Philippines - Angat Water Supply Optimization Project

Docwnent of The World Bank FOR OFFCIAL USE ONLY Report No. P-5096-PH MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$40.0 MILLION TO THE METROPOLITAN WATERWORKS AND SEWERACE SYSTEM WITH THE GUARANTEE OF THE REPUBLIC OF THE PHILIPPINES FOR AN ANGAT WATER SUPPLY OPTIMIZATION PROJECT August 23, 1989 This document has a restricted disth;bution 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.  FOR OFCIAL USE ONLY PHILIPPINES ANGAT WATER SUPPLY OPTEMITON PROJECT L and Project Summary Borrower ~ Metropolitan Waterworks and Sewerage System (MWSS). Guarantor. Republic of the Philippines. Beneficiaries: Manila and 36 neighboring municipalities. Amount: US$40 million equivalent ms:rar. 20 years, including 5 years of grace, at the standard variable interest rate. Financint Plan: US$ million World Bank 40.0 Asian Development Bank 130.0 Oveseas Economic Cooperation Fund of Japan 80.0 Bonds-Local Banks 55.2 Internal Cash Generation 34.5 Other Local Funds 22.2 TOTAL 3261. Economic Rate of Return: 15% Staff ADrraisal RepotL Report No. 7801-PH Map: IBRD-21605 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.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM FOR AN ANGAT WATER SUPPLY OPTIMIZATION PROJECT 1. The following memorandum and recommendation on a proposed loan to the Metropolitan Waterworks and Sewerage System (MWSS), with the guarantee of the Republic of the Philippines, for US$40 million equivalent is submitted for approval. The loan would help finance the proposed Angat Water Supply Optimization Project and would be for a term of 20 years, including a five-year grace period, at the Bank's standard variaole interest rate. The project would be cofinanced by a US$130 million loan from the Asian i>velopment Bank (ADB) for a term of 24 years, including a four-year grace period, at ADB's standard variable interest rate, and by a Government equity contribution of US$80 million to be funded by a loan from the Overseas Economic Cooperation Fund of Japan (OECF). 2. Background. The provision of water supply and sanitation services in 0. Philippines has shown considerable improvement. Between 1980 and 1987 the population with safe water (house connections or standpipes) increased from 45% to 63% of the total population. During the period 1974-83 this sector improvement was supported by five Bank projects and six ADB projects, which helped to establish sector institutions and strategies and financed the implementation of sector developing plans. At end-1986, safe excreta disposal facilities were provided to about 69% of all households nationwide, including 62% of the rural population and 80% of the urban population. 3. Despite such improvements, however, service levels are still low relative to those of other countries with comparable incomes. In the greater Metropolitan Manila area, for example, only about 58% of the population has water supply connections, a service rate which is lower than that of other capital cities of comparable size and importance. Extensive areas of Metro Manila still lack distribution networks, and the quality of service in many areas is inadequate, with low water pressures and rationed or intermittent supply. 4. Water supply to the city of Manila and to 36 neighboring municipalities is provided by MWSS. MWSS's Service Area (MSA) covers some 150,000 ha and has a population of some 9 million. 5. The proposed project has therefore been designed to expand both the water production and distribution capacity of MWSS. Production capacity would be increased by optimizing the use of water resources available from MWSS's current supply source, the Angat Multipurpose Dam, and distribution facilities would be expanded to provide water supply through house connections to 75% of the MSA population by 1994. 6. Rationale for Bank Involvement. In accordance with Bank strategy, the proposed project supports Government efforts to improve the living conditions of the urban poor, promote economic and social development by eliminating major water shortages, and improve environmental conditions by providing safe water in the MSA. The project would strengthen MWSS through the implementation of a four-year institutional development program (para. 11), with particular emphasis on improved planning and financial performance, as well as better operation and maintenance of water production and distribution facilities. The cofinancing with ADB and OECF would ensure the achievement of common institutional and development objectives by MWSS. 7. Proiect Obiectives. The main objective of the project would be to meet the expected water demand in MSA until the year 2000. The project has been designed to: (a) increase MWSS's water production capacity; (b) provide 15 cubic meters per second (cums) of  water for an additional population of 3 million persons; (c) expand the distribution system to Increase service coverage to 75% of MSA by 1994, particularly in poor neighborhoods; (d) Improve the efficiency of MWSS's operations; and (e) strengthen MWSS's finances as well as its planning and management information systems. The project would also reinforce and complement efforts being made under two ongoing distribution system rehabilitation projects, both financed by ADD, to reduce non-revenue water (NRW), i.e., water produced by not paid for, which is largely due to system leakages, from the currently very high level of 55%. S. Proloot 2e1criotion. The project is part of an overall investment program for which the Government has secured financing from different sources. The project incluldes construction of raw water transmission, water treatment and distribution facilities for an additional supply of 15 cums, including engineering, and consists of the following: Part A: Transmission and Bulk Water SunnDv, comprising construction of: (i) tunnel No. 3 (about 6 km, 4.6 m diameter); (ii) aqueduct No. S in three sections, SA, SB and SC (about 16 km, 3.6 m diameter); (iii) the second La Mesa by-pass (about 2.5 km, 3.6 m diameter); and (iv) water mains (about 35 km) to provide treated water (1.1 cums) in bulk to eight municipalities in Bulacan Province. EA1t13: Water Source. Treatment and Distribution Facilities, comprising construction of: (i) modification of the Angat power station; (ii) the La Mesa II treatment plant (10.4 cums); (iii) a water reservoir (260,000 cu m);(iv) expansion of the primary and secondary distribution system by about 420 kmi; (v) expansion of the tertiary distribution system by about 100 km, including provision of about 345,000 service connections; and (vi) telemetering. Part C Consultants' Services. Provision of engineering consultancy services for the project. 9. Cofinancina Arrangemmi. Part A of the project would be financed by the Bank, except for section SA of aqueduct No. 5, which will be financed locally. Parts B and C would be cofinanced by ADB, except for items B (iii) and (iv), including respective consultancy services in Part C, which would be financed by OECF. 10. The project would be carried out in six years, and would be implemented by MWSS's Project Office. Its total cost is estimated at US$291 million equivalent, with a foreign exchange component of US$152 million (52%). The total financing required, including interest during construction, is US$362 million, of which the Bank would finance US$40 million, ADB would finance US$130 million, OECF would finance US$80 million, MWSS's internal cash would finance US$35 million, and local loans or other government contributions would finance US$77 million. To accelerate project start-up and the elimination of water rationing in the area, retroactive financing of the Bank loan, not to exceed US$4 million, is recommended for expenditures made after May 1, 1989. A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and the disbursement schedule for the Bank-financed components are shown in Schedule B. A timetable of key project processing events and the status of Bank group operations in the Philippines are given in Schedules C and D, respectively. The Staff Appraisal Report, No. 7801-PH, is being distributed separately. i1. MWSS's Develooment Program. During 1989-92, MWSS would continue to develop its institutional capabilities by carrying out a Development Program aimed at improving the corporation's financial performance, planning and operating efficiency. The Program, which is satisfactory to the Bank, has been approved by MWSS's management. The Program sets the  - 3 - following water supply objectives to be achieved by end- 1992: (a) increase the population served by house connections to 70%; (b) reduce NRW to less than 46%; (c) prevent further leakage by improved specifications for meters, pipelines and pressure-reducing valves; (d) improve staff efficiency; (e) provide training to about one third of all staff; (f) improve billing and collection; (g) improve the tariff structure to make tariffs more affordable to the urban poor; (h) maintain a satisfactory financial condition; (i) provide more uniform water pressures throughout the MSA; (j) improve the management information system by including delinquency reports, pending connections and other financial indicators; and (k) improve operation and maintenance of the water system. For sewerage and drainage, MWSS intends to: (a) improve services; (b) reduce pollution in MSA; and (c) assist the population living in areas without sewerage services to gain access to adequate alfernative sanitation. 12. Actions Aireed. The effectiveness of the Bank loan is conditional on the effectiveness of the ADB loan. Assurances were obtained from the Government during neaotiations that (a) an agreement on compensation between the National Power Corporation (NPC) and MWSS for power losses would be concluded not later than December 31, 1990; while compensation to NPC is studied and resolved, project construction would proceed as scheduled; (b) adequate amounts will be included in the budgetary appropriations of national government agencies and the operating budgets of government corporations for the payment of their water and sewerage bills; (c) a substantial portion (60%) of the past due accounts receivable of MWSS from local government units and government corporations would be settled by December 31, 1990; (d) by December 31, 1990, and thereafter, the accounts receivable of MWSS from national government agencies will not exceed the aggregate amount of four months of their billing; and (e) MWSS would be capitalized by equity contributions of US$80 million equivalent (expected to be financed by an OECF loan). Assurances were obtained at neaotiations that MW$: (a) would conclude an agreement for compensation to NPC for power losses not later than December 31, 1990; (b) would reduce NRW to below 40% by 1994; (c) by December 31, 1993, would improve its operational systems; (d) by December 31, 1990, would improve its customer services, connection monitoring and reduce its accounts receivable to less than four months of billing; (e) would review annually its tariffs to achieve a rate of return on its revalued net fixed assets in operation of not less than 8% per year (an improved tariff structure for water and sewerage was approved by MWSS's Board of Trustees in July 1989); (f) would maintain a debt- service ratio no lower than 1.2; and (g) would prepare periodically updated reports on water demand, monitoring indicators, long-term plans and financial projections. 13. Justification. The project would maximize benefits from existing headwork investments at the Angat Dam and thus postpone the need for construction of additional dam and transmission system, which would require investments three times those of the proposed optimization project. It would also provide urgently needed water to the Metropolitan Manila area, which has about half of the country's industrial base, its commercial center and a population of about 9 million people. The project would: (a) eliminate water rationing and low pressures for about 5 million people who are already served; (b) distribute water supply benefits to the entire MSA; (c) reduce the dependence of commercial and industrial consumers on deep wells and excessive use of underground water, which is damaging the aquifer; (d) by restoring normal pressures, decrease the potential health risk posed by sewage infiltration into unpressurized distribution mains; and (e) by institutional improvements and the .mplementation of MWSS's Development Program, strengthen one of the country's largest corporations, which would influence other water utilities in the Philippines. The project has an estimated economic rate of return of 15%.  -4- 14. By 1994 about 1.6 million urban poor, 70% of the project beneficiaries (2.6 million), would be provided with house connections. The provision of water by house connections would free the urban poor, particularly women, from the arduous task of carrying 65 metric tons of water per family per year. The total additional population receiving water by new house connections would reach 4.3 million by the year 2000. 15. BiAk There are no unusual project risks. The major risk, i.e., delayed implementation of the various components which would postpone overall project comD letion by one or more years, Is mitigated by MWSS's experience with similar works and the fact that the raw water system, the critical component of the project, has already been contracted. When this component is completed, any other completed works would produce immediate benefits by using the existing facilities. It is estimated that even with two years' delay in construction, the economic rate of return would still be 14%. Failure to reduce NRW would increase the cost of water and reduce the population benefited. However, the results achieved in areas with rehabilitated distribution systems indicate that the proposed NRW targets are achievable. 16. ndctien. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the proposed loan. Barber B. Conable President Attachments Washington, D.C. August 23, 1989  5- ScheMue AV PHILPPINES ANGAT WATER SUPPLY OPTOMAION PROJECr ESTEMATED COSI'S AND FINANCING PLAN Local Foreign Total A -- (USS million) - IBRD-Financed Works 27.7 22.7 50.4 ADEFinanced Works 31.2 54.1 85.3 OECF-Financed Works 33.6 42.7 76.3 Locally-Financed Works 19.4 4.6 24.0 Base Cost 111.9 124.1 236.0 Physical Contingencies 8.3 9.3 17.6 Price Contingencies 19.5 18.3 37.8 Total Proiect Cost ^/ 139.7 1AU a.4 Interest During Conslruction 37.3 33.2 70.5 Total Financing Reouired 177. 18i.9 361.9 Financi PIan:. World Bank 12.9 27.1 40.0 Asian Development Bank 37.5 92.5 130.0 OECF Loan (Govemment's Equity to MWSS) 29.3 50.7 80.0 Bonds-Local Banks 46.3 &9 55.2 Internal Cash Generstion 2&8 5.7 34.S Other Local Funds 222 - 22.2 TOTAL 17.0 184. 361.9 M/ Including taxes and duties amounting to about US$7.6 million. Prices as of December 1988.  -6- Schedule B PHLPPINES ANGAT WATER SUPPLY OPTIMZTION PROJECr Procurement Method and Dlbuer Bs ank-Finned (NIL-Lion Us$) 12 . . .................................................... project CGRout sc1 LCO Ot8l TOTAL _._. ......... . ............._..............._....... CLvil Worka 46690 5.76 50.66 (31.60) (2.50) (34,10) Materials & Equipmont 0.00 0.84 9.84 (5.40) (0.50) ($.90) &5no00i0 8 0.65 0.65 (0.00) (0.00) Land Acquisttion 0.16 0.16 (0.00) (O.00) smios 55.9"0 4.60 0.1 61.31 ID YImA DaC (27.00) %(.0O) (0.00) (40.00) 11 Figures in parentheses are ackntmts flnanaed by the Blak. DBisbinsemens Ctegzory Amount (US$ Mllllon) Bxpsodltures to be Financed Civil Works 34.10 20X Equlpment & Materials 5.90 lOO0 Estimated IBRD Disbursements Bank Fiscal Year lii gmi lii xi lxi II ----------- (US$ Million) ------------- Annual 5.2 6 8 8.4 10.0 8.0 1.6 Cumulative 5.2 12.0 20.4 30.4 38.4 40.0  -7- Schedule C PHLPPINES ANGAT WATER SUPPLY OPTIlZAMTION PROJECT TIMETABLE OF KEY PROJECT PROCESSING STEPS (a) Time Taken to Prepare: 18 months (b) Prepared by. MWSS, local consultants and assistance from ADB and the Bank. (c) First Bank Mission: October 1988 (d) Appraisal Mission Start: April 11, 1989 (e) Negotiations: August 1 to 4, 1989 (f Planned Date of Effectiveness: November 1989 (g) List of Relevant PCRM id PPARs: First Provincial Cities Water Supply Project (Loan 1415-PH, Project Performance Audit Report No. 6422) and Water Supply and Sanitation in Metro Manila (Loan 1615-PH, Project Completion Report No. 7153).  -8-3~ S dcheulo ! THE STATUS OF BANK GROU OPERATIONS IN Th4E PHILIPPINES A. STATEMENT OF BANK LOANS AND IDA CREDITS Lo AO of' March II, Mg8 Loan or credit Fiscal Amount (loss cancel ltien number Yeor iBorrower Puurpso Bank IDA inOlaburno Seventy-nine loons and five credito fully dlSburood 2,912.74 72.98 923 1979 Rop. of tho Philippinos Population II - 84.40 2.0 1809 1990 Rep. of tho Philippinee Modium-Scale Irrigatlon 88.98 11.84 1914 1960 Rap. of tho Phillppinoso Monila Sevoroge & Sanitation 46.06 1 1.48 1890 1991 Rop. of the Philippinos Watorahed Mangagment 85.54 - 4.72 2080 1981 Rep. of the Philippinos Elementary Edue. Sector Loan 60.50 - 11.12 2040 1982 Rep. of the Philippinos Agric. Support Servieea 22.00 - 8.46 2160 19'2 Rep. of the Philippines National Flherles Devolopment 2.10 - 0.88 2169 19112 Rep. of tho Philippinos SmI III 67.40 - 4.47 2173 19111 Rep. of the Philippines Communal Irrigation 51.00 - 24.96 2200 1983 Rep, of the Philippines Educotion VIII 16.40 - 8.24 2202 1998 Republic of Phil. A PNOC Potroloum Explorotion Promotion 8.44 - 1.14 2206 1988 Rep. of the Philippines Wator Supply and Sanitation 29.00 - 6.41 2257 1988 Rep. of tho Philippines Regionol Cities Development 47.00 - 31.81 2a80 1984 Rep. of the Philippines Central Vieaysa Regional Developmont 25.60 - 15.89 2418 1984 Rep. of the Philippinos Highways V 102.00 - 85.10 2435 1984 Rep. of the Philippines Municipal Developmont 40.00 - a8.28 2495 198S Rep. of the Philippinos Telecom. Tech. Ausistance 4.00 - 1.88 2570 199S Central Bank of the Phil. Agricultural Credit 100.00 - 48.88 2678 1986 Rep. of the Philippines Manila Water Distribution 89.00 - 28.19 2710 1986 Rep. of the Philippinoe Rural Roads II 82.00 - 76.85 2787 1987 Rep. of the Philippines Economic Recovery Loan 800.00 - 100.00 2788 1981 Rsp. of the Philippines Economic Recovery Loan TA 6.00 - 4.00 2828 1987 Rep. of the Philippines Provincial Ports 32.00 - 22.55 2948 1989 Rep. of the Philippines Irrigation Operations Su ort 45.00 - 45.00 2956 1998 Rep. of the Philippines Program for Government Reform 200.00 - 125.00 2999 1988 Philippine Nat'l Oll Co. Bacon-Manito Goothermal Power 41.00 - 40.88 2969-1 1988 Phil. Nat'l Power Corp. Bacon-Manito Geothormal Power 59.00 - 69.00 2974 1989 Rep. of the Philippines Housing Sector 100.00 - 107.98 Total 4,587.75 107.38 S99.66 of which has been repaid 1,081.77 1.90 Total now outstanding a,556.98 105.46 Amount sold 81.94 Of which has been repaid (third parties) 81.85 Total now held by Bank and IDA (prior to exchango rate adjustments) 8,524.04 105.48 Total undisbursed 997.27 2.38 899.65 / The status of the projects listed in Part A is described In a separate report on all Sank/IDA-financed projctsv In execution, which Is updated twice yearly and circulated to the Executive Directors on April 80 and October 81.  -9- Schediule 0 Paso 2 of 2 B. ST^TEMENT OF IFC INVESTMENTS (As of Morch 31, 1989) Investment Fiscal Loan Equity Total number year Obligor Typo of businosa ---- (USe billion) --- 67/233 1983/1973 Private Dev. Corp. of tho Philippineo Dovelop20nt financo 16.0 4.4 19.4 116 1967 Manila Electric Company Utilities 8.0 - 8.0 118/1088 1967/1989 Merelco Securitiea Corporation Utilition ao.o 4.0 34.0 167/999/1091 1970 Phil. Long Distance Tolophone Co. Utilitios 61.7 0.S 69.6 168/218 1970/1972 Maricasa Manufacturing, Inc. Cement a constr. put. 0.8 0.4 1.2 186 1970 Paper Industries Corp. of the Phil. Pulp A paper products - 2.2 2.2 186/389 1971/1977 Philippine Petroleum Corporation Chemicals A potrochem. 6.2 2.1 8.3 207 1972 Marinduque Mining & Industrial Corp. Mining 16.0 - 16.0 241 1973 Victorias Chemical Corporation Chemicals A potrochem. 1.9 0.3 2.2 267 1974 Filipinas Synthetic Fiber Corp. Textiles A fibers 1.6 - 1.6 272/484 1914/1979 Marla Chriotina Chem. Ind. Inc. Iron A stoel 1.8 0.8 2.2 28s 1974 Ropublic Flour Mills Corp. (RFM) Food A food processing 1.2 - 1.2 300 1976 Philippine Polyamide Industrial Corp. Toxtilos A fibor 7.0 - 7.0 329 1976/1980 Philegro Edible Oils, Inc. Coconut oil a copra 2.8 0.2 2.8 379/766 1977/1986 Acoje Mining Company, Inc. Mining 2.6 1.2 3.7 374 1977 Sarml,nto Industries, Inc. Plywood 3.5 - 3.6 423 1978 Cebu Shipyard A Eng. Works, Inc. Ship repairing 2.1 - 2.1 469 1979 Gonoral Milling Corporation Food a food processing 4.0 1.1 6.1 481/666 1980 PISO Leasing Corp. (All Asia capital) Money A capital markot 11.0 0.2 11.2 480 1980 Ventures In Industry A Businose Money & capital market - 0.3 0.3 Enterprises, Inc. 619 1980 Consolidated Industrial Gases, Inc. Chemicals A petrochem. 4.6 - 4.6 -82 1981 Loans to Seven Corp. for SMSE Money a capital market 18.6 0.6 19.1 6b3 1981 Phil. Assoc. Smelting A Refin. Corp. Mining - 6.0 6.0 672 1981 Davao Union Cement Corp. Cemont A constr. mat. 16.0 - 18.0 627 1982 NDC-Outhrie Plantations Palm oil 11.0 - 11.0 84i 1986 Pure Foods Food A food processing - 1.4 1.4 946 1988 BPI Agricultural Dovelopment Bank Development finance - 1.0 1.0 1061 1989 Philifund Money & capital markets - 4.2 4.2 Total Cross Commitments 221.6 80.0 251.6 Lots sold, acquired by others, repaid or cancelled 114.4 18.6 130.9 Total Commitments Now Hold by IFC 107.2 18.6 120.7 Total Undisbursed (including participants' portion) 69.0 / 69.0 /o 814,063.00.  IBRD 21605 12VI45 ' ( - 121PR0\ p-' 121-1S'|},7nssoa>s@r>S| ]~~~~~~~~~~c S ALIUAG R AFAEL X ',*__ .CALUMI PUA BUSTOS DAGA c -MULIUPE|M @s J' / -;\ r 7..'s< NORZAGARAY IPO MALOLOS GUIGUO m8CTIn ST. MARIA g,a,/X ,r)PMONYgr '9t- SANU|| JOSE !rnC /~~~~~~~~~~~~~~~~~~~~ omeo I MARILAO ~ ~ I I - IIX e -K MONTALBAN ide ~~~~~~~~~~~~~~~~~CALOOCAN CITY 0MSAN MATEO PHILIPPINES N N%@JW-I ITY f SANMATEO S ANGAT WATER SUPPLY OPTIMIZATION ____________________________ PROJECT (AW SOP) TONDOI VF <N / 4 IMA"IKINA i '\ P90P05f0 EX6G DISTRIBUTION MAINS SEWAGE ~ ~ ~ ~ ~ ~ ~ NIPL - -AQUEDUCTS . |@ <>a ;, IJi,!, ANTIPOLO > C== == TUNNELS AkANiLA y ~~~~~~~~~~~~~~~~~~~~~~~~~~~*TEEATMENT PLANTS L U Z O N -