Philippines - Second Municipal Development Project

Document of The World Bank FoR OFICIAL USE ONLY Repot No. 7t7 3-PP STAFF APPRAISAL REPORT PHILIPPINES SECOND MUNICIPAL DEVELOPMENT PROJECT NOVEMBER 17, 1989 Infrastructure Division Country Department II Asia Refional Office Ts docmnt has a resricted distribution and may be used by recipients only in the performance of their officl duties Its contents may not otherwise be disclosed without World Bank authorization.  . gag= BLDUIYALIM Currency Unit - Peso (P) P 1 - US$0.048 P 21 - US$1.00 (As of September 1989) FISCAL YEAR January 1 to December 31 WEIGHTS AND MEASURES 1 meter (m) - 3.28 feet (ft) 1 kilometer (km) 0.62 mile (mi) 1 square meter (sq m) - 10.76 square feet (sq ft) ABBREVIATIONS AND ACRONYMS BLGF - Bureau of Local Government Finance CPO - Central Project Office (First Nunicipal Development Project) DLG - Department of Local Government DOF - Department of Finance DPWH - Department of Public Works and Highways ERR - Economic Rate of Return LOU - Local Government Unit MDF - Municipal Development Fund MDP I - First Municipal Development Project MDP II - Second Municipal Development Project MKINUTE - Metro Manila Infrastructure and Engineering Program NEDA - National Economic Development Authority PHO - Project Management Office RPTA - Real Property Tax Administration  FOR OMFCIAL USE ONLY PHILPPINES SECOND MUNICIPAL DEVEOPMENT PROJECT Loan and Progect Summary Borroer: Republic of the Philippines Amount: US$40 million equivalent Terms: Repayable in 20 years, including 5 years of grace, at the standard variable interest rate. Project Description: The proposed project would assist local governments in Metro Manila and the surrounding provinces: (a) provide basic municipal infrastructure, services and facilities, especially to lower income communities, and (b) improve investment planning and management in local governments. The project would include: (i) basic infrastructure, public facilities, maintenance equipment, and consultant services for project preparation and const-uction supervision at the local level; (ii) Real Property Tax Administration Program to improve real property tax data, records management, billings and collections; and (iii) technical assistance to DPWH and DOF. The main project benefits would be: (a) enhancing the ability of the local governments in the fast developing metropolitan area to meet their investment needs; (b) improving sanitation and health, especially in low income communities; and (c) strengthening the institutional framework for fviancing local government investments and increasing rev.nue generation at the local level. Risks: The primary risk is that the local governments would not undertake measures to improve property tax collections or market revenues required to qualify for MDF subloans. To minimize this risk, subloans would be for short periods with local governments successfully carrying out fiscal improvements qualifying for follow- up subloans. Local council approval of fiscal reforms would be obtained prior to start of implementation to assure political support. A second risk is that this project could overwhelm the institutional framework developed under the First Municipal Development Project which is still in an early stage. However, a second project is considered a managable expansion since the two projects cover different geographical areas and would be implemented in parallel by two separate project offices which are presently fully operational. 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.  - ii - Estimated Cost: Local Foreign Total ---- -(US$ Million)------ Subprojects 21.0 14.6 35.6 Real Property Tax Administration 5.3 3.5 8.8 Technical Assistance Solid Waste Study 0.1 0.2 0.3 Advisory Services 0.6 0.2 0.9 Base Cost 27.0 186 4. (in Sep. 1989 prices) Contingencies: Physical 2.4 1.2 3.6 Price 4.7 3.2 8.0 Total Proiect Cost aJ 34.1 5. Financing Plan: Local Foreigrn Total ---(US$ Million)------ Local Governments 8.8 - 8.8 DPWH 7.6 0.5 8.1 DOF 0.3 0.3 World Bank 17.7 22.3 40.0 Total 34.1 23.1 Estimated Disbursements: -------------------Bank FY------------------- 90 91 92 93 94 95 96 97 ----------------(US$ million)---------------- Annual 2.5 2.4 4.6 6.5 7.3 7.3 7.0 2.4 Cumulative 2.5 4.9 9.5 16.0 23.3 30.6 37.6 40.0 Economic Rate of Return: 16% aJ Net of taxes and duties; may not add up due to rounding.  - iii - SECOND HUNICIPAL4 .EVE0PM PROJKa STAFF APPRAISAL REPORT Table of Contents Page No. LOAN AND PROJECT SUMMARY ............................... i I. SECTOAL CONTMXT A. Urban Grcwth in the Philippines ..... ................ 1 B. Local Government Structure .......................... 2 C. Issues in Local Government Management .... ........... 3 D. Bank Urban Strategy and Experience from Previous Projects .............................. .... 5 II. THE MUNICIPAL DEVELOPMENT PROGRAM A. Program Objectives and Organizational Structure ..... 8 B. Subproject Selection ................................ 10 C. Subloan Terms and Conditions and Onlending Agreements. 11 D. Implementation to Date .............................. 12 E. Bank Municipal Sector Strategy ..... ................. 13 III. THE PRDJCT A. Project Origin and Formulation ..... ................. 16 B. Project Rationale ................................... 16 C. Project Objectives .................................. 16 D. Project Description ................................. 17 E. Project Costs and Financing Plan ..... ............... 20 F. On-lending Arrangements ............................. 22 IV. PROJECT ORGANIZATION. IMPLEMENTATION AND MANAGEMENT A. Project Organization and Implementing Arrangements .... 24 B. Implementation Schedule .............................. 27 C. Procurement and Disbursements ....................... 29 D. Accounts and Audits ................................. 31 E. Progress Reporting and Monitoring ..... .............. 31 V. PROJECT JUSTIFICATION AND RISKS A. Institutional Impact ................................ 32 B. Environmental Impact ................................ 33 C. Urban Poverty Impact ................................ 33 D. Economic Analysis ................................... 34 E. Risks ............ ................................... 34 This report is based on the findings of an appraisal mission consisting of Messrs. Y. Uchimura (Economist), C. S. Yu (Economist) and E. Munasinha (Consultant Engineer) which visited the Philippines between February 14 and March 10, 1989.  - iv - VI. AGREEMENTS REACHED AND RECOMMENDATION ................. 36 1. Municipal Development Fund Subloan Financial Flows 2. Subproject Evaluation Methodology 3. Real Property Tax Administration Program 4. Outline Terms of Reference: Solid Waste Management Study 5. Outline Terms of Reference: Municipal Development Fund Advisory Services 6. Detailed Cost Estimates 7. Local Revenue Enhancement Measures 8. Local Government Finances Summary 9. The NMINUTE Project Management Office 10. Implementation Schedule 11. Disbursement Schedule 12. Economic Analysis Summary 13. Documents in Project Files 1. Municipality of Pasig 2. Organization for On-lending Facility to Local Governments: First Municipal Development Project 3. Organization for On-lending Facility to Local Governments: Second Municipal Development Project 4. MMINUTE Project Management Office M2AP IBRD 21292  PHILIPPNP SECOND MUNICIPAL DEVELOPMENT PROJECT I. SECTORAL CONTEXT A. Urban Growth in the Philipoines 1.01 The Philippines is experiencing rapid growth in its urban population. The number of people living in the urban areas increased from 18 million (37% of total population) in 1980 to an estimated 24 million (42% of total population) in 1988, an average growth of about 4% per annum or about 1.6 times the overall population growth rate. In 1985 close to half the urban population was living below the urban poverty line, i.e. having incomes below that required to purchase minimum food and basic needs 1J_. 1.02 Metro Manila 2_/, with an estimated population of 7.6 million in 1988, accounts for one out of every three urban residents, reflecting Metro Manila's importance as the country's main political, administrative and economic center. Metro Manila's population is estimated to increase to around 10.5 million by the year 2000, an average increase of about 2.7% per annum or over 200,000 persons every year. Growth of Metro Manila is spillIng over into the surrounding provinces. Given the continued importance of the capital region in the economy, maintaining Metro Manila and its fringe areas as a functioning urban center will be critical to the country's overall development. 1.03 The provision of basic urban services and infrastructure has not kept pace with this rapid growth in population. Provisiei of affordable housing has not been sufficient to meet demand, resulting in squatting in the cities. The lack of drainage facilities has prevented urban development and/or resulted in residents (mainly low- income families) living in areas prone to flooding during the rainy season. Stagnant water, improper sanitation facilities and inadequate solid waste disposal are posing health hazards in high density urban communities. Low income communities suffer most from the lack of services. It is estimated that about 30% of Metro Manila's population live in slum areas lacking adequate water supply, sanitation and drainage, health and community facilities. 1.04 Both the local governments and several national government agencies are responsible for meeting the basic urban service and 1J The incidence of urban poverty is 42% using the Bank estimated poverty line of P 5,010 per capita in 1985 prices or 50% using government estimated poverty line of P 6,042 per capita in 1985 prices (see "The Philippines: The Challenge of Poverty", October 17, 1988). 2J Metro Manila consists of the cities of Manila, Caloocan, Pasay and Quezon, and 13 municipalities.  -2- infrastructure needs of the population. The cities and municipalities are generally responsible for constructing and maintaining minor roads and drains, operating public markets and slaughterhouses, and providing garbage collection and other municipal services. The Department of Public Works and Highways (DPWH) prepares and executes larger urban road, drainage and flood control projects which are designated 'national" infrastructure. The National Housing Authority produces low income housing through sites and services projects and upgrades slum areas, providing basic services and land tenure for slum residents. The Metropolitan Water Supply and Sewerage System is responsible for development, operation and maintenance of the water supply and sewerage system in Metro Manila while outside Metro Manila, the Local Water Utilities Administration provides loans for projects requested by the autonomous water districts set up at the local level. B. Local Government Structure 1.05 The local government structure in the Philippines consists of 75 provinces, 60 cities and over 1,500 municipalities which include both urban and rural areas. The provinces are completely subdivided into municipalities over which they maintain administrative controls. The cities on the other hand are administratively equal to and independent from the province. Both cities and municipalities are further subdivided into barangays (community organizations). 1.06 The provinces and cities are organized into 13 Regions including Metro Manila (the National Capital Region). Regional Development Councils, consisting of provincial governors, city and municipality mayors, and regional directors of the main national agencies, co-ordinate planning and programming of national agencies and the local governments. In the case of Metro Manila, a Metro Manila Commission was established with power to carry out metropolitan-wide service activities, such as solid waste management, in addition to playing a co-ordinating role. The Metrc Manila Commission was legally abolished with the introduction of the new constitution in July 1987 but continues to function while legislation establishing a Metro Manila Authority is under consideration by the Congress. 1.07 The cities and municipalities (to be referred to as Local Government Units, LGUs) are headed by Mayors who are elected officials and report to elected local councils. They have the authority to set and collect charges and taxes, prepare budgets, hire staff and invest in and manage local services and enterprises within limitations set by the Local Government Code and various national government regulations. The organization of a LGU would generally consist of: (a) the Treasurer's Office which collects and disburses local funds, maintains accounts, and prepares actual and projected income and expenditure statements; (b) the Assessor's Office which assesses and maintains records on real property; (c) the Budget Office which prepares annual and supplemental budgets; (d) the Planning and Development Office which carries out studies, prepares development plans, and monitors and evaluates development programs; and (e) the Engiraer's Office  which prepares plans, maps, specifications, and other estimates for and carries out construction and maintenance of buildings, streets, bridges and other public works. The larger cities would also have legal, health, social services and city administration offices. The organization of Pasig Municipality in Metro Manila is presented in Chart 1 as an example. 1.08 Several national government agencies are responsible for administrative oversight of the local governments. The Departm3nt of Local Government (DLG) is concerned with the jurisdiction and changes in status of the local governments and their political relationship with the national government. The Department of Finance (DOF) oversees the distribution of national government support grants and financial management and revenue operations of local governments. While all local government officials report to the Mayor, the Treasurer and Assessor are appointed by DOF. Nationa. government regulations require LGUs to set aside funds for specific expenditures or set ceilings oi personnel expenditures. The Department of Budget and Management reviews local government budgets to ensure their accordance with statutory requirements, while the Commission on Audit is responsible for auditing the financial records of the local governments. 1.09 Total revenues of the LGUs in 1987 were P 7,481 million, about 1% of GDP. The LGUs are highly dependent on national government grants which accounted for 32% of total revenues in 1987 (Table 1.1). Business and real property taxes are the main local source of revenue for the LGUs. Borrowings by IGUs are negligible. LGUs in Metro Manila depend less on national government grants and more on business and property taxes which accounted for 65% of total revenues in 1987 reflecting the capital's stronger economic base. Total expenditures of LGUs in 1987 were P 7,026 million, the bulk of which (94%) was for recurrent expenses. Metro Manila accounted for 38% of total LGU expenditures. C. Issues in Local Government Management 1.10 The LGUs are having difficulty providing services, maintaining existing infrastructure and facilities, and planning future investrments. The WLUs' financial and managerial capabilities have clearly not kept pace with the increase in demand for services which accompanied the shift in population from rural to urban areas. 1.11 Lack of funds has been a major constraint. Despite the fact that the LGUs are responsible for providing many of the basic services and facilities that directly impact the living standards of their residents, they have played a limited role in the Philippine economy. Total expenditures by LGUs in 1987 (P 7,026 million or about US$338 million) amounted only to 18 of CDP, 5% of national government expenditures and P 123 (US$5.89) per resident (Table 1.1). Capital expenditures accounted for only about 6% of total expenditure. Most LGUs lacked medium-term working plans for the construction, rehabilitation and maintenance of their infrastructure and facilities.  - 4 - Zah 1g.: Revenues and Expenditures of Cities and Municipalities in the Philippines, 1987 (in P millions) Metro Manila Others Total Tax Revenues Business Taxes 680 544 1,224 Real Property Taxes 1242 22 Z.-= 1,922 1,339 3,261 Non-tax Revenues Economic Enterprises 92 622 714 Fees. Charges & Others l03 611 1.114 595 1,233 1,828 National Government Grants 421 1,971 2,392 Total Revenues 2.938 4.543 7.481 Recurrent Expenditures 2,479 4,120 6,599 Capital Expenditures 178 249 427 Total Expenditures 2.657 4.369 7.026 Surplus/Deficit 281 174 455 Source: Department of Finance 1.12 Despite the shortage of funds, many LGUs do not adequately utilize their existing revenue base due primarily to administrative weaknesses. On average, the LGUs collect only around 60% of the real property taxes due because of poor record keeping and administration. Property transactions are not always recorded so that ownership records are out of date. Notices of payments due are not sent out to taxpayers in most LGUs. Payments of taxes are recorded manually so that it is not possible to monitor adequately the status of delinquencies. Legal sanctions are rarely enforced against delinquent tax payers. 1.13 In addition, the property values are under-assessed. Under the Real Property Code, properties are revalued every three years. However, the Government has deferred revaluations or phased them in over several years to avoid sudden increases in tax payments. Current assessment levels date back to the early 1980s. Furthermore, many L6Us do not adjust property assessments to incorporate improvements  - 5 - and changes in land-use between regular revaluations. This is a major problem in rapidly growing urban areas where development of residential and commercial buildings increases demand for infrastructure and services but does not necessarily result in more revenues because propertias continue to be recorded and assessed as agricultural land. Assessment values were increased by about 30% in several Metro Manila LGUs after real property tax records were updated to reflect actual land-use. 1.14 Operatie-s of public markets are an important function and a major source of revenue for most LGUs. However, most LGUs do not maintain separate accounts for markets, making it difficult to determine the actual operating costs. Market rents generally are not revised on a regular basis and have not kept pace with inflation. The conditions in tLe markets have been allowed to deteriorate because of lack of regular maintenance and rehabilitation, making it more difficult for the WU to raise rents. D. Bank Urban Strate&v and Exoerience from ?revious Projects 1.15 The Bank's strategy in the urban sector as a whole has been to assis: the Government to meet the needs of the growing urban population, especially the low-income groups, by: (a) introducing low-cost designs and approaches to optimize use of limited resources and enhance affordability by the urban poor; (b) strengthening sector institutions to plan investments, implement projects, operate and maintain services, and institute proper pricing for cost recovery ; and (e) providing financing for investments. To date, a total of 15 urban, water supply and sewerage projects have been approved by the Bank for US$756 million in Bank loans and US$22 million in IDA credits. Initially the Bank addressed urban infrastructure deficiencies through complex, multi-component, multi- agency projects. However, these operations proved difficult to prepare and supervise. This subsequently gave way to operations structured along narrower subsectoral lines which allowed a sharper focus on institutions and issues. Four subsectors emerged: (a) shelter, (b) water supply and sanitation, (c) urban transport, and (d) municipal development.  -6 The MMINUTE Proeram 1.16 The Metro Manila Infrastructure and Engineering Program (MMINUTE) Was a component of the Bank's Third Urban Project (Loan 1821-PH), one of the last complex multi-component projects supported by the Bank 3_. MINUTE was developed as a community based program with DPWIH to provide roads and drainage works, communal sanitation facilities (grouped household toilets with septic tank or sewer connections) and communal faucets and water systems to the lower income communities in Metro Manila. I*INUTE was designed to complement or-oing programs by other agencies such as the National Housing Av-- . y by providing minimal services to those communities which were not covered by these programs. Under MINUTE, improvements were restricted to existing rights-of-way with no provision of tenure or movement of existing plate or buildings. 1.17 HMINUTE was considered to be a successful component of the Third Urban Project. It developed a methodology for identifying and prioritizing infrastructure iwivestments and expertise in community organization. By end 1987, thki program had constructed 226 km of drainage, 153 km of street improvements, 203 communal faucets, 41 communal sanitation facilities, 12 water storage tanks, 9 deepwells, and one communal septic tank. Project investments totalled P 345 million. While the program was not as comprehensive as the National Housing Authority's slum uLpgrading programs, MMINUTE was able to move more rapidly since no major land acquisition or relocation was involved. It is estimated by the government that over 1 million people benefited from MMINUTE. 1.18 While MMINUTE was successful in constructing the facilities, the program was not able to recover &velopment costs. Since the program did not provide for maintenance of the completed facilities which was left to the LGUs, performance in this regard was mixed. The LGUs which were handed over the completed facilities, were not involved directly in financing and implementing of MKINUTE. The two key problems of lack of cost recovery and spotty maintenance also reflected the managerial weakness of the LGUs. Project costs which were planned to be recovered indirectly through property taxes have not been collected because of delays in reassessments of properties (para. 1.13). Lack of adequate maintenance is not limited to MNINUTE investments and reflects the underly)ig endemic problems of inadequate financing and planning in the LGUs (para. 1.12). 3_/ The Third Urban Project was a multi-faceted project addressing the basic shelter, municipal service and employment needs of low- income families in fast growing Metro Manila. The project was approved in 1980 and closed in 1987. The Project Completion Report was issued on June 30, 1989. The lessons learned through the Third Urban Project and reflected in the Project Completion Report (para. 1.18 above) were taken into consideration in designing the proposed project (para. 1.19 below).  - 7 - 1.19 After the completion of the Third Urban Project, the LGUs not only in Metro Manila but those in the adjacent provinces, expressed interest in continuing with MMINUTE. The design of MMINUTE was modified to allow the LGUs to play a direct role in planning, implementing and financing project investments and the project scope was expanded to include public facilities such as markets and slaughterhouses which were considered a priority by the LGUs. It was decided to use the framework developed under the Bank's First Municipal Development Project (Loan 2435-PH) to on-lend loan funds to the LGUs. This framework is described in detail in Chiapter II. Rezional Cities Development Proiect 1.20 The Bank altered its approach and first on-lent funds directly to the LGUs in the fourth urban development project, the Regional Cities Development Project (Loan 2257-PH). This project addressed the comprehensive investment needs of the four larger regional cities: Bacolod, Cagayan De Oro, Davao and Iloilo. A loan of US$60.0 million 4J was approved in 1983 to finance drainage, solid waste management, roads, markets, slaughterhouses and other municipal infrastructure to be implemented by DPWH and the LGUs, and a traditional shelter component to be implemented by the National Housing Authority. A portion of the Bank loan was on-lent to LGUs. As of September 30, 1989, 39% of the losn has been disbursed. 1.21 The approach adopted under the Regional Cities Development Project where designs and contracts for each facility are individually reviewed by the Bank clearly limited the number of participating cities. Considering the large numbers of LGUs in the Philippines, the diversity of their needs and the structural issues facing them, an approach was needed where intermediary institutions were developed at the national level to assist LGUs in the preparation, implementation and financing of local investments. The First Municipal Development Project, discussed in the next chapter, was the Bank's first step towards developing such institutions. 4J US$20.0 million was cancelled in 1987 to adjust for the devaluation of the peso and US$ 4.921 million was cancelled in 1989.  - 8 - II. THE MUNICIPAL DEVELOPMENT PROGRAM A. Program Objectives and Organizational Structure Program Objectives and Components 2.01 To assist the local governments to meet the infrastructure and service needs of the growing urban population, the Government, with Bank support, initiated a Municipal Development Program in the early 1980s that allowed a flexible response to key LWU financial and managerial constraints. The program was designed to: (a) assist LGUs to identify infrastructure investment priorities and plan and implement development projects; (b) provide LGUs with direct access to long-term development finance (initially from foreign sources); and (c) strengthen local technical and financial capacity for project implementation, service management and maintenance. 2.02 The main components of the Municipal Development Program are: (i) Subprojects to finance infrastructure investments and equipment purchases at the local level; (ii) Real Property Tax Administration Program (RPTA) through DOF to update real prcperty cadasters and improve tax collections; and (iii) Municipal Training Program through DLG to strengthen financial and project management at the local level. 2.03 Under the program, LOUs receive financing for subprojects on condition that they undertake measures to improve municipal management. Based on a review of their deficiencies and priorities, LGUs identify priority investments which are packaged into a subproject and divided into two categories: (a) National Components funded and implemented by DPWH; and (b) Local Components funded and implemented by the LGUs. Loans are provided to the LGUs to finance part of the Local Component investment costs. Those areas such as trunk roads and major drainage which have traditionally been the responsibility of the national government are implemented by DPWH, while the remaining areas which have been the responsibility of the local governments are implemented by the LWUs. To generate revenues to repay loans, participating LOUs receive assistance through RPTA to finance additional contractual staff, equipment and supplies to conduct tax mapping, update real property tax records, prepare tax notices and follow-up with delinquent taxpayers. LWU staff also receive training through the Municipal Training Program in project planning and project development, municipal finance and revenue administration, municipal enterprise management, engineering and  - 9 - contract management, and infrastructure maintenance and equipment management. Orgainizational Struetur 2.04 The key feature of the program is the establishment of an institutional framework at the national level to finance LGU investments and co-ordinate national government assistance to LGUs. The main elements are: (a) The Project Steering Committee consisting of Under- secretaries or Assistant Secretaries of the DPWH, DOF, DLG, NEDA and the Department of Budget and Management and chaired by DPWH, which: (i) formulates policy and sets overall priorities and directions for the program; (ii) approves appraisals of subprojects; and (iii) co-ordinates among the different agencies involved in the planning, financing and implementation of the program. (b) The Central Prolect Office (CPO) under DPWH which: (i) prequalifies LGUs for inclusion in the program; (ii) assists LWUs to develop subprojects; (iii) appraises subprojects proposed by LWUs for approval by the Steering Committee; (iv) monitors implementation and advises LGUs during subproject implementation, including coordination with other national agencies providing support to LGUs; (v) prepares annual budgets and cash flow requirements, monitors flow of funds, and recommends fund releases to LWUs; and (vi) evaluates impact of programs. (C) The Municipal Development Fund (NDF) a loan account administered by DOF which: (i) administers release of subloan funds to LGUs; and (b) maintains subloan accounts. This organizational structure largely mirrored existing institutional responsibilities and strengths. The MDF was established within the DOF which had administrative responsibility over LGU finances and appointed the key local financial officers (para. 1.08). DOF lacked the technical expertise to assist LGUs in project planning or evaluate investments submitted by LWUs. A separate CPO under DPWH was set up to handle project preparation, appraisal and supervision. This institutional framework is shown in Chart 2. The First Municinal Develonment Proiect 2.05 The Bank supported the Municipal Development Program with a loan of US$ 40.0 million equivalent in 1984 through the First Municipal Development Project (MDP I, Loan 2435-PH). This was expected to be the first of a series of Bank projects to assist the Government to establish and gradually expand the Municipal Development 5J Presidential Decree 1914, dated March 29, 1984, formalized this organizational structure.  - 10 - Program. The Bank loan was broken down as follows: (a) subloans to LGU through the MDF (US$28.2 million equivalent); (b) RPTA under DOF (US$3.6 million equivalent) 6J; (c) Municipal Training Program under DLG (US$3.3 million equivalent); (d) technical assistance to DPWH, DOF and other national agencies for advisory support and studies (US$4.8 million equivalent); and (e) the front-end fee. The project anticipated financing comprehensive investment programs covering most of the major infrastructure and service deficiencies in a limited number of LGUs (about 15) through subprojects implemented over a 4 to 5 year period. The project emphasized development of regional cities and municipalities and provided funding to LGUs outside of Metro Manila. The operational procedures for the Municipal Development Program were developed for implementing MDP I. These procedures and the present status of MDP I are described below. B. Subnroiect Selection 2.06 The process under MDP I for the selection of project LGUs and the appraisal of subprojects is as follows. Interested LGUs submit requests to participate in the project to the CPO which evaluates the LGUs' eligibility and borrowing capacity and recommends inclusion the Project Steering Committee. To be included in the project, LGUs are required to have populations over 10,000, serve a regional economic function, have significant infrastructure deficiencies and high incidence of poverty, and be willing to undertake fiscal improvement. After LGUs have been cleared for participation in the project, there is a "self-selection" process in determining project LGUs: i.e. those LGUs with the willingness and ability to prepare viable investment projects are provided access to financing. 2.07 LGUs then prepare subprojects for financing under the project (with guidance from the CPO) and submit them to the CPO for review. Possible subproject components are: (a) construction and rehabilitation of sanitation facilities, drainage, roads, markets, slaughterhouses, bus terminals, and solid waste facilities; (b) maintenance and solid waste equipment; and (c) consultancies for construction supervision. 2.08 The subprojects are appraised by the CPO and submitted to the Steering Committee for approval. Subprojects are evaluated on the impact on low-income groups, demand and the technical, financial and administrative feasibility of the Individual components, and on the ability of the LGUs to service the proposed debt obligation. Larger components are evaluated to determine whether the proposed investments are the most efficient use of funds based on economic rates of return. LGU finances are analyzed, and revenue and expenditure projections made to determine whether the investment package as a whole is 6J Both the RPTA and Municipal Training Program are being implemented nationwide so that the beneficiaries would not necessarily be limited to those LGUs with subprojects.  - 11 - affordable to the LGU concerned: i.e. whether the LWU can provide the necessary counterpart funds and service the debt obligations. LGUs are required to maintain a minimum Debt Service Coverage of 1.2 7_J. The LGU is also required, where necessary, to implement measures to improve fi3cal performance, such as enforce collection of arrears on real property taxes and revise market tariffs. 2.09 Subprojects approved by the Steering Committee are eligible for financing through NDF for the Local Components and through DPWH budget funds for the National Components. Once a subproject is approved by the Steering Committee, a Subproject Agreement is signed between DPWH and the LGU outlining the obligations of the LGU, DPWH and CPO with respect to the subproject (including both National and Local Components), and a Subloan Agreement signed between the LGU and DOF outlining both parties' obligations with respect to the MDF subloan. The subloan terms and conditions, and onlending agreements are discussed below. The CPO monitors implementation of both national and local components and administers the release of funds to the LGUs together with the DOF. C. Subloan Terms and Conditions and Onlending Agreements