Philippines - Metropolitan Manila Water Distribution Project

DeOantcOf The World Bank FOR OMCIAL USE ONLY Repwt No. 5903-PH STAFF APPRAISAL REPORT PHILIPPINES METROPOLITAN MANILA WATER DISTRIBUTION PROJECT February li, 1986 Projects Department East Asia and Pacific Regional Office This~~~~ ~~ doae wareffoddMf1M d= be _e by r*eikm ady In tde pofon"#s do | I Iiar Ie5ma d7afie; lil my aS eIrwbebe dbdind witUbS Wodd Bank mbedna jt JR  CURRENCY EQUIVALENTS Currency Unit = Pesos P 1 US$0.0535 P 18.7 US$1.00 (as of February 11, 1986) FISCAL YEAR January 1 to December 31 WEIGHTS AND MEASURES cu m = cubic meter (1,000 liters or 264 US gallons) ha = hectare (2.47 acres) km = kilometer (0.62 miles) I = liter (0.26 US gallons) 1/cd = liter per capita per day (0.26 US g/cd) m = meter (3.28 foot) MI/d = million liters per day (264,172 US g/d) PRINCIPAL ABBREVIATIONS AND ACRONYMS USED ADB = Asian Development Bank LWUA = Local Water Utilities Administration MLC Ministry of Local Government MOH = Ministry of Health MPWH = Ministry of Public Works and Highways MWS II = Second Manila Water Supply Project MWS III = Third Manila Water Supply Project MWSS = Metropolitan Waterworks and Sewerage System RWDC = Rural Waterworks Development Corporation RWSA = Rural Water Supply and Sanitation Association USAID = United States Agency for International DeveLopment WD = Water District  FOR OFCAL USE ONLY PHILIPPINES METROPOLITAN MANILA WATER DISTRIBUTION PROJECT Loan and Project Summary Borrower Republic of the Philippines Beneficiary: Metropolitan Vaterworks and Sewerage System (MWSS) Amount: US$69 million equivalent Terms: Repayable in 20 years including 5 years of grace, at the standard variable rate. Relendins Terms: Government would relend the entire loan proceeds to MWSS on the same terms and conditions as the Bank loan under a subsidiary Loan Agreement acceptable to the Bank. MWSS would carry the foreign exchange risk. Project Objectives: The proposed project would assist MWSS to optimize utiliza- tion of existing infrastructure and thus make significant improvements in its level of internal cash generation and financial performance. It would also assist MUSS to improve its operational efficiency. Specifically, this would be achieved under the proposed project by improving the water supply in the MWSS service area through: (a) the completion of works commenced under the Second Manila Water Supply Project (Loan 1615-PH), including construction of about 3 km of bulk water supply mains, 17 km of primary, secondary and tertiary distribution lines, and installation of about 100,000 service connections; (b) construction of about 8 km of additional bulk water supply mains; (c) construction of additional water distribution works providing water to about 72 existing subdivisions, comprising some 16,000 households; (d) infilling the distribution network in about 24 areas covering about 13,500 households; (e) provision of yard connections and standpipes in about 160 low-income areas to serve about 70,000 households; (f) acquisition of about 100,000 water meters; (g) improvement to the distribution system through the installation of control valves; (h) devel- opment of about five deep wells; (i) future project prepara- tion including seismic monitoring of a future dam site; and (j) institutional support including consulting services, training, and provision of motor vehicles and computing facilities. The proposed project would provide water to many unserved low-income areas and thus directly benefit the urban poor. [ document ha a rested dituoua and may be used by recipiens oly in the perfornance of bdeir afrll dutiet Is cnes MY not oterwise be didosed wthout World Bank authorizm J  - ii - Risks: There are no unusual risks associated with this project. The major challenges to MWSS are to meet the water meter connec- tion and water loss reduction targets. The management and coordination of these activities, which must be regarded as the two =st difficult tasks in water supply management, will preoccuspy the implementing agency. However, through a recent reorganization including the strengthening of the upper levels of management, decentralization of operations, and the continuation of a staff training program, appropriate steps have been taken to minimize risks. Project Costs: Local Foreign Total ($ million) Water mains - ongoing works 15.8 14.6 30.4 Water mains - new works 1.6 2.7 4.3 Distribution and connections 19.4 9.5 28.9 Technical assistance 1.4 8.0 9.4 Base cost 38.2 34.8 73.0 Physical contingencies 2.8 1.6 4.4 Price contingencies 4.3 3.6 7.9 Total project cost /a 45.3 40.0 85.3 Interest during construction Bank-financed - 8.0 8.0 MUSS-financed - 3.0 3.0 Total financing required 45.3 51.0 96.3 Financing Plan IBiD 21.0 48.0 69.0 MUSS 24.3 3.0 27.3 Total 45.3 51.0 96.3 Estimated Disbursements: Bank FY 1986 1987 1988 1989 1990 1991 - -T($ million)--- Annual 4.9 20.6 20.1 12.4 8.1 2.9 Cumulative 4.9 25.5 45.6 58.0 66.1 69.0 Financial Internal Rate of Return: 40Z Staff Appraisal Report: No. 5903-PH, dated February 11, 1986 Maps: IBRD 19089 and 19090. /a Including duties and taxes estimated at $4.3 million equivalent.  - iii - PHILIPPINES METROPOLITAN MANILA WATER DISTRIBUTION PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. I. THE WATER SUPPLY SECTOR ..................................... 1 Sector Background .0.........................* ........... 1 Sector Organization and Financing ........................... 2 Sectoral Issues and Constraints ............................. 3 - MWSS Investment Program es ... 000000S000@000 00000..........0 3 - MWSS Operational Efficiency 4...0.00.0....... 4 - LWUA's Future ............................................ 4 - RWDC's Role4.............. . 4 Previous Bank Lending, Role and Strategy .................... 5 - Experience with Previous Bank Lending ..................... 5 - Bank Role and Lending Strategy ..... . 5 IIe THE PROJECT ses..6 I. TEPOET.................................................6 Project Origin and Formulation ................ 00*.0.... .6. 6 Rationale for Bank Involvement and Project Objectives ....... 6 The Project Area and Water Demand and Supply ................ 7 Project Description *****............. W 7 Project Costs and Financing *....................* ....* 8 Implementation .............................................. 10 Status of Project Preparation ............................... 11 Procurement ..................................... 12 Disbursements ............................................... 13 III. INSTITUTIONAL AND FINANCIAL ASPECTS ..............e........... 13 Borrower and Executing Agency................................. 13 Operations and Maintenance ..... ............ ........* 14 Training .................................................... 15 Financial Aspects ....... .................................... 15 Billing and Collection................................ *...... 16 Accounts and Audit, and Reporting ........................... 17 This report is based on the findings of an appraisal mission consisting of Messrs. A. Van Vugt (Financial Analyst), A. Saravanapavan (Engineer), Mrs. S. Velji (Research Assistant), and Ms. Kyung Yoon (Operations Assistant), who visited the Philippines in April/May 1985. Ms. Beth Creed assisted in the preparation of this Staff Appraisal Report.  -iv - Page No. IV. ECONOMIC AND SOCIAL ANALYSIS ................... . .....o....... 17 Project Benefits ......... ................................... 17 Poverty Impact .............................................. 18 Environmental Impact ........................................ 18 Risks ....................................................... 18 V. AGREEMENTS REACHED AND ......... ................ .... 19 Recowa_endation.e ................................... *19 ANNEXES 1. Revised Cost Estimates MWS II ...... o ....... ........ 20 2. Water Demand and Supply Projection . . ... .........- 21 3. Description of Institutional Support .. . 32 4. Detailed Project Cost Estimates . ......... .... 35 5. Sumary Implementation Schedule .. . ...............o ..... 39 6. Monitoring Indicators... ... . . ...... -- ...... 40 7. Disbursement Schedule ................ . . . 42 8. mWSS Organization Chart ..................... 43 9. Schedule of Tariffs...4....................4....... .... 10. Analysis of Historical Financial Performance . . ....... . 45 11. Projected Financial Performance . .......... 50 12. Assumptions Used in Financial Projections .............. . 55 13. Affordability Calculationo-...... --- .. . 57 14. Calculation of Internal Rate of Return ......... ........ . 58 15. Documents in Project File.9 ... . . 59 MAPS IBRD MAP 19089 Status of MWS II Project as of October 1985 IBRD MAP 19090 Proposed Water Distribution Works  PHILIPPINES METROPOLITAN MANILA WATER DISTRIBUTION PROJECT STAFF APPRAISAL REPORT I. THE WATER SUPPLY SECTOR Sector Background 1.01 The Philippines is well endowed with natural fresh water resources. Its average annual rainfall is in the order of 3,000 m. It has more than 100 major rivers, about 60 natural lakes, and significant groundwater resources. However, as the population grew, the most easily accessible and cheapest water resources were generally exploited. Many are now inadequate to support the present population and some have now become polluted. Future development to serve the large urban areas requires exploitation of distant and hence more expensive catchment areas, and more costly groundwater resources in rural areas. Health statistics show that water-borne and sanitation related diseases such as typhoid, gastro-enteritis, intestinal parasites and dysentery are prevalent nationwide. Schistosomiasis is wide- spread in several regions. Reducing the incidence of these diseases, improving living conditions of the population generally, and economic develop- ment all require substantial improvement in water supply and sanitation. 1.02 Much has already been done, mainly during the last decade, to improve water supply and more recently a start was made on improving sanitary conditions. Following a major sector review in 1972, sector development institutions were established, sector objectives and strategies were defined and master plans prepared. Physical development started with water supply and sanitation projects in several provincial cities and towns and later in Metropolitan Manila and in the rural areas. It is estimated that potable water supply was made available to an additional three million people between 1972 and 1980, bringing the total number of people with piped water supply to around 22 million, i.e. to about 45% of the total population. Despite this achievement, the proportion of the population unserved has remained at about 55Z because of continued population growth. 1.03 According to the 1980 census estimate, only about 56% of the total population had access to water-borne sewerage, combined sewerage/drainage systems, or septic tanks or pits for excreta disposal; the remainder of the population had no facilities. In the rural areas only about 44Z of the popu- lation had access to such facilities. In the urban areas the situation is better with about 76Z of the population having facilities. In Metropolitan Manila, the 1980 census showed that about 17% of the population was served by public sewerage or combined sewer/drainage systems, 34% by septic tanks but the remaining 49% had pit latrines or no service at all. Since 1980 some improvements have taken place in Metropolitan Manila and recently a start was made on improving rural sanitation. Only six out of 700 provincial cities or towns have a public sewerage system.  1.04 The Government has been assisted in its water supply and sanitation development efforts by several multilateral and bilateral agencies, notably the Bank, the Asian Development Bank (ADB), and the United States Agency for International Development (USAID). Under the impetus of the United Nations' International Drinking Water and Sanitation Decade, the Government has given and continues to give a high order of priority to water supply and sanitation development but resources have been curtailed because of the economic situation in the Philippines. During 1979-81 about P 3.1 billion or 7.2% of public investment went to the water suppLy and sanitation sector. In 1982-84 investment increased to P 5.4 billion or 8.6% of total public investment. Although future investments were expected to total some P 6.7 billion in 1985- 87 and P 7.3 billion in 1988-90, investment plans for 1985 and 1986 have already been substantially curtailed. The feasibility of investment plans for subsequent years is being studied under an ongoing Public Investment Review conducted by Bank staff. Sector Organization and Financing 1.05 The institutional framework of the sector, and funding and cost recovery policies are well established in the Philippines. The National Water Resources Council, which includes representatives oF the various sector insti- tutions, is responsible for formulating policies for the water supply sector. The Metropolitan Waterworks and Sewerage System (MWSS), established in 1972, is responsible for development and operation and maintenance of water supply and sewerage systems in Metropolitan Manila. The Local Water Utilities Administration (LWUA), established in 1973, is chartered to provide technical and financial assistance to provincial cities and towns for water supply and sanitation development. The operation and maintenance of provincial water supply systems is the responsibility of locally established Water Districts MODs). The Rural Waterworks Development Corporation (RWDC), established in 1980, is responsible for water supply development in the rural areas. The lower level systems provided in rural areas are operated and maintained through local Rural Water Supply and Sanitation Associations (RWSAs). The Ministry of Public Works and Highways (MPWH) assists RWDC with the drilling of wells and the Ministry of Health (MOH) implements the rural sanitation program. 1.06 Development in Metropolitan Manila is funded through self-generated funds of MWSS, government equity contributions, and foreign loans. LWUA is funded in the same way and lends these funds to WDs for system development; the WDs are normally required to make an equity contribution to self-finance part of the cost of development. The financially weaker WDs may receive some government grants towards the cost of system development. RWDC also receives government equity and foreign loans and uses these resources to finance water supply development in the rural areas. The Government's general policy is to develop systems on the basis of the communities' financial ability and willingness to pay for them. Accordingly, individual house connections are usually provided in the larger metropolitan and provincial urban areas, standpipe systems in smaller settlements, and wells with hand pumps in the rural areas. Government policy is that tariffs in Metropolitan Manila are to be set at levels which should earn MWSS a financial rate of return of 8Z on its revalued net fixed assets in operation on water supply operations and a  - 3 - positive rate of return on sewerage operations. For provincial cities and towns, tariffs are to generate adequate levels of revenue to meet operation and maintenance costs and cover debt servicing costs or depreciation, whichever is greater. In rural areas tariffs are expected to meet operation and maintenance costs and the capital costs of any distribution works; the Government finances the capital costs of the source works. Sectoral Issues and Constraints 1.07 MWSS Investment Program. Until recently, MWSS had an ambitious long-term investment program aimed at providing adequate water to most of the population of Metropolitan Manila by 1990, and a sustained expansion of the sewerage system up to the year 2000. A major component of the water program was to double the present production capacity of 2,500 Ml/d through the exploitation of a distant catchment area. This project, referred to as Manila Water Supply III (MWS III), was scheduled for implementation in 1985-90. However, the economic downturn starting in 1982-83, the resultant shortage of local funds, and the high inflation which affected both ongoing and future investments, reduced internal cash generation of MWSS and limited the Government's ability to provide equity capital. These developments, and the successive devaluations of the peso, necessitated a re-examination of MWSS' investment priorities. A joint review undertaken by MWSS and the Bank in 1984 concluded that in the short- and medium-term, emphasis should be on: (a) the completion of ongoing bulk water supply mains and distribution works (financed under the Bank's Second Manila Water Supply Project (MWS II), Loan 1615-PH) and further expansion of the distribution system to utilize the available production capacity while at the same time significantly improving the population coverage and MWSS' revenues; and (b) renewed emphasis on reducing water losses through expediting the ADB-financed rehabilitation project (para. 3.02 below). A review of the demand forecast indicated that additional production capacity would not be needed until at least 1995, and thus the major expenditures for MWS III could be deferred until about 1990. It was also concluded that the proposed sewerage investments would have to be deferred indefinitely in view of financial constraints, and of necessity prolonging dependence on existing drainage systems for carrying effluents. This investment review resulted in a reduction in MWSS's medium-term (1985-89) investment program from over P 15 billion to about P 6 billion. 1.08 The funding of even the reduced MWSS program will not he easy. Its previous tax-exempt status has been withdrawn and MWSS is now subject to duties and import taxes, a franchise tax of 5% on its gross billings, and an income tax averaging about 33%. Even so, MWSS is expected to finance about 30% of its program from internal cash generation. Achieving this will require a sustained effort in reducing non-revenue water, increasing sales rapidly through expanding the number of connections, and regular tariff adjustments. Slippage in any of these areas would entail a further downward revision in the investment program (largely meaning further delaying MWS III), since it might not be realistic for the Government to make contributions to MWSS' equity beyond its present commitments in 1986 and 1987 (P 350 million and P 300 million respectively). To facilitate a close monitoring of MWSS' performance, agreement was reached at negotiations that MWSS will prepare annually, starting with 1986, an updated investment program and financing plan for the  - 4 - following five years, furnish them to the Bank by September 30, and review the program and plan with the Bank semi-annually. 1.09 MWSS Operational Efficiency. HWSS continues to have a high level of non-revenue water, that is, water which is produced but does not generate revenues. This results from two factors: (a) physical losses comprising pro- duction losses, leaks in the distribution system and water used in pressure testing and flushing newly constructed pipelines, and (b) administrative losses, that is, water reaching the consumer but not paid for because of under-registration of meters, incomplete customer records, billing inefficien- cies and illegal use. Currently, total non-revenue water is estimated at more than half of production, being shared about equally between physical and administrative losses. With financial assistance from ADB, MWSS is implemen- ting a program of rehabilitation works and instituting reforms on administra- tive procedures to reduce the high volume of non-revenue water from more than 50Z in 1985 to 25Z by 1993. MWSS has geared up to meet this target but it is a difficult task; its achievement is critical to MWSS' long-term financial viability. 1.10 LWUA's Future. At the provincial level LWUA, with financial and technical support from USAID, has developed into a strong sector institution and has played a significant role in the physical and institutional develop- ment of WDs. The establishment of LWUA and the introduction of the Water District concept, which removes water supply from the responsibility of local municipal governments, was intended to make water supply an autonomous and financially viable activity. LWUA's charter provides that all municipalities with populations in excess of 20,000 would be eligible to form WDs and thus qualify for financial support through LWUA from the Government. To date only about 250 of the potential 700 WDs have been formed. As the remaining eli- gible areas are generally financially weaker, i.e., they have smaller popula- tions and a weak economic base, it is becoming increasingly difficult to form financially viable WDs. In existing WDs, actual revenue compared to targets falls short of expectations, largely because of the longer than expected leadtime needed for institutional development and achievement of financial viability. The Bank and LWUA are reviewing LWUA's financial policies and practices, funding of WD development and related cost recovery, and LWUA's role in assisting WDs with sanitation improvements as prescribed in its charter but not yet carried out. The review will provide the means to refor- mulate LWUA's sector plans and responsibilities. 1.11 RIDC's Role. Rural water supply and sanitation are currently being improved through the Bank-assisted Rural Water Supply and Sanitation Project (Loan 2206-PH) which includes the construction or rehabilitation of about 10,000 wells and the provision of 750,000 pour-flush toilet units. This pro- gram is being implemented by: (a) MPWH for well drilling, (b) MOB for the sanitation component, and (c) RWDC for water supply development in the larger rural settlements not covered by LWUA. RWDC is also responsible for overall coordination of rural water supply development. However, RWDC has not yet made significant progress on rationalizing and coordinating activities in the rural sector; coordination will be increasingly needed as other aid agencies become more actively involved in sector development. Similarly, substantial institutional development at the local level is required before new commit-  ments can be made in rural water supply and sanitation. For this purpose, and the wider sector issues and constraints described above, the Government and the Bank have agreed on the updating of the earlier sector study in order to reappraise sector objectives, development targets and institutional arrangements. The study has already begun with a review of the operations of LWUA and RWDC. Previous Bank Lending, Role and Strategy 1.12 Experience with Previous Bank Lending. Except for an early loan for Metropolitan Manila Water Supply (MWS I) in 1964, the Bank's involvement in the sector essentially started in 1977 with the First Provincial Cities Water Supply Project (Loan 1415-PH, $23 million) to improve water supp'ly to five provincial towns outside Manila. Since then, four additional loans have been made providing for the expansion of water supply and sewerage in Metropolitan Manila (Loan 1615-PH, $88 million; and Loan 1814-PH, $63 million), water supply in additional provincial towns (Loan 1710/Credit 920-PH, for a total of $38 million), and a national program of rural water supply and sanitation (Loan 2206-PH, $35.5 million). Initial implementation experience with all projects was generally good, except for start-up delays in the earlier projects. However, since 1982 implementation of most of the projects has been adversely affected by the general shortage of Government counterpart funds. The projects in Metropolitan Manila also suffered particularly from serious delays and cost over-runs because of the rapid inflation in the last few years and the failure of several major contractors. Under the Special Action Program (SAP), the Bank took one or more of the following meAsures to assist individual projects: increasing the disbursement percentages, establishment of special accounts, and reduction in the project scope. These measures, com- bined with actions taken by the implementing agencies to renegotiate and/or re-award contracts facing difficulties, have helped stabilize the situation. It is expected that all of the projects will be completed with delays of 2-3 years, and largely achieve their original objectives. The proposed project has been designed keeping in view this past experience by adopting a realistic implementation program, and by keeping Government counterpart funds to a minimum. The First Provincial Cities Water Supply Project was completed in 1983. The Project Completion Report, completed in May 1984, is currently under review by OED; it noted satisfactory achievement of the project's physical and institutional goals. However, it also highlighted the need to re-examine LWUA's charter and financial policies (para. 1.10). 1.13 Bank Role and Lending Strategy. The Bank's role in the sector is to assist the Government in the implemtntation of its continuing program in the sector, which is well conceived, but for which it has very limited resources. In the context of the country' s currently constrained economic conditions, the Bank expects to assist the Government in formulating sector priorities and investment programs. The Bank's past involvement in the sector has been instrumental in helping the Government to develop a well conceived institu- tional framework and policies for the sector. Past experience has indicated the need for certain revisions and adjustments. The Bank expects to continue to advise the Government in these areas.  II. THE PROJECT Project Origin and FormuLation 2.01 The proposed project arose out of a joint Bank/MWSS review of investment priorities in the wake of the country's deteriorating financial condition, and the subsequent decision to focus in the short- and mediumr-term on completion of ongoing works and the expansion of the distribution networks in order to maximize the use of existing excess production capacity. Some of these proposed immediate works were originally included in MWS II financed by the Bank. The implementation of this project has slipped by about two and a half years, initially because of delays in the construction of water supply headworks (funded by ADB), and more recently the financial failure of several large contractors (attributed to the country's economic crisis), necessitating cancellation and re-award of several contracts. The delays combined with rapid local inflation have resulted in substantial cost increases, from about P 1.5 billion to P 3.0 biLlion (see Annex 1). However, because of successive devaluations of the peso the costs expressed in US dollars remained at roughly the same level as estimated at appraisal ($200 million). Under SAP, the Bank agreed in November 1983 to increase the disbursement percentage for civil works from 40Z to 65Z, which will result in the full utilization of the proceeds of the Bank Loan by about April 1986, and leaving MWSS with a financing gap of about $20 million (out of a total value of unfinished works of about $30 million). Completion of these works is of the highest priority in MWSS' program, since without them the headworks and related works already completed cannot be utilized. The proposed project will finance this gap together with additional distribution works of about twice this magnitude. The project was prepared-by MWSS staff and appraised in May 1985. Rationale for Bank Involvement and Project Objectives 2.02 The short-term objective of Bank involvement is to assist MWSS to optimize utilization of existing infrastructure and thus significantly improve the level of internal cash generation and financial performance. The longer- term objective is to preserve and strengthen MWSS' institutional development and financial position to achieve its longer-term sector development objec- tives. The Bank's involvement is particularly important during the currently constrained economic conditions. 2.03 One of the means of achieving the above objectives is the proposed project. Specifically, the project would improve water supply in the MWSS service area through: (a) the full utilization of the additional water pro- duction and distribution facilities made available under MWS II, (b) extension of the distribution system to unserved areas and infilling of the MWSS distri- bution network; and (c) the provision of service connections and public stand- pipes, thus increasing water sales and revenues. The project also includes institutional support to improve efficiency in implementation, operation and financial administration. The proposed project would provide water to many unserved low-income areas, and in this way improve living conditions for the urban poor.  - 7 - The Project Area and Water Demand and Supply 2.04 The MWSS service area covers the whole of Metropolitan Manila, as well as the city of Cavite and 10 other municipalities contiguous to the metropolitan area; in total it covers about 150,000 ha and has a population estimated at about 7 million in 1984. Population growth in the metropolitan areas alone was about 4.5% per year in the 1970s, and is now estimated at about 3X per year. 2.05 Total water consumption from all sources in Metropolitan Manila in 1985 is estimated at about 2,000 Mi/d. Of this, MUSS supplies 1,400 Ml/d with the remaining coming from private groundwater supplies. About 65% of the total consumption is for domestic purposes and 35Z for commercial and indus- trial purposes. It is estimated that about 70% of the Metropolitan Manila population obtains water directly or indirectly from the public water supply system. About 80% of the domestic but only about 27% of the industrial con- sumption is supplied by MWSS. The unserved consumers, who rely on groundwater have to be particularly targetted in the future to arrest the continuing deterioration of the already over-exploited acquifers. In 1981, the groundwater level throughout most of Metropolitan Manila was 50 m to 200 m below sea level, resulting in extensive saline intrusion. 2.06 MWSS' total production capacity is about 2,600 Ml/d. From an actual total production of about 2,100 MI/d MWSS supplied, after water losses, about 1,400 Ml/d in 1985. This left an excess production capacity of about 500 Ml/d. Projections of future demand, based on the estimate of population and income growth, per capita consumption levels (in 1985, 175 I/cd with a range of 217 1/cd for people with individual house connnections and 50 llcd for the low-income population in "blighted areas"), price and income elastici- ties of demand, and a reduction in non-revenue water indicate that the current MUSS production capacity should be sufficient until about 1995. Total demand will by that time have grown to about 3,000 Ml/d. With MWSS supplying about 2,300 Ml/d from existing facilities, about 700 Ml/d would still be required from groundwater sources. Draft legislation has been prepared to improve control over groundwater extraction in an attempt to conserve this resource. This proposed legislation will be further processed when MUSS is able to offer alternative forms of supply to the affected areas. The Metropolitan Manila area will continue to depend heavily on groundwater until major new surface water sources are developed. The long-term projection of water demand and supply (see Annex 2 for Water Demand and Supply Projections) shows that the next major phase of water supply source development, referred to as MUS III, should be on-stream by about 1995. Project Description 2.07 The project has the following main components: (a) completion of the ongoing works started under MWS II, including construction of about 3 km of bulk water supply mains and construction of about 17 km of primary and secondary networks, as well as tertiary networks, and installation of about 100,000 metered house service connections; (b) construction of about 8 km of additional bulk water supply mains; (c) connection of about 72 subdivisions to the distribution network, including installation of meters and service connec-  tions to serve about 15,600 households; (d) infilling of about 24 areas with secondary and tertiary distribution pipelines including installation of meters and service connections to serve about 13,500 households; (e) provision of tertiary pipelines, yard connections and public standpipes in about 160 low- income areas to serve about 70,000 poor households; (f) acquisition of about 100,000 domestic, industrial and commercial water meters; (g) improvements to the distribution system through the installation of control valves; (h) drill- ing and equipping about 5 deep -wells including pumps and storage reservoirs; (i) zuture project preparation including updating of engineering and financial studies needed for the future MWS III project and micro-seismic monitoring at the future Laiban dam site; (j) Institutional support and development includ- ing provision of consulting services to assist MWSS with project implementa- tion and the super--cion of an integrated action program to achieve service connection targets and general management support; acquisition of about 110 vehicle3, mainly utility trucks and motor cycles, for project implementa- tion and supervision to improve operational performance; purchase of computer equipment and services to upgrade customer records, billing, accounting and engineering; training of staff to improve operational efficiency, and meter maintenance practices; and undertaking aerial photography to verify and improve customer records, and assist in the detection of illegal connections and thus improve billing efficiency. (Details of Institutional Support describing the above are given in Annex 3.) Project Costs and Financing 2.08 The cost of the project, including physical and price contingencies, and interest during construction 'IDC) of about P 222 million ($11.0 million), is estimated at about P 1,947 million ($96.3 million). The project cost excluding IDC amounts to about P 1,726 million ($85.3 million), of which P 806 million ($40.0 million) or about 47X would be the foreign exchange component. The total IDC was computed on the basis of the interest and other charges payable by MWSS to the Bank during the implementation period. Import duties and taxes are estimated at about $4.3 million equivalent and are included in the cost estimates. Table 2.1 below sulmmarizes project cost esti- mates and details are provided in Annex 4.  Table 2.1: PROJECT COST ESTIMATES Project Components Local Foreign Total Local Foreign Total --PPesos mn ---- US$ mn --- Water mains - ongoing works 292.1 269.6 561.8 15.8 14.6 30.4 Water mains - new works 29.2 50.9 80.2 1.6 2.8 4.3 Subdivision connections 57.1 27.4 84.5 3.1 1.5 4.6 Infilling areas connections 94.8 48.5 143.3 5.1 2.6 7.7 Blighted areas connections 184.6 70.4 255.0 10.0 3.8 13.8 Metering 1.1 27.4 28.9 0.1 1.5 1.6 System improvement - valves 18.5 - 18.5 1.0 - 1.0 Deep wells and connections 2.3 2.2 4.5 0.1 0.1 0.2 Future projects preparation 3.3 16.9 20.2 0.2 0.9 1.1 Institutional support and development 22.9 130.2 153.1 1.2 7.0 8.3 Total Baseline Costs 706.3 643.6 1,349.9 38.2 34.8 73.0 Physical contingencies 50.9 30.4 81.3 2.8 1.6 4.4 Price contingencies 162.7 131.6 294.3 4.4 3.6 7.9 Total Project Costs 919.9 805.7 1,725.6 45.3 40.0 85.3 Interest during construction: IBRD-financed - 161.2 161.2 - 8.0 8.0 MWSS-financed - 60.4 60.4 - 3.0 3.0 Total financing required 919.9 1,027.3 1,947.2 45.3 51.0 96.3 Cost estimates are based on (a) contractors' bid prices for contracts already awarded by MWSS to complete the major trunk mains and associated works under MWS II; (b) a study of bids received in early 1995 for similar civil works; (c) latest quotations by domestic and international goods suppliers who have recently submitted bids for similar kinds of equipment and vehicles; and (d) prices and technical assistance contracts executed in 1984 and 1985. Costs for consultant services estimated to total about $728,000 equivalent include 39 man-months of internationally-recruited consultants and 100 man- months of local consultant services. All costs are expressed in end-1985 prices. Physical contingencies have been estimated at 10Z for new works with completed detailed engineering and 15% for works in blighted areas. It is estimated that exchange rate adjustments would, on the average, maintain "*purchasing power parity" during the project implementation period. Price increases are assumed to be 15% in 1986, 10% in 1987-88 and 8S thereafter for domestic costs; and 7.0Z in 1986-87, and 7.5% thereafter for foreign costs. Price contingencies over the project period are equal to $7.9 million or about  - 10 - 10.2Z of the base costs plus physical contingencies of new works. Contingen- cies for the ongoing works are included in the contracts as awarded. 2.09 The proposed Bank loan of $69 million would finance 75Z of the total project cost (including IDC but excluding duties and taxes); and would cover $48 million of the foreign exchange cost and $21 million or about 46% of local costs. MUSS will contribute the remaining 25% of total project costs from corporate funds. The contribution from MWSS corporate funds is reasonable given the level of the debt servicing commitments, the new income and other taxes payable and the size of the investment program. To support MWSS' total investment program, including the proposed project, government contributions of about P 350 million in 1986, and P 300 million in 1987 will be required. During negotiations the Government confirmed that the requirements for 1986 and 1987 were provided for in the Government's investment plans. The amount of $8 million included in the loan to finance IDC would cover the interest and other charges incurred during the first four years of the five year implemen- tation period. The MWSS financing plan for its total investment program, including the proposed project, during the implementation period is summarized in Table 2.2 below. Table 2.2: MUSS INVESTMENT PROGRAM AND FINANCING PLAN (Pesos million) 1986 1987 1988 1989 1990 Total Z Investments Program: Water distribution project 396 532 359 265 139 1,691 25.7 Other projects: Rehabilitation project 306 325 243 440 476 1,790 27.3 MWS III 10 105 265 303 1,719 2,402 36.6 Other water projects 48 45 94 100 100 387 5.9 Sewerage and sanit'n projects 156 59 0 0 0 215 3.3 Other sewerage projects 13 17 18 16 16 80 1.2 Total Investment 929 1,083 979 1,124 2,450 6,565 100.0 Financing Plan: MWSS corporate funds -94 32 237 678 1,133 1,986 30.3 Government equity 350 300 0 0 0 650 9.9 Foreign loans 673 751 742 446 1,317 3,929 59.8 Total Funding 929 1,083 979 1,124 2,450 6,565 100.0 Implementation 2.10 The project is expected to be implemented over a five year period, from January 1986 to December 1990. Earlier projects financed by the Bank  - 11 - have been handled by the Special Projects Office (SPO) established within MWSS to manage all foreign-assisted projects. It was recently decided to disband SPO following the completion of the ongoing works. Accordingly, new works under the project will be handled by the relevant Departments, i.e., Engineer- ing for design, Construction for contract supervision and administration, Customer Services for the connection program, and Finance for project account- ing. The activities undertaken by the separate Departments will be coordi- nated by the Senior Deputy Administrator, who formerly headed SPO. He will be assisted by consultants to advise on and monitor performance of the water distribution and rehabilitation programs. Construction activities will be undertaken by prequalified contractors, and house connections will be made by accredited plumbing contractors and in-house teams. MWSS already has trained and experienced teams but additional staff are being recruited and trained to support the expanding program. These implementation arrangements are satisfactory. Status of Project Preparation 2.11 The project is in an advanced stage of preparation. The surveys and designs for the project components are carried out by MWSS' Design Division. This Division has been carrying out similar projects routinely. Additional temporary staff is being recruited to expedite surveys and drafting. MWSS' staff are also preparing the cost estimates and bid documents. The proposed works are relatively straight forward and are based upon hydraulic modeLs developed by the consuLtants for MWS II. The review of hydraulic analysis has confirmed that there would be satisfactory residual pressures in all parts of tertiary system. The areas that are included in the project for the provision of service connections were prioritized on the basis of least-cost per connec- tion and this ranking is satisfactory. The designs for all of the 24 InfilL- ing Areas, covered by 19 contract packages, are in progress and bidding for five packages will commence in March 1986. The designs and contract packages for four out of the 72 subdivision works are now ready and eight packages representing 37 contracts are scheduled to commence in June 1986. A typical contract document to be used throughout the project period for all distribu- tion related civil works has already been forwarded to the Bank, reviewed and found satisfactory (Detailed Implementation Schedules are given in Annex 5 and Monitoring indicators in Annex 6).  - 12 - Procurement 2.12 Procurement arrangements are sumnarized in the table below: PROCUREMENT ARRANGEMENTS /a ($ million) Project element ICB LCB Other Total Civil Works Completion of ongoing works 29.5 - - 29.5 (19.6) - - (19.6) New water distribution works 5.5 37.4 - 42.9 (3.7) (24.9) - (28.6) Equipment and Vehicles 7.0 3.2 - 10.2 (7.0) (3.1) - (10.1) Technical Assistance Consultants - 2.5 2.5 - - (2.5) (2.5) Training - 0.2 0.2 - - (0.2) (0.2) Total /b 42.0 40.6 2.7 85.3 30.3) (28.0) (2.7) (61.0) /a Figures in parentheses are respective amounts financed by the Bank loan. 7b Excludes $8 million provided in the loan to finance IDC. 2.13 The estimated total value of civil works under the project is about $72.4 million which includes contracts valued at about $29.5 million already started under MWS II and previously awarded under international competitive bidding procedures (ICB). Of the remaining civil works contracts a major bulk water supply main estimated to cost about $5.5 million will be awarded under ICB. Civil works for minor water distribution works, totalling about $37.4 million, involve about 100 small contracts varying in costs from $5,000 to $600,000 equivalent. Scattered through Metropolitan Manila and to be executed over a five-year period, these contracts are not likely to attract foreign bidders and will therefore be awarded to prequalified contractors, through LCB in accordance with MWSS' procedures which have been discussed and are satisfactory to the Bank. LCB does not preclude foreign firms from bidding. Contracts for goods (water meters, vehicles, and computer equipment) totalling about $7.0 million equivalent will be procured by ICB in accordance with Bank guidelines. Qualifying domestic manufacturers will receive a pre- ference in bid evaluation of 15% or the import duty, whichever is less. Items of goods will be grouped by category in appropriate bidding packages, costing not less than $500,000 each for water meters, and $300,000 each for vehicles and computer equipment. Minor items of equipment not exceeding $200,000 each and up to an aggregate amount of $3,000,000, will be procured through local  - 13 - competitive bidding procedures satisfactory to the Bank. Coods contracts costing less than $15,000 each and totalling not more than $200,000, may be procured by prudent local shopping. Technical assistance will be provided by Consultants hired in accordance with Bank guidelines. Contract review will be applied as follows: all contracts over $200,000 for goods, over $100,000 for civil works, and all terhnical assistance contracts will be subject to the Bank's prior review. This will cover about 80% of value of goods contracts and about 60Z of value of civil works contracts (net of the value of such contracts already awarded under HWS II). Other contracts will be subject to selective post-award review. Disbursements 2.14 Proceeds of the Bank loan would be disbursed as follows: (a) 100% of the CIF cost of directly imported goods; or 10OZ of ex-factory costs of locally manufactured goods; or 65Z of the cost of imported goods procured locally; (b) 70% of expenditures on civil works contracts; and (c) 100% of the expenditures on technical assi.stance and training. Disbursements under minor contracts for civil works, goods and for training services (costing less than $25,000 equivalent each) will be made against statements of expenditure based on actual payments to the supplier. Supporting documents for such expendi- tures will be retained by MWSS and made available to Bank missions for inspec- tion. To expedite loan disbursements, a Special Account of $6 million corresponding to four months estimated maximum expenditure will be esta- blished. Disbursement is expected to be completed in 5