE IMPROVEMENT PROGRAM, 3.(TOTAL REVENUES - OPERATING COSTS)/(DEBT SERVICE).