Philippines - Manila Sewerage and Sanitation Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 13204 PERFORMANCE AUDIT REPORT PHILIPPINES MANILA SEWERAGE AND SANITATION PROJECT (LOAN 1814-PH) JUNE 24, 1994 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit = Peso (P) MEASURES AND EQUIVALENTS mm = millimeters = 0.04 inches m = meters = 3.28 feet km = kilometers = 0.62 miles sq km = square kilometers = 0.39 square miles ha = hectare = 10,000 square meters or 2.47 acres cu m = cubic meter = US gallons cu m/m = cubic meters per month = 8,030 US gallons per month cu m/s = cubic meters per second = 22.8 million US gallons per day 1 = liter = 0.26 US gallons lcd = liters per capita per data = 0.26 US gallons per capita per day m/s = meters per second = 3.28 feet per second ABBREVIATIONS AND ACRONYMS ADB - Asian Development Bank EMB - Environmental Management Bureau LWUA - Local Water Utilities Administration METROSS - Manila Sewerage and Sanitation Project MMA - Metropolitan Manila Area MMC - Metropolitan Manila Commission MWSS - Metropolitan Waterworks and Sewerage System MPW - Ministry of Public Works NHA - National Housing Administration NPCC - National Pollution Control Commission PEA - Public Estate Authority UP - University of the Philippines MWSS FISCAL YEAR January 1 through December 31 FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operations Evaluation June 24, 1994 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Performance Audit Report on the Philippines Manila Sewerage and Sanitation Project (Loan 1814-PH) Attached is the report entitled "Performance Audit Report on the Philippines - Manila Sewerage and Sanitation Project (Loan 1814-PH)", prepared by the Operations Evaluation Department. The project was the fifth Bank operation supporting the water supply and sanitation sector in the Philippines and the third in Manila, but the first one tackling the issue of waste disposal which lags far behind water supply services. Bank participation was instrumental in directing the project to improving sanitary conditions in the densely populated, blighted, areas of the city. The success of removing sewage from the vicinity of houses and significantly improving health conditions was marred by inadequate attention to the ultimate disposal of wastewater. The sewage so removed created increased pollution in other areas of the city and, ultimately, the pollution load on the Manila Bay. Current and future Bank attention is focusing on rectifying this situation as well as on reducing the notoriously high level of unaccounted for water in Manila and on restoring the financial viability of Metropolitan Waterworks and Sewerage System. The outcome of the project is, nonetheless, rated marginally satisfactory and its sustainability as likely. Institutional development was substantial. Robert Picciotto by H. Eberhard K6pp Attachment 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.  FOR OFFICIAL USE ONLY PERFORMANCE AUDIT REPORT PHILIPPINES MANILA SEWERAGE AND SANITATION PROJECT (LOAN 1814-PH) TABLE OF CONTENTS Page No. PREFACE . i BASIC DATA SHEET ................................ ii EVALUATION SUMMARY ............................ v 1. BACKGROUND .................................. 1 G eneral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Water Supply and Sanitation Service Levels ................ 1 Bank Involvem ent ............................... 3 2. THE PROJECT AND ITS OBJECTIVES .................. 3 G eneral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Project objectives and Content ........................ 4 3. IMPLEMENTATION. ...............................5 General ..................................... 5 Project Costs and Disbursements....................... .5 Project Results and Operations......................... 6 Institutional Aspects............................... . 9 The Role of the Bank ...................... ...... 9 4. ECONOMIC AND FINANCIAL ASPECTS ................ 10 Economic Analysis ............................... 10 Financial Aspects ................................ 10 5. COMPLIANCE WITH COVENANTS AND DIRECTIVES ...... 12 C ovenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Directives and Guidelines ........................... 13 This report was prepared by Mr. Jozsef B. Biky (Task Manager). Mrs. Helen Watkins provided administrative assistance. 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. TABLE OF CONTENTS (cont.) Page No. 6. CONCLUSIONS AND LESSONS ....................... 13 ANNEX 1. Comments from the Borrower. .............. ...... 15 PERFORMANCE AUDIT REPORT PHILIPPINES MANILA SEWERAGE AND SANITATION PROJECT (LOAN 1814-PH) PREFACE 1. This report presents the results of the Performance Audit of the Manila Sewerage and Sanitation Project for which Loan 1814-PH for US$ 63.0 million was approved on March 20, 1980. The loan was made to the Republic of the Philippines and US$ 62.5 million was onlent to the Metropolitan Waterworks and Sewerage System (MWSS) of Manila. Parallel financing for US$ 42.8 million was provided by the Asian Development Bank. 2. The Loan Agreement was signed on March 28, 1980 and the loan became effective on September 10, 1980, some three month after the originally planned date. The loan was closed on December 31, 1988 after three one year extension. The last disbursement was made on July 10, 1989. During implementation US$ 18.5 million of the loan was canceled. 3. The Performance Audit Report (PAR) was prepared by the Operations Evaluation Department. Parts I and III of the Project Completion Report (PCR) were prepared by the East Asia Regional Office and Part II by the Borrower. The PCR was forwarded to the Board for information on June 28, 1990. OED has reviewed the PCR, the Staff Appraisal Report, the legal documents and Bank files and discussed the project with the Bank staff involved. An OED mission visited the Philippines in November 1993 and discussed the project experience with government and implementation agency officials. The cooperation of these officials is gratefully acknowledged. 4. The Audit, in agreement with the PCR, generally confirmed the success of the project, albeit at a reduced scope. However, it also identified unintended detrimental environmental effects such as increased water pollution outside the project areas. It further noted that the operating department of the sewer system is inadequately funded which could, in the future, affect the life of the facilities constructed under the project. 5. The draft PAR was sent to the government and the implementing agency for comments. The comments received are reproduced as Annex 1 to the PAR.  ii PERFORMANCE AUDIT REPORT PHILIPPINES MANILA SEWERAGE AND SANITATION PROJECT (LOAN 1814-PH) BASIC DATA SHEET KEY PROJECT DATA Appraisal Actual or Actual as % of Item Expectation Current Apraisal Estimate Estimate Total Project Costs (US$ million) 177.41 103.24 58 Loan Amount (US$ million) 63.0 44.5 71 Cofinancing - Total (US$ million) Asian Development Bank 42.8 NA NA Date Physical Components 6/30/85 12/31/89 Completed Economic Rate of Return 11% to 14% 2 CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTES FY81 FY82 FY83 FY84 FY85 FY86 FY87 FY88 FY89 PY90 Appraisal Estimate (US$ million) 0.86 23.60 50.32 57.71 63.00 Actual (US$ million) 2.32 10.02 17 94 28.05 36 38 38.94 40.16 43.10 44.21 44.50 Actual as W of Appraisal (t) 269% 115% 36% 49% 58% 62% 64% 68% 70% 71% Date of Final Disbursement July 10, 1989 Depending on whether or not revenues for wastewater charges collected from properties which are not connected to the central sewerage sysem are included as enefits in the calculations. 2 Because of a series of currency devaluations, a high local inflation rate and major Government policy changes during the project implementation period, and because of the limitations of the available data on actual project expenditures and land values during that period, no attempt has been made to recalculate the IERR on the same basis as used for appraisal. With respect to land values, property assessments generally have not been raised by the local governments in the metropolitan area to reflect any increased values because of improved conditions. Iii PROJECT DATES Original Plan Revisions Actual First Mention in Files 04/75 Preparation 05/77 03/78-06/79 Appraisal Mission FY78 04/79 07/79-08/79 Negotiations FY9 02/05-07/80 Board Approval FY79 03/80 03/20/80 Signing 03/28/80 Effectiveness 06/30/80 08/29/80 09/10/80 Project Completion 06/30/85 12/31/86 12/31/89 03/31/88 12/31/88 Closing Date 112/31/85 12/31/86 12/31/88 12/31/87 Final Disbursement 12/31/85 12/31/86 07/10/89 06/30/88 06/30/89 STAFF INPUTS (staff weeks) Pre FY77 PY7, FY78 PYI9 FYa0 FY81 FY82 FY83 FY84 FY85 FYe6 FY87 FY88 FY89 TOTALS Preappraisal 9 3 0.6 5 8 12 1 27.8 Appraisal 45 3 45.3 Negs/Admin. 1.0 14 2 0.4 15.6 Supervision 0 7 8 3 3.8 5 2 8.8 6 7 5.6 14 1 3.9 2.2 59.0 Other 1.0 0 7 0.1 0 2 0.3 0.3 2.6 Totals 9 3 0.6 5 B 13 1 60.2 9 0 4 5 5 3 8 8 6 9 6.3 14.4 3.9 2.2 150.3 iv MISSION DATA Date Type of Mission 7 T/yr.) Staff Performance Ratings' Problen Types Identification 05/24-31/75 Engineer Financial Analyst Preparation 07/24-08/13/77 Engineer Preparation 05/28-6/16/78 Engineers (3) Urban Planner Economist Preparation 10/22-11/27/78 Engineer Fnancial Analyst Pre. Appraisal 03/08-16/79 Engineer Financial Analyst Supervision 1 06/05-27/80 Engineer n.a. Financial Analyst Supervision 2 02/14-03/10/81 Engineer 1 Financial Analyst Supervision 3 07/12-31/81 Engineer 1 Financial Analyst Supervision 4 06/18-07/02/82 Engineer 1 Disbursements Supervision 5 09/ /83 Engineer 5 Financial Financial Analyst Disbursements Technical Supervision 6 03/20-31/84 Training Expert n.a. Staff Supervision 7 09/24-10/30/84 Engineer 2 Financial Financial Analyst Disbursements Economist Development Impact Institutional Dev. Adviser Supervision 8 04/29-05/28/85 Financial Analyst 2 Financial Engineers (2) Development Impact Admin. Aset. Overall Status Supervision 9 06/03-15/86 Engineers (2) n.a. FinancialAnalyst Supervision 10 11/05-14/86 Financial Analyst 2 Project management Engineers (2) Overall Status Supervision 11 03/10-23/87 Engineer 2 Project Management Financial Analyst Overall Status Economist Super vision 12 08/05-12/87 Engineer 2 Proj ect Management Financial Analyst Overall Status Supervision 13 02/08-18/88 Engineer 2 Project Management Financial Analyst Overall Status Super-vision 14 10/11-15/88 Financial Analyst 1 Project Management Engineers (2) P In addition to the conventional Bank supervision and other missions, supervision and important technical a ssistance contributions were provided from Bank resources through brief visits by experts in various fields (hydraulic structures environment, water distribution system design, computer applications, and public utility management) from areas of the Bank other than the department directly responsible for supervision of the project, and by Bank staff participation on expert review panels. Performance Ratings: 1 = Problem Free or Minor Problems; 2 = Moderate Problems; 3 = Major Problems and n.a. = Not available from reports. I -v - PERFORMANCE AUDIT REPORT PHILIPPINES MANILA SEWERAGE AND SANITATION PROJECT (LOAN 1814-PH) EVALUATION SUMMARY General house connections, is about 220 liters, i. The Metropolitan Manila Area reducing to 50 Ipcd at public standpipes. (MMA) contains four cities and 23 municipalities, with a present population of v. In spite of reasonable operating and about 8.5 million. At an average of 193 maintenance standards the level of people per hectare, Manila has one of the unaccounted for water (UFW) has been, highest urban densities in the world. Many persistently, at near record levels for many areas have much higher densities; some 2 years, reaching 65% in some years.' This million people live in slums and about 40% order of magnitude is placing unacceptable of the city's population is below the poverty financial burden on MWSS. Extensive and line. expensive remedial actions brought only minimal improvements. The principal ii. In spite of continued developments, problem appears to be the lack of adequate urban services and public health conditions legal powers for MWSS to pursue illegal are far from satisfactory and water borne connections and theft of water. diseases are endemic to the area. vi. Sewerage and sanitation services iii. Water supply and waste water lagged far behind water supply. At the time disposal in Manila is the responsibility of of appraisal only 17% of the city's the Metropolitan Waterworks and Sewerage population was served by piped sewerage System (MWSS), government owned public and another 34% had adequate septic tank utility corporation created in 1971 (PAR, service, the rest of the population having no paras. 1.01-1.04). formal waste disposal facilities. The existing Central Service Area System Water & Sanitation Services (CSAS) served close to 850,000 people with a badly deteriorated system of sewers, lift iv. The present water supply service stations and sea outfall. The small Makati levels in Manila are about 80%. A major System (originally a private system) was in expansion of the source capacity expansion much better condition, served some 60,000 is under implementation. The overall water people. Most septic tanks were poorly demand in Manila is 67% domestic, 23% constructed and usually overflowed into commercial and 10% industrial. The roadside drains. average per capita daily consumption, for - vi - vii. The topography of Manila channels sewer network, design, implementation and all run-off and waste water flows into the monitoring of a pilot sanitation system in Manila Bay creating an ever growing level low income areas, construction of of pollution, endangering fishing and "combined sewers" in areas served by septic recreation (PAR, paras.1.05 to 1.10). tanks, organization and equipping a septic tank emptying service, establishing a waste Bank Involvement water laboratory an monitoring service, training and consulting services. The viii. Bank involvement in the water and prioritizing of the sanitation services was sanitation sector in the Philippines spans based on a city wide survey of hazardous some thirty years, nine IBRD loans and one health conditions due to unavoidable contact IDA credit for the total lending amount of with sewage. US$462.5 million equivalent. Five of these operations supported Manila (PAR, para. xii. The project was appraised in August 1.11) 1979, a loan of US$63.00 million equivalent was approved on March 20, 1980 and the The Project and its Objectives loan became effective on September 10, 1980. The loan was closed on December ix. The first Sewerage Master plan for 31, 1988, completion reported a year later - Manila was prepared in 1969 which a total delay of over four years. During recommended comprehensive piped implementation US$18.50 million of the sewerage. The Master Plan was updated in loan was canceled and the final disbursement 1977 and the project being evaluated here took place on July 10, 1989 (PAR, paras. formed the first phase of its implementation. 2.01 to 2.05) During preparation the concept of comprehensive sewerage underwent Implementation considerable reassessment based on affordability, the pollution threat to Manila xiii. After a good start, progress quickly Bay and the need to identify effective means deteriorated. The detailed reasons for the of improving sanitary conditions in the low accumulating delays are described in the income areas of the city. PCR. The main reasons for the delays were: i) inherent difficulties (not foreseen) x. The main objectives of the project in sewer reconstruction; (ii) inexperience of were identified as: a) improvement of Philippine contractors; (iii) shortage of local sanitation in the poor ares of Metropolitan funds and (iv) procurement problems. Manila and b) developing an institutional strategy for implementing similar projects in xiv. Changes in project scope resulted in the future. the reduction of the sewer network and the "combined sewers". The ADB financed xi. The project consisted of four sets of rehabilitation work was reduced significantly components: Part A (financed by ADB) when extensive length of main sewers were covered the comprehensive rehabilitation of discovered not to require rehabilitation (PAR, the CSAS; Parts B, C, and D, (Bank paras. 3.01 to 3.03). financed) included the extension of the piped - vii - Project Costs class residential area it is well screened by trees planted around the area and complaints xv. The accuracy of the final project costs, are minimal. The effluent is satisfactory presented in the PCR, is doubtful and the Audit quality. was also unable to get more accurate figures. Available figures indicate that, in US$ terms, the xix. The component of the so called final cost was 42% below appraisal estimates, "combined sewers" provided roadside drains mainly due to reduction in the project's scope. In Peso terms, the final cost is some 9% above estimates but the local cost component shows a overflow of septic tanks. This effectively 62% increase. The latter is largely due to the removes the sewage which previously spilled substantial devaluation of the Peso versus the around the houses resulting in significant Dollar during the implementation period (7.4 to local health improvements. However, the 21.84) and the larger than estimated loan Audit noted with concern that the sewage disbursement in local currency (PAR, paras. transported by the drains flows into open 3.04 to 3.06). drainage canals and water courses. As these are, usually, choked with garbage the level Project Results & Operations of pollution becomes extremely high. As xvi. The DB fnancd sytem these canals and water courses run through xvi. The ADB financed systemultimately improvements, lift stations and the discharge into Manila Bay, a heavy submarine outfall are operating satisfactorily concentration of sewage s removed from one although minor design problems are area, only to become stagnant in another. hampering operations. However, the relatively new but well organized and xx. This aspect of environmental managed Sewerage System Department has degradatien has either escaped the attention limited funds and equipment and it is of the designers or was considered outside overshadowed by the much larger water the scope of the component. The problem is supply department. As a result the new aggravated by the divided responsibilities of outfall, the trunk sewers and the station wet sewerage and drainage. wells can not be inspected and maintained properly and this may shorten the life of xxi. The septic tank emptying program is these assets. successful in its primary task but the eventual discharge of the sludge is an xvii. The proper functioning of the outfall unsatisfactory process which is also creating is particularly important in view of the unintentional health hazards. concern for the water quality in Manila Bay. The recent study of the Bay's waters did not raise special concerns but fishermen report xxii. Notwithstanding some shortcomings plumes of sewage on the surface. the project helped to increase environmental awareness in Manila and the Philippines as xviii. The operation of the Ayala Treatment a whole. New effluent standards and water Plant of the Makati System is excellent quality regulations issued in 1990 set considering the restrictive operational satisfactory control standards. However, procedure. Located in the middle of a high their effectiveness and the level of - viii - enforcement is yet to be determined (PAR, portion of the 14% ERR was derived from paras. 3.07 to 3.15). the assumption that land values would increase where sewerage/ sanitation Institutional Aspects improvements take place. No such increase could be verified on completion of the xxiii. MWSS is a mature utility project. organization with well qualified staff, lead by an able administrator who is appointed xxvii. The overall financial position of by the President of the Republic. Policy MWSS is, at present, satisfactory with both direction is by a Board of Trustees. The the sewerage and water supply producing fledgling Sewerage System Department is, at positive net income. For December 1992, present, the "poor relative" of the the rate of return on revalued fixed assets organization, receiving limited attention and was 11 %. Large cash balances are due to resources. In view of the expected rapid the slow progress of the current investment development of this subsector much greater program. support is required if the new facilities are to be fully sustainable. xxviii. On the negative side, accounts receivable are about five month billing and xxiv. The project's main contribution to the UFW was 58%. The progress on the institutional development was the much latter, despite sustained efforts, has been increased experience with sewer system negligible. The existing legal powers of construction and its management. Financial MWSS are inadequate to act forcefilly management and monitoring and reporting against illegal connections and theft of have also improved (PAR paras. 3.16 & water. 3.17). xxix. Financial management is satisfactory The Role of the Bank and continues to improve. Reporting and management information is detailed and xxv. Bank assistance has been instrumental timely. Auditing of the accounts, by in directing attention to the neglected area of external auditors is, generally, timely and sanitation services for the poor in areas of severe health hazard. The long period of Bank assistance created a cooperative xxx. Meter reading, billing and collection atmosphere and the Banks advice is is the responsibility of the Customer Service welcome. The continuity of Bank Department. Collection is, mostly, by supervision was, however, less than optimal contract workers. Customers have 91 days (PAR, para. 3.18). to pay, after which the service is cut off Economic and Financial Aspects (PAR, paras. 4.01 to 4.06).'~ xxvi. The elaborate economic analysis of the SAR, showing an expected ERR of 14% could not be repeated due to changes in project scope and lack of data. A major - lx - Compliance with Covenants and cases at the expense of increased pollution in Directives others. Future Bank projects need to focus on rectifying these. xxxi. Eighteen "major" covenants were applied to the project, fifteen of them xxxvi. MWSS has established a well run through the project agreement. The Audit Sewerage Department but failed to provide considers all covenants as relevant, to a it with adequate resources. MWSS' overall greater or lesser degree. Most were dated performance is satisfactory with the covenants and the majority of the dates were exception of coming to grips with the optimistic and unreasonable. Eventually all excessively high levels of UFW. requirements were met with delays paralleling project execution but none of xxxvii. The Audit rates the overall them had a significant impact on the project performance of the project as satisfactory, outcome. its institutional development as significant and sustainability of its benefits as likely. xxxii. Three important financial covenants related to a) government equity contribution; xxxviii. The main lessons to be b) introduction of a 10% waste disposal learned from the project are: a) charge on water consumption and c) improvement of waste disposal in localized revenues from water and sewerage areas must consider the ultimate disposal of operations. All were complied with the wastes; b) newly created although the slow government equity utilities/departments require more generous contribution was a major reason for delays support in their formative years and (PA9 in implementation. paras. 6.01 to 6.07). xxxiii. All relevant OMS and OPN The borrower points out that this figure was the result of civil disturbence in that year. Since then guidelines were, generally complied with. it has been reduced to 56% in 1992. As the current, more stringent, environmental guidelines were not in The borrower comments that steady progress is existence at appraisal, the unintended being made in reducing Accouts Receivable (4.4 environmental damage can only be regarded month by end of 1993) and UW (20.000 illegal connections registered in mid 1993). Further, an as an omission, not a non compliance (PAR, Anti-Water Pilferage Act will shortly be enacted paras. 5.01 to 5.04). by Congress. Conclusions and Lessons The borrower comments that MSS Board has recently revised its collection policies and customers now have 61 days to pay. Further, xxxiv. The project was well prepared but monthly billing volumns have more than doubled the implementation targets were optimistic. due to computerisation of meter reading. Inexperienced contractors and shortage of local funds contributed to delays. xxxv. The objectives of the project have been met. Sanitation and health conditions improved in the target areas but, in some  PERFORMANCE AUDIT REPORT PHILIPPINES MANILA SEWERAGE AND SANITATION PROJECT (LOAN 1814-PH) 1. BACKGROUND General 1.01 Manila, located on Luzon island, is the capital city, principal port of entry and the cultural and commercial center of the Republic of Philippines. The Metropolitan Manila Area (MMA) covers about 1,500 sq km, contains four cities and 23 municipalities. Its present population is about 8.5 million with an average annual growth rate of 3%. The MMA sits on the eastern shore of the Manila Bay, an inlet of the South China Sea, bordered on the south-east by the Laguna de Bay, the largest fresh water lake in the Philippines and is bisected by the Pasig river. Precipitation is abundant, averaging about 2,100mm per annum, most of it falling between June and October during the southwest monsoon. 1.02 At about 193 people per hectare, Manila has one of the highest urban densities in the world. Many areas of the city have much higher densities housing some two million slum dwellers. About 40% of the city's population is estimated to be below the poverty line. 1.03 Notwithstanding continued efforts of development, urban services and public health conditions are far from satisfactory with typhoid, cholera and gastroenteritis being endemic to the area. 1.04 Water supply and waste disposal services in Metro Manila are the responsibility of the Metropolitan Waterworks and Sewerage System (MWSS), a wholly government owned public utility corporation. It was formed in 1971, following the abolishing of the National Water and Sewerage Agency (NWASA). Water Supply and Sanitation Service Levels 1.05 In the late 1970s about 53% of Metro Manila's population had access to piped water supply. By the mid 1980s this has increased to 70% and, today, it probably reaches 80%. The principal source utilized today is the Angat river system providing about 2.5 million m3 per day. A further expansion of the system is nearing completion. Throughout the last decade MWSS consistently had excess production capacities, the constraining factor in improving the city's supply has been the distribution system. Private and institutional ground water supplies with the use of deep wells contribute about 0.12 million m3 but declining due to overexploitation of the aquifer resulting in penetration of salt water. 2 1.06 The overall water demand in Manila is about 67% domestic, 23% commercial and 10% industrial. The average domestic per capita consumption for house connection service is about 220 liters per day reducing to 50 lpcd in the blighted areas with supplies through public standpipes. A notable feature of the system is the widespread "borrowing" whereby people obtain water from a house connection via garden hose and plastic pipes. In many areas this increases the effective household size to over eight persons. People not connected to the system rely on ground water, vendors and traditional sources. 1.07 An unflattering characteristic of the Manila water supply system has been, for many years, the almost record level unaccounted for water (UFW). Reaching reported levels of over 60% with leakage over 30% it represents a major economic and unacceptable financial loss to MWSS. While the precise value may be in question, largely due to the lack of accurate production and consumption metering, the order of magnitude of the losses can still represent the production of an entire expansion program. Major efforts have been and are being made (mainly with Asian Development Bank (ADB) financing) but significant improvements remain elusive. Apart from the technical issues relating to old and ill maintained pipes, inaccurate meters and the detection and elimination of illegal connections, the major factor in the loosing fight is the lack of appropriate legal powers for MWSS against theft of water, meter tampering and non payment of water bills. Although the overall availability of water is not affected by these losses due to the excess production capacities, the regularity of zonal supplies are, due to localized reduction of pressure. The negative financial impact on MWSS has to be obvious as is the overcharging of the legal and bill-paying customers when tariffs are raised to meet funding requirements and financing agencies' covenants. 1.08 Sewerage and sanitation services are still in their infancy, considering the size and recent rapid development of Grater Manila. At the time of appraisal only about 17% of the metropolitan population was served by piped sewerage, another 34% by communal or individual septic tanks. The remaining population relied on pit latrines or had no formal disposal service. 1.09 At the time of appraisal, two, separate, piped sewer systems, the Central Service Area (CSAS) and the Makati System provided service to high class residential and commercial areas serving, respectively some 828,000 and 56,000 people. The CSAS' seven lift stations and sea outfall were overloaded and in poor repair, the outfall, in particular, badly damaged. The shortcomings of the system created particularly hazardous conditions to the high density, poverty stricken, Tondo foreshore area. The originally privately installed Makati System which was, subsequently, taken over by MWSS, is an "enclave" system, built to serve an exclusive high income residential area, has its own mechanical treatment plant (Ayala Plant). It is well run and maintained under specially restrictive noise and pollution regulations. The majority of the septic tanks were poorly designed and, lacking sub-surface filters and drains, overflowed into roadside drains and, in turn, into the nearest water course, causing serious health hazards. No regular emptying service was available. 3 1.10 Due to the topography of the MMA, virtually all run off and waste water flows into the Manila Bay, creating an ever increasing level of pollution, adversely affecting fishing, commerce, recreation and public health. Bank Involvement 1.11 Bank involvement in the water supply and sewerage sector in the Philippines spans thirty years involving nine IBRD loans and one IDA credit for a total lending amount of US$ 462.5 million equivalent. Five of these operations were to support Manila with a total of US$ 280.2 million. Table 1.1 shows summary details of Bank lending to the sector. Table 1.1 - SUMMARY OF BANK LENDING Project Name L/Cr. No Amount US$ Date Evaluat. Mill. Approval Closing Manila Water I L 0386 20.20 07/21/64 06/30/70 N.A. Prov.Cities W I L 1415 23.80 05/03/77 06/30/83 PAR Manila Water II L 1615 88.00 07/25/78 12/31/85 PCR Prov.Cities W II L 1710 16.00 05/29/79 12/31/87 PCR C 0920 22.00 05/29/79 12/31/87 PCR Manila Sew.&San L 1814 63.00 03/20/80 12/31/88 PCR Water & San. L 2206 35.50 10/19/82 06/30/90 NA Manila Distrib. L 2676 69.00 04/03/86 Ongoing NA Angat Water L 3124 40.00 10/05/89 Ongoing NA Water&San.Sector L 3242 85.00 06/28/90 Ongoing NA Total 462.50 2. THE PROJECT AND ITS OBJECTIVES General 2.01 The first sewerage Master Plan for Manila was prepared in 1969 which recommended comprehensive piped sewerage for the city. Updating of this Master Plan was financed under the Bank funded Provincial Cities Water Supply Project (Loan No. 1415-PH) approved in 1977. Preparatory work for a Bank financed project to implement part of the long term master plan started in 1975. During project preparation, a series of modifications were proposed to the 4 concept of piped sewerage (complicated by intense "turf battles" between the Urban and Water Supply sector staff in the Bank), based primarily on affordability, increasing concern about the impact of sewage effluent on Manila Bay and the need to identify effective means of improving sanitation in the low income and slum areas of Manila. The outcome was the Manila Sewerage and Sanitation Project, the sewerage part of which was to be financed by the Asian Development Bank (ADB). Project Objectives and Content 2.02 The SAR (para. 3.01) identifies the "main objectives" of the project as a) the improvement of sanitation in the poor and densely populated areas of Metropolitan Manila and b) developing an institutional strategy for implementing similar projects in the future. 2.03 The project, as appraised, consisted of four sets of components (SAR para. 3.02). Part A, to be financed by ADB, covered the comprehensive rehabilitation/reconstruction of the existing central sewer system; Parts B, C and D, to be financed by the Bank, included the extension of the central sewage collection system in two areas totaling 640 hectares; technical services, design and implementation of a pilot sanitation project in low income areas including monitoring of health conditions; construction of "combined sewers"' in areas totaling some 1,400 hectares where hazardous conditions were identified; provision of equipment for septic tank emptying and sewer maintenance; wastewater laboratory and monitoring equipment for sea outfall and Manila Bay; overseas training for operators and consultant services for the design of future projects. The Loan Agreement was amended in October 1981 to include, under the "design of future projects", the construction of a diversion tunnel on the Kalawi River as preparatory work for a follow on water supply source extension project. 2.04 The preparation of the project was extensive and detailed. The selection of the city areas for the pilot project and priority areas for the low cost sanitation solutions were based on a city wide survey, classifying the residential areas according to the degree of health hazards present due to unavoidable contact with sewage and other wastes. This not only allowed the assigning of correct priorities for investment, but also provided an excellent overall picture of the sanitation and environmental conditions in the whole of Metro Manila. 2.05 Appraisal took place in July/August 1979 and the US$63.00 million loan was approved by the Executive Directors on March 20, 1980. The loan became effective on September 10, 1980, some three month later than projected. The original and actual closing dates were December 31, 1985 and December 31, 1988 respectively. The final completion date is reported 1 A somewhat misleading term, actually referring to covered or piped roadside drains which receive overflows from septic tanks. 5 as December 31, 1989, a delay of over four years. A total of US$18.50 million of the loan amount was canceled during implementation and the final disbursement took place on July 10, 1989. 3. IMPLEMENTATION General 3.01 The apparently good start to the project, as indicated by early disbursement figures (mainly payments for consulting services), soon gave way to much reduced progress. The PCR, in paras. 5.1 to 5.6 gives a detailed description of the delays and their causes and these are not repeated here. The principal causes of delays can be summarized under the following headings: (i) difficulties inherent in the rehabilitation of any sewer system; (ii) inexperience and financial problems of Philippine contractors; (iii) country economic difficulties resulting in shortage of local funds; and (iv) protracted approval process for contract awards. The programs for the combined sewers and the monitoring of Manila Bay were, in fact, interrupted for three and two years respectively. By hindsight, the original implementation schedule included a considerable degree of optimism. 3.02 The procurement problems cited above were due, entirely to the bureaucratic process as MWSS' standard for the production of bid documents and specifications was high. Import regulations such as the exclusive use of Philippine flagged ships also significantly hindered progress. 3.03 Changes in the project scope were largely confined to the reduction in the areas covered by the extension of the sewer system and to the areas covered by the "combined sewers". The sewer system rehabilitation portion of the ADB financed part of the project was also reduced in scope when some of the projected works were found to be unnecessary. Project Costs and Disbursements 3.04 The final, actual, cost of the project, presented in the PCR in Part I, paragraphs 5.7 and 5.8 and Section 5. of Part III is heavily qualified with regard to accuracy. Furthermore, even though the figures are claimed to have been obtained from MWSS, they do not even match the figures presented in Part II (borrower's contribution). The inaccurate and/or incomplete reporting of project costs is a frequently noted feature in PCRs and clearly indicates the inadequacy of the project monitoring procedures. The attempts by the Audit to verify or otherwise the final cost figures were also unsuccessful due to staff movements and less than adequate records in MWSS. On the positive side, serious attempts appear to have been made to assemble annual project expenditures and convert them at the average exchange rate ruling in the year of expenditure. Bearing in mind the major changes in the US$/Peso exchange rates during the life of the project (appraisal:7.4 - final disbursement:21.84) this is a major improvement on the use of the final exchange rate normally found in PCRs. 3.05 The available figures indicate that, in US$ terms, the final cost of the project was some 42% below appraisal estimate. Expressed in Pesos, the total cost shows a 9% increase. These figures are complicated by several factors but the principal ones appear to have been: a) the 6 reduced scope of the project (both the ADB and IBRD components); b) the devaluation of the Peso; and c) the larger than projected disbursement of the Bank loan in local currency. The combined effects of b) and c) largely account for the 62% increase in the local costs, in Peso terms. The largest single component cost reduction, 55%, appears in the ADB financed sewer system rehabilitation. During construction it was found that fewer than anticipated main sewers actually required rehabilitation. Table 3.1 below provides a summary of the appraisal estimates and the reported final costs of the project. 3.06 Disbursements, in percentage terms, far exceeded estimates in the first six month but slowed down thereafter and, by the original closing date (1985), reached only 52%. At that time US$12.00 million of the loan was canceled with a further US$6.5 million canceled in bits and pieces in subsequent years. Table 3.1 - Project Costs (US$ million) Component Appraisal Actual Local Foreign Total Local Foreign Total Part A (ADB) 40.78 42.77 83.55 9.68 27.77 37.45 Parts B,C,D Civil Works 22.81 12.65 35.46 8.78 21.33 30.11 Equipment 0.53 3.98 4.51 0.06 1.04 1.10 Monitoring 0.74 0.00 0.74 0.18 0.04 0.22 Solid W. Study - - - 0.16 0.40 0.56 Engineering 11.42 15.99 27.41 12.59 21.21 33.80 Contingencies 14.94 10.80 25.74 - - - Total:B,C,D 50.44 43.42 93.86 21.77 44.02 65.79 Grand Total 91.22 86.19 177.41 31.45 71.79 103.24 Project Results and Operations 3.07 The ADB financed, rehabilitated sea outfall, pumping stations and main sewers are all operational and, generally, provide a satisfactory disposal service. The outfall's Tondo pumping station is operating, at present, with less than half its design capacity due to limited inflows. Some design shortcomings have progressively come to light (pumping station inlet sluice gates take several hours to close) and will require remedial action. In general the quality of 7 construction, as observed by the Audit mission, is satisfactory. However, the now well organized and ably led Sewerage System Department which is responsible for the operation and maintenance of the system, is functioning under a severe handicap in the role of the "poor relative" to the vastly larger water supply organization. It is short of funding and lacks vital equipment for the proper preventive maintenance of the system. Clearly, the equipment provided under the project was inadequate2. As a result the sea outfall, the trunk sewers and the lift station wet wells can not be inspected or cleaned. The current lack of prospects of remedying the design faults at the lift stations - which are resulting in the rapid wear and tear of the pump impellers - and the inability to inspect and clean the sewers is likely to result in continued high level of infiltration and deterioration, shortening the life of these assets. 3.08 The proper functioning of the outfall may also be in question. Although the study/monitoring of the Manila Bay has not raised serious issues, many opinions appear to hold that the assimilative capacity of (parts of) the Bay may have been reached and fishermen were said to report plumes of sewage in the area of the diffusers. While the generally heavy shore line pollution is not likely to be due to the operation of the outfall, it is difficult to convince the public that they are not connected. Although the waters of the Bay, as a whole, receive by far the largest pollution load from agricultural run-off from the Pampanga River watershed, the shore line pollution from uncontrolled urban run-off (see further discussions below) is more visible and, on bathing beaches, may present direct health hazard. Nevertheless, earlier studies indicated that improved controls of pesticide run-off and properly sighted submarine outfalls disposing of sewage from Manila, would not result in irreversible environmental damage to the waters of the Bay. The Department of Environment and Natural Resources (DENR) is working in close cooperation with MWSS on this issue. 3.09 The operation of the Ayala sewage treatment plant is exemplary. While some modernization is desirable, the quality of the effluent produced by the plant and discharged into a creek, is superior to that of the receiving waters. The plant being in the middle of a high class residential area, occupies extremely valuable land but, at present, contractual obligations prevent MWSS from closing down the plant and disposing the land (at great profit) and connecting the area to the central system. The whole plant is well shielded from the housing are by a screen of trees and plants and there are few complaints of odor. 3.10 The so called "combined sewers" component of the project provided roadside drainage channels in, mostly, low income areas and small bore piping connected septic tanks to these drains to dispose of liquid overflow. These have been highly effective in removing sewage from the immediate area of the houses and health surveys report significant improvement in local health conditions. However, the Audit found that there is a severe downside to this solution which, in effect, transfers to other areas and, in some cases, magnifies, the undesirable effects of sewage in the open. The roadside drains constructed under the project discharge their content into larger drainage canals and/or water courses (all leading, ultimately, to the Bay), 2 Note the actual expenditure of US$1.1 million, compared to the Appraisal estimate of US$4.51 million. 8 progressively accumulating higher volume and concentration of sewage. Due to the topography of Manila, the hydraulic gradient of these canals and water courses is extremely flat and practically no self cleansing takes place. Garbage discarded on the streets and blown by the wind is also accumulating in these canals presenting extreme levels of pollution and, obviously, health hazards (identical situation exists in Jakarta, Indonesia). 3.11 This aspect of environmental degradation either completely escaped the designers or it was ignored as being outside the scope of PROGRESS which stands for "Program to Reduce and Eliminate Sewage from Streets". In the Audit's view, this just about equals throwing garbage over the fence to have a clean garden. The water levels in the numerous canals observed by the Audit were all at street level and the flow, if any, was imperceptible and, curiously, the conditions were the same in the housing areas of the highest and lowest standard. With the projected increase in the supply of water to Manila (24.5 m3/sec additional supplies to come on stream shortly) these conditions are bound to be aggravated. 3.12 The main reason for the environmental problems created by the canals is, in the Audit's view, the divided responsibility for sanitation and drainage. Although MWSS was responsible for the design and construction of the combined sewers/drains, they were, on completion, turned over for operation and maintenance to the Metropolitan Manila Commission (MMC). There is little reference in the project documentation of the degree of cooperation between the agencies and it is impossible to establish whether the omission of considering the capacity and flow conditions of the canals was by MWSS, the designers, or MMC, the future owners, or it was, simply, the lack of funds. There can be little doubt that if the environmental and public health conditions in Manila are to improve significantly, apart from the continued expansion of the sewerage/sanitation systems, major efforts will be needed in the storm drainage and solid waste disposal areas. The conditions obtaining in Manila can be seen in all the similar major (tropical) cities of the world such as Jakarta, Bombay, Bangkok etc. where the priority of waste disposal lags far behind that of water supply. 3.13 The septic tank emptying program is largely successful, insofar as the affected householders are concerned. The program is publicized as "free" but, in fact, it is paid for by the 10% "environmental surcharge" imposed on the water bill. The program is designed to empty every septic tank every twelve years and, on the basis of current experience, this is adequate. A private contractor is carrying out the bulk of the work and MWSS's own crews serve the 41 communal tanks of Quezon City. The Audit visited the ongoing operation and found it clean, unobtrusive and efficient. However, the sludge disposal, carried out well outside the Metro Manila boundary, should be regarded as socially and environmentally unacceptable. The dumping of the sludge (under a private arrangement by the contractor) into a disused quarry, with people settled in and around it and pumping drinking water a few meters from the dumping site, should be discontinued or modified as soon as possible. The Audit was informed that MWSS is working on the development of a more acceptable disposal site. In this case, also, the householders served benefit significantly while others suffer "over the fence". 9 3.14 It should be noted that the SAR (para. 5.13) did recognize the potential danger of increased pollution of the canals and waterways as a result of the project. However, it simply states that future programs will improve the situation. 3.15 Notwithstanding these conditions, the overall environmental awareness and concern is very high in Manila, and the Philippines as a whole. In March 1990 the DENR issued revised, more stringent, regulations regarding Effluent Standards and Water Quality Criteria with particular emphasis on industrial effluent control and toxic substances. The enforcement of these standards is being put into effect but full scale monitoring and compliance is likely to be a slow process. Government and public support is strong and the First Lady of the Philippines has taken a particular and personal interest in the water quality of the Manila Bay. Institutional Aspects 3.16 MWSS is a mature utility organization, run by an able Administrator and highly qualified, professional, managers. Its policy direction is by a thirteen member Board of Trustees. The Administrator is appointed by the President of the Republic. In September 1993 its total staff was about 4570. The sewerage and sanitation part of its operations are the responsibility of the Sewerage System Department (SSD), ably run by a highly motivated and competent Manager under the authority of the Deputy Administrator Engineering/Operations.. As already mentioned, the SSD is both the small and poor relative of the much larger water supply unit and is, permanently short of funding and equipment. However, under fast or slow time scale, sewerage and sanitation has to be the "growth industry" within MWSS and with the massive water supply investments coming to completion, both the Bank and MWSS ought to focus their attention on the effective maintenance of the recent sewerage investments and the planning of the much needed expansions and general environmental improvements in Greater Manila. The training facilities and efforts of MWSS are effective and impressive but, perhaps, it is still heavily biased toward technical training. 3.17 The main institutional achievements of the project were in the areas of contract management, procurement process, experience gained in the construction of sewers and in the continued improvement of MWSS's financial management. The Role of the Bank 3.18 As indicated in paragraph 1.10, the Bank had a long and intensive involvement in the water supply and sewerage sector in the Philippines and, in particular, in Manila. Together with ADB (who are "on the spot") it has been providing sustained external financial assistance as well as technical assistance and advice. In the project under review, the Bank's influence has been substantial in redirecting (at least part of) MWSS' efforts in the much neglected area of sanitation toward those most affected by unsanitary conditions, the poor. Although the postponement of possibly financially unsupportable investments in piped sewerage, or even replacing it, for the time being in certain areas, with lower and cheaper standard of service was 10 well advised, in the event, the outcome was less than wholly satisfactory. Nevertheless, the Bank is held in high esteem and its advice and assistance is welcome. Bank supervision of the project had less than optimum continuity which presented some problems to MWSS but, overall, the Bank/borrower relationship has been satisfactory. 4. ECONOMIC AND FINANCIAL ASPECTS Economic Analysis 4.01 The SAR (para. 5.06 and Annex 1) presents an elaborate analysis of the Economic Rate of Return (ERR) for the project. The analysis is based the estimated capital and projected operation and maintenance costs of the project facilities and, on the benefit side, the projected revenues from sewer charges which are imposed as surcharges on water charges - 50% for those connected to the sewers and 10% for all others, consuming in excess of 30 m3 per month. In addition, based on estimates prepared in the Bank financed Third Urban Development Project, it was assumed that, following the provision of drainage to housing areas not previously served, land values would increase substantially. The ERR so calculated was a high 14% 4.02 The PCR did not recalculate the ERR due to the lack of accurate cost data and the changes in project scope and country economic conditions. Furthermore, it notes that no evidence could be found to show that land values have increased in the project area and this was also confirmed to the Audit mission. Financial Aspects 4.03 Overall the financial situation of MWSS, as of June 1993, was reasonably healthy. Both the water and sewerage operations produced positive net income. The substantial cash balances are due, to some extent, to the delays in the investment program. The consolidated Current ratio was 4.94:1 and the Debt Service Coverage 1.51:1. In December 1992, the Rate of Return on average net fixed assets in operation was a high 11 %. 4.04 On the negative side, accounts receivable were about five month billings and, the "trade mark" of Manila, unaccounted for water (UFW) was holding steady at 58% The progress in improving the latter has been negligible in spite of the massive efforts and assistance committed to reducing the losses. Meter under registration has been identified as one of the problems and a replacement program, using better quality meters is under way. The most intractable problem appears to be MWSS' inability to take action against illegal connections and/or theft of water which proliferate in the city. Existing legal measures at MWSS' disposal are inadequate and, it is possible, that no real progress can be made until the laws are changed. The fear of social repercussions against stronger measures should be balanced against the inequities of legal consumers paying excessive tariffs which, incidentally, allows MWSS to reach high rates of return. 11 4.05 Separate accounts are maintained for the sewerage operations which also manages to maintain a positive net income but, mainly due to its small size, is a long way from being able to contribute substantially to investments. 4.06 Financial management is satisfactory. MWSS operates a computerized commercial accounting system and detailed financial reports can be and are produced regularly providing adequate information for top management. The Audit has obtained such reports and Table 4.1 below presents salient data extracted from these. The auditing of the accounts, by external auditors is reasonably timely and the quality is satisfactory. 4.07 Meter reading, billing and collection is the responsibility of the Customer Service Department, the fastest growing unit of MWSS. Led by a dynamic Manager, the Department is working on the modernizing of its functions such as using hand held computers for meter reading. Bill collection is, mostly, by contract workers as less than 30% of the residents have bank accounts. Consumers have a total of 91 days to pay, after which the service is cut off. Table 4.1 - Financial Highlights June 93 Dec. 92 Dec. 91 Consolidated AC Operating Revenue (P000) 1,694,623 3,165,162 2,887,790 Operating Expenses (P000) 827,378 1,759,321 1,438.526 Net Operating Inc. (P000) 867,245 1,405,805 1,449,264 Return on Net F. Assets (%) 11.88 10.26 Current Ratio 4.94:1 4.86:1 4.35:1 Debt Service Coverage 1.51:1 1.40:1 1.38:1 UFW (%) 58.0 56.0 58.0 Sewerage System Operating Revenue (P000) - 533,412 467,595 Operating Expenses (P000) - 316,809 244,108 Net Operating Inc. (P000) - 216,603 223,487 12 5. COMPLIANCE WITH COVENANTS AND DIRECTIVES Covenants 5.01 The PCR, in Section 7 of Part III lists no less than eighteen "major" covenants and comments on compliance or otherwise. Fifteen of the covenants relate to the Project Agreement, i.e. to actions to be taken by MWSS and MMC. Six of the covenants relate to programs and/or studies to be initiated as complementary actions such as a solid waste study, pollution monitoring, industrial wastes study etc. Three covenants related to minor internal reorganization and/or establishment of new sewerage sub-units. 5.02 The Audit regards all these covenants as representing generally reasonable requirements which would contribute to the environmental improvements in Manila which was the real objective of the project. However, most of these covenants were "dated covenants"and the majority of the compliance dates was January 1, 1981. Considering that the loan was approved by the Executive Directors on March 20, 1980, the Audit regards these target dates as wildly optimistic. In practice all requirements were met, fully or in part, with varying delays, more or less paralleling the delays of the project as a whole. None of the delays have had a major impact on project implementation. 5.03 Three finance related covenants carried major significance for the implementation progress and/or the future financial sustainability of MWSS' expansion program and operations. These are listed below: a) Loan Agreement, Section 3.01 Government equity contributions " Borro wer to take all were not made available during action... including provision of 1983-86 contributing to the delays in funds... " implementation. b) Project Agreement, Section 3.07 "By Implemented by July 1, 1981, January 1, 1981 MWSS to revenues from these charges implement a waste water disposal exceeded or equalled revenues from charge of 10% on water bills of sewer connections. connections using above 30 m3 per month" 13 c) Project Agreement, Secton 4.05(a) Compliance generally satisfactory. MWSS "...revenues to produce: for sewer has been able to raise its tariffs despite the operations, beginning 1981, ian excessive UFW levels. annual positive rate of return, and for wter operations, an annual rate of return of 5% in 1981 and 8% thereafter." - Amended under Loan 2676-PH:6% in 1986, 7% in 1987 and 8% thereafter. Directives and Guidelines 5.04 The Audit concludes that the requirements of the relevant OMS and OPN, relating to project preparation, appraisal, and supervision - including procurement - were properly followed and complied with. The project's generally routine nature did not bring any special requirements into force. In the absence of the current, stringent, environmental assessment requirements, the issues relating to the discharge of "combined sewers" and the state of the drainage canals (paras. 3.10 to 3.13) can not be regarded as violation of any Bank directive but should,simply, be considered a major omission in project planning. 6. CONCLUSIONS AND LESSONS 6.01 A well prepared project. Its implementation target dates were mostly optimistic as they did not allow for the lack of experience of sewer construction in the country. Progress was also delayed by shortage of local funds due to country economic problems and procurement related bureaucracy. The project was, ultimately, implemented with a reduced scope, partly because of funding shortages and partly because certain items of sewer rehabilitation/reconstruction proved unnecessary. 6.02 The objectives of the project have been met albeit some of them on a reduced scale. The improvement of sanitary/environmental condition in specific low income areas was successful but, apparently, at the expense of increased pollution in other areas receiving waste water discharges. At the same time, environmental awareness has increased considerably in Manila and the country as a whole providing the foundation for increased future efforts. Future Bank and other donor assistance should focus on waste disposal projects/programs which will ensure that improvements in one area do not cause unintended damage in others and include the clean up of canals and water courses. 6.03 MWSS established a well run Sewerage System Department but failed to endow it with adequate resources for effective day to day operations, let alone for expansion. This may well endanger the sustainability of the new or reconstructed facilities and is clearly damaging to the moral of the unit. 14 6.04 The management, organization and financial performance of MWSS is, generally, satisfactory. Its glaring shortcomings in the area of unaccounted for water control must receive the highest and most persistent level of attention. 6.05 The financial performance of MWSS, at present, is adequate but its increasing debt service gives cause for caution. 6.06 The Audit rates the overall performance of the project as satisfactory, institutional development as substantial and the sustainability of the benefits accruing to the targeted beneficiaries, as likely. These ratings are the same as those based on the PCR. 6.07 The principal lessons to be learned from this project can be summarized as follows: a) Remedial measures for urban pollution/health hazard problems in localized areas can not be considered fully effective without appropriate solution for the final disposal of the wastes. b) Newly created utilities or sub-units of utilities (such as the SSD) require more generous support in their formative years than more mature units which can draw on years of experience and more diverse resources to improvise or "muddle through" operational problems. .15 ANNEX 1 ADORESS:Page 1 of 1 CABLE ADDRESS: in reply. peas refer toPae1o1 MWSS PH* Te. Nos. (2) 95-32-11 to 29 FAX No. (2)921-287 COMMENTS FROM THE BORROWER Telex No. (722) 27947 MWSS PH Republika ng Pilipinas PANGASIWAAN NG TUBIG AT ALKANTARILYA SA METROMANILA Metropolitan Waterworks and Sewerage System Katipunan Road, Balara, Quezon City 1105, Philippines May 30, 1994 Mr. YVES ALBOUY Chief, Infrastructure and Energy Division Operations Evaluation Department The World Bank 1818 H. Street, N.W. Washington, D.C. 20433 U.S.A. Dear Sir We thank you for your letter of 2! April 1994, inviting our comment on the enclosed "Draft Performance Audit Report, Manila Sewerage and Sanitation Project (Loan 1814-PH)". We offer the following observations: 1. On page V, paragraph V of the Evaluation Summary, the figure of 65% UFW was mentioned. We wish to point out that this level of UFW was reached in 1986, and was partly the result of the widespread campaign of civil disobedience directed at the incumbent government at the time. This was progressively lowered at the rate of approximately 1.5% per year, reaching a level of 56% by 1992. 2 On Section XXVIII, Accounts Receivables (A/R) of MWSS have been reduced to about 4.36 months-billing as of 1st-quarter 1994. As a result of intensive collection efforts and "clean-up of the unpaid bill books, the current A/R measure shows a continuous decline from a high of 5.7 months in 1986 to 4.4 months in end-1993. NRW (UFW) reduction efforts have been accelerated since 1993 which included the intensification of leak repair activities through the sectoralization (decentralization) of the leak repair function, and the voluntary registration of 20,000 illegal connecdons in mid-1993. An Anti-Water Pilferage Act will be shortly enacted in congress to strengthen the legal powers and enforcement capabilities of MWSS against water theft. 3. On Section XXIX, page VIII, the MWSS Board, in the 3rd quarter of 1993 revised collection policies which included among others the rule that customers have only 61 days (as contrasted to the previous 91 days) to pay their water bills. This policy boosted collection efforts, manifested in the reduction of the A/R rate to less than 5.0 months billing. The average monthly billing volume has dramatically increased from P 137 M/month in 1987 to about P300 M/month as of 1994, partly due to the computerization of the meter reading function through the Rover System. On the whole, the report presents a fair and accurate picture, and we take this opportunity to acknowledge the Bank's continuing support for our development programs. V w y yours, G RI R. VIGILAR Chairman